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FMCKI Federal Home Loan Mortgage

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2020
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
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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)
Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 Large accelerated filer  Accelerated filer
 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 
As of April 16, 2020, 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
l Credit Risk
l Operational Risk
l Market Risk
n    Liquidity and Capital Resources
n    Off-Balance Sheet Arrangements
n    Critical Accounting Policies and Estimates
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 1Q 2020 Form 10-Q i

Table of Contents

MD&A TABLE INDEX
TableDescriptionPage
1
Summary of Condensed Consolidated Statements of Comprehensive Income (Loss)

2Components of Net Interest Income
3Analysis of Net Interest Yield
4Components of Guarantee Fee Income
5Components of Investment Gains (Losses), Net
6Components of Mortgage Loans Gains (Losses)
7Components of Investment Securities Gains (Losses)
8Components of Debt Gains (Losses)
9Components of Derivative Gains (Losses)
10Components of Benefit (Provision) for Credit Losses
11Components of Credit Enhancement (Expense) Benefit, Net
12Summarized Condensed Consolidated Balance Sheets
13Single-Family Guarantee Segment Financial Results
14Multifamily Portfolio and Market Support
15Multifamily Segment Financial Results
16Capital Markets Segment Financial Results
17Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
18Single-Family New Business Activity
19Single-Family Credit Guarantee Portfolio CRT Issuance
20Single-Family Credit Guarantee Portfolio Credit Enhancement Coverage Outstanding
21Credit-Enhanced and Non-Credit-Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
22Credit Enhancement Coverage by Year of Origination
23Details of Single-Family Credit Enhancement (Expense) Benefit, Net
24Reduction in Conservatorship Credit Capital as a Result of Certain CRT Transactions
25Single-Family Allowance for Credit Losses Activity
26Single-Family Credit Guarantee Portfolio Credit Performance Metrics
27Single-Family TDR and Non-Accrual Loans
28Single-Family TDR Loan Activity
29Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
30Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
31Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
32Concentration of Credit Risk of Our Single-Family Credit Guarantee Portfolio
33Single-Family REO Activity
34Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
35Level of Subordination Outstanding
36Credit Quality of Our Multifamily Mortgage Portfolio Without Credit Enhancement
37Single-Family Credit Guarantee Portfolio Non-Depository Servicers
38Single-Family Mortgage Insurers
39PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
40Duration Gap and PVS Results
41PVS-L Results Before Derivatives and After Derivatives
42Earnings Sensitivity to Changes in Interest Rates
43Liquidity Sources
44Other Investments Portfolio
45Funding Sources
46Other Debt Activity

Freddie Mac 1Q 2020 Form 10-Q ii

Table of Contents

47Activity for Debt Securities of Consolidated Trusts Held by Third Parties
48Net Worth Activity
49Return on Conservatorship Capital
50Mortgage-Related Investments Portfolio Details

Freddie Mac 1Q 2020 Form 10-Q iii

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, including the effects the COVID-19 pandemic and the actions taken in response may have on our liquidity, business activities, financial condition, and results of operations, and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-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 and Other Information - Risk Factors sections of this Form 10-Q and the Business, Forward-Looking Statements, and Risk Factors sections of our Annual Report on Form 10-K for the year ended December 31, 2019, or 2019 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2019 Annual Report.
You should read the following MD&A in conjunction with our 2019 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2020 included in Financial Statements.
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 guaranteed mortgage-related securities, which are sold in the global capital markets and transfer interest-rate and liquidity risks to third-party investors. In addition, we transfer mortgage credit risk exposure to third-party investors through our credit risk transfer programs, which include securities- and insurance-based offerings. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America's families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers, and the industry to build a better housing finance system for the nation.
COVID-19 Pandemic Response Efforts
Late last year, a novel coronavirus disease, later named COVID-19, was detected, and outbreaks of COVID-19 have since spread globally, causing significant adverse effects on populations and economies. The outbreak of COVID-19 was declared a pandemic by the World Health Organization (WHO) on March 11, 2020. President Trump declared the COVID-19 pandemic a national emergency in the United States on March 13, 2020, and all states have declared states of emergency. The COVID-19 pandemic continues to evolve rapidly both globally and domestically. In response, many state and local governments have enacted measures designed to curb the spread of the disease that have severely curtailed economic activity and significantly increased unemployment levels. We remain focused on serving our mission and the crucial role we play in the U.S. housing finance system while supporting the health and safety of our communities, customers, and staff. We continue to actively monitor the situation and make decisions based on guidance from national and state governments and public health authorities, including the WHO and U.S. Centers for Disease Control and Prevention (CDC).
Ensuring Business Continuity and Supporting Our Staff and Community
We have business continuity plans in place to ensure we are fulfilling our mission while protecting our staff and community. We have activated our Crisis Management Team (CMT), consisting of representatives from across the company. The CMT and senior leaders are meeting regularly, closely monitoring the situation, and providing frequent updates to our Board of Directors and staff.
We have taken several actions in line with guidance from national and state governments and public health authorities to ensure business continuity, including requiring more than 95% of our staff to work remotely and taking specific actions to protect and support essential staff working in our offices, such as social distancing, face coverings, and frequent deep cleanings.
In addition to these actions, we have been engaging with FHFA and third parties to ensure continuity of critical business activities that will allow us to serve our mission and support the U.S. housing finance system during this pandemic.
We have also taken actions to support our staff and community, including providing additional paid sick leave to our staff to care for themselves or family members due to COVID-19 related illness, partnering with our vendors to ensure workers dedicated to Freddie Mac continue to receive pay and benefits, and launching virtual volunteering opportunities for staff to support their communities.

Freddie Mac 1Q 2020 Form 10-Q 1

Management's Discussion and Analysis Introduction

Providing Assistance to Homeowners and Supporting the Single-Family Mortgage Market
We have taken actions to help make sure homeowners with Freddie Mac-owned mortgages who are directly or indirectly affected by COVID-19 are able to stay in their homes during this challenging time. In March 2020, FHFA directed Freddie Mac and Fannie Mae (the Enterprises) to suspend foreclosures and evictions for homeowners with an Enterprise-backed single-family mortgage for at least 60 days due to the COVID-19 pandemic. The suspension of foreclosures and evictions will remain in effect until May 17, 2020, and if necessary, at the direction of FHFA, may be extended beyond that date.
We are also offering additional mortgage relief options for borrowers affected by COVID-19, including:
nProviding mortgage forbearance for up to 12 months;
nWaiving assessments of penalties and late fees;
nSuspending reporting to credit bureaus of delinquency related to forbearance; and
nOffering loan modification options that lower payments or keep payments the same after the forbearance period.
These measures apply to borrowers who are unable to make their mortgage payments due to financial hardship resulting from the impact of COVID-19, regardless of whether they have contracted the virus. Borrowers are eligible for forbearance regardless of whether their property is owner occupied, a second home, or an investment property.
We will also be providing servicers a payment deferral option to offer to eligible homeowners beginning on July 1, 2020. This solution, a broad offering that, at the direction of FHFA, is aligned with Fannie Mae's approach, is available to homeowners who have endured a short-term hardship and subsequently resolved it (including but not limited to hardships related to COVID-19), and provides them with a means to make up for missed payments. The payment deferral provides relief to eligible borrowers who have the financial capacity to resume making their monthly payments, but who are unable to afford the additional monthly contributions required by a repayment plan. An eligible borrower will be brought current by deferring delinquent principal and interest to the end of their existing mortgage term. Under this offering, servicers will need to evaluate the following key criteria:
nWhether the hardship has been resolved;
nWhether the borrower has the financial capacity to continue making the existing contractual monthly mortgage payment and does not require a payment reduction; and
nWhether a repayment plan or full reinstatement of the mortgage is not a viable option to cure the delinquency.
In addition, in coordination with Fannie Mae and under the guidance of FHFA, we have introduced temporary measures to help provide sellers with the clarity and flexibility to continue to lend in a prudent and responsible manner. These measures are in effect for mortgages for which applications were received on or after April 14, 2020 and before May 17, 2020. If necessary, at the direction of FHFA, the application date window may be extended beyond May 17, 2020. These temporary requirements include:
nAllowing flexibility in demonstrating a borrower's current employment status or the existence of a borrower's business;
nEstablishing underwriting restrictions applicable to a borrower's accounts containing stocks, stock options, and mutual funds due to current market volatility; and
nRequiring income and asset documentation, including that associated with self-employed borrowers, to be dated closer to the loan closing date in order to ensure the most up-to-date information is being used to support the borrower's ability to repay.
Working closely with Fannie Mae and under the guidance of FHFA, we have also announced loan processing flexibilities to expedite loan closings and help keep homebuyers, sellers, and appraisers safe during the pandemic. The flexibilities are in effect for mortgages with application dates on or before May 17, 2020, and if necessary, at the direction of FHFA, the application date window may be extended beyond that date. The flexibilities include:
nAllowing desktop appraisals or exterior-only inspection appraisals for certain purchase transactions;
nAllowing exterior-only appraisals for certain no cash-out refinances;
nAllowing desktop appraisals on new construction properties (purchase transactions);
nAllowing flexibility on demonstrating that construction has been completed;
nAllowing flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws);
nOffering flexibility in condominium project reviews; and
nExpanding the use of powers of attorney and remote online notarizations.
We have also permanently expanded our automated collateral evaluation eligibility for certain mortgages.
In April 2020, working in coordination with Fannie Mae and under the guidance of FHFA, we announced we would begin purchasing certain single-family mortgage loans that have entered into forbearance as a result of borrower hardship caused by the COVID-19 pandemic in order to help provide liquidity to the mortgage market and allow originators to keep lending. Due to

Freddie Mac 1Q 2020 Form 10-Q 2

Management's Discussion and Analysis Introduction

the unprecedented economic impact of the pandemic, some borrowers have sought forbearance shortly after closing on their single-family mortgage loan and before the lender could sell the mortgage loan to us. Although mortgage loans that have been placed into forbearance are normally ineligible for sale to us, we are removing this restriction for a limited period of time and only for mortgage loans for which the borrower:
nRequested forbearance and attested to or otherwise informed the seller/servicer that, after the mortgage note date, he or she suffered financial hardship caused directly or indirectly by COVID-19, or
nWas approved for a forbearance plan based on a COVID-19 related financial hardship that occurred after the mortgage note date.
Mortgage loans in forbearance are eligible for purchase by us provided the loans are either purchase mortgage loans or no cash-out refinance mortgage loans and are no more than 30 days delinquent. These temporary requirements are effective for mortgages with note dates on or after February 1, 2020 and on or before May 31, 2020, and settlement dates on or after May 1, 2020 and on or before July 31, 2020. Eligible loans will be priced to reflect the heightened risk of loss from these loans.
Providing Assistance to Renters and Multifamily Borrowers and Supporting the Multifamily Mortgage Market
To keep renters in multifamily properties in their homes and to support multifamily borrowers during the COVID-19 pandemic, FHFA announced in March 2020 that we and Fannie Mae will offer multifamily borrowers mortgage forbearance, with the condition that they suspend all evictions for renters unable to pay rent due to this pandemic. Under this program, multifamily borrowers with a fully performing loan as of February 1, 2020 may defer their loan payments for up to 90 days (three consecutive monthly payments) by showing hardship as a consequence of the COVID-19 pandemic and by gaining servicer approval. To align with the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a stimulus package designed to mitigate the effects of the COVID-19 pandemic that was enacted on March 27, 2020, multifamily borrowers may enter into forbearance agreements until termination of the national emergency related to the COVID-19 pandemic, but not later than December 31, 2020. Multifamily borrowers have an option to enter into a forbearance agreement to help until normal operations can be restored. In addition:
nMultifamily borrowers must repay forborne amounts in no more than 12-equal monthly installments, but they will have the option to repay such amounts sooner. No late fees or interest charges will be assessed during the 90-day forbearance period;
nMultifamily borrowers must submit a hardship letter explaining their circumstances, and a tenant delinquency and forbearance report demonstrating the effect of the COVID-19 pandemic on the property’s operation and performance;
nEach multifamily borrower that is approved for forbearance must execute a Freddie Mac standard form of forbearance agreement; and
nMultifamily borrowers must remain in compliance with all other terms and conditions of the loan documents and with all laws (including the CARES Act), ordinances, rules, regulations and requirements of any governmental authority having jurisdiction over the property.
Federal Reserve Response
In March 2020, the Federal Reserve committed to use its full range of tools to support the U.S. economy during the COVID-19 pandemic. The Federal Reserve announced that the Federal Open Market Committee (FOMC) would purchase Treasury securities and agency MBS in the amounts needed to help provide this support. In addition, the Federal Reserve noted that the FOMC will include purchases of agency CMBS in its agency MBS purchases.
The CARES Act
The CARES Act provides assistance for homeowners, renters, and multifamily borrowers, including a foreclosure moratorium, a renter eviction moratorium, and single-family and multifamily forbearance, similar to the plans we had previously announced that are discussed above. For more information on the CARES Act, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments - The CARES Act.
Business Outlook
We expect the COVID-19 pandemic to have a significant adverse effect on our business for the remainder of 2020 and into 2021, and perhaps beyond. The duration and continued severity of the COVID-19 pandemic will determine the extent of the effect on our business. Given the substantial decline in economic activity, including the likelihood of a recession, and the unprecedented nature and scope of government relief efforts, our economic and business forecasts are more uncertain than usual and there are significant downside risks. Over the past month, economic data, such as unemployment insurance claims and payroll employment growth, have been worse than expected.
With large parts of the U.S. economy shut down to fight the pandemic, the housing market faces its greatest challenge in over a decade. We expect home sales to fall significantly in 2Q 2020 and then begin to recover over the next year, but home sales may be slower to recover and improvement in homes sales may be dampened or delayed if potential buyers do not come to market. While home prices increased during 1Q 2020, the future effect of the COVID-19 pandemic on home prices is highly uncertain and dependent on the pace of economic recovery, and home price declines could be significant if forbearance and foreclosure

Freddie Mac 1Q 2020 Form 10-Q 3

Management's Discussion and Analysis Introduction

mitigation programs do not successfully limit contagion effects on home prices. The Federal Reserve’s purchases of mortgage securities have stabilized the mortgage market and lowered mortgage rates. We expect mortgage rates to remain low over the next two years and result in an increase in mortgage refinance activity. However, the volume of borrowers eligible for refinancing may decline due to a combination of the deterioration in their credit profile and credit overlays implemented by market participants. Given these offsetting factors, we estimate that overall single-family mortgage originations will remain near pre-pandemic levels for both full-year 2020 and 2021.
We also anticipate that supply and demand in the multifamily housing market will be affected over the next year due to the COVID-19 pandemic, which could flow through to multifamily fundamentals. The lack of ability to move and form new households, as well as economic uncertainty for renter households, will make it difficult to fill vacancies, but as people shelter in place, the number of lease renewals will also increase, partially offsetting the lack of new tenants moving in. New completions are expected to slow due to the pandemic, which should limit supply. The multifamily sector entered the COVID-19 pandemic on solid ground, with below historical average vacancy rates and above average rent growth. The higher unemployment rate resulting from the COVID-19 pandemic will cause some renters to face financial hardships. However, federal interventions from enhanced unemployment benefits and other forms of direct relief for the multifamily mortgage market could help lessen the impact of the COVID-19 pandemic on the multifamily sector. Multifamily delinquency rates could increase in the near term due to the effects of the pandemic. However, we currently do not expect to experience significant credit losses based on the strong fundamentals of the multifamily market, combined with our risk transfer business model. For additional information on market and macroeconomic indicators that can affect our business and financial results, see Market Conditions and Economic Indicators.
Our allowance for credit losses has increased significantly, and we expect single-family serious delinquency rates and the volume of loss mitigation activity to increase significantly in the near-term as a result of the COVID-19 pandemic and the forbearance programs we have announced. While we expect that the actions we have taken to support the mortgage markets as a result of the COVID-19 pandemic will improve borrower outcomes, these actions may not be as successful as we hope. In addition, these actions may negatively affect our financial condition and results of operations, perhaps significantly. The ultimate success of these programs will depend on the duration and severity of the economic downturn. In addition, our counterparty credit risk level has increased, particularly with respect to non-depository institutions and credit enhancement providers, as a result of financial strains and liquidity pressures on our counterparties due to the pandemic. For additional information, see MD&A - Risk Management - Credit Risk.
We maintained excess liquidity during 1Q 2020 due to volatile market conditions driven by the COVID-19 pandemic, and we expect to continue to do so in the near term, which may negatively affect our net interest income. Additionally, we expect to advance significant amounts to cover principal and interest payments to security holders for loans in forbearance in the coming months. We have also maintained adequate access to debt markets to meet our financial obligations as they come due and to meet the needs of customers in a timely and cost-efficient manner throughout the course of the pandemic, and we expect to continue to do so. However, certain of our important business activities have been negatively affected by the market volatility caused by the pandemic. Our ability to transfer single-family credit risk has been, and may continue to be, negatively affected by the COVID-19 pandemic. In addition, the cost to us of doing so has been fluctuating more significantly and rapidly than usual as a result of developments related to the COVID-19 pandemic, and may continue to change significantly and rapidly depending on the continuing effects of the pandemic on market conditions. While CRT remains a critical component of our business strategy and we intend to continue to pursue our existing CRT strategies, there may not be sufficient investor demand for single-family CRT transactions at acceptable prices for the foreseeable future, and it is uncertain if there will be adequate demand for them over the longer term based on the potential impacts of the pandemic on mortgage performance. In addition, while we continued to actively reduce our holdings of less liquid assets during 1Q 2020, the effect of the COVID-19 pandemic on market conditions negatively affected the overall liquidity of our portfolios. Although FHFA has instructed us to maintain loans in COVID-19 payment forbearance plans in mortgage-backed security pools for at least the duration of the forbearance plan, our less liquid assets are likely to increase in future periods as we will likely purchase a higher amount of delinquent and modified loans out of Freddie Mac mortgage-backed security pools. We also expect our ability to continue to sell less liquid assets at acceptable prices may be negatively affected by the market volatility caused by the COVID-19 pandemic.
For additional information on the risks associated with the COVID-19 pandemic, see Other Information - Risk Factors.

Freddie Mac 1Q 2020 Form 10-Q 4

Management's Discussion and Analysis Introduction

Business Results
Consolidated Financial Results
Net Revenues, Net Income, and Comprehensive Income
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nComprehensive income was $0.6 billion for 1Q 2020, a decrease of $1.1 billion, or 63%, from 1Q 2019, primarily driven by higher provision for credit losses due to our forecasts of higher expected credit losses from our single-family credit guarantee portfolio as a result of the COVID-19 pandemic.
nNet revenues declined $0.5 billion compared to 1Q 2019, primarily due to lower net interest income as a result of unfavorable hedge accounting impacts and a decrease in investment gains (losses), net due to the significant market volatility from the COVID-19 pandemic.
Total Equity
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nTotal equity was $9.5 billion as of March 31, 2020, up from $9.1 billion as of December 31, 2019.
nPursuant to the September 2019 Letter Agreement, the liquidation preference of the senior preferred stock increased from $79.3 billion on December 31, 2019 to $81.8 billion on March 31, 2020 based on the $2.4 billion increase in our Net Worth Amount during 4Q 2019, and will increase to $82.2 billion on June 30, 2020 based on the $0.4 billion increase in our Net Worth Amount during 1Q 2020.

Freddie Mac 1Q 2020 Form 10-Q 5

Management's Discussion and Analysis Introduction

Housing Market Support
Housing Market Support
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We support the U.S. housing market by executing our Charter Mission to ensure credit availability for new and refinanced single-family mortgages as well as for rental housing. Despite the significant challenges presented by the COVID-19 pandemic, we remain open for business. We provided $152.5 billion in liquidity to the mortgage market in 1Q 2020, which enabled the financing of 637,000 home purchases, refinancings, or rental units.

Freddie Mac 1Q 2020 Form 10-Q 6

Management's Discussion and Analysis Introduction

Portfolio Balances

Guarantee Portfolio chart-0eedc9f0b60d5358974.jpg
 
Investments Portfolio
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nOur total guarantee portfolio grew $138 billion, or 6%, from March 31, 2019 to March 31, 2020, driven by a 6% increase in our single-family credit guarantee portfolio and a 13% increase in our multifamily guarantee portfolio.
lThe growth in our single-family credit guarantee portfolio continued in 1Q 2020 driven by home price appreciation contributing to new business acquisitions having a higher average loan size compared to older vintages that continued to run off.
lThe growth in our multifamily guarantee portfolio also continued in 1Q 2020, primarily driven by strong loan purchase and securitization activity attributable to healthy multifamily market fundamentals and strong demand for multifamily loan products.
nOur total investments portfolio at March 31, 2020 increased compared to March 31, 2019, primarily due to an increase in our other investments portfolio driven by higher near-term cash needs for upcoming debt maturities and anticipated calls of other debt and a higher expected loan purchase forecast. We also maintained excess liquidity due to volatile market conditions driven by the COVID-19 pandemic. In February 2019, FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times.

Freddie Mac 1Q 2020 Form 10-Q 7

Management's Discussion and Analysis Introduction

Credit Risk Transfer
Single-Family Credit Guarantee Portfolio with Credit Enhancement
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Multifamily Mortgage Portfolio with Credit Enhancement
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In addition to transferring interest-rate and liquidity risk to third-party investors through our securitization activities, we have developed innovative CRT programs that distribute mortgage credit risk to third-party investors and have transformed our business model from one where we buy and hold credit risk to one where we buy and transfer a portion of such credit risk. Our programmatic offerings regularly transfer a portion of the credit risk primarily on recently acquired loans, with the percentage of our single-family credit guarantee portfolio and the percentage of our multifamily mortgage portfolio covered by credit enhancements at 58% and 89%, respectively, as of March 31, 2020. However, our ability to transfer single-family credit risk has been, and may continue to be, negatively affected by the COVID-19 pandemic. See COVID-19 Pandemic Response Efforts - Business Outlook and Other Information - Risk Factors for additional information. See MD&A - Our Business Segments - Single-Family Guarantee - Products and Activities and MD&A - Our Business Segments - Multifamily - Products and Activities in our 2019 Annual Report for additional information on our credit enhancements.
New Accounting Guidance for Credit Losses on Financial Instruments
On January 1, 2020, we adopted CECL, which replaces the previous incurred loss impairment methodology with a new methodology that measures the allowance for credit losses for financial instruments at amortized cost and off-balance sheet credit exposures based on current expected credit losses. CECL also changes the methodology for accounting for credit losses on debt securities classified as available-for-sale. We recorded a cumulative-effect adjustment on January 1, 2020, to recognize the impact of adopting CECL. This adjustment reduced our opening retained earnings balance by $0.2 billion, net of income taxes. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, Note 6, and Note 7 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
The adoption of CECL significantly changes how we measure credit losses on mortgage loans classified as held-for-investment and off-balance sheet credit exposures and may result in additional volatility in our credit-related expenses, as our estimate of credit losses now incorporates both our forecasts of certain future economic conditions and our expectations of credit losses over the entire contractual term of the instruments, which for many of our mortgage loans is 30 years. The length and severity of the economic downturn caused by the COVID-19 pandemic, and its impact on the housing market, is subject to significant uncertainty, which makes it difficult to estimate credit losses. These developments may have a material effect on our allowance for credit losses in future periods. See Risk Management - Credit Risk and Critical Accounting Policies and Estimates for additional information.

Freddie Mac 1Q 2020 Form 10-Q 8

Management's Discussion and Analysis Introduction

Conservatorship and Government Support for Our Business
Since September 2008, we have been operating in conservatorship, with FHFA as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury, under which we issued Treasury both senior preferred stock and a warrant to purchase common stock. Our Purchase Agreement with Treasury and the terms of the senior preferred stock also affect our business activities and are critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.
Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as, and if declared by the Conservator, acting as successor to the rights, titles, powers, and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our cash dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. Pursuant to the September 2019 Letter Agreement, the Capital Reserve Amount is $20.0 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. This would not affect our ability to draw funds from Treasury under the Purchase Agreement.
The September 2019 Letter Agreement also provides that the liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion. See Note 2 for more information about our Purchase Agreement with Treasury.
Under the September 2019 Letter Agreement, Freddie Mac and Treasury agreed to negotiate and execute an amendment to the Purchase Agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in Treasury's September 2019 Housing Reform Plan. For more information regarding Treasury's Plan, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments - Treasury Housing Reform Plan in our 2019 Annual Report.
Draw Requests From and Dividend Payments To Treasury
At March 31, 2020, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. In addition, because our Net Worth Amount did not exceed the applicable Capital Reserve Amount of $20.0 billion, we did not declare or pay a dividend to Treasury on the senior preferred stock during the three months ended March 31, 2020. The amount of available funding remaining under the Purchase Agreement was $140.2 billion at March 31, 2020 and will be reduced by any future draws.
The graph below shows our cumulative draw requests from Treasury and cumulative dividend payments to Treasury. The Treasury draw request amounts reflect the total draws requested based on our quarterly net deficits for the periods presented. Draw requests are funded in the quarter subsequent to any net deficit. The dividend payment amounts reflect the total dividend payments made to Treasury as required by the Purchase Agreement for the periods presented. Dividend payments are currently based on the prior quarter's Net Worth Amount. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock. For more information on the conservatorship and government support for our business, see MD&A - Conservatorship and Related Matters and Note 2 in our 2019 Annual Report.

Freddie Mac 1Q 2020 Form 10-Q 9

Management's Discussion and Analysis Introduction

Draw Requests From and Dividend Payments To Treasury
chart-a92e7c6f65ca4a30e20.jpg

Freddie Mac 1Q 2020 Form 10-Q 10

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-493935faeee75c4aae9.jpg
(1) 30-year PMMS interest rates are as of the last week in each quarter. SOFR interest rates are 30-day average rates.
 

 
nThe 30-year Primary Mortgage Market Survey (PMMS) interest rate is indicative of what a consumer could expect to be offered on a first-lien prime conventional conforming home purchase mortgage with an LTV of 80%. Increases (decreases) in the PMMS rate typically result in decreases (increases) in refinancing activity and originations.
nChanges in the 10-year LIBOR interest rate and other benchmark rates can significantly affect the fair value of our financial instruments. We have elected hedge accounting for certain assets and liabilities in an effort to reduce GAAP earnings variability attributable to changes in benchmark interest rates.
nChanges in the 3-month LIBOR rate affect the interest earned on our short-term investments and interest expense on our short-term funding.
nSOFR is a benchmark rate for secured overnight dollar denominated financing identified by certain banking regulators and market participants as a potential replacement for LIBOR.
nInterest rates declined dramatically across the yield curve during 1Q 2020, in many cases reaching record lows, as the Federal Reserve announced several emergency rate cuts and unlimited purchases of Treasuries and agency MBS in response to the COVID-19 pandemic.
Unemployment Rate and Monthly Net New Jobs
chart-bf8ee2b2c760a70646a.jpg
Source: U.S. Bureau of Labor Statistics.
 
nChanges in the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
nThe COVID-19 pandemic has resulted in many state and local governments enacting measures designed to curb the spread of COVID-19 that have severely curtailed economic activity and significantly increased unemployment levels, which continued to rise in April 2020.


Freddie Mac 1Q 2020 Form 10-Q 11

Management's Discussion and Analysis Market Conditions and Economic Indicators

Single-Family Housing and Mortgage Market Conditions
chart-abd3ced681c9a60a71a.jpgSources: National Association of Realtors, U.S. Census Bureau, and Freddie Mac House Price Index.



U.S. Single-Family Mortgage Originations
chart-fb4d500877c21da1aba.jpg
Source: Inside Mortgage Finance.

 
nFor full-year 2020, due to the COVID-19 pandemic, we expect U.S. single-family home purchase volume to decline, while low mortgage interest rates are expected to result in higher refinance volume. Freddie Mac's single-family loan purchase volumes follow a similar trend.
nChanges 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.
nSingle-family home prices increased 2.5% during 1Q 2020, compared to an increase of 1.5% during 1Q 2019. The future effect of the COVID-19 pandemic on home prices is highly uncertain and dependent on the economic impact of the COVID-19 pandemic and the pace of economic recovery.










nU.S. single-family mortgage origination volume increased to $670 billion in 1Q 2020 from $350 billion in 1Q 2019, driven by higher refinance volume as a result of declining average mortgage interest rates in recent quarters.
nMortgage interest rates are expected to remain low over the next two years, keeping single-family mortgage originations near pre-pandemic levels for both full-year 2020 and 2021.



Freddie Mac 1Q 2020 Form 10-Q 12

Management's Discussion and Analysis Market Conditions and Economic Indicators

Multifamily Housing and Mortgage Market Conditions
chart-386acf3195294a9de03.jpgSource: Reis.
Apartment Completions and Net Absorption
chart-8596f1aa07d2dfb50a7.jpg
Source: Reis.
 


nCompletions in 1Q 2020 totaled nearly 29,000 units, which slightly outpaced net absorptions of about 25,000 units. Despite new supply exceeding demand, the vacancy rate remained unchanged from 4Q 2019 at 4.7% nationally. This rate is below the long-term average vacancy rate of 5.3% dating back to 2000.
nEffective rent growth (i.e., the average rent paid by the tenant over the term of the lease, adjusted for concessions by the landlord and costs borne by the tenant) increased by 0.4% in 1Q 2020, and 3.4% over the past 12 months, just above the long-term average of 3.1% since 2000.




  



 

nApartment completions are an indication of the supply of rental housing. Net absorption, which is a measurement of the rate at which available apartments are occupied, is an indication of demand for rental housing.
nDemand growth was in line with supply growth, as completions slightly outpaced net absorption.
nThe economic impacts of the COVID-19 pandemic will affect renter households. Both supply and demand for rental housing will be affected over the next year which could flow through to multifamily fundamentals. The lack of ability to move and form new households as well as economic uncertainty for renter households will make it difficult to fill vacancies, but, as people shelter in place, the number of lease renewals will also increase. Also, new completions are expected to slow, which should limit supply.
nThe multifamily sector entered the COVID-19 pandemic on solid ground, with below historical average vacancy rates and above average rent growth. The higher unemployment rate will cause some tenants to face financial hardships. However, federal interventions from enhanced unemployment benefits and other forms of direct relief could help lessen the impact of the COVID-19 pandemic on the multifamily sector.

       


Freddie Mac 1Q 2020 Form 10-Q 13

Management's Discussion and Analysis Market Conditions and Economic Indicators

Mortgage Debt Outstanding
Single-Family Mortgage Debt Outstanding
chart-140213d63cc7e21f7e6.jpg
Source: Federal Reserve Financial Accounts of the United States of America.

Multifamily Mortgage Debt Outstanding chart-5d02c7a81e3cee922cc.jpgSource: Federal Reserve Financial Accounts of the United States of America. 1Q 2020 U.S. multifamily mortgage debt outstanding data is not yet available.
 

 
nDuring 1Q 2020, the single-family mortgage market grew primarily driven by house price appreciation. However, with large parts of the U.S. economy shut down to fight the COVID-19 pandemic, the housing market faces its greatest challenge in over a decade. The length and severity of the economic downturn caused by the COVID-19 pandemic, and its impact on the housing market, is subject to significant uncertainty.














nDuring most of 1Q 2020, the multifamily mortgage market grew because of continued strong demand for multifamily loan products due to solid multifamily market fundamentals. Up until March 2020, multifamily market fundamentals were driven by a healthy job market, population growth, high propensity to rent among young adults, and rising single-family home prices. Since then the effects of the pandemic have slowed the economy significantly, which we believe could slow the multifamily mortgage market during 2020.

 

Freddie Mac 1Q 2020 Form 10-Q 14

Management's Discussion and Analysis Market Conditions and Economic Indicators

Delinquency Rates
chart-910bd55cabdbfb8a522.jpg
Source: National Delinquency Survey from the Mortgage Bankers Association. Total mortgage market rate for 1Q 2020 is not yet available.
chart-9445186e75b0e5ae790.jpgSource: Freddie Mac, FDIC Quarterly Banking Profile, Intex Solutions, Inc., and Wells Fargo Securities (Multifamily CMBS market, excluding REOs), American Council of Life Insurers (ACLI). The 1Q 2020 delinquency rates for FDIC insured institutions and ACLI investment bulletin are not yet available.

 

nWe expect our single-family serious delinquency rate to increase significantly in the near term as a result of the COVID-19 pandemic and the forbearance programs we are offering in response.












n
Our 1Q 2020 multifamily delinquency rate remained low compared to other market participants, ending the quarter at 8 basis points, primarily due to our prior-approval underwriting approach and strong multifamily market fundamentals. See Risk Management - Multifamily Mortgage Credit Risk for additional information on our delinquency rates.
nMultifamily delinquency rates could increase in the near term due to the effects of the COVID-19 pandemic. However, we currently do not expect to experience significant credit losses based on the strong fundamentals of the multifamily market, combined with our risk transfer business model.

Freddie Mac 1Q 2020 Form 10-Q 15

Management's Discussion and Analysis Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
On January 1, 2020, we adopted CECL, which changed our methodology for accounting for credit losses on financial assets measured at amortized cost, off-balance sheet credit exposures, and investments in debt securities classified as available-for-sale. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, Note 6, and Note 7 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
The table below compares our summarized consolidated results of operations. Certain prior period amounts have been revised to conform to the current period presentation. See Note 1 in our 2019 Annual Report for additional information.
Table 1 - Summary of Condensed Consolidated Statements of Comprehensive Income (Loss)
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Net interest income 
$2,785

$3,153
 
($368)(12)%
Guarantee fee income 377
290
 87
30
Investment gains (losses), net (835)(513) (322)(63)
Other income (loss) 95
(17) 112
659
Net revenues 2,422
2,913
 (491)(17)
Benefit (provision) for credit losses (1,233)135
 (1,368)(1,013)
Credit enhancement (expense) benefit, net 236
(158) 394
249
REO operations expense (85)(33) (52)(158)
Credit-related expense (1,082)(56) (1,026)(1,832)
Administrative expense (587)(578) (9)(2)
Temporary Payroll Tax Cut Continuation Act of 2011 expense (432)(390) (42)(11)
Other expense (103)(124) 21
17
Operating expense (1,122)(1,092) (30)(3)
Income (loss) before income tax (expense) benefit 218
1,765
 (1,547)(88)
Income tax (expense) benefit (45)(358) 313
87
Net income (loss) 173
1,407
 (1,234)(88)
Total other comprehensive income (loss), net of taxes and reclassification adjustments 449
258
 191
74
Comprehensive income (loss) 
$622

$1,665
 
($1,043)(63)%

Freddie Mac 1Q 2020 Form 10-Q 16

Management's Discussion and Analysis Consolidated Results of Operations


Net Revenues
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 20201Q 2019 $%
Guarantee portfolio net interest income:      
Contractual net interest income 
$1,125

$906
 
$219
24 %
Net interest income related to the Temporary Payroll Tax Cut Continuation Act of 2011 429
377
 52
14
Amortization 552
482
 70
15
Total guarantee portfolio net interest income 2,106
1,765
 341
19
Investments portfolio net interest income:      
Contractual net interest income 1,433
1,536
 (103)(7)
Amortization (164)(128) (36)(28)
Interest expense related to CRT debt (240)(287) 47
16
Total investments portfolio net interest income 1,029
1,121
 (92)(8)
Income (expense) from hedge accounting (350)267
 (617)(231)
Net interest income 
$2,785

$3,153
 
($368)(12)%
Key Drivers:
nGuarantee portfolio contractual net interest income
l
1Q 2020 vs. 1Q 2019 - Increased primarily due to a higher contractual guarantee fee rate coupled with the continued growth of the core single-family loan portfolio.
nGuarantee portfolio amortization
l
1Q 2020 vs. 1Q 2019 - Increased primarily due to income from upfront fees due to an increase in the liquidation rate, partially offset by higher loan premium amortization.
nInvestments portfolio contractual net interest income
l
1Q 2020 vs. 1Q 2019 - Decreased primarily due to the lower and flatter interest rate environment, coupled with a change in our investment mix as the other investments portfolio represented a larger percentage of our total investments portfolio.
nInvestments portfolio amortization
l
1Q 2020 vs. 1Q 2019 - Decreased primarily due to the change in our investment mix as the other investments portfolio represented a larger percentage of our total investments portfolio.
nInterest expense related to CRT debt
l
1Q 2020 vs. 1Q 2019 - Decreased primarily due to a decline in volume as we no longer issue STACR debt notes on a regular basis.
nIncome (expense) from hedge accounting
l
1Q 2020 vs. 1Q 2019 - Shifted to expense in 1Q 2020 primarily due to an unfavorable earnings mismatch and amortization of hedge accounting related basis adjustments, partially offset by higher income related to accruals of periodic cash settlements on derivatives in hedging relationships.

Freddie Mac 1Q 2020 Form 10-Q 17

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 2020 1Q 2019
(Dollars in millions) 
Average
Balance
Interest
Income
(Expense)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)
Average
Rate
Interest-earning assets:        
Cash and cash equivalents 
$12,232

$21
0.68 % 
$7,105

$38
2.14 %
Securities purchased under agreements to resell 72,291
261
1.44
 47,224
297
2.51
Secured lending 3,680
26
2.72
 1,567
16
4.08
Mortgage-related securities:        
Mortgage-related securities 130,721
1,358
4.16
 133,925
1,461
4.36
Extinguishment of debt securities of consolidated trusts held by Freddie Mac

 (85,720)(829)(3.87) (84,709)(895)(4.23)
Total mortgage-related securities, net 45,001
529
4.71
 49,216
566
4.60
Non-mortgage-related securities 28,616
123
1.71
 19,408
123
2.54
Loans held by consolidated trusts(1)
 1,964,613
15,857
3.23
 1,847,861
16,977
3.68
Loans held by Freddie Mac(1)
 78,406
775
3.95
 89,152
969
4.35
Total interest-earning assets 2,204,839
17,592
3.19
 2,061,533
18,986
3.68
Interest-bearing liabilities:        
Debt securities of consolidated trusts including those held by Freddie Mac 1,987,187
(14,276)(2.87) 1,871,847
(14,876)(3.18)
Extinguishment of debt securities of consolidated trusts held by Freddie Mac (85,720)829
3.87
 (84,709)895
4.23
Total debt securities of consolidated trusts held by third parties 1,901,467
(13,447)(2.83) 1,787,138
(13,981)(3.13)
Other debt:        
Short-term debt 119,222
(430)(1.43) 70,192
(436)(2.48)
Long-term debt 170,471
(930)(2.18) 199,937
(1,416)(2.83)
Total other debt 289,693
(1,360)(1.87) 270,129
(1,852)(2.74)
Total interest-bearing liabilities 2,191,160
(14,807)(2.70) 2,057,267
(15,833)(3.08)
Impact of net non-interest-bearing funding 13,679

0.02
 4,266

0.01
Total funding of interest-earning assets 2,204,839
(14,807)(2.68) 2,061,533
(15,833)(3.07)
Net interest income/yield  
$2,785
0.51 %  
$3,153
0.61 %
(1)Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $838 million and $574 million for loans held by consolidated trusts and $21 million and $16 million for loans held by Freddie Mac during 1Q 2020 and 1Q 2019, respectively.

Freddie Mac 1Q 2020 Form 10-Q 18

Management's Discussion and Analysis Consolidated Results of Operations


Guarantee Fee Income
The table below presents the components of guarantee fee income.
Table 4 - Components of Guarantee Fee Income
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Contractual guarantee fees 
$240

$217
 
$23
11%
Guarantee obligation amortization 220
192
 28
15
Guarantee asset fair value changes (83)(119) 36
30
Guarantee fee income 
$377

$290
 
$87
30%
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Increased primarily driven by lower fair value losses on our multifamily guarantee asset due to declining interest rates coupled with continued growth in our multifamily guarantee portfolio.
Investment Gains (Losses), Net
The table below presents the components of investment gains (losses), net.
Table 5 - Components of Investment Gains (Losses), Net
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Mortgage loans gains (losses) 
$1,172

$934
 
$238
25 %
Investment securities gains (losses) 1,055
144
 911
633
Debt gains (losses) 700
15
 685
4,567
Derivative gains (losses) (3,762)(1,606) (2,156)(134)
Investment gains (losses), net 
($835)
($513) 
($322)(63)%
Mortgage Loans Gains (Losses)
The table below presents the components of mortgage loans gains (losses).
Table 6 - Components of Mortgage Loans Gains (Losses)
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Gains (losses) on certain multifamily loan purchase commitments 
$532
$390 
$142
36 %
Gains (losses) on mortgage loans:      
Single-family (22)203
 (225)(111)
Multifamily 662
341
 321
94
Total gains (losses) on mortgage loans 640
544
 96
18
Mortgage loans gains (losses) 
$1,172

$934
 
$238
25 %
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Increased primarily due to interest rate-related fair value gains on multifamily loans and commitments driven by the decline in long-term interest rates, partially offset by spread-related fair value losses on multifamily loans and commitments and single-family seasoned loans as a result of the significant market volatility caused by the COVID-19 pandemic.

Freddie Mac 1Q 2020 Form 10-Q 19

Management's Discussion and Analysis Consolidated Results of Operations


Investment Securities Gains (Losses)
The table below presents the components of investment securities gains (losses).
Table 7 - Components of Investment Securities Gains (Losses)
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Realized gains (losses) on sales of available-for-sale securities 
$10

$34
 
($24)(71)%
Realized and unrealized gains (losses) on trading securities 1,069
139
 930
669
Other (24)(29) 5
17
Investment securities gains (losses) 
$1,055

$144
 
$911
633 %
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Increased primarily due to higher gains on trading securities as a result of the decline in long-term interest rates, partially offset by losses due to spread widening on mortgage-related securities as a result of the significant market volatility caused by the COVID-19 pandemic.
Debt Gains (Losses)
The table below presents the components of debt gains (losses).
Table 8 - Components of Debt Gains (Losses)
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Fair value changes:    

Debt securities of consolidated trusts 
$4

($2) 
$6
300%
Other debt 548
(2) 550
27,500
Total fair value changes 552
(4) 556
13,900
Gains (losses) on extinguishment of debt:    

Debt securities of consolidated trusts 4
(7) 11
157
Other debt 144
26
 118
454
Total gains (losses) on extinguishment of debt 148
19
 129
679
Debt gains (losses) 
$700

$15
 
$685
4,567%
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Increased primarily due to fair value gains on STACR debt notes for which we elected the fair value option as a result of spread widening caused by the significant market volatility related to the COVID-19 pandemic, coupled with an increase in gains on extinguishments of callable debt due to an increase in call volume.

Freddie Mac 1Q 2020 Form 10-Q 20

Management's Discussion and Analysis Consolidated Results of Operations


Derivative Gains (Losses)
The table below presents the components of derivative gains (losses).
Table 9 - Components of Derivative Gains (Losses)
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Fair value changes:      
Interest-rate swaps 
($4,863)
($1,047) 
($3,816)(364)%
Option-based derivatives 4,222
(187) 4,409
2,358
Futures (2,328)(242) (2,086)(862)
Commitments (726)(96) (630)(656)
CRT-related derivatives 78
(1) 79
7,900
Other 31
21
 10
48
Total fair value changes (3,586)(1,552) (2,034)(131)
Accrual of periodic cash settlements (176)(54) (122)(226)
Derivative gains (losses) 
($3,762)
($1,606) 
($2,156)(134)%
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - The decline in long-term interest rates during 1Q 2020 resulted in higher fair value losses on pay-fixed interest rate swaps, forward commitments to issue mortgage-related securities, and futures, partially offset by fair value gains on receive-fixed swaps and certain option-based derivatives. These interest rate-related derivative losses mostly offset the interest rate-related gains on our mortgage loans and investment securities.
Credit-Related Expense
Benefit (Provision) for Credit Losses
The table below presents the components of benefit (provision) for credit losses.
Table 10 - Components of Benefit (Provision) for Credit Losses
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Benefit (provision) for credit losses:      
  Single-family 
($1,166)
$136
 
($1,302)(957)%
  Multifamily (67)(1) (66)(6,600)
Benefit (provision) for credit losses 
($1,233)
$135
 
($1,368)(1,013)%
Key Drivers:
nSingle-family
l
1Q 2020 vs. 1Q 2019 - Shifted to a provision for credit losses as we incorporated our forecasts of higher expected credit losses as a result of the COVID-19 pandemic. The $1.2 billion provision in 1Q 2020 resulted in an increase of more than 20% in the allowance for credit losses related to our single-family guarantee portfolio in 1Q 2020. The increase in the allowance from higher expected credit losses related to the pandemic was partially offset by a benefit from higher estimated prepayments as a result of the significant decline in interest rates during 1Q 2020.
nMultifamily
l
1Q 2020 vs. 1Q 2019 - Increase in provision due to slightly higher expected credit losses as a result of the pandemic. However, we do not expect to experience significant credit losses related to our multifamily mortgage portfolio based on the strong fundamentals of the multifamily market and our risk transfer business model.
The decline in economic activity caused by the pandemic, and the corresponding government response, is unprecedented, and as a result, our estimate of expected credit losses is subject to significant uncertainty. See MD&A - Risk Management - Credit Risk and Critical Accounting Policies and Estimates for additional information.

Freddie Mac 1Q 2020 Form 10-Q 21

Management's Discussion and Analysis Consolidated Results of Operations


Credit Enhancement (Expense) Benefit, Net
The table below presents the components of credit enhancement (expense) benefit, net.
Table 11 - Components of Credit Enhancement (Expense) Benefit, Net
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Premiums, amortization, and transaction costs 
($231)
($162) 
($69)(43%)
Expected recoveries 467
4
 463
11,575
Credit enhancement (expense) benefit, net 
$236

($158) 
$394
249%
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Shifted to a benefit primarily driven by an increase in expected recoveries from freestanding credit enhancements as a result of the corresponding increase in expected credit losses on the covered loans due to the COVID-19 pandemic.
Other Comprehensive Income (Loss)
Key Drivers:
n
1Q 2020 vs. 1Q 2019 - Increased $0.2 billion primarily due to fair value gains on available-for-sale securities as long-term interest rates declined, partially offset by fair value losses on agency and non-agency mortgage-related securities due to spread widening as a result of the significant market volatility caused by the COVID-19 pandemic.

Freddie Mac 1Q 2020 Form 10-Q 22

Management's Discussion and Analysis Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized condensed consolidated balance sheets.
Beginning January 1, 2020, we elected to offset payables related to securities sold under agreements to repurchase against receivables related to securities purchased under agreements to resell when such amounts meet the conditions for balance sheet offsetting. Prior period amounts have been reclassified to conform to the current presentation. See Note 1 and Note 10 in this Form 10-Q for additional information.
Table 12 - Summarized Condensed Consolidated Balance Sheets
     Change
(Dollars in millions) March 31, 2020December 31, 2019 $%
Assets:      
Cash and cash equivalents 
$24,324

$5,189
 
$19,135
369 %
Securities purchased under agreements to resell 45,968
56,271
 (10,303)(18)
Subtotal 70,292
61,460
 8,832
14
Investment securities, at fair value 79,189
75,711
 3,478
5
Mortgage loans, net 2,046,657
2,020,200
 26,457
1
Accrued interest receivable 6,841
6,848
 (7)
Derivative assets, net 2,815
844
 1,971
234
Deferred tax assets, net 4,629
5,918
 (1,289)(22)
Other assets 31,561
22,799
 8,762
38
Total assets 
$2,241,984

$2,193,780
 
$48,204
2 %
       
Liabilities and Equity:      
Liabilities:      
Accrued interest payable 
$6,271

$6,559
 
($288)(4)%
Debt 2,216,135
2,169,685
 46,450
2
Derivative liabilities, net 2,226
372
 1,854
498
Other liabilities 7,848
8,042
 (194)(2)
Total liabilities 2,232,480
2,184,658
 47,822
2
Total equity 9,504
9,122
 382
4
Total liabilities and equity 
$2,241,984

$2,193,780
 
$48,204
2 %
Key Drivers:
As of March 31, 2020 compared to December 31, 2019:
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 debt maturities and anticipated calls of other debt and a higher expected loan purchase forecast. In addition, we carried higher cash and cash equivalents due to volatile market conditions driven by the COVID-19 pandemic.
n Derivative assets, net and derivative liabilities, net increased primarily due to significant changes in the fair value of forward commitments to purchase and sell mortgage loans and mortgage-related securities.
n Deferred tax assets, net declined primarily due to a lower deferred tax asset related to derivatives.
n Other assets increased primarily due to higher servicer receivables driven by an increase in mortgage loan payoffs reported but not yet remitted at the end of 1Q 2020.






Freddie Mac 1Q 2020 Form 10-Q 23

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 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 (loss) and allocating certain revenues and expenses to our three reportable segments. For more information on our segment reclassifications, see Note 13.
Segment Comprehensive Income (Loss)
The graph below shows our comprehensive income (loss) by segment.
chart-b1da0260ed655915950.jpg
     


Freddie Mac 1Q 2020 Form 10-Q 24

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 and Average Guarantee Fee Rate (1) Charged on New Acquisitions
(UPB in billions, guarantee fee in bps)
chart-146427389807259bbb5.jpg(1) Guarantee fee excludes legislated 10 basis point increase.
 
Number of Families Helped to Own a Home

(In thousands)

chart-5270a91ca5f2043ccd7.jpg
nOur loan purchase and guarantee activity increased in 1Q 2020 compared to 1Q 2019, primarily due to higher refinance activity driven by the declining average mortgage interest rates in recent quarters and increased home purchase volume.
nThe average guarantee fee rate charged on new acquisitions increased in 1Q 2020 compared to 1Q 2019, primarily due to an increase in contractual guarantee fees and an enhancement in our estimation methodology related to recognition of buy-up fees in 2Q 2019.
nWe expect home sales to fall significantly in 2Q 2020 as a result of the COVID-19 pandemic and then begin to recover over the next year. We expect mortgage rates to remain low over the next two years and result in an increase in mortgage refinance activity. However, the volume of borrowers eligible for refinancing may decline due to a combination of the deterioration in their credit profile and credit overlays implemented by market participants. Given these offsetting factors, we expect overall mortgage origination volumes to remain near pre-pandemic levels for 2020 and 2021.



Freddie Mac 1Q 2020 Form 10-Q 25

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

Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
(UPB in billions) chart-4b076c9965c7eb0e4b0.jpg
 
Single-Family Loans
(Loan count in millions)
chart-6f7160c8a266e3377ec.jpg
nThe single-family credit guarantee portfolio increased at an annualized rate of approximately 5% between December 31, 2019 and March 31, 2020, driven by an increase in U.S. single-family mortgage debt outstanding. Continued home price appreciation contributed to new business acquisitions having a higher average loan size compared to older vintages that continued to run off.
nThe core single-family loan portfolio grew to 86% of the single-family credit guarantee portfolio at March 31, 2020, compared to 85% at December 31, 2019. The legacy and relief refinance single-family loan portfolio declined to 14% of the single-family credit guarantee portfolio at March 31, 2020, compared to 15% at December 31, 2019.
nThe average portfolio Segment Earnings guarantee fee rate was 42 bps during 1Q 2020 and 35 bps during 1Q 2019, both excluding the legislated 10 basis point increase in guarantee fees. The rate increased in 1Q 2020 compared to 1Q 2019 due to an increase in the recognition of upfront fees, net of hedging, driven by a higher prepayment rate and an increase in contractual guarantee fees as older vintages were replaced by acquisitions of new loans with higher contractual guarantee fees.

Freddie Mac 1Q 2020 Form 10-Q 26

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. The graphs below show the issuance amounts on the protected UPB and maximum coverage associated with CRT transactions for loans in our single-family credit guarantee portfolio.
CRT Issuance Protected UPB CRT Issuance Maximum Coverage chart-cc07a28768e8030e726.jpgchart-522a294dc012cd44000.jpg
nDuring 1Q 2020, 70% of our single-family acquisitions were loans in the targeted population for our CRT transactions (primarily 30-year fixed rate loans with LTV ratios between 60% and 97%).
nThe CRT transactions we executed during 1Q 2020 primarily related to loans we acquired during 2Q 2019 and 3Q 2019. As a result, our CRT protected UPB and maximum coverage issuance amounts increased during 1Q 2020 due to the increase in loan purchase activity that occurred in those prior periods.
n
Our ability to transfer single-family credit risk has been, and may continue to be, negatively affected by the COVID-19 pandemic. In addition, the cost to us of doing so has been fluctuating more significantly and rapidly than usual as a result of developments related to the COVID-19 pandemic, and may continue to change significantly and rapidly depending on continuing effects of the pandemic on market conditions. While CRT remains a critical component of our business strategy and we intend to continue to pursue our existing CRT strategies, there may not be sufficient investor demand for CRT transactions at acceptable prices for the foreseeable future, and it is uncertain if there will be adequate demand for them over the longer term based on the potential impacts of the pandemic on mortgage performance. For additional information on the impact of COVID-19, see MD&A - Introduction - COVID-19 Pandemic Response Efforts and Other Information - Risk Factors.
n
We are continually evaluating our CRT strategy, and we make changes depending on market conditions, including the significant market volatility caused by the COVID-19 pandemic, and our business strategy. See Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors for additional information on our CRT activities and other credit enhancements.

Freddie Mac 1Q 2020 Form 10-Q 27

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

Loss Mitigation Activities
Loan Workout Activity
chart-be1da8f3cc8e5b118ca.jpg
nOur loan workout activity decreased in 1Q 2020 compared to 1Q 2019 primarily driven by the ongoing reduction in the impact of the hurricanes that occurred in late 2017.
n
We expect the volume of our loss mitigation activities related to the effects of the COVID-19 pandemic to increase substantially over the next several quarters as a result of the actions we take to support the mortgage market. For additional information on our responses to the COVID-19 pandemic, see MD&A - Introduction - COVID-19 Pandemic Response Efforts.


Freddie Mac 1Q 2020 Form 10-Q 28

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 13 - Single-Family Guarantee Segment Financial Results
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Guarantee fee income 
$2,093

$1,635
 
$458
28 %
Investment gains (losses), net 437
6
 431
7,183
Other income (loss) 15
112
 (97)(87)
Net revenues 2,545
1,753
 792
45
Benefit (provision) for credit losses (1,222)71
 (1,293)(1,821)
Credit enhancement (expense) benefit, net 28
(316) 344
109
REO operations expense (87)(38) (49)(129)
Credit-related expense (1,281)(283) (998)(353)
Administrative expense (372)(374) 2
1
Other expense (151)(168) 17
10
Operating expense (523)(542) 19
4
Segment Earnings (Losses) before income tax (expense) benefit 741
928
 (187)(20)
Income tax (expense) benefit (153)(188) 35
19
Segment Earnings (Losses), net of taxes 588
740
 (152)(21)
Total other comprehensive income (loss), net of tax (2)(4) 2
50
Total comprehensive income (loss) 
$586

$736
 
($150)(20)%
Key Business Drivers:
n 1Q 2020 vs. 1Q 2019
lHigher guarantee fee income primarily due to increased upfront fee amortization income driven by higher prepayments and a higher contractual guarantee fee rate.
lHigher investment gains primarily due to higher gains on STACR debt notes for which we have elected the fair value option driven by significant widening of market spreads due to the COVID-19 pandemic, partially offset by higher lower-of-cost-or-fair-value losses related to held-for-sale loans.
lBenefit (provision) for credit losses shifted to provision in 1Q 2020 primarily due to higher expected credit losses as a result of the COVID-19 pandemic.
lCredit enhancement (expense) benefit, net shifted to benefit in 1Q 2020 primarily driven by higher expected CRT recoveries, which partially offset the higher provision for credit losses related to the adverse effects of the COVID-19 pandemic.


Freddie Mac 1Q 2020 Form 10-Q 29

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
New Business Activity
(UPB in billions)
chart-db9619f3d5df55a188c.jpg
nIn 3Q 2019, FHFA announced a revised loan purchase cap structure for the multifamily business. The loan purchase cap is $100.0 billion for the five-quarter period from 4Q 2019 through 4Q 2020 and applies to all multifamily business activity, with no exclusions. To ensure a strong focus on affordable housing and traditionally underserved markets, at least 37.5% of the new multifamily business activity must be mission-driven, affordable housing over the same five-quarter period.
lAs of March 31, 2020, the total cumulative new business activity counting toward the cap was $27.4 billion. Approximately 39% of this activity was mission-driven, affordable housing.
nOutstanding commitments, including index lock commitments and commitments to purchase or guarantee multifamily assets were $22.7 billion and $20.8 billion as of March 31, 2020 and March 31, 2019, respectively. At the end of March 2020, we temporarily suspended the availability of our index lock and early-rate lock commitment options for all loan products. The impact of this change on future new business activity is uncertain.
nThe combination of our new business activity and outstanding commitments remained relatively flat for 1Q 2020 compared to 1Q 2019.
nThe portion of our new mortgage loan purchase activity that was classified as held-for-sale and intended for our securitization pipeline decreased to 87% in 1Q 2020 from 92% in 1Q 2019 due to an increase in the issuance of fully guaranteed and consolidated other securitizations as we continued to refine the disposition path for certain loan products. The purchase activity in 1Q 2020, combined with market demand for our securities, will be a driver for our primary securitizations in the next two quarters of 2020.

Freddie Mac 1Q 2020 Form 10-Q 30

Management's Discussion and Analysis 
Our Business Segments | Multifamily


Securitization, Guarantee, and Risk Transfer Activities
Securitization and Guarantee Activities
(UPB in billions)
chart-242376067c1d5a71b1a.jpg
nTotal securitization UPB decreased during 1Q 2020 compared to 1Q 2019, primarily due to a lower held-for-sale loan portfolio available for securitization during the quarter.
nApproximately 86% and 96% of total securitization UPB related to our primary securitizations during 1Q 2020 and 1Q 2019, respectively.
nThe average guarantee fee rate on new guarantees increased during 1Q 2020 compared to 1Q 2019, primarily driven by a higher volume of securitizations without subordination, which typically have higher guarantee fee rates than our primary securitizations with subordination.
nWe further reduced our risk exposure through loan sales to whole loan funds of $0.2 billion and $0.4 billion in UPB during 1Q 2020 and 1Q 2019, respectively.
We continually evaluate our risk transfer strategy and make changes depending on market conditions and our business strategy. See Risk Management - Multifamily Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors for more information on risk transfer transactions and credit enhancements on our multifamily mortgage portfolio.

Freddie Mac 1Q 2020 Form 10-Q 31

Management's Discussion and Analysis 
Our Business Segments | Multifamily


Multifamily Portfolio and Market Support
The following table summarizes our support of the multifamily portfolio and our support of the multifamily market by UPB.
Table 14 - Multifamily Portfolio and Market Support
(In millions) March 31, 2020December 31, 2019
Guarantee portfolio:   
Primary securitizations 
$242,445

$240,134
Other securitizations 21,392
20,205
Other mortgage-related guarantees 10,937
10,514
Total guarantee portfolio 274,774
270,853
Mortgage-related investments portfolio:   
Unsecuritized mortgage loans held-for-sale 15,929
18,954
Unsecuritized mortgage loans held-for-investment 10,421
10,831
Mortgage-related securities(1)
 5,651
5,889
Total mortgage-related investments portfolio 32,001
35,674
Other investments(2)
 2,699
2,945
Total multifamily portfolio 309,474
309,472
Add: Unguaranteed securities(3)
 41,076
40,666
Less: Acquired mortgage-related securities(4)
 (5,508)(5,709)
Total multifamily market support 
$345,042

$344,429
(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 from the mortgage-related securities balance to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio or unguaranteed securities.
nOur total multifamily portfolio remained relatively flat during 1Q 2020. While we expect continued growth in our total portfolio as purchase and securitization activities should outpace run off, the near-term impacts to our new business activity and overall multifamily mortgage portfolio as a result of the COVID-19 pandemic are uncertain.
nAt March 31, 2020, approximately 76% of our held-for-sale loans were fixed-rate, while the remaining 24% were floating-rate.
nAs of March 31, 2020, we had cumulatively transferred the large majority of expected and stress credit risk on the multifamily guarantee portfolio primarily through subordination in our securitizations. In addition, nearly all of our securitization activities shifted substantially all of the interest-rate and liquidity risk associated with the underlying collateral away from Freddie Mac to third-party investors.
nWe earn guarantee fees in exchange for providing our guarantee of some or all of the securities we issue as part of our securitizations. The average guarantee fee rate that we earn on our guarantee portfolio was 37 bps, and the average remaining guarantee term was eight years, as of both March 31, 2020 and December 31, 2019. While we expect to earn future guarantee fees at the average guarantee fee rate over the average remaining guarantee term, the actual amount earned will depend on the performance of the underlying collateral subject to our financial guarantee.


Freddie Mac 1Q 2020 Form 10-Q 32

Management's Discussion and Analysis 
Our Business Segments | Multifamily


Net Interest Yield and K Certificate Benchmark Spreads
Net Interest Yield & Average Investment Portfolio Balance
chart-057f3101cc875bc8b78.jpg
 
K Certificate Benchmark Spreads
chart-52792d9ecd74f920d4b.jpg

nNet interest yield increased during 1Q 2020 compared to 1Q 2019 due to lower funding costs on our held-for-sale loans driven by lower interest rates.
n
The weighted average investment portfolio balance of interest-earning assets decreased during 1Q 2020 compared to 1Q 2019 due to a decrease in held-for-sale loans and mortgage-related securities.
nK Certificate benchmark spreads significantly widened during 1Q 2020 as a result of market volatility related to the COVID-19 pandemic, resulting in spread-related fair value losses on our held-for-sale loans and commitments and mortgage-related securities.


Freddie Mac 1Q 2020 Form 10-Q 33

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 15 - Multifamily Segment Financial Results
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
Net interest income 
$269

$247
 
$22
9 %
Guarantee fee income 413
287
 126
44
Investment gains (losses), net (851)(26) (825)(3,173)
Other income (loss) 37
29
 8
28
Net revenues (132)537
 (669)(125)
Credit-related expense (43)(5) (38)(760)
Administrative expense (120)(112) (8)(7)
Other expense (5)(6) 1
17
Operating expense (125)(118) (7)(6)
Segment Earnings (Losses) before income tax benefit (expense) (300)414
 (714)(172)
Income tax (expense) benefit 62
(84) 146
174
Segment Earnings (Losses), net of taxes (238)330
 (568)(172)
Total other comprehensive income (loss), net of tax 64
65
 (1)(2)
Total comprehensive income (loss) 
($174)
$395
 
($569)(144)%
Key Business Drivers:
n1Q 2020 vs. 1Q 2019
lIncrease in net interest income due to lower funding costs on our held-for-sale loans, partially offset by a decline in our weighted average portfolio balance of interest earning assets.
lIncrease in guarantee fee income driven by lower fair value losses on our guarantee asset due to declining interest rates coupled with continued growth in our multifamily guarantee portfolio.
lShifted to investment losses (net of other comprehensive income) in 1Q 2020 primarily driven by increased spread-related fair value losses due to spread widening, coupled with larger losses on derivatives used to economically hedge index lock commitments due to greater interest rate declines as a result of the market volatility caused by the COVID-19 pandemic. We expect these economic hedging losses to be mostly offset in 2Q 2020 as the index locks become loan purchase commitments that are measured at fair value.

Freddie Mac 1Q 2020 Form 10-Q 34

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-54b2f9158d925de3b65.jpg
 
Mortgage Investments Portfolio
chart-af1ad1de21985c8d900.jpg
n
The balance of our mortgage investments portfolio remained relatively flat from December 31, 2019 to March 31, 2020. See Conservatorship and Related Matters - Managing Our Mortgage-Related Investments Portfolio for additional details.
nThe balance of our other investments portfolio increased by 19.3%, primarily due to higher near-term cash needs as of March 31, 2020 compared to December 31, 2019 for upcoming debt maturities and anticipated calls of other debt. We also maintained excess liquidity during 1Q 2020 due to volatile market conditions caused by the COVID-19 pandemic, which may negatively affect our net interest income. Additionally, we expect to advance significant amounts to cover principal and interest payments to security holders for loans in forbearance in the coming months.
nOur less liquid assets continued to decrease and the percentage of less liquid assets relative to our total mortgage investments portfolio declined from 17.9% at December 31, 2019 to 16.6% at March 31, 2020, primarily due to repayments, sales, and securitizations. We continued to actively reduce our holdings of less liquid assets during 1Q 2020 by selling $1.9 billion of reperforming loans using senior subordinate securitization structures. However the impact of COVID-19 on market conditions negatively affected the overall liquidity of our portfolios. Although FHFA has instructed us to maintain loans in COVID-19 payment forbearance plans in mortgage-backed security pools for at least the duration of the forbearance plan, our less liquid assets are likely to increase in future periods as we will likely purchase a higher amount of delinquent and modified loans out of Freddie Mac mortgage-backed security pools. We also expect our ability to continue to sell less liquid assets at acceptable prices may be negatively affected by the market volatility caused by the COVID-19 pandemic.
nWe continue to participate in transactions that support the development of 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 1Q 2020 Form 10-Q 35

Management's Discussion and Analysis 
Our Business Segments | Capital Markets


nWe have maintained adequate access to the debt markets to meet our financial obligations as they come due and meet the needs of customers in a timely and cost-efficient manner. We expect to continue to maintain excess liquidity in the near term in order to be able to meet our financial obligations as they come due.
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(Weighted average balance in billions)
chart-951636b7ac6f5c9da3e.jpg
n
1Q 2020 vs. 1Q 2019 - Net interest yield decreased 51 basis points primarily due to the lower and flatter interest rate environment, which also resulted in an increase in amortization expense from higher loan liquidation rates and a change in our investment mix, as the other investments portfolio represented a larger percentage of our total investments portfolio.
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 2019 Annual Report for more information.


Freddie Mac 1Q 2020 Form 10-Q 36

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 16 - Capital Markets Segment Financial Results
     Change
(Dollars in millions) 1Q 20201Q 2019 $%
  Net interest income 
$509

$758
 
($249)(33)%
  Investment gains (losses), net (427)(36) (391)(1,086)
  Other income (loss) (201)(206) 5
2
Net revenues (119)516
 (635)(123)
  Administrative expense (95)(92) (3)(3)
  Other expense (9)(1) (8)(800)
Operating expense (104)(93) (11)(12)
Segment Earnings (Losses) before income tax (expense) benefit (223)423
 (646)(153)
Income tax (expense) benefit 46
(86) 132
153
Segment Earnings (Losses), net of taxes (177)337
 (514)(153)
Total other comprehensive income (loss), net of tax 387
197
 190
96
Total comprehensive income (loss) 
$210

$534
 
($324)(61)%
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 investment gains (losses), net, income tax expense, and total other comprehensive income (loss), net of tax.
Table 17 - Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
     Change
(Dollars in billions) 1Q 20201Q 2019 $%
Interest rate-related 
$0.3

$0.1
 
$0.2
200%
Market spread-related (0.4)
 (0.4)N/A
Key Drivers:
n1Q 2020 vs. 1Q 2019
lNet interest income decreased primarily due to the lower and flatter interest rate environment, which also resulted in an increase in amortization expense due to higher loan liquidation rates and a change in our investment mix, as the other investments portfolio represented a larger percentage of our total investments portfolio.
l
Decrease in investment gains (losses), net of $0.4 billion, partially offset by an increase of $0.2 billion in other comprehensive income, primarily due to spread-related fair value losses as a result of significant market volatility caused by COVID-19. See Risk Management - Market Risk for additional information on the effect of market-related items on our comprehensive income.

Freddie Mac 1Q 2020 Form 10-Q 37

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 Other Information - Risk Factors and MD&A - Liquidity and Capital Resources in this Form 10-Q and Risk Factors, MD&A - Risk Management, and MD&A - Liquidity and Capital Resources in our 2019 Annual Report. See below for updates since our 2019 Annual Report.
Credit Risk
Overview
Credit risk is the risk associated with the inability or failure of a borrower, issuer, or counterparty to meet its financial and/or contractual obligations. We are exposed to both mortgage credit risk and counterparty credit risk.
Mortgage credit risk is the risk associated with the inability or failure of a borrower to meet its financial and/or contractual obligations. We are exposed to two types of mortgage credit risk:
n
Single-family mortgage credit risk, through our ownership or guarantee of loans in the single-family credit guarantee portfolio and
n
Multifamily mortgage credit risk, through our ownership or guarantee of loans in the multifamily mortgage portfolio.
On January 1, 2020, we adopted CECL, which changed our methodology for accounting for credit losses on financial assets measured at amortized cost and off-balance sheet credit exposures. See Note 1 for additional information on our adoption of CECL. See Note 4 and Note 5 for additional information on the changes in our significant accounting policies that affect the accounting for credit losses on our single-family and multifamily credit risk exposures as a result of our adoption of CECL.
In the section below, we provide a discussion of the current risk environment for our mortgage credit risk.
Single-Family Mortgage Credit Risk
Maintaining Prudent Underwriting Standards and Quality Control Practices and Managing Seller/Servicer Performance
Loan Purchase Credit Characteristics
The credit quality of our single-family loan purchases remained strong during 1Q 2020 by historical standards. We continually monitor and evaluate market conditions that could impact the credit quality of our single-family loan purchases. We have announced temporary changes in our underwriting standards due to the COVID-19 pandemic, which may affect the expected performance of loans purchased while these changes are in effect.
In April 2020, we announced that we would temporarily purchase certain single-family mortgage loans that have entered into forbearance as a result of borrower hardship caused by the COVID-19 pandemic to help provide liquidity to the mortgage market and allow originators to keep lending. These loans will be priced to mitigate the heightened risk of loss that they present. For additional information on these temporary changes, see MD&A - Introduction - COVID-19 Pandemic Response Efforts.
The graphs below show the credit profile of the single-family loans we purchased or guaranteed in each of the last five quarters.


Freddie Mac 1Q 2020 Form 10-Q 38

Management's Discussion and Analysis Risk Management



Weighted Average Original LTV Ratio chart-0c0121ff5f8977cf12b.jpg
 
Weighted Average Original Credit Score (1)chart-328ab47f98c7d121106.jpg(1) Original credit score is based on three credit bureaus (Equifax, Experian, and xxxTransUnion).
The table below contains additional information about the single-family loans we purchased or guaranteed.
Table 18 - Single-Family New Business Activity
  1Q 2020 1Q 2019
(Dollars in millions) Amount% of Total Amount% of Total
30-year or more amortizing fixed-rate 
$114,251
83% 
$61,178
87%
20-year amortizing fixed-rate 6,097
4
 1,441
2
15-year amortizing fixed-rate 17,400
13
 5,600
8
Adjustable-rate 649

 1,817
3
FHA/VA and other governmental 29

 25

Total 
$138,426
100% 
$70,061
100%
       
Percentage of purchases      
DTI ratio > 45%  14%  16%
Property type:      
Detached single-family houses  62
  60
Townhouse  30
  31
Condominium or co-op  8
  9
Occupancy type: `    
Primary residence  91
  90
Second home  4
  4
Investment property  5
  6
Loan purpose:      
Purchase  40
  65
Cash-out refinance  21
  20
Other refinance  39
  15


Freddie Mac 1Q 2020 Form 10-Q 39

Management's Discussion and Analysis Risk Management



Transferring Credit Risk to Third-Party Investors
To reduce our credit risk exposure, we engage in various credit enhancement arrangements, which include CRT transactions and other credit enhancements.
Single-Family Credit Guarantee Portfolio CRT Issuance
The table below provides the issuance amounts during 1Q 2020 and 1Q 2019, including the protected UPB and maximum coverage by loss position, associated with CRT transactions for loans in our single-family credit guarantee portfolio. While we successfully executed a number of CRT transactions in 1Q 2020, the COVID-19 pandemic has resulted in significant volatility in the single-family CRT markets, which may negatively affect our ability to transfer credit risk on single-family loans in future periods. See MD&A - Introduction - COVID-19 Pandemic Response Efforts - Business Outlook for additional information.
Table 19 - Single-Family Credit Guarantee Portfolio CRT Issuance
  
Issuance for the Three Months Ended
March 31, 2020
 
Issuance for the Three Months Ended
March 31, 2019
  
Protected UPB(1)
Maximum Coverage(2)
 
Protected UPB(1)
Maximum Coverage(2)
(In millions) Total
First Loss(3)
MezzanineTotal Total
First Loss(3)
MezzanineTotal
STACR 
$132,571

$1,040

$2,667

$3,707
 
$74,849

$582

$1,660

$2,242
Insurance/reinsurance 97,758
221
633
854
 65,230
275
611
886
Subordination 1,688
118
59
177
 1,903
115
79
194
Lender risk-sharing 6,207
202
189
391
 4,060

128
128
Less: UPB with more than one type of CRT activity (97,505)


 (45,368)


Total CRT Activities 
$140,719

$1,581

$3,548

$5,129
 
$100,674

$972

$2,478

$3,450
(1)For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool. For other insurance/reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, 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 insurance/reinsurance transactions, represents the aggregate limit of insurance purchased from third parties at issuance. For subordination, 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 Trust notes and their equivalent in ACIS and other CRT transactions.
Single-Family Credit Guarantee Portfolio Credit Enhancement Coverage Outstanding
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 as of March 31, 2020 and December 31, 2019.
Table 20 - Single-Family Credit Guarantee Portfolio Credit Enhancement Coverage Outstanding
  Outstanding as of March 31, 2020
  
Protected UPB(1)
Percentage of Single-Family Credit Guarantee Portfolio
Maximum Coverage(2)
(Dollars in millions) TotalTotal
First Loss(3)
MezzanineTotal
Primary mortgage insurance
 
 
$427,467
21%
$109,003

$—

$109,003
STACR 906,431
45
6,912
20,422
27,334
Insurance/reinsurance 907,873
45
2,709
7,733
10,442
Subordination 44,363
2
2,715
2,785
5,500
Lender risk-sharing 29,222
1
5,154
769
5,923
Other 879

874

874
Less: UPB with multiple CRT and/or other credit enhancements (1,143,799)(56)


Single-family credit guarantee portfolio with credit enhancement 1,172,436
58
127,367
31,709
159,076
Single-family credit guarantee portfolio without credit enhancement 847,483
42



Total 
$2,019,919
100%
$127,367

$31,709

$159,076

Freddie Mac 1Q 2020 Form 10-Q 40

Management's Discussion and Analysis Risk Management



  Outstanding as of December 31, 2019
  
Protected UPB(1)
Percentage of Single-Family Credit Guarantee Portfolio
Maximum Coverage(2)
(Dollars in millions) TotalTotal
First Loss(3)
MezzanineTotal
Primary mortgage insurance
 
 
$421,870
21%
$107,690

$—

$107,690
STACR 824,359
41
5,874
19,238
25,112
Insurance/reinsurance 863,149
43
2,483
7,674
10,157
Subordination 44,941
2
2,608
2,791
5,399
Lender risk-sharing 24,078
1
5,077
580
5,657
Other 1,056

1,051

1,051
Less: UPB with multiple CRT and/or other credit enhancements (1,058,402)(52)


Single-family credit guarantee portfolio with credit enhancement 1,121,051
56
124,783
30,283
155,066
Single-family credit guarantee portfolio without credit enhancement 873,398
44



Total 
$1,994,449
100%
$124,783

$30,283

$155,066
(1)
For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool. For other insurance/reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, 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 insurance/reinsurance transactions, represents the remaining aggregate limit of insurance purchased from third parties. For subordination, 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.
We had outstanding maximum coverage of $159.1 billion and $155.1 billion on our single-family credit guarantee portfolio as of March 31, 2020 and December 31, 2019, respectively. CRT transactions provided 30.9% and 29.8% of the outstanding maximum coverage on those dates.
Credit Enhancement Coverage Characteristics
The table below provides information on the credit-enhanced and non-credit-enhanced loans in our single-family credit guarantee portfolio. The credit-enhanced categories are not mutually exclusive as a single loan may be covered by both primary mortgage insurance and other credit protection.
Table 21 - Credit-Enhanced and Non-Credit-Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
  As of March 31, 2020 As of December 31, 2019
(Percentage of portfolio based on UPB) % of PortfolioSDQ Rate % of PortfolioSDQ Rate
Credit-enhanced      
   Primary mortgage insurance 21%0.77% 21%0.79%
   Other 50
0.39
 55
0.40
Non-credit-enhanced 43
0.67
 45
0.70
Total N/A
0.60
 N/A
0.63
The table below provides information on the amount of credit enhancement coverage by year of origination associated with loans in our single-family credit guarantee portfolio.

Freddie Mac 1Q 2020 Form 10-Q 41

Management's Discussion and Analysis Risk Management



Table 22 - Credit Enhancement Coverage by Year of Origination
  As of March 31, 2020 As of December 31, 2019
(Dollars in millions) 
UPB(1)
Percentage of UPB with Credit Enhancement 
UPB(1)
Percentage of UPB with Credit Enhancement

Year of Loan Origination      
  2020 
$79,764
25% N/A
N/A
  2019 418,787
55
 
$383,003
40%
  2018 200,563
81
 221,712
81
  2017 227,276
78
 242,605
77
  2016 264,988
71
 277,762
71
  2015 and prior 828,111
44
 869,043
44
Total 
$2,019,489
57
 
$1,994,125
55
(1)Excludes loans underlying certain securitization products for which loan-level data is not available.
Credit Enhancement Expenses and Recoveries
The recognition of expenses and estimated probable recoveries associated with credit enhancements in our condensed consolidated financial statements depends on the type of credit enhancement. See our 2019 Annual Report for more information. See Note 6 for additional information on our credit enhancements. The table below contains details on the costs associated with our single-family credit enhancements.
Table 23 - Details of Single-Family Credit Enhancement (Expense) Benefit, Net
(In millions) 1Q 20201Q 2019
Credit enhancement costs (1)
   
Credit enhancement (expense) benefit, net 
$214

($153)
Interest expense related to CRT debt (232)(275)
 Total costs (18)(428)
    
Estimated reinvestment income from proceeds of CRT debt issuance

 46
112
Single-family credit enhancement (expense) benefit, net 
$28

($316)
(1)
Excludes fair value gains and losses on CRT derivatives and CRT debt recorded at fair value. See MD&A - Consolidated Results of Operations for additional information on these items.
Impact of CRT Transactions on Conservatorship Capital
We use FHFA's risk-based CCF guidelines to determine the amount of total conservatorship capital needed for our single-family credit guarantee portfolio. We reduce the amount of conservatorship capital needed for credit risk by shifting the risk of credit losses from Freddie Mac to third-party investors through our CRT transactions, primarily our STACR and ACIS transactions. The table below presents information on the impact of certain CRT transactions on the amount of capital needed for credit risk (conservatorship credit capital) pursuant to the CCF. For more information on the CCF, see Liquidity and Capital Resources - Capital Resources - Conservatorship Capital Framework.
Table 24 - Reduction in Conservatorship Credit Capital (1) as a Result of Certain CRT Transactions
  As of March 31, 2020 As of December 31, 2019
(Dollars in billions) Single-Family Credit Guarantee PortfolioSingle-Family Credit Guarantee Portfolio - Covered by Certain CRT TransactionsSingle-Family Credit Guarantee Portfolio - Other Single-Family Credit Guarantee PortfolioSingle-Family Credit Guarantee Portfolio - Covered by Certain CRT TransactionsSingle-Family Credit Guarantee Portfolio - Other
Conservatorship credit capital prior to CRT (2)
 
$32.7

$19.2

$13.5
 
$32.0

$16.1

$15.9
Conservatorship credit capital reduced by CRT (3)
 (14.4)(14.4)
 (11.8)(11.8)
Conservatorship credit capital needed after CRT 
$18.3

$4.8

$13.5
 
$20.2

$4.3

$15.9
Reduction in conservatorship credit capital (%) (4)

 44.0%75.0%% 36.9%73.3%%
UPB 
$2,020

$1,026

$994
 
$1,994

$945

$1,049
% of portfolio 100%51%49% 100%47%53%

Freddie Mac 1Q 2020 Form 10-Q 42

Management's Discussion and Analysis Risk Management



(1)Conservatorship credit capital figures for each period are based on the CCF in effect during the period. The CCF in effect as of March 31, 2020 was largely unchanged from the CCF as of December 31, 2019. The conservatorship credit capital figures as of March 31, 2020 are preliminary and subject to change until official submission to FHFA. The conservatorship credit capital figures as of December 31, 2019 have been revised to conform to the official submission to FHFA.
(2)Represents the total conservatorship credit capital prior to CRT on the outstanding balance of our single-family credit guarantee portfolio as of March 31, 2020 and December 31, 2019 based on prescribed CCF guidelines.
(3)Represents the amount of conservatorship credit capital released from certain CRT transactions, including STACR, ACIS/AFRM, certain senior subordination securitization structures, and certain lender risk-sharing transactions, based on prescribed CCF guidelines.
(4)Calculated as conservatorship credit capital reduced by CRT divided by conservatorship credit capital prior to CRT.
Monitoring Loan Performance and Characteristics
We review loan performance, including monitoring credit quality characteristics in conjunction with housing market and economic conditions, to assess credit risk when estimating our allowance for credit losses.
Allowance for Credit Losses
Upon the adoption of CECL on January 1, 2020, we recognized an increase to the opening balance of the allowance for credit losses on single-family loans classified as held-for-investment. Under CECL, we recognize an allowance for credit losses before a loss event has been incurred, which results in earlier recognition of credit losses compared to the previous incurred loss impairment methodology. Under CECL, we estimate the allowance for credit losses for loans on a pooled basis using a discounted cash flow model that evaluates a variety of factors to estimate the cash flows we expect to collect. The discounted cash flow model forecasts cash flows over the loan’s remaining contractual life, adjusted for expectations of prepayments and TDRs we reasonably expect will occur, and using our historical experience, adjusted for current and future economic forecasts. These projections require significant management judgment and we face uncertainties and risks related to the models we use for financial accounting and reporting purposes. In particular, the length and severity of the economic downturn caused by the COVID-19 pandemic and its impact on home prices and the housing market, the number of borrowers that require assistance under the COVID-19 forbearance programs we are offering, and the ultimate success of those programs in resolving borrower hardships are all subject to significant uncertainty and may have a material effect on our allowance for credit losses in future periods.
For further information on our accounting policies and methods for estimating our allowance for credit losses and related management judgments, see Critical Accounting Policies and Estimates.
The table below summarizes our single-family allowance for credit losses activity.
Table 25 - Single-Family Allowance for Credit Losses Activity
 (Dollar in millions) 1Q 20201Q 2019
Ending balance, December 31 
$4,268

$6,176
Cumulative-effect adjustment recognized upon adoption of CECL 965

Beginning balance, January 1 5,233
6,176
(Benefit) provision for credit losses 1,166
(136)
Charge-offs (164)(605)
Recoveries collected 88
106
Other 24
41
Ending balance 
$6,347

$5,582
    
As a percentage of our single-family credit guarantee portfolio

 0.31%0.29%

Freddie Mac 1Q 2020 Form 10-Q 43

Management's Discussion and Analysis Risk Management



Credit Losses and Recoveries
The table below contains certain credit performance metrics for our single-family credit guarantee portfolio.
Table 26 - Single-Family Credit Guarantee Portfolio Credit Performance Metrics
(Dollars in millions) 1Q 20201Q 2019
Charge-offs 
$164

$605
Recoveries collected (88)(106)
Charge-offs, net 76
499
REO operations expense 85
33
Total credit losses 
$161

$532
    
Total credit losses (in bps)

 4.6
11.5
Recoveries from gains on loan sales 
($29)
$—
Recoveries collected under freestanding credit enhancements and write-offs of CRT debt (3)
TDRs and Non-Accrual Loan Activity
Single-family loans that have been modified or placed on non-accrual status generally have a higher associated allowance for credit losses. Due to the large number of loan modifications completed in past years, a significant portion of our allowance for credit losses is attributable to TDR loans:
nAs of March 31, 2020, 25% of the allowance for credit losses for single-family loans related to interest-rate concessions provided to borrowers as part of loan modifications.
nMost of our modified single-family loans, including TDRs, were current and performing at March 31, 2020.
nIn general, we expect our allowance for credit losses associated with existing single-family TDRs to decline over time as borrowers continue to make monthly payments under the modified terms and interest-rate concessions are amortized into earnings. In addition, our sales of reperforming loans will decrease these allowances for credit losses. However, the COVID-19 pandemic is likely to cause some borrowers to have difficulty making their monthly payments under the modified terms, and our ability to sell reperforming loans at acceptable prices has been negatively affected by the COVID-19 pandemic and may continue to be negatively affected in the near term.

Freddie Mac 1Q 2020 Form 10-Q 44

Management's Discussion and Analysis Risk Management



The CARES Act provides temporary relief from the accounting requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. We have elected to apply this temporary relief and therefore will not account for qualifying loan modifications as TDRs. In addition, interpretive guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that borrowers who receive relief through government-mandated modification or deferral programs related to COVID-19 are not experiencing financial difficulty and, therefore, such modifications or deferral programs should not be accounted for as TDRs. As a result, we expect that substantially all of the forbearance and other relief programs we are offering as a result of COVID-19 will not be accounted for as TDRs, and we therefore expect the volume of TDRs to decline in the near term. In addition, we are currently evaluating our policy for interest income recognition for loans that receive forbearance as a result of a hardship related to COVID-19. See Note 4 for additional information on our accounting policies for forbearance programs related to COVID-19.
The table below presents information about the UPB and interest income of single-family TDR loans and non-accrual loans on our condensed consolidated balance sheets.
Table 27 - Single-Family TDR and Non-Accrual Loans
  As of March 31, 2020 As of December 31, 2019
(Dollars in millions) Mortgage Loans Held-for-InvestmentMortgage Loans Held-for-SaleTotal Mortgage Loans Held-for-investmentMortgage Loans Held-for-SaleTotal
UPB:        
  TDRs on accrual status(1)
 
$30,288

$11,604

$41,892
 
$32,188

$11,576

$43,764
  Non-accrual loans 6,279
4,477
10,756
 6,529
4,654
11,183
Total TDRs and non-accrual loans 
$36,567

$16,081

$52,648
 
$38,717

$16,230

$54,947
         
Allowance for credit losses associated with:        
  TDRs on accrual status 
$1,354

$7

$1,361
 
$2,452

$—

$2,452
  Non-accrual loans 436
159
595
 597

597
Total 
$1,790

$166

$1,956
 
$3,049

$—

$3,049
         
Allowance as % of UPB:        
  TDRs on accrual status 4%%3% 8%%6%
  Non-accrual loans 7
4
6
 9

5
Total 5
1
4
 8

6
  Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
(In millions) Mortgage Loans Held-for-InvestmentMortgage Loans Held-for-SaleTotal Mortgage Loans Held-for-InvestmentMortgage Loans Held-for-SaleTotal
Interest on TDRs and non-accrual loans:        
  At original contractual rates 
$464

$223

$687
 
$603

$253

$856
  Recognized (331)(129)(460) (401)(143)(544)
Foregone interest income on TDRs and non-accrual loans(2)
 
$133

$94

$227
 
$202

$110

$312
(1)In prior periods, UPB amounts included only loans classified as held-for-investment.
(2)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.

Freddie Mac 1Q 2020 Form 10-Q 45

Management's Discussion and Analysis Risk Management



The table below summarizes the UPB of single-family held-for-investment TDR loan activity.
Table 28 - Single-Family TDR Loan Activity
  March 31, 2020 
March 31, 2019(1)
(Dollars in millions) Loan CountAmount Loan CountAmount
Beginning balance, as of January 1 249,182

$35,623
 290,255

$42,254
New additions 7,424
1,215
 8,734
1,347
Repayments and reclassifications to held-for-sale (19,741)(3,223) (21,347)(3,809)
Foreclosure sales and foreclosure alternatives (864)(127) (1,373)(185)
Ending balance, as of March 31 236,001
33,488
 276,269
39,607
Loans impaired upon purchase 

 2,403
158
Total impaired loans with an allowance recorded 

 278,672
39,765
Allowance for credit losses  (1,699)  (3,820)
Net investment, as of March 31  
$31,789
  
$35,945
(1)Excludes held-for-investment TDRs with no allowance for credit losses based on the individual impairment assessment according to the previous incurred loss impairment methodology.
Delinquency Rates
The charts below show the credit losses and serious delinquency rates for each of our single-family loan portfolios. Our core single-family loan portfolio continued to perform well through March 31, 2020 and accounted for a small percentage of our credit losses at that date, as shown below. Our legacy and relief refinance single-family loan portfolio continues to decline as a percentage of our overall portfolio, but continues to account for the majority of our credit losses.
The total serious delinquency rate on our single-family credit guarantee portfolio was 0.60% as of March 31, 2020. However, 42% of the seriously delinquent loans at March 31, 2020 were covered by credit enhancements designed to reduce our credit risk exposure. See Note 4 for additional information on our single-family delinquency rates.
Our total single-family serious delinquency rate was lower as of March 31, 2020 compared to March 31, 2019 due to 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. This decline is also attributable to our continued loss mitigation efforts and sales of certain seriously delinquent loans, as well as home price appreciation and a low unemployment rate.
The ongoing COVID-19 pandemic has caused an unprecedented disruption in the mortgage market. While we expect the actions we take to support the mortgage market to improve borrower outcomes, these actions may not be as successful as we hope, and we expect the serious delinquency rates for our single-family loan portfolio to increase substantially in the near term.

Freddie Mac 1Q 2020 Form 10-Q 46

Management's Discussion and Analysis Risk Management



chart-aa8cf8e927f48841bab.jpg
 

Serious Delinquency Rates chart-3c0c06ac70835a836e1.jpg
Loan Characteristics
The table below contains details on characteristics of the loans in our single-family credit guarantee portfolio.
Table 29 - Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
  As of March 31, 2020
(Dollars in billions) UPB
Original Credit
Score
 (1)
Current Credit
Score
(1)
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
Core single-family loan portfolio 
$1,739
750
751
75%60%%%
Legacy and relief refinance single-family loan portfolio 281
711
692
83
51
2
7
Total 
$2,020
745
748
76
58

1
Referenced footnotes are included after the next table.
  As of December 31, 2019
(Dollars in billions) UPB
Original Credit
Score
 (1)
Current Credit
Score
(1)
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
Core single-family loan portfolio 
$1,701
750
752
75%60%%%
Legacy and relief refinance single-family loan portfolio 293
712
692
83
52
2
7
Total 
$1,994
745
749
76
59

1
(1)
Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion). Current credit score is based on Experian only.
Higher Risk Loan Attributes and Attribute Combinations
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 CLTV ratio attributes of loans in our single-family credit guarantee portfolio.

Freddie Mac 1Q 2020 Form 10-Q 47

Management's Discussion and Analysis Risk Management



Table 30 - Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
  As of March 31, 2020
  CLTV ≤ 80 CLTV > 80 to 100 CLTV > 100 All Loans
(Original credit score) % PortfolioSDQ Rate % Portfolio
SDQ Rate(1)
 % Portfolio
SDQ Rate(1)
 % PortfolioSDQ Rate% Modified
Core single-family loan portfolio:             
< 620 0.3%2.89% %NM
 %NM
 0.3%3.02%3.4%
620 to 659 2.2
1.24
 0.3
1.58% 
NM
 2.5
1.28
2.0
≥ 660 70.7
0.20
 12.4
0.28
 
NM
 83.1
0.21
0.3
Not available 0.1
1.40
 
NM
 
NM
 0.1
1.95
3.7
Total 73.3%0.25
 12.7%0.34
 %NM
 86.0%0.26
0.4
              
Legacy and relief refinance single-family loan portfolio:             
< 620 1.1%4.10
 0.1%8.97
 0.1%15.57% 1.3%4.72
17.1
620 to 659 1.4
2.94
 0.2
7.86
 0.1
12.51
 1.7
3.39
15.8
≥ 660 10.1
1.02
 0.6
3.97
 0.2
6.23
 10.9
1.18
5.7
Not available 0.1
4.37
 
NM
 
NM
 0.1
4.68
19.7
Total 12.7%1.54
 0.9%5.42
 0.4%8.95
 14.0%1.79
8.1
Referenced footnotes are included after the next table.
  As of December 31, 2019
  CLTV ≤ 80 CLTV > 80 to 100 CLTV > 100 All Loans
(Original credit score) % PortfolioSDQ Rate % Portfolio
SDQ Rate(1)
 % Portfolio
SDQ Rate(1)
 % PortfolioSDQ Rate% Modified
Core single-family loan portfolio:             
< 620 0.3%2.68% %NM
 %NM
 0.3%2.87%3.5%
620 to 659 2.1
1.26
 0.4
1.59% 
NM
 2.5
1.30
1.9
≥ 660 69.8
0.20
 12.6
0.26
 
NM
 82.4
0.20
0.3
Not available 0.1
1.23
 
NM
 
NM
 0.1
1.96
3.6
Total 72.3%0.24
 13.0%0.33
 %NM
 85.3%0.26
0.4
              
Legacy and relief refinance single-family loan portfolio:             
< 620 1.1%4.16
 0.2%9.33
 0.1%15.03% 1.4%4.83
17.7
620 to 659 1.5
3.01
 0.2
7.91
 0.1
12.84
 1.8
3.52
16.3
≥ 660 10.5
1.06
 0.7
3.91
 0.2
6.32
 11.4
1.23
5.9
Not available 0.1
4.39
 
NM
 
NM
 0.1
4.68
19.6
Total 13.2%1.58
 1.1%5.39
 0.4%8.96
 14.7%1.84
8.3
(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 $0.7 billion and $0.8 billion of security collateral underlying our other securitization products at March 31, 2020 and December 31, 2019, 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 their prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation

Freddie Mac 1Q 2020 Form 10-Q 48

Management's Discussion and Analysis Risk Management



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, part of our relief refinance initiative or 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 or 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, 2020, we have purchased approximately $36.4 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
Table 31 - Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
  As of March 31, 2020 As of December 31, 2019
(Dollars in billions) UPBCLTV% ModifiedSDQ Rate UPBCLTV% ModifiedSDQ Rate
Alt-A 
$20.5
60%18.0%3.64% 
$21.1
61%18.4%3.75%
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.
Geographic Concentrations
The table below summarizes the concentration by geographic area of our single-family credit guarantee portfolio as of March 31, 2020 and December 31, 2019, respectively. While our portfolio is well-diversified geographically, the economic effects of the COVID-19 pandemic may be disproportionately concentrated in certain geographic regions or areas. See Risk Management - Single-Family Mortgage Credit Risk in our 2019 Annual Report for additional information on geographic concentrations. See Note 14 for more information about credit risk associated with loans that we hold or guarantee.
Table 32 - Concentration of Credit Risk of Our Single-Family Credit Guarantee Portfolio
  March 31, 2020 December 31, 2019 Percent of Credit Losses
  
Percentage  of
Portfolio
Serious
Delinquency
Rate
 
Percentage  of
Portfolio
Serious
Delinquency
Rate
 1Q 20201Q 2019
Region(1)
         
West 30%0.35% 30%0.36% 8%15%
Northeast 24
0.83
 24
0.87
 36
37
North Central 16
0.59
 16
0.61
 29
16
Southeast 16
0.70
 16
0.73
 18
25
Southwest 14
0.52
 14
0.54
 9
7
Total 100%0.60
 100%0.63
 100%100%
State(2)
         
Illinois 4%0.82
 4%0.85
 16%10%
New York 5
1.13
 5
1.21
 9
12
Florida 6
0.71
 6
0.77
 9
18
New Jersey 3
1.01
 3
1.08
 8
10
Maryland 3
0.82
 3
0.88
 5
4
All other 79
0.52
 79
0.54
 53
46
Total 100%0.60
 100%0.63
 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 2020.

Freddie Mac 1Q 2020 Form 10-Q 49

Management's Discussion and Analysis Risk Management



Engaging in Loss Mitigation Activities
Loan Workout Activities
Pursuant to FHFA guidance and the CARES Act, we are required to offer mortgage relief options for borrowers affected by the COVID-19 pandemic. Among other things, we are offering forbearance of up to 12 months to single-family borrowers experiencing a financial hardship, either directly or indirectly, related to COVID-19. We will also be providing servicers a payment deferral option to offer to eligible homeowners beginning on July 1, 2020. This solution, a broad offering that, at the direction of FHFA, is aligned with Fannie Mae's approach, is available to homeowners who have endured a short-term hardship and subsequently resolved it (including but not limited to hardships related to COVID-19) and provides them with a means to make up for missed payments. The payment deferral provides relief to eligible borrowers who have the financial capacity to resume making their monthly payments, but who are unable to afford the additional monthly contributions required by a repayment plan. We expect these programs to result in a substantial increase in our loss mitigation activity in the near term.
For additional information on actions we have taken in response to the COVID-19 pandemic, see MD&A - Introduction - COVID-19 Pandemic Response Efforts.
Sales and Securitization of Certain Seasoned Loans
We pursue sales of seriously delinquent loans when we believe the sale of these loans provides better economic returns than continuing to hold them. During 1Q 2020 and 1Q 2019, we completed sales of $0.3 billion and $0.0 billion, respectively, in UPB of seriously delinquent single-family loans. Of the $18.5 billion in UPB of single-family loans classified as held-for-sale at March 31, 2020, $3.9 billion related to loans that were seriously delinquent.
In addition to sales of seriously delinquent loans, we sell certain reperforming loans. Our sales of reperforming loans typically involve securitization of the loans using our senior subordinate securitization structures. During 1Q 2020 and 1Q 2019, we sold $1.9 billion and $2.1 billion, respectively, in UPB of reperforming loans through these structures.
Our ability to sell seriously delinquent loans and reperforming loans at acceptable prices has been negatively affected by the COVID-19 pandemic and may continue to be negatively affected in the near term.
Managing Foreclosure and REO Activities
Pursuant to FHFA guidance and the CARES Act, we are required to suspend foreclosures and evictions due to the COVID-19 pandemic until May 17, 2020, and this suspension period may be extended by FHFA, if necessary.
Our REO ending inventory declined in 1Q 2020, 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.
The table below presents a summary of our single-family REO activity.
Table 33 - Single-Family REO Activity
  1Q 2020 1Q 2019
(Dollars in millions) Number of PropertiesAmount Number of PropertiesAmount
Beginning balance — REO 4,989

$565
 7,100

$780
Additions 1,441
136
 2,156
208
Dispositions (2,262)(227) (2,542)(234)
Ending balance — REO 4,168
474
 6,714
754
Beginning balance, valuation allowance  (10)  (11)
Change in valuation allowance  (7)  1
Ending balance, valuation allowance  (17)  (10)
Ending balance — REO, net  
$457
  
$744

Freddie Mac 1Q 2020 Form 10-Q 50

Management's Discussion and Analysis Risk Management



Multifamily Mortgage Credit Risk
Pursuant to FHFA guidance and the CARES Act, Freddie Mac will offer multifamily borrowers mortgage forbearance, with the condition that they suspend all evictions for renters unable to pay rent due to the impact of this pandemic. Under this forbearance program, multifamily borrowers with a fully performing loan as of February 1, 2020 can defer their loan payment for up to 90 days by showing hardship as a consequence of the COVID-19 pandemic and by gaining lender approval. We have various forms of credit enhancements that reduce our credit risk exposure to the underlying mortgage borrower. As a result, we currently do not expect to experience significant credit losses due to the COVID-19 pandemic. For additional information on our responses to the COVID-19 pandemic, see MD&A - Introduction - COVID-19 Pandemic Response Efforts.
Transferring Credit Risk to Third-Party Investors
To reduce our credit risk exposure, we engage in various credit enhancement arrangements, which include securitizations and other credit enhancements. Our securitizations remain our principal risk transfer mechanism. Through these securitizations, we have transferred a large majority of the expected and stress credit risk on the multifamily guarantee portfolio, thereby reducing our overall credit risk exposure and required conservatorship capital.
The table below presents the delinquency rates and current expected credit losses for both credit-enhanced and non-credit enhanced loans underlying our multifamily mortgage portfolio.
Table 34 - Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
  March 31, 2020 December 31, 2019
(Dollars in millions) UPB% of PortfolioDelinquency RateCurrent Expected Credit Losses UPB% of PortfolioDelinquency Rate
Credit-enhanced:         
Subordination 
$253,547
84%0.09%
$8
 
$251,008
84%0.09%
Other(1)
 15,418
5
0.06
44
 16,069
5
0.06
Total credit-enhanced 268,965
89
0.09
52
 267,077
89
0.09
Non-credit-enhanced 31,706
11
0.03
64
 33,091
11

Total 
$300,671
100%0.08%
$116
 
$300,168
100%0.08%
(1)Includes lender risk-sharing agreements related to certain securitizations, insurance/reinsurance contracts, SCR, and other credit enhancements.
The following table provides information on the level of subordination outstanding on our securitizations with subordination.
Table 35 - Level of Subordination Outstanding
  March 31, 2020 December 31, 2019
(Dollars in millions) UPBDelinquency Rate UPBDelinquency Rate
Less than 10% 
$2,078
0.04% 
$2,094
0.04%
10% or greater 251,469
0.09
 248,914
0.09
Total 
$253,547
0.09% 
$251,008
0.09%
Weighted average subordination level 14%  14% 
The table below contains details on the loans underlying our multifamily mortgage portfolio that are not credit-enhanced.
Table 36 - Credit Quality of Our Multifamily Mortgage Portfolio Without Credit Enhancement
  March 31, 2020 December 31, 2019
(Dollars in millions) UPBDelinquency RateCurrent Expected Credit Losses UPBDelinquency Rate
Unsecuritized loans:       
Held-for-sale 
$13,070
0.07%N/A
 
$15,930
0.01%
Held-for-investment 9,204


$40
 9,408

Securitization-related products 4,841

20
 3,656

Other mortgage-related guarantees 4,591

4
 4,097

Total 
$31,706
0.03%
$64
 
$33,091
%
We continue to develop other strategies to reduce our credit risk exposure to multifamily loans and securities. See Our Business Segments - Multifamily - Business Overview - Products and Activities - Securitization and Guarantee Products in our 2019 Annual Report for additional information.

Freddie Mac 1Q 2020 Form 10-Q 51

Management's Discussion and Analysis Risk Management



Counterparty Credit Risk
We are exposed to counterparty credit risk, which is a type of institutional credit risk, as a result of our contracts with sellers and servicers, credit enhancement providers (mortgage insurers, investors, etc.), financial intermediaries, clearinghouses, and other counterparties. During 1Q 2020, many of our counterparties, primarily non-depository institutions, faced financial strains and liquidity pressure due to the economic downturn and market volatility caused by the COVID-19 pandemic. If these financial strains and liquidity pressure continue, our counterparties may not be able to perform under their contracts and as a result our counterparty credit risk exposure may increase. We have heightened our monitoring of counterparty credit risk and continue to assess impacts on an ongoing basis.
We have activated counterparty contingency plans that are responsible for safeguarding us from counterparty losses related to our business either directly from taking mortgage credit risk or to support customer and market transactions. Despite our active monitoring and communication, as the effect of COVID-19 continues to evolve, it is difficult to currently assess the impact on our financial results of increased counterparty credit risk.
Sellers and Servicers
Single-Family
We perform ongoing monitoring and review of our exposure to individual sellers or servicers in accordance with our institutional credit risk management framework, including requiring our counterparties to provide regular financial reporting to us. We have significant exposure to non-depository and smaller depository financial institutions in our single-family business. In March 2020, as the COVID-19 pandemic evolved rapidly, liquidity concerns primarily regarding non-depository financial institutions arose as market conditions changed and borrowers affected by COVID-19 were offered widespread forbearance, including forbearance on loans purchased and securitized by Freddie Mac. Servicers must continue to advance mortgage interest payments for Freddie Mac loans for up to 120 days during the forbearance period, which may increase liquidity pressures on certain of our counterparties.
In response to these potential liquidity concerns, we have heightened our monitoring and review of the financial stability of our non-depository institutional counterparties. However, if these counterparties continue to experience financial difficulty, we could experience a decline in mortgage servicing quality and/or be less likely to recover losses. In order to reduce our credit exposure, we may use a variety of tools and techniques to engage our single-family sellers and servicers and limit our losses, including providing incentives and compensatory fees and facilitating servicing transfers.
The table below summarizes the concentration of non-depository servicers of our single-family credit guarantee portfolio.
Table 37 - Single-Family Credit Guarantee Portfolio Non-Depository Servicers
  March 31, 2020 December 31, 2019
  
% of Portfolio(1)
% of Serious Delinquent Single-Family Loans 
% of Portfolio(1)
% of Serious Delinquent Single-Family Loans
Top five non-depository servicers 18%11% 18%13%
Other non-depository servicers 21
55
 20
55
Total 39%66% 38%68%
(1)
Excludes loans where we do not exercise control over the associated servicing.
Multifamily
The majority of our multifamily loans are securitized using trusts that are administered by master servicers who bear responsibility to advance funds in the event of payment shortfalls. In the majority of our primary securitization transactions, we utilize one of three large financial depository institutions as master servicers, except for small balance loan securitizations where we serve as master servicer. In instances where payment shortfalls occur, the master servicer is required to make advances as long as such advances have not been deemed non-recoverable. For loans purchased and held in our mortgage-related investment portfolio, the primary servicers are not required to advance funds in the event of payment shortfalls and therefore do not present significant counterparty credit risk.

Freddie Mac 1Q 2020 Form 10-Q 52

Management's Discussion and Analysis Risk Management



Credit Enhancement Providers
We monitor our exposure to individual insurers by performing periodic analysis of the financial capacity of each insurer under various adverse economic conditions. The COVID-19 pandemic may increase financial strains on our credit enhancement providers, and as a result, we have heightened our monitoring and are actively communicating with our counterparties to assess potential risk impacts. If our credit enhancement providers fail to meet their obligations to reimburse us for claims, we could experience an increase in credit losses.
The table below summarizes our exposure to single-family mortgage insurers as of March 31, 2020. In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum exposure to credit losses resulting from such a failure.
Table 38 - Single-Family Mortgage Insurers
     As of March 31, 2020
(In millions) 
Credit Rating(1)
Credit Rating
Outlook
(1)
 UPBCoverage
Arch Mortgage Insurance Company A-Negative 
$93,062

$23,838
Radian Guaranty Inc. (Radian) BBB+Negative 85,071
21,454
Mortgage Guaranty Insurance Corporation (MGIC) BBB+Negative 74,822
19,203
Genworth Mortgage Insurance Corporation BB+Watch Dev 65,077
16,619
Essent Guaranty, Inc. BBB+Negative 64,081
16,343
National Mortgage Insurance (NMI) BBBNegative 39,243
10,042
PMI Mortgage Insurance Co. (PMI) Not RatedN/A 2,676
668
Republic Mortgage Insurance Company (RMIC) Not RatedN/A 1,988
494
Triad Guaranty Insurance Corporation (Triad) Not RatedN/A 1,151
289
Others N/AN/A 296
53
Total    
$427,467

$109,003
(1)Ratings and outlooks are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by consolidated affiliates and subsidiaries of the counterparty. Latest rating available as of March 31, 2020. Represents the lower of S&P and Moody's credit ratings and outlooks stated in terms of the S&P equivalent.
Other Counterparties
We have exposure to institutions that act as counterparties to other types of transactions that we enter into in the ordinary course of business, including securities purchased under agreements to resell, secured lending transactions, and forward settlement of our loans and securities. We monitor the financial strength of these institutions and may use collateral maintenance requirements to manage our exposure to individual counterparties.
During 1Q 2020, certain of our counterparties engaging in securities purchased under agreements to resell on Freddie Mac securities defaulted under the terms of the governing legal agreements by failing to meet margin requirements. The transactions were terminated in accordance with the terms of the agreements and we recognized the collateral at fair value, which was in excess of the counterparties' outstanding obligations. We did not recognize a financial loss as a result of these defaults.

Freddie Mac 1Q 2020 Form 10-Q 53

Management's Discussion and Analysis Risk Management



Operational Risk
Overview
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, or systems or from external events. Operational risk is inherent in all of our activities. For additional discussion of operational risk events and our operational risk environment, see Risk Management - Operational Risk in our 2019 Annual Report.
See below for updates to operational risk since our 2019 Annual Report.
Business Resiliency Risk
As a result of the COVID-19 pandemic, our business resiliency risk has increased. We have instituted temporary operational changes, such as shifting to remote work for more than 95% of our staff. We have not yet experienced significant operational or technological issues associated with these operational changes. However, a prolonged period of remote work for us or our counterparties or vendors, or any significant technological or infrastructure-related disruptions during this period of remote work, could affect our ability to conduct normal business operations, perhaps significantly.
To manage this increased risk, we are leveraging our business resiliency and crisis management capabilities to mitigate the impact of the COVID-19 pandemic on our operations. Our business resiliency and executive crisis management teams have been meeting daily to address issues as they arise. These teams have developed a series of scenarios anticipating various degrees of impact on our resources and business operations and corresponding action plans that can be leveraged, if needed, as the situation evolves. The crisis management team and our senior leaders are providing frequent updates to our Board of Directors and staff. We are also working with FHFA and third parties to ensure continuity of critical business activities.
Third-Party Risk
We anticipate that our third-party service providers, sellers, servicers, and other counterparties are facing challenges due to the unprecedented events surrounding the COVID-19 pandemic. To address the elevated third-party risks arising from these anticipated challenges, we have increased our monitoring of third parties we deem to be critical or high risk to our operations. For example, we are using market intelligence sources to assess a number of risk factors for certain critical third parties, including financial health, geographic risk, and liquidity risk. We have also evaluated the contingency plans provided to us by significant third parties as well as our internal plans in the event that these third parties were to fail. We will continue to assess the contingency plans as the situation evolves and, where necessary, will invoke our plans to ensure continuity of operations.
See Risk Management - Credit Risk - Counterparty Credit Risk for additional information on our monitoring of our sellers and servicers.
Model Risk
The unprecedented events surrounding the COVID-19 pandemic, along with the associated severe market dislocation, has generated an increased degree of model risk and uncertainty. As a result, we expect our models to face significant challenges in accurately forecasting key inputs into our financial cash flows. These can include, but are not limited to, projections of mortgage rates, home prices, credit defaults, negative yields, prepayments and interest rates. In response, we are attempting to mitigate this increased risk by monitoring model performance and applying model overlays and adjustments when deemed appropriate. These will be driven by the latest developments and emerging trends in the economy, as well as any additional government interventions and internal policy changes. However, these adjustments have an element of subjectivity and are based upon difficult and complex judgments. Actual results could differ from our estimates, and the use of different judgments and assumptions related to these estimates could have a material impact on our condensed consolidated financial statements.
For additional information on risks associated with our use of models, see Other Information - Risk Factors in this Form 10-Q and MD&A - Risk Management - Operational Risk - Model Risk and Risk Factors - Operational Risks - We face risks and uncertainties associated with the models that we use to inform business and risk management decisions and for financial accounting and reporting purposes in our 2019 Annual Report.

Freddie Mac 1Q 2020 Form 10-Q 54

Management's Discussion and Analysis 
Risk Management 

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), the debt we issue to fund our assets, and upfront fees (including buy-downs) related to our single-family credit guarantee activity. 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 Portfolio Value Sensitivity (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.
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 39 - PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
  March 31, 2020 December 31, 2019
  PVS-YC PVS-L PVS-YC PVS-L
(In millions) 25 bps 50 bps100 bps 25 bps 50 bps100 bps
Assuming shifts of the LIBOR yield curve, (gains) losses on:(1)
          
Assets:          
Investments 
$248
 
$4,522

$9,277
 
($307) 
$4,840

$10,011
Guarantees(2)
 249
 335
894
 (224) 351
706
Total Assets 497
 4,857
10,171
 (531) 5,191
10,717
Liabilities (58) (1,245)(2,315) 20
 (1,563)(3,413)
Derivatives (431) (3,474)(7,525) 513
 (3,646)(7,409)
Total 
$8
 
$138

$331
 
$2
 
($18)
($105)
PVS 
$8
 
$138

$331
 
$2
 
$—

$—
(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 includes buy-ups, float, and upfront fees (including buy-downs).

Freddie Mac 1Q 2020 Form 10-Q 55

Management's Discussion and Analysis 
Risk Management 

Table 40 - Duration Gap and PVS Results
  1Q 2020 1Q 2019
(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 0.4

$10

$62
 0.1

$10

$15
Minimum (0.1)

 (0.2)

Maximum 1.5
28
236
 0.4
30
46
Standard deviation 0.4
7
73
 0.1
8
15
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 41 - PVS-L Results Before Derivatives and After Derivatives
  PVS-L (50 bps)  
(In millions) 
Before
Derivatives
After
Derivatives
 
Effect of
Derivatives
March 31, 2020 
$3,612

$138
 
($3,474)
December 31, 2019 3,628

 (3,628)
Earnings Sensitivity to Market Risk
The 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 earnings when interest rates and spreads change. We have elected fair value hedge accounting for certain assets and liabilities in an effort to reduce this earnings variability and better align our financial results with the economics of our business. See Consolidated Results of Operations and Our Business Segments for additional information on the effect of changes in interest rates and market spreads on our financial results for 1Q 2020 and 1Q 2019.
Interest Rate-Related Earnings Sensitivity
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our models, changes in interest rates may still result in significant earnings variability from period to period. Based upon the composition of our financial assets and liabilities, including derivatives, at March 31, 2020, we would generally recognize fair value losses when interest rates decline if we did not apply fair value hedge accounting.
By electing fair value hedge accounting for certain single-family mortgage loans and certain debt instruments, we are able to reduce the potential variability in our earnings attributable to changes in interest rates. See Note 9 for additional information on hedge accounting.
Earnings Sensitivity to Changes in Interest Rates
We evaluate a range of interest rate scenarios to determine the sensitivity of our earnings due to changes in interest rates and to determine our fair value hedge accounting strategies. The interest rate scenarios evaluated include parallel shifts in the yield curve in which interest rates increase or decrease by 100 basis points, non-parallel shifts in the yield curve in which long-term interest rates increase or decrease by 100 basis points, and non-parallel shifts in the yield curve in which short-term and medium-term interest rates increase or decrease by 100 basis points. This evaluation identifies the net effect on comprehensive income from changes in fair value attributable to changes in interest rates for financial instruments measured at fair value, including the effects of fair value hedge accounting, for each of the identified scenarios. This evaluation does not include the net effect on comprehensive income from interest-rate sensitive items that are not measured at fair value (e.g., amortization of mortgage loan premiums and discounts, changes in fair value of held-for-sale mortgage loans for which we have not elected the fair value option, etc.) or from changes in our future contractual net interest income due to repricing of our interest-bearing assets and liabilities. The results of this evaluation are shown in the table below.

Freddie Mac 1Q 2020 Form 10-Q 56

Management's Discussion and Analysis 
Risk Management 

Table 42 - Earnings Sensitivity to Changes in Interest Rates
  Changes in Fair Value Due to Changes in Interest Rates for Financial Instruments Measured at Fair Value, Net of Hedge Accounting (Before-Tax)
(In billions) March 31, 2020March 31, 2019
Interest Rate Scenarios   
Parallel yield curve shifts:   
  +100 basis points 
$0.3

$—
  -100 basis points (0.3)
Non-parallel yield curve shifts - long-term interest rates:   
  +100 basis points 0.1
(0.2)
  -100 basis points (0.1)0.2
Non-parallel yield curve shifts - short-term and medium-term interest rates:   
 +100 basis points 0.2
0.2
    -100 basis points (0.2)(0.2)
The actual effect of changes in interest rates on our comprehensive income in any given period may vary based on a number of factors, including, but not limited to, the composition of our assets and liabilities, the actual changes in interest rates that are realized at different terms along the yield curve, and the effectiveness of our hedge accounting strategies. Even if implemented properly, our hedge accounting programs may not be effective in reducing earnings volatility, and our hedges may fail in any given future period, which could expose us to significant earnings variability in that period. See Risk Factors - Market Risk - Changes in interest rates could negatively affect the fair value of financial assets and liabilities, our results of operations, and our net worth in our 2019 Annual Report for additional information.
Spread-Related Earnings Sensitivity
We have limited ability to manage our spread risk exposure in a cost beneficial manner, and therefore the changes in market spreads may contribute to significant earnings variability from period to period. 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. See MD&A - Our Business Segments for additional information on the impact of market spreads on our results of operations.

Freddie Mac 1Q 2020 Form 10-Q 57

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 2019 Annual Report.
Liquidity
Primary Sources of Liquidity
The following table lists the sources of our liquidity, the balances as of March 31, 2020, and a brief description of their importance to Freddie Mac.
Table 43 - Liquidity Sources
Source
Balance(1)
 (In billions)
 Description
Liquidity   
Other Investments Portfolio - Liquidity and Contingency Operating Portfolio
$80.4
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
$121.3

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 44 - Other Investments Portfolio
  March 31, 2020 December 31, 2019
(In billions) Liquidity and Contingency Operating PortfolioCustodial AccountOther
Total Other Investments Portfolio (1)
 Liquidity and Contingency Operating PortfolioCustodial AccountOther
Total Other Investments Portfolio (1)
Cash and cash equivalents 
$6.4

$17.9

$—

$24.3
 
$4.2

$0.9

$0.1

$5.2
Securities purchased under agreements to resell 45.8
13.5
1.0
60.3
 40.6
23.1
2.4
66.1
Non-mortgage related securities 28.2

4.6
32.8
 23.2

3.9
27.1
Secured lending and other 

6.1
6.1
 

5.2
5.2
Total 
$80.4

$31.4

$11.7

$123.5


$68.0

$24.0

$11.6

$103.6
(1)Represents carrying value.
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 $3.8 billion and $3.7 billion as of March 31, 2020 and December 31, 2019, respectively.
The liquidity and contingency operating portfolio also included collateral posted to us in the form of cash primarily by derivatives counterparties of $6.4 billion and $2.6 billion as of March 31, 2020 and December 31, 2019, 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 1Q 2020 Form 10-Q 58

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, 2020 and a brief description of their importance to Freddie Mac.
Table 45 - Funding Sources
Source
Balance(1)
 (In billions)
 Description
Funding   
Other Debt
$286.1
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
$1,930.0

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 carrying value of debt balances after consideration of offsetting arrangements.
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-term and callable 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.
Beginning in March 2020, we ceased issuing LIBOR-indexed floating-rate unsecured debt securities that mature beyond the end of 2021. As of March 31, 2020, we did not have any outstanding LIBOR-indexed unsecured debt securities, except for our remaining outstanding STACR debt notes, which we are no longer issuing on a regular basis.
Despite the impact of COVID-19, we have had adequate access to the debt markets to meet our financial obligations as they come due.
The table below summarizes the par value and the average rate of other debt 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 from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt.

Freddie Mac 1Q 2020 Form 10-Q 59

Management's Discussion and Analysis 
Liquidity and Capital Resources 


Table 46 - Other Debt Activity
  1Q 2020 1Q 2019
(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 
$60,830
1.67%
$—
% 
$28,787
2.36%
$—
%
Issuances 99,376
1.34


 94,886
2.34


Repurchases 



 



Maturities (102,384)1.62


 (77,819)2.28


Ending Balance 57,822
1.33


 45,854
2.46


           
Securities sold under agreements to repurchase          
Beginning balance 9,843
1.46


 6,019
2.40


Additions 299,679
1.10


 50,157
2.45


Repayments (295,217)1.16


 (41,214)2.43


Ending Balance 14,305
0.16


 14,962
2.50


           
Callable debt          
Beginning balance 1,000
2.36
94,152
2.03
 2,000
2.53
105,206
2.09
Issuances 

29,089
1.78
 

14,120
2.99
Repurchases 



 



Calls (1,000)2.36
(36,102)2.09
 (2,000)2.78
(14,171)3.10
Maturities 

(2,270)1.48
 

(3,681)1.23
Ending Balance 

84,869
1.92
 

101,474
2.10
           
Non-callable debt          
Beginning balance 39,407
2.31
62,228
2.86
 14,440
2.04
80,789
2.56
Issuances 14,356
1.57
31,656
0.85
 8,119
2.43


Repurchases 



 

(221)1.50
Maturities (13,450)2.24
(3,589)1.57
 (6,050)1.87
(4,872)2.89
Ending Balance 40,313
2.07
90,295
2.21
 16,509
2.29
75,696
2.62
           
STACR and SCR Debt(2)
          
Beginning balance 

15,497
5.55
 

17,729
6.02
Issuances 



 

280
2.48
Repurchases 



 



Maturities 

(843)3.83
 

(412)4.65
Ending Balance 

14,654
5.57
 

17,597
6.17
           
Total other debt 
$112,440
1.45%
$189,818
2.34% 
$77,325
2.43%
$194,767
2.67%
(1)Average rate is weighted based on par value.
(2)STACR debt notes 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 table.
As of March 31, 2020, our aggregate indebtedness, calculated as the par value of other debt, was $288.2 billion, which was below the $300.0 billion debt cap limit imposed by the Purchase Agreement. Beginning January 1, 2020, we elected to net securities sold under agreements to repurchase against securities purchased under agreements to resell when such amounts meet the conditions for balance sheet offsetting, both on our condensed consolidated balance sheets and for purposes of measuring our aggregate indebtedness under the debt cap limit. Prior period amounts have been reclassified to conform to the current presentation. See Note 10 for additional information.
Our outstanding other debt balance increased during 1Q 2020 compared to 1Q 2019, driven by an increase in the issuance of short-term SOFR debt primarily due to higher near-term cash needs for upcoming debt maturities and anticipated calls. We also maintained excess liquidity due to volatile market conditions caused by the COVID-19 pandemic, which may negatively affect our net interest income. Additionally, we expect to advance significant amounts to cover principal and interest payments to security holders for loans in forbearance in the coming months.

Freddie Mac 1Q 2020 Form 10-Q 60

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, 2020 (1) chart-a15ebb4b77f45a1f962.jpg
 
Earliest Redemption Date as of March 31, 2020 1) chart-5f91d48be276593aa81.jpg
(1)STACR debt notes 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:
nThe assets held by the securitization trusts, the majority of which are mortgage loans. We recognized $1,963.6 billion and $1,940.5 billion of mortgage loans, which represented 87.6% and 88.1% of our total assets, as of March 31, 2020 and December 31, 2019, respectively.
nThe debt securities issued by the securitization trusts, the majority of which are Level 1 securitizations that 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 securities. We recognized $1,930.0 billion and $1,898.4 billion of debt securities of consolidated trusts, which represented 87.1% of our total debt, as of both March 31, 2020 and December 31, 2019, 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. In April, 2020, FHFA instructed us to maintain loans in COVID-19 payment forbearance plans in mortgage-backed security pools for at least the duration of the forbearance plan.


Freddie Mac 1Q 2020 Form 10-Q 61

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 47 - Activity for Debt Securities of Consolidated Trusts Held by Third Parties
(In millions) 1Q 20201Q 2019
Beginning balance 
$1,854,802

$1,748,738
Issuances:   
New issuances to third parties 103,769
43,604
Additional issuances of securities 42,652
27,832
Total issuances 146,421
71,436
Extinguishments:   
Purchases of debt securities from third parties (4,017)(6,015)
Debt securities received in settlement of secured lending (14,765)(5,947)
Repayments of debt securities (96,670)(48,185)
Total extinguishments (115,452)(60,147)
Ending balance 1,885,771
1,760,027
Unamortized premiums and discounts 44,234
43,680
Debt securities of consolidated trusts held by third parties 
$1,930,005

$1,803,707
Cash Flows
Cash and cash equivalents (including restricted cash and cash equivalents) increased by $18.1 billion from March 31, 2019 to March 31, 2020, primarily driven by an increase in proceeds from the issuance of debt and higher loan liquidations due to decreasing interest rates. In addition, we carried higher cash and cash equivalents due to volatile market conditions caused by the COVID-19 pandemic during March 2020.
Capital Resources
Primary Sources of Capital
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 funding, under certain conditions, to eliminate deficits in our net worth. At March 31, 2020, 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 $9.5 billion and the applicable Capital Reserve Amount of $20.0 billion, we will not have a dividend requirement to Treasury for the quarter ending March 31, 2020. See Note 2 for details of the support we receive from Treasury.
The table below presents activity related to our net worth during 1Q 2020 and 1Q 2019.
Table 48 - Net Worth Activity
(In millions) 1Q 20201Q 2019
Ending balance, December 31 
$9,122

$4,477
Cumulative-effect adjustment (1)
 (240)
Beginning balance, January 1 8,882
4,477
Comprehensive income (loss) 622
1,665
Capital draw from Treasury 

Senior preferred stock dividends declared 
(1,477)
Total equity / net worth 
$9,504

$4,665
Aggregate draws under Purchase Agreement 
$71,648

$71,648
Aggregate cash dividends paid to Treasury 119,680
118,015
Liquidation preference of the senior preferred stock 81,770
75,648
(1)
Cumulative-effect adjustment related to our adoption of CECL. See Note 1 for additional information on our adoption of CECL.

Freddie Mac 1Q 2020 Form 10-Q 62

Management's Discussion and Analysis Liquidity and Capital Resources


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, a 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 use the CCF to evaluate business decisions and ensure the company makes such decisions prudently when pricing transactions and managing its businesses. This framework focuses on returns on conservatorship capital versus an estimated cost of equity capital needed to support the risk assumed to generate those returns.
The CCF has been and may be further revised by FHFA from time to time, including 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, and, thus, our returns on conservatorship capital. FHFA has announced that it plans to re-propose the Enterprise Capital Rule in 2020.
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 and the September 2019 Letter Agreement, we are not able to retain equity, as calculated under GAAP, in excess of the $20.0 billion Capital Reserve Amount. As a result, we do not have capital sufficient to support our aggregate risk-taking activities.
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.
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 net worth limit imposed since 2012 under the Purchase Agreement.
Table 49 - Return on Conservatorship Capital(1)  
(Dollars in billions) 1Q 20201Q 2019
Comprehensive income 
$0.6

$1.7
Conservatorship capital (average during the period)(2)
 50.5
52.4
ROCC, based on comprehensive income(2)
 4.9%12.7%
(1)Average conservatorship capital and ROCC for 1Q 2020 are preliminary and subject to change until official submission to FHFA.
(2)Average conservatorship capital for each period is based on the CCF in effect during that period. The CCF in effect as of March 31, 2020 was largely unchanged from the CCF as of March 31, 2019.
Our ROCC for 1Q 2020 decreased compared to the return for 1Q 2019, primarily driven by the significant decrease in comprehensive income due to higher provision for credit losses based on our forecasts of higher expected credit losses from our single-family credit guarantee portfolio as a result of the COVID-19 pandemic. Our ROCC in future periods may be affected by the significant adverse effect the COVID-19 pandemic may have on our business for the remainder of 2020 and into 2021, and perhaps beyond.
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 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.

Freddie Mac 1Q 2020 Form 10-Q 63

Management's Discussion and Analysis Off-Balance Sheet Arrangements

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 2019 Annual Report. See Note 3 and Note 5 for more information on our off-balance sheet securitization and guarantee activities. Our adoption of CECL on January 1, 2020 changed how we measure our allowance for credit losses on off-balance sheet credit exposures. See Note 5 for additional information.
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 $300.5 billion and $296.5 billion at March 31, 2020 and December 31, 2019, respectively. These amounts exclude Fannie Mae securities backing Freddie Mac resecuritization products discussed below.
We commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities in our commingled resecuritization products, our guarantee covers timely payments of principal and interest on such securities. Accordingly, commingling Fannie Mae collateral in our resecuritization transactions increases our off-balance sheet exposure as we do not have control over the Fannie Mae collateral. The total amount of our off-balance sheet exposure related to Fannie Mae securities backing Freddie Mac resecuritization products was $39.5 billion and $27.4 billion at March 31, 2020 and December 31, 2019, respectively. We expect this exposure to increase over time.





Freddie Mac 1Q 2020 Form 10-Q 64

Management's Discussion and Analysis Critical Accounting Policies and Estimates

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make a number of judgments, estimates, and assumptions that affect the reported amounts within our condensed consolidated financial statements. Certain of our accounting policies, as well as estimates we make, are critical, as they are both important to the presentation of our financial condition and results of operations and require management to make difficult, complex, or subjective judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from our estimates, and the use of different judgments and assumptions related to these policies and estimates could have a material impact on our condensed consolidated financial statements.
Our critical accounting policies and estimates relate to the single-family allowance for credit losses. For additional information about our critical accounting policies and estimates and other significant accounting policies, as well as recently issued accounting guidance, see Note 1 in this Form 10-Q and in our 2019 Annual Report.
Single-Family Allowance for Credit Losses
Beginning on January 1, 2020, upon the adoption of CECL, the single-family allowance for credit losses represents our estimate of expected credit losses over the contractual term of the mortgage loans. The single-family allowance for credit losses pertains to all single-family loans classified as held-for-investment on our condensed consolidated balance sheets.
Determining the appropriateness of the single-family allowance for credit losses is a complex process that is subject to numerous estimates and assumptions requiring significant management judgment about matters that involve a high degree of subjectivity. This process involves the use of models that require us to make judgments about matters that are difficult to predict, the most significant of which are the probability of default, prepayment, and loss severity. We regularly evaluate the underlying estimates and models we use when determining the single-family allowance for credit losses and update our assumptions to reflect our historical experience and current view of economic factors. For additional information on uncertainty and risks related to models, see Other Information - Risk Factors in this Form 10-Q and Risk Factors - Operational Risks - We face risks and uncertainties associated with the models that we use to inform business and risk management decisions and for financial accounting and reporting purposes in our 2019 Annual Report. Upon adoption of CECL, the single-family allowance for credit losses also includes our reasonable and supportable forecast of certain future economic conditions, such as house prices and interest rates. Changes in our forecasts or the occurrence of actual economic conditions that differ significantly from our forecast may significantly affect the measurement of our single-family allowance for credit losses. The length and severity of the economic downturn caused by the COVID-19 pandemic, and its impact on the housing market, is subject to significant uncertainty, which makes it difficult to estimate credit losses. These developments may have a material effect on our allowance for credit losses in future periods.
We believe the level of our single-family allowance for credit losses is appropriate based on internal reviews of the factors and methodologies used. No single statistic or measurement determines the appropriateness of the allowance for credit losses. Changes in one or more of the estimates or assumptions used to calculate the single-family allowance for credit losses could have a material impact on the allowance for credit losses and benefit (provision) for credit losses.
Most single-family loans are aggregated into pools based on similar risk characteristics and measured collectively using a statistically based model that evaluates a variety of factors affecting collectability, including but not limited to current LTV ratios, trends in home prices, loan product type, delinquency/default status and history, and geographic location. Inputs used by the model are regularly updated for changes in the underlying data, assumptions, and market conditions. We review the output of this model by considering qualitative factors such as macroeconomic and other factors to see whether the model outputs are consistent with our expectations. Management adjustments may be necessary to take into consideration external factors and current economic events that have occurred but are not yet reflected in the factors used to derive the model outputs. Significant judgment is exercised in making these adjustments.
Some examples of the qualitative factors considered include:
nRegional housing trends;
nApplicable home price indices;
nUnemployment and employment dislocation trends;
nThe effects of changes in government policies and programs;
nIndustry trends;
nConsumer credit statistics;
nThird-party credit enhancements;
nNatural disasters (such as hurricanes and wildfires); and
nOther catastrophic events (such as the COVID-19 pandemic and the impact of associated relief programs).
The inability to realize the benefits of our loss mitigation activities, declines in home prices, deterioration in the financial condition of our mortgage insurers, or increases in delinquency rates would cause our losses to be significantly higher than those currently estimated.

Freddie Mac 1Q 2020 Form 10-Q 65

Management's Discussion and AnalysisConservatorship 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. In November 2019, FHFA directed us, by January 31, 2020, to include 10% of the notional value of certain interest-only securities owned by Freddie Mac in the calculation of this portfolio, while continuing to maintain the portfolio below the limit imposed by FHFA. For this purpose, our mortgage-related investments portfolio was $215.5 billion as of March 31, 2020, including $4.3 billion representing 10% of the notional amount of the interest-only securities we held as of March 31, 2020.
Table 50 - Mortgage-Related Investments Portfolio Details
  March 31, 2020 December 31, 2019
(Dollars in millions) LiquidSecuritiz-ation PipelineLess LiquidTotal LiquidSecuritiz-ation PipelineLess LiquidTotal
Capital Markets segment - Mortgage investments portfolio:         

Single-family unsecuritized loans    
    
Performing loans 
$—

$26,300

$—

$26,300
 
$—

$19,144

$—

$19,144
Reperforming loans 

24,622
24,622
 

26,134
26,134
Total single-family unsecuritized loans 
26,300
24,622
50,922


19,144
26,134
45,278
Agency securities 116,291

2,385
118,676
 119,156

2,518
121,674
Non-agency mortgage-related securities 

1,421
1,421
 

1,458
1,458
Total Capital Markets segment - Mortgage investments portfolio 116,291
26,300
28,428
171,019
 119,156
19,144
30,110
168,410
Single-family Guarantee segment - Single-family unsecuritized seriously delinquent loans 

8,177
8,177
 

8,589
8,589
Multifamily segment:    
     
Unsecuritized loans 
15,397
10,953
26,350
 
18,531
11,254
29,785
Mortgage-related securities 5,019

632
5,651
 5,209

680
5,889
Total Multifamily segment 5,019
15,397
11,585
32,001
 5,209
18,531
11,934
35,674
Total mortgage-related investments portfolio 
$121,310

$41,697

$48,190

$211,197
 
$124,365

$37,675

$50,633

$212,673
Percentage of total mortgage-related investments portfolio 57%20%23%100% 58%18%24%100%
While we continued to purchase new single-family seriously delinquent loans from securities we guarantee and certain multifamily unsecuritized loans, which are classified as held-for-investment, our active disposition of less liquid assets during 1Q 2020 included the following:
nSales of $1.9 billion in UPB of single-family reperforming loans and $0.3 billion in UPB of seriously delinquent unsecuritized single-family loans; and
nSecuritizations of $1.2 billion in UPB of less liquid multifamily loans.
While we continued to actively reduce our holdings of less liquid assets during 1Q 2020, the effect of the COVID-19 pandemic on market conditions negatively affected the overall liquidity of our portfolios. In addition, although FHFA has instructed us to maintain loans in COVID-19 payment forbearance plans in mortgage-backed security pools for at least the duration of the forbearance plan, our less liquid assets are likely to increase in future periods as we will likely purchase a higher amount of delinquent and modified loans out of Freddie Mac mortgage-backed security pools. We also expect our ability to continue to sell less liquid assets at acceptable prices may be negatively affected by the market volatility caused by the COVID-19 pandemic.


Freddie Mac 1Q 2020 Form 10-Q 66

Management's Discussion and AnalysisRegulation 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
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. During 1Q 2020, we completed $147.6 billion of new business purchases subject to this requirement and accrued $62 million of related expense. We are prohibited from passing through these costs to the originators of the loans that we purchase.
Affordable Housing Goals
In March 2020, we filed our Annual Housing Activities Report with FHFA. For 2019, we have determined that, based on the FHFA benchmarks for the affordable housing goals, we achieved all five of our single-family affordable housing goals 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 2019.
Duty to Serve
The GSE Act and FHFA regulation established 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. Freddie Mac is currently operating under an underserved markets plan for 2018-2020. In March 2020, we submitted our 2019 Duty to Serve Annual Report, which includes information on activities and objectives undertaken during 2019. FHFA will use this report to evaluate our 2019 performance under our current underserved markets plan.
On March 30, 2020, in light of COVID-19, FHFA notified us that it has extended until September 1, 2020 the deadline for the submission of our draft 2021-2023 duty to serve underserved markets plan.
Legislative and Regulatory Developments
The CARES Act
On March 27, 2020, President Trump signed into law the CARES Act, which includes several provisions related to Freddie Mac and the mortgage industry. Key provisions include:
n
Credit Reporting: If borrowers affected by COVID-19 are granted an accommodation, including partial payments, forbearance, or other relief, and the credit obligation was current at the time the accommodation was granted, the credit obligation is to be reported as current. If the credit obligation was delinquent before the accommodation and continues to be delinquent during the accommodation period, the credit obligation will continue to be reported as delinquent.
n
Forbearance for Homeowners: Homeowners with federally backed mortgage loans, which include loans that are purchased or securitized by Freddie Mac, that are experiencing a financial hardship due to COVID-19 can request forbearance. Servicers must grant forbearance to any borrower claiming a financial burden arising from COVID-19, regardless of the delinquency status. Forbearance may be granted for a period of up to 180 days and may be extended for an additional period of up to 180 days if requested by the borrower. The initial or extended forbearance period may be shortened at the borrower’s request. During the forbearance period, no fees, penalties, or interest will accrue on the borrower’s account beyond what would have normally accrued if the borrower was current.
n
Foreclosure Moratorium: Except with respect to vacant or abandoned properties, all foreclosure actions, from initial filing to eviction, by servicers of federally backed mortgage loans, including loans purchased or securitized by Freddie Mac, are forbidden for at least 60 days beginning on March 18, 2020.

Freddie Mac 1Q 2020 Form 10-Q 67

Management's Discussion and AnalysisRegulation and Supervision


n
Multifamily Forbearance: During the covered period, multifamily borrowers with federally backed multifamily mortgage loans, including loans purchased or securitized by Freddie Mac, that are current as of February 1, 2020 may request forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Servicers must grant forbearance for up to 30 days and extend the forbearance for up to two additional 30-day periods upon the request of the borrower. The borrower may discontinue the forbearance at any time. During the forbearance period, tenants may not be evicted for nonpayment of rent or other fees or charges or charged any late fees, penalties, or other charges for late payment of rent, and landlords cannot issue an eviction notice until after the end of the forbearance period. The covered period began on the date of the enactment of the CARES Act and ends on the sooner of the conclusion of the presidentially-declared natural emergency or December 31, 2020.
n
Renter Eviction Moratorium: Independent of the optional forbearance program under the CARES Act, for a period of 120 days after enactment of the CARES Act, any borrower with a federally backed mortgage loan or a federally backed multifamily mortgage loan, which terms together include single-family and multifamily loans purchased or securitized by Freddie Mac, may not evict tenants for nonpayment of rent or charge any fees, penalties, or other charges related to such non-payment of rent. After this 120-day period, landlords must give tenants at least a 30-day eviction notice.



Freddie Mac 1Q 2020 Form 10-Q 68

Management's Discussion and AnalysisForward-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, the effects of the COVID-19 pandemic and actions taken in response thereto on our business, financial condition, and liquidity, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, the costs and benefits of our CRT transactions, and our results of operations and financial condition on a GAAP, Segment Earnings, and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as "could," "may," "will," "believe," "expect," "anticipate," "forecast," and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the Other Information - Risk Factors section of this Form 10-Q, the Risk Factors section in our 2019 Annual Report, and:
nUncertainty regarding the duration and severity of the COVID-19 pandemic and the effects of the pandemic and actions taken in response thereto on the United States economy and housing market, which could, in turn, adversely affect our business in numerous ways, including, for example, by increasing our credit losses, impairing the value of our mortgage-backed securities, decreasing our liquidity and capital levels, and increasing our credit risk and operational risk;
nThe actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets (such as programs implemented in response to the COVID-19 pandemic) or to implement the recommendations in the Treasury Housing Reform Plan or FHFA's Conservatorship Scorecards and other objectives for us;
nThe effect of the restrictions on our business due to the conservatorship and the Purchase Agreement;
nChanges in our Charter or in applicable legislative or regulatory requirements (including changes pursuant to the Treasury Housing Reform Plan or pursuant to any legislation affecting the future status of our company);
nChanges in the fiscal and monetary policies of the Federal Reserve (including purchasing agency MBS and agency CMBS in amounts needed to support the market during the COVID-19 pandemic);
nChanges in tax laws;
nChanges in accounting policies, practices, or guidance, such as our adoption of CECL;
nChanges in economic and market conditions generally, and as a result of the COVID-19 pandemic, including changes in employment rates, interest rates, spreads, and home prices;
nChanges in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase and fixed-rate vs. ARM);
nThe success of our efforts to mitigate our losses on our legacy and relief refinance single-family loan portfolio;
nThe success of our strategy to transfer mortgage credit risk through STACR debt note, STACR Trust note, ACIS, K Certificate, SB Certificate, and other CRT transactions;
nOur ability to maintain adequate liquidity to fund our operations;
nOur ability to maintain the security and resiliency of our operational systems and infrastructure, including against cyberattacks;
nOur ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
nThe adequacy of our risk management framework, including the adequacy of the CCF for measuring risk;
nOur ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices;
nOur ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
nOur operational ability to issue new securities, make timely and correct payments on securities, and provide initial and ongoing disclosures;
nOur reliance on CSS and the CSP for the operation of the majority of our single-family securitization activities, our reduced influence over CSS Board decisions as a result of recent FHFA-required changes to the CSS LLC agreement, and any additional changes FHFA may require in our relationship with, or support of, CSS;
nChanges or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
nChanges in investor demand for our debt or mortgage-related securities;
nOur ability to align pooling practices and the treatment of forbearance loans with Fannie Mae;
nChanges in the practices of loan originators, servicers, investors, and other participants in the secondary mortgage market;

Freddie Mac 1Q 2020 Form 10-Q 69

Management's Discussion and AnalysisForward-Looking Statements


nThe discontinuance of, transition from. or replacement of LIBOR and the adverse consequences it could have on our business and operations;
nThe occurrence of a major natural or other catastrophic event (such as the COVID-19 pandemic) 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 2019 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 1Q 2020 Form 10-Q 70

Financial Statements 


Financial Statements

Freddie Mac 1Q 2020 Form 10-Q 71

Financial StatementsCondensed Consolidated Statements of Comprehensive Income

FREDDIE MAC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions, except share-related amounts)
 1Q 20201Q 2019
Interest income   
Mortgage loans 
$16,632

$17,946
Investment securities 652
689
Other 308
351
Total interest income 17,592
18,986
Interest expense (14,807)(15,833)
Net interest income 2,785
3,153
    
Non-interest income (loss)   
Guarantee fee income 377
290
Investment gains (losses), net (835)(513)
Other income (loss) 95
(17)
Non-interest income (loss) (363)(240)
Net revenues 2,422
2,913
    
Benefit (provision) for credit losses (1,233)135
    
Non-interest expense   
Salaries and employee benefits (341)(322)
Professional services (76)(105)
Other administrative expense (170)(151)
Total administrative expense (587)(578)
Credit enhancement (expense) benefit, net (Note 6) 236
(158)
REO operations expense (85)(33)
Temporary Payroll Tax Cut Continuation Act of 2011 expense (432)(390)
Other expense (103)(124)
Non-interest expense (971)(1,283)
    
Income (loss) before income tax (expense) benefit 218
1,765
Income tax (expense) benefit (45)(358)
Net income (loss) 173
1,407
    
Other comprehensive income (loss), net of taxes and reclassification adjustments   
Changes in unrealized gains (losses) related to available-for-sale securities 438
246
Changes in unrealized gains (losses) related to cash flow hedge relationships 13
18
Changes in defined benefit plans (2)(6)
Total other comprehensive income (loss), net of taxes and reclassification adjustments 449
258
Comprehensive income (loss) 
$622

$1,665
    
Net income (loss) 
$173

$1,407
Undistributed net worth sweep, senior preferred stock dividends, or future increase in senior preferred stock liquidation preference (382)(1,665)
Net income (loss) attributable to common stockholders 
($209)
($258)
Net income (loss) per common share — basic and diluted 
($0.06)
($0.08)
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 1Q 2020 Form 10-Q 72

Financial StatementsCondensed Consolidated Balance Sheets

FREDDIE MAC
Condensed Consolidated Balance Sheets (Unaudited)
  March 31,December 31,
(In millions, except share-related amounts)
 20202019
Assets   
Cash and cash equivalents (Notes 1, 3, 14) (includes $17,920 and $991 of restricted cash and cash equivalents) 
$24,324

$5,189
Securities purchased under agreements to resell (Notes 3, 10) 45,968
56,271
Investment securities, at fair value (Note 7) 79,189
75,711
Mortgage loans held-for-sale (Notes 3, 4) (includes $13,518 and $15,035 at fair value) 32,502
35,288
Mortgage loans held-for-investment (Notes 1, 3, 4) (net of allowance for credit losses of $6,121 and $4,234) 2,014,155
1,984,912
Accrued interest receivable (Notes 3, 4, 7, 10) 6,841
6,848
Derivative assets, net (Notes 9, 10) 2,815
844
Deferred tax assets, net (Note 12) 4,629
5,918
Other assets (Notes 3, 18) (includes $4,914 and $4,627 at fair value) 31,561
22,799
Total assets 
$2,241,984

$2,193,780
Liabilities and equity   
Liabilities   
Accrued interest payable (Note 3) 
$6,271

$6,559
Debt (Notes 3, 8) (includes $3,214 and $3,938 at fair value) 2,216,135
2,169,685
Derivative liabilities, net (Notes 9, 10) 2,226
372
Other liabilities (Notes 3, 18) 7,848
8,042
Total liabilities 2,232,480
2,184,658
Commitments and contingencies (Notes 5, 9, 16) 


Equity (Note 11)   
Senior preferred stock (liquidation preference of $81,770 and $79,322) 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 outstanding 

Additional paid-in capital 

Retained earnings (accumulated deficit) (74,255)(74,188)
AOCI, net of taxes, related to:   
Available-for-sale securities 1,056
618
Cash flow hedge relationships (231)(244)
Defined benefit plans 62
64
Total AOCI, net of taxes 887
438
Treasury stock, at cost, 75,804,853 shares (3,885)(3,885)
Total equity 
 9,504
9,122
Total liabilities and equity 
$2,241,984

$2,193,780
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) 20202019
Condensed Consolidated Balance Sheet Line Item   
Assets: (Note 3)   
Mortgage loans held-for-investment 
$1,963,630

$1,940,523
All other assets 53,415
40,598
Total assets of consolidated VIEs 
$2,017,045

$1,981,121
Liabilities: (Note 3)   
Debt 
$1,930,005

$1,898,355
All other liabilities 5,551
5,537
Total liabilities of consolidated VIEs 
$1,935,556

$1,903,892
The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac 1Q 2020 Form 10-Q 73

Financial StatementsCondensed 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, 2019 1
464
650

$72,648

$14,109

$—

$—

($74,188)
$438

($3,885)
$9,122
Comprehensive income (loss):            
Net income (loss) 






173


173
Other comprehensive income (loss), net of taxes 







449

449
Comprehensive income (loss) 






173
449

622
Cumulative effect from adoption of CECL 






(240)

(240)
Ending balance at March 31, 2020 1
464
650

$72,648

$14,109

$—

$—

($74,255)
$887

($3,885)
$9,504
             
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 paid 






(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 1Q 2020 Form 10-Q 74

Financial StatementsCondensed Consolidated Statements of Cash Flows



FREDDIE MAC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions) 1Q 20201Q 2019
Net cash provided by (used in) operating activities 
$2,791

$4,274
Cash flows from investing activities   
Purchases of trading securities (29,067)(22,738)
Proceeds from sales of trading securities 24,252
23,099
Proceeds from maturities and repayments of trading securities 4,992
1,754
Purchases of available-for-sale securities (1,375)(2,298)
Proceeds from sales of available-for-sale securities 2,072
3,032
Proceeds from maturities and repayments of available-for-sale securities 865
932
Purchases of mortgage loans acquired as held-for-investment (68,834)(34,756)
Proceeds from sales of mortgage loans acquired as held-for-investment 2,464
2,308
Proceeds from repayments of mortgage loans acquired as held-for-investment 107,876
52,425
Advances under secured lending arrangements (17,047)(7,997)
Repayments of secured lending arrangements 591
290
Net proceeds from dispositions of real estate owned and other recoveries 260
268
Net (increase) decrease in securities purchased under agreements to resell 5,688
(15,363)
Derivative premiums and terminations, swap collateral, and exchange settlement payments, net (8,357)(3,142)
Other, net (138)(187)
Net cash provided by (used in) investing activities 24,242
(2,373)
Cash flows from financing activities   
Proceeds from issuance of debt securities of consolidated trusts held by third parties 73,626
36,092
Repayments and redemptions of debt securities of consolidated trusts held by third parties (100,829)(54,327)
Proceeds from issuance of other debt 473,937
167,026
Repayments of other debt (454,607)(150,248)
Increase in liquidation preference of senior preferred stock 

Payment of cash dividends on senior preferred stock 
(1,477)
Other, net (25)(1)
Net cash provided by (used in) financing activities (7,898)(2,935)
Net increase (decrease) in cash and cash equivalents (includes restricted cash and cash equivalents) 19,135
(1,034)
Cash and cash equivalents (includes restricted cash and cash equivalents) at beginning of year 5,189
7,273
Cash and cash equivalents (includes restricted cash and cash equivalents) at end of period 
$24,324

$6,239
    
Supplemental cash flow information   
Cash paid for:   
Debt interest 
$17,962

$17,366
Income taxes 

Non-cash investing and financing activities (Note 4, 7, and 10)   
The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac 1Q 2020 Form 10-Q 75

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, 2019, or 2019 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 2019 Annual Report.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2019 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. See Note 1 in our 2019 Annual Report for additional information on these reclassifications. 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.
Beginning January 1, 2020, we elected to offset payables related to securities sold under agreements to repurchase against receivables related to securities purchased under agreements to resell, when such amounts meet the conditions for balance sheet offsetting under GAAP. Certain amounts in prior periods' condensed financial statements have been reclassified to conform to the current presentation. See Note 10 in this Form 10-Q for additional information.
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. The financial statements include certain adjustments to correct immaterial errors related to previously reported periods.
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.
Cash and Cash Equivalents
Upon adoption of CECL on January 1, 2020, we measure an allowance for credit losses on cash equivalents based on expected credit losses over the contractual term of the instrument. As of March 31, 2020, we did not recognize an allowance for credit losses on our cash equivalents due to their overall high credit quality and short-term nature.

Freddie Mac 1Q 2020 Form 10-Q 76

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance

StandardDescriptionDate of AdoptionEffect on Condensed Consolidated Financial Statements
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; and
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses

The amendments in these Updates replace the incurred loss impairment methodology 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
Due to the adoption of these Updates, we recognized a reduction to retained earnings of $0.2 billion through a cumulative-effect adjustment on January 1, 2020. See the CECL Transition Impacts section below for additional information on transition impacts. See Note 4, Note 5, Note 6, and Note 7 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
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
We added disclosure of the change in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. See Note 15 for additional information.



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, 2020The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.
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
The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.

ASU 2019-01, Leases (Topic 842): Codification Improvements
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, 2020The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The amendments in this Update provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or other interbank offered rates expected to be discontinued.

January 1, 2020The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.



Freddie Mac 1Q 2020 Form 10-Q 77

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


CECL Transition Impacts
The table below provides details on the transition impacts of adopting CECL. Other balance sheet lines not presented were not affected by CECL.
Table 1.1 CECL Transition Impacts
(In millions) December 31, 2019Transition AdjustmentsJanuary 1, 2020
Assets    
Mortgage loans held-for-investment:    
    Single-family 
$1,971,657

$199

$1,971,856
    Multifamily 17,489

17,489
Less allowance for credit losses:    
    Single-family (4,222)(668)(4,890)
    Multifamily (12)(24)(36)
         Mortgage loans held-for-investment, net 1,984,912
(493)1,984,419
Deferred tax assets, net 5,918
64
5,982
Other assets 22,799
193
22,992
              Total transition adjustments  
($236) 
Liabilities and equity    
Other liabilities 8,042
4
8,046
Retained earnings (accumulated deficit) (74,188)(240)(74,428)
             Total transition adjustments  
($236) 
     
Upon adoption of CECL on January 1, 2020, we did not recognize an allowance for credit losses on cash equivalents, investments in debt securities classified as available-for-sale, or securities purchased under agreements to resell. See Note 7 and Note 10, respectively, for additional information. We also did not recognize an allowance for credit losses on accrued interest receivable as we charge-off outstanding accrued interest receivables through interest income when loans are placed on non-accrual status. See Note 4 for additional information.
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Condensed Consolidated Financial Statements
StandardDescriptionDate of Planned AdoptionEffect on Consolidated Financial Statements
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
The amendments in this Update simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740.January 1, 2021We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.



Freddie Mac 1Q 2020 Form 10-Q 78

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.
Purchase Agreement
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as, and if declared by 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, acting as successor to the rights, titles, powers, and privileges of the Board.
Under the August 2012 amendment to the Purchase Agreement, for each quarter from January 1, 2013 and thereafter, the dividend payment will be 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 September 2019 Letter Agreement, the applicable Capital Reserve Amount is $20.0 billion. As a result, we will not be required to pay a dividend on the senior preferred stock to Treasury until our Net Worth Amount exceeds $20.0 billion. If for any reason we do not pay the net worth sweep dividend in full for any period, the applicable Capital Reserve Amount will thereafter be 0.
In addition, pursuant to the September 2019 Letter Agreement, the liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion. As a result, the liquidation preference of the senior preferred stock increased from $79.3 billion on December 31, 2019 to $81.8 billion on March 31, 2020 based on the $2.4 billion increase in our Net Worth Amount during 4Q 2019, and will increase to $82.2 billion on June 30, 2020 based on the $0.4 billion increase in our Net Worth Amount during 1Q 2020.
Under the September 2019 Letter Agreement, Freddie Mac and Treasury also agreed to negotiate and execute an amendment to the Purchase Agreement that further enhances taxpayer protections by adopting covenants broadly consistent with recommendations for administrative reform contained in the Treasury's September 2019 Housing Reform Plan.
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. We began including 10% of the notional value of certain interest-only securities owned by Freddie Mac in the calculation of this portfolio during 1Q 2020 as directed by FHFA in November 2019. The UPB of this portfolio was $215.5 billion at March 31, 2020, including $4.3 billion representing 10% of the notional amount of the interest-only securities we held as of March 31, 2020. 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 to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:

Freddie Mac 1Q 2020 Form 10-Q 79

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


nKeeping us solvent;
nAllowing us to focus on our primary business objectives under conservatorship; and
nAvoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At December 31, 2019, 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 2020. 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 and is also deemed a related party. In connection with the formation of CSS, we entered into a limited liability company agreement with Fannie Mae. We and Fannie Mae have each appointed two executives to the CSS Board of Managers and signed governance and operating agreements for CSS, including an updated customer services agreement with Fannie Mae and CSS in May of 2019. In June of 2019, we entered into an agreement with Fannie Mae regarding the commingling of certain of our mortgage securities under the Single Security Initiative and related indemnification obligations. In January 2020, FHFA directed Freddie Mac and Fannie Mae to amend the CSS LLC agreement to change the structure of the CSS Board of Managers, appointing a new independent non-Executive Chair and providing the CSS CEO a seat on the CSS Board. During conservatorship, all CSS Board decisions will require the affirmative vote of the FHFA-designated CSS Board Chair and FHFA may appoint up to three additional independent members to the CSS Board.
We account for our investment in CSS using the equity method. We increase the carrying value of our investment in CSS when we contribute capital to CSS. We recognize our equity in the net earnings of CSS each period as a component of investment gains (losses), net on our condensed consolidated statements of comprehensive income (loss). During 1Q 2020, we contributed $29 million of capital to CSS, and we have contributed $598 million since we began making contributions in the fourth quarter of 2014. The carrying value of our investment in CSS was $36 million and $35 million as of March 31, 2020 and December 31, 2019, respectively, and was included in other assets on our condensed consolidated balance sheets.


Freddie Mac 1Q 2020 Form 10-Q 80

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, 2020As of December 31, 2019
Condensed Consolidated Balance Sheet Line Item   
Assets:   
Cash and cash equivalents (includes $17,855 and $869 of restricted cash and cash equivalents) 
$17,856

$870
Securities purchased under agreements to resell 13,510
23,137
Investment securities, at fair value 1,536
597
Mortgage loans held-for-investment, net 1,963,630
1,940,523
Accrued interest receivable 6,181
6,170
Other assets 14,332
9,824
Total assets of consolidated VIEs 
$2,017,045

$1,981,121
Liabilities:   
Accrued interest payable 
$5,551

$5,536
Debt 1,930,005
1,898,355
Other liabilities 
1
Total liabilities of consolidated VIEs 
$1,935,556

$1,903,892

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. As part of the Single Security Initiative, we have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products that we do not consolidate. We extend our guarantee of these products to cover principal and interest that are payable from the underlying Fannie Mae collateral. See Note 5 for additional information on our guarantee of Fannie Mae securities.
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 and total assets of the VIEs. Our maximum exposure to loss includes the guaranteed UPB of the securities issued by the non-consolidated VIEs, the UPB of unguaranteed securities that we acquired from these securitization transactions, and the UPB of master servicer and guarantor advances made to the holders of the guaranteed securities. While we include the UPB of Fannie Mae securities backing non-consolidated Freddie Mac resecuritization trusts because we are providing a guaranty for the timely payment and interest on the underlying Fannie Mae securities that we have not previously guaranteed, we exclude the UPB of Freddie Mac securities backing these same trusts primarily because we already consolidate the underlying Freddie Mac collateral of these trusts on our condensed consolidated balance sheets. Our maximum exposure to loss also excludes our interest rate exposure on certain securitization activity and other mortgage-related guarantees measured at fair value where our interest rate exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited interest rate exposure through separate contracts with third parties. Total assets of non-consolidated VIEs excludes our investments in and obligations to non-consolidated Freddie Mac resecuritization trusts primarily because we already consolidate the underlying Freddie Mac collateral of these trusts on our condensed consolidated balance sheets. 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

Freddie Mac 1Q 2020 Form 10-Q 81

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


proceeds from related collateral liquidation, including possible recoveries under credit enhancements. See Note 6 for additional information on credit enhancements.
Table 3.2 - Non-Consolidated VIEs
(In millions) As of March 31, 2020As of December 31, 2019
Assets and Liabilities Recorded on our Condensed Consolidated Balance Sheets(1)


 
Assets:

 
Investment securities, at fair value

$35,660

$37,918
Accrued interest receivable
208
212
Derivative assets, net 8
14
Other assets
4,465
3,951
 Liabilities:
  
Derivative liabilities, net
109
108
Other liabilities
3,752
3,761
Maximum Exposure to Loss(2)

322,557
307,820
Total Assets of Non-Consolidated VIEs
342,265
335,562

(1)Includes our variable interests in REMICs and Strips, commingled Supers, K Certificates, SB Certificates, certain senior subordinate securitization structures, and other securitization products that we do not consolidate.
(2)Includes amounts related to Fannie Mae securities backing non-consolidated Freddie Mac resecuritizations trusts. These amounts were previously included in text in prior periods.
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 1Q 2020 Form 10-Q 82

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NOTE 4
Mortgage Loans and Allowance for Credit Losses
On January 1, 2020, we adopted CECL, which changed certain of our significant accounting policies for mortgage loans held- for-investment and the associated allowance for credit losses, as discussed further in the sections below.
The table below provides details of the loans on our condensed consolidated balance sheets.
Table 4.1 - Mortgage Loans
  March 31, 2020 December 31, 2019
(In millions) Held by Freddie MacHeld by
Consolidated
Trusts
Total Held by Freddie MacHeld by
Consolidated
Trusts
Total
Held-for-sale:        
Single-family 
$18,474

$—

$18,474
 
$18,543

$—

$18,543
Multifamily 15,929

15,929
 18,954

18,954
Total UPB 34,403

34,403
 37,497

37,497
Cost basis and fair value adjustments, net (1,901)
(1,901) (2,209)
(2,209)
Total held-for-sale loans, net 32,502

32,502
 35,288

35,288
Held-for-investment:        
Single-family 40,626
1,921,521
1,962,147
 35,324
1,902,958
1,938,282
Multifamily 10,421
7,837
18,258
 10,831
6,642
17,473
Total UPB 51,047
1,929,358
1,980,405
 46,155
1,909,600
1,955,755
Cost basis adjustments 532
39,339
39,871
 (183)33,574
33,391
Allowance for credit losses (1,054)(5,067)(6,121) (1,583)(2,651)(4,234)
Total held-for-investment loans, net 50,525
1,963,630
2,014,155
 44,389
1,940,523
1,984,912
Total mortgage loans, net 
$83,027

$1,963,630

$2,046,657
 
$79,677

$1,940,523

$2,020,200

We own both single-family loans, which are secured by one- to four-unit residential properties, and multifamily loans, which are secured by properties with five or more residential rental units. Our single-family loans are predominantly first lien, fixed-rate loans secured by the borrower's primary residence. We do not typically acquire loans that have experienced more-than-insignificant deterioration in credit quality since origination as of our acquisition date, although we may acquire such loans in connection with performance under certain of our securitization activity or other mortgage-related guarantees. In addition, in April 2020, we announced that we would temporarily purchase certain single-family mortgage loans that have entered into forbearance as a result of borrower hardship caused by the COVID-19 pandemic and that these loans will be priced to mitigate the heightened risk of loss that they present.
Upon acquisition, we classify a loan as either held-for-investment or held-for-sale based on our intent with respect to the loan. Loans that we have the ability and intent to hold for the foreseeable future, including loans held by consolidated trusts and loans we intend to securitize using an entity we will consolidate, are classified as held-for-investment. Loans that we intend to sell are classified as held-for-sale.
Held-for-investment loans for which we have not elected the fair value option are reported on our condensed consolidated balance sheets at their amortized cost basis, net of the allowance for credit losses. The amortized cost basis is based on a loan’s outstanding UPB, net of deferred fees and other cost basis adjustments (including unamortized premiums and discounts, upfront fees, commitment-related derivative basis adjustments, fair value hedge accounting adjustments, and other pricing adjustments), excluding accrued interest receivable. Accrued interest receivable for both held-for-investment and held-for-sale loans is separately presented on our condensed consolidated balance sheets and excluded for the purposes of disclosure of the amortized cost basis of mortgage loans held-for-investment.
Held-for-sale loans for which we have not elected the fair value option are reported at lower-of-cost-or-fair-value on our condensed consolidated balance sheets. Any excess of a held-for-sale loan's cost over its fair value is recognized as a valuation allowance in investment gains (losses), net on our condensed consolidated statements of comprehensive income (loss), with subsequent changes in this valuation allowance also being recorded in investment gains (losses), net. Premiums, discounts, and other cost basis adjustments (including lower-of-cost-or-fair-value adjustments) are deferred and not amortized.
We elect the fair value option for certain multifamily loans that are originally classified as held-for-sale. Loans for which we have elected the fair value option are measured at fair value on a recurring basis, with subsequent gains or losses related to changes in fair value reported in investment gains (losses), net on our condensed consolidated statements of comprehensive income (loss). All fees, upfront costs, and other cost basis adjustments are recognized in earnings as incurred.

Freddie Mac 1Q 2020 Form 10-Q 83

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Cash flows related to loans originally classified as held-for-investment are classified as either investing activities (e.g., principal repayments) or operating activities (e.g., interest payments received from borrowers included within net income (loss)). Cash flows related to loans originally classified as held-for-sale are classified as operating activities.
The table below provides details of the UPB of loans we purchased, reclassified from held-for-investment to held-for-sale, and sold during the periods presented.
Table 4.2 - Loans Purchased, Reclassified from Held-for-Investment to Held-for-Sale, and Sold
(In billions) 1Q 20201Q 2019
Single-family:   
Purchases   
  Held-for-investment loans 
$137.7

$69.7
Reclassified from held-for-investment to held-for-sale (1)
 2.6
4.1
Sale of held-for-sale loans(2)
 2.2
2.1
Multifamily:   
Purchases   
  Held-for-investment loans 1.2
1.0
  Held-for-sale loans 8.2
11.6
Reclassified from held-for-investment to held-for-sale (1)
 
0.5
Sale of held-for-sale loans (3)
 10.7
14.7
(1)
We reclassify loans from held-for-investment to held-for-sale when we no longer have both the intent and ability to hold the loans 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.
(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.
Reclassifications
We reclassify loans from held-for-investment to held-for-sale when we no longer have both the intent and ability to hold the loan for the foreseeable future. Upon reclassification from held-for-investment to held-for-sale, we perform a collectability assessment. When we determine that a loan to be transferred has experienced more-than-insignificant deterioration in credit quality since origination, the excess of the loan’s amortized cost basis over its fair value is written off against the allowance for credit losses prior to the transfer. For all other loans, upon a transfer from held-for-investment to held-for-sale, we reverse the loan’s existing allowance for credit losses, if any, and establish a held-for-sale valuation allowance if the loan’s fair value is less than its amortized cost basis.
We reclassify loans from held-for-sale to held-for-investment when we have both the intent and ability to hold the loan for the foreseeable future. Upon a loan reclassification from held-for-sale to held-for-investment, we reverse the loan’s held-for-sale valuation allowance, if any, and establish an allowance for credit losses as needed.
The table below presents the allowance for credit losses or valuation allowance that was reversed or established due to loan reclassifications between held-for-investment and held-for-sale during the period presented.
Table 4.3 - Loan Reclassifications
  1Q 2020
(In millions) Unpaid Principal BalanceAllowance for Credit Losses Reversed or (Established)Valuation Allowance (Established) or Reversed
Single-family reclassifications from:    
Held-for-investment to held-for-sale(1)
 
$2,637

$214

$—
Held-for-sale to held-for-Investment

 1


Multifamily reclassifications from:    
Held-for-investment to held-for-sale 32


   Held-for-sale to held-for-Investment 482
(1)
(1)
Prior to reclassification from held-for-investment to held-for-sale, we charged-off $79 million against the allowance for credit losses during 1Q 2020.

Freddie Mac 1Q 2020 Form 10-Q 84

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Interest Income
We recognize interest income on an accrual basis except when we believe the collection of principal and interest in full is not reasonably assured, which generally occurs when a loan is three monthly payments or more past due, at which point we place the loan on non-accrual status unless the loan is well secured and in the process of collection based upon an individual loan assessment. A loan is considered past due if a full payment of principal and interest is not received within one month of its due date. We charge off outstanding accrued interest receivable through interest income when loans are placed on non-accrual status and recognize interest income on a cash basis while a loan is on non-accrual status.
Cost basis adjustments on held-for-investment loans are amortized into interest income over the contractual life of the loan using the effective interest method. No amortization is recognized during periods in which a loan is on non-accrual status.
A non-accrual loan is returned to accrual status when the collectability of principal and interest in full is reasonably assured. For single-family loans, we generally determine that collectability is reasonably assured when the loan returns to current payment status. For multifamily loans, the collectability of principal and interest is considered reasonably assured based on an analysis of the factors specific to the loan being assessed. Upon a loan's return to accrual status, all previously reversed interest income is recognized and amortization of any basis adjustments into interest income is resumed.
We are currently evaluating our policy for interest income recognition for loans that receive forbearance as a result of a hardship related to COVID-19.
The table below presents the amortized cost basis of non-accrual loans at the beginning and end of the periods presented, including the interest income recognized for the periods presented that is related to the loans on non-accrual status at end of the periods.
Table 4.4 - Amortized Cost Basis of Held-for-Investment Loans on Non-accrual
  Non-accrual Amortized Cost Basis
Interest Income Recognized

(In millions) January 1, 2020March 31, 20201Q 2020
Single-family:    
20- and 30-year or more, amortizing fixed-rate 
$5,598

$5,494

$4
15-year amortizing fixed-rate 242
241

Adjustable-rate 91
83

Alt-A, interest-only, and option ARM 439
389
2
Total single-family 6,370
6,207
6
Total multifamily 13
13

Total single-family and multifamily 
$6,383

$6,220

$6

The table below provides the amount of accrued interest receivable presented on our condensed consolidated balance sheets and the amount of accrued interest receivable related to loans on non-accrual status at end of the periods that is written off through reversal of interest income on our condensed consolidated statements of comprehensive income (loss) by portfolio.
Table 4.5 - Accrued Interest Receivable and Related Charge-offs
  March 31, 20201Q 2020
(In millions) Accrued Interest ReceivableAccrued Interest Receivable Related Charge-offs
Single-family loans 
$6,320

($29)
Multifamily loans 118


Allowance for Credit Losses
On January 1, 2020, we adopted CECL. The objective of CECL is to recognize an allowance for credit losses that is deducted from or added to the amortized cost basis of the financial asset to present the net amount expected to be collected on the financial asset on the balance sheet. Under CECL, an allowance for credit losses is recognized before a loss event has been incurred, which results in earlier recognition of credit losses compared to the previous incurred loss methodology.
Our allowance for credit losses on mortgage loans pertains to all single-family and multifamily loans classified as held-for-investment for which we have not elected the fair value option. We recognize changes in the allowance for credit losses by recording a provision for credit losses (or reversal of a provision for credit losses) on our condensed consolidated statements of

Freddie Mac 1Q 2020 Form 10-Q 85

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



comprehensive income (loss). We measure the allowance for credit losses on a collective basis when our loans share similar risk characteristics. We record charge-offs in the period in which a loan is deemed uncollectible. Proceeds received in excess of amounts previously written off are recorded as a decrease to REO operations expense on our condensed consolidated statements of comprehensive income (loss).
We may incur expenses related to a mortgage loan subsequent to its original acquisition but prior to foreclosure (pre-foreclosure costs). These expenses are generally to protect or preserve our interest or legal right in or to the property prior to foreclosure, such as property taxes or homeowner's insurance premiums owed by the borrower. Many of these expenses are advanced by the servicer and are reimbursable from the borrower. If the borrower ultimately defaults, we reimburse the servicer for the advances it has made. Upon advance by the servicer, we recognize a receivable for the amounts due from the borrower and a payable for amounts due to the servicer. We recognize an allowance for credit losses for amounts that we do not ultimately expect to collect from the borrower (allowance for credit losses on pre-foreclosure costs).
The table below summarizes changes in our allowance for credit losses for single-family and multifamily loans held-for-investment and related single-family advances of pre-foreclosure costs. Provision (benefit) for credit losses shifted to a provision in 1Q 2020 from a benefit in 1Q 2019 as we incorporated our forecasts of higher expected credit losses as a result of the COVID-19 pandemic, resulting in an increase of more than 20% in the allowance for credit losses related to our single-family guarantee portfolio in 1Q 2020. The increase in the allowance from higher expected credit losses related to the pandemic was partially offset by a benefit from higher estimated prepayments as a result of the significant decline in interest rates during 1Q 2020. In addition, charge-offs decreased in 1Q 2020 due to a lower volume of transfers of single-family loans from held-for-investment to held-for-sale. The decline in economic activity caused by the COVID-19 pandemic, and the corresponding government response, is unprecedented, and as a result, our estimate of expected credit losses is subject to significant uncertainty.
Table 4.6 - Details of the Allowance for Credit Losses
 (In millions) 1Q 20201Q 2019
Single-family:   
Beginning balance (1)
 
$5,184

$6,130
Provision (benefit) for credit losses 1,164
(137)
Charge-offs (162)(604)
Recoveries collected 88
106
Other 24
41
Single-family ending balance 6,298
5,536
Multifamily ending balance 77
10
Total ending balance 
$6,375

$5,546
(1)
Includes transition adjustments recognized upon the adoption of CECL on January 1, 2020. See Note 1 for more information on transition adjustments.
Single-Family Loans
We estimate the allowance for credit losses for single-family loans on a pooled basis using a discounted cash flow model that evaluates a variety of factors to estimate the cash flows we expect to collect. If we determine that foreclosure on the underlying collateral is probable, we measure the allowance for credit losses for single-family loans based upon the fair value of the collateral, less costs to sell, adjusted for estimated proceeds from attached credit enhancements.
The discounted cash flow model we use to estimate the single-family loan allowance for credit losses forecasts cash flows over the loan’s remaining contractual life, adjusted for expectations of prepayments and TDRs we reasonably expect will occur. We do not have a reasonable and supportable forecast period beyond which we revert to historical loss information. Cash flow estimates are discounted at the loan’s prepayment-adjusted effective interest rate. For adjustable-rate loans, forecasts are adjusted for projections in the underlying benchmark interest rate. For both fixed-rate and adjustable-rate loans, we forecast cash flows we expect to collect using our historical experience, such as historical default rates and severity of loss based on loan characteristics, adjusted for current and future economic forecasts, such as current and projected home price appreciation and interest rate forecasts, and estimated recoveries from loss mitigation activities, attached credit enhancements, and disposition of collateral, less estimated disposition costs. We also calculate allowance for credit losses for advances of pre-foreclosure costs based on the amounts we expect to collect using our historical experience such as historical default rates.
These projections require significant management judgment. We rely on third-parties to provide certain model inputs used in our projections. At loan delivery, the seller provides us with loan data, which includes borrower and loan characteristics and underwriting information. Each subsequent month, the servicers provide us with monthly loan level servicing data, including delinquency and loss information.

Freddie Mac 1Q 2020 Form 10-Q 86

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



We measure an allowance for credit losses for TDR loans on a pooled basis when they share similar risk characteristics, using either the discounted cash flow approach discussed above or based on the fair value of the collateral, less costs to sell when foreclosure is probable. When using a discounted cash flow approach, the present value of the expected future cash flows is discounted at the loan's prepayment-adjusted effective interest rate just prior to the restructuring, with no adjustments made to the effective interest rate for changes in the timing of expected cash flows subsequent to the restructuring.
We review the outputs of our model by considering qualitative factors such as current economic events and other external factors, including the economic effects of the COVID-19 pandemic and the impact of associated government relief programs, to see whether the model outputs are consistent with our expectations. Additionally, we incorporate expected credit losses for TDRs that are reasonably expected to occur and the incidence of redefault we have experienced on similar loans that have completed a loan modification. Further management adjustments may be necessary to take into consideration the qualitative factors that have occurred but that are not yet reflected in the factors used to derive the model outputs or the uncertainty inherent in our projections. Significant judgment is exercised in making these adjustments.
Multifamily Loans
We estimate the allowance for credit losses for multifamily loans using a loss-rate method to estimate the net amount of cash flows we expect to collect. The loss rate method is based on a probability of default and loss given default framework that estimates credit losses by considering a loan’s underlying characteristics and current and forecasted economic conditions. Loan characteristics considered by our model include vintage, loan term, current DSCR, current LTV ratio, occupancy rate, and interest rate hedges. We forecast economic conditions over a reasonable and supportable two-year period prior to reverting to historical averages at the model input level over a five-year period, using a linear reversion method. We also consider as model inputs expected prepayments, contractually specified extensions, modifications we reasonably expect will occur, expected recoveries from collateral posting requirements, and the expected recoveries from attached credit enhancements.
Our loss rates incorporate published historical commercial loan performance data, which we calibrate for differences between that data and our portfolio experience. Except for cases of fraud and certain other types of borrower defaults, most multifamily loans are non-recourse to the borrower. As a result, the cash flows of the underlying property (including any attached credit enhancements) serve as the primary source of funds for repayment of the loan. For loans where we determined that the borrower is experiencing financial difficulty and is two monthly payments or more past due, we measure the allowance for credit losses using the fair value of the underlying collateral, less estimated costs to sell, adjusted for estimated proceeds from credit enhancements that are not freestanding contracts. Factors considered by management in determining whether a borrower is experiencing financial difficulty include the borrower’s current payment status and an evaluation of the underlying property's operating performance as represented by its current DSCR, its available credit enhancements, the current LTV ratio, the management of the underlying property, and the property's geographic location.
We review the outputs of our model considering qualitative factors such as current economic events and other external factors to determine whether the model outputs are consistent with our expectations. Further management adjustments may be necessary to take into consideration the qualitative factors that have occurred but that are not yet reflected in the factors used to derive the model outputs. Significant judgment is exercised in making these adjustments.
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 tables below present the amortized cost basis 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. For reporting purposes:
nLoans 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
nLoans 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.

Freddie Mac 1Q 2020 Form 10-Q 87

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Table 4.7 - Amortized Cost Basis of Single-Family Held-for-Investment Loans by Current LTV Ratios and Vintage
  March 31, 2020
  Year of OriginationTotal
(In millions) 20202019201820172016Prior
Current LTV Ratio:        
  20- and 30-year or more, amortizing fixed-rate        
  ≤ 80 
$45,990

$229,800

$125,462

$176,050

$222,411

$637,471

$1,437,184
  > 80 to 100 24,835
148,243
55,970
21,881
5,091
11,220
267,240
  > 100 (1)
 142
432
104
159
150
2,389
3,376
  Total 20- and 30-year or more, amortizing fixed-rate 70,967
378,475
181,536
198,090
227,652
651,080
1,707,800
  15-year amortizing fixed-rate        
  ≤ 80 8,951
38,981
17,996
27,553
37,962
108,636
240,079
  > 80 to 100 1,466
4,493
478
85
33
64
6,619
  > 100 (1)
 11
17
5
13
10
19
75
  Total 15-year amortizing fixed-rate 10,428
43,491
18,479
27,651
38,005
108,719
246,773
  Adjustable-rate        
  ≤ 80 217
2,462
2,143
5,450
3,618
19,424
33,314
  > 80 to 100 53
529
295
246
31
43
1,197
  > 100 (1)
 
1



4
5
  Total Adjustable-rate 270
2,992
2,438
5,696
3,649
19,471
34,516
  Alt-A, Interest-only, and option ARM        
  ≤ 80 




12,032
12,032
  > 80 to 100 




727
727
  > 100 (1)
 




138
138
  Total Alt-A, Interest-only, and option ARM 




12,897
12,897
Total single-family loans 
$81,665

$424,958

$202,453

$231,437

$269,306

$792,167

$2,001,986
Referenced footnotes are included after the next table.
  December 31, 2019
  Current LTV Ratio Total
(In millions)  ≤ 80> 80 to 100
> 100(1)
20- and 30-year or more, amortizing fixed-rate 
$1,405,562

$267,752

$3,954

$1,677,268
15-year amortizing fixed-rate 236,837
6,797
89
243,723
Adjustable-rate 35,478
1,425
6
36,909
Alt-A, interest-only, and option ARM 12,668
901
188
13,757
Total single-family loans 
$1,690,545

$276,875

$4,237

$1,971,657
(1)
The serious delinquency rate for the single-family held-for-investment mortgage loans with current LTV ratios in excess of 100% was 4.03% and 4.51% as of March 31, 2020 and December 31, 2019, respectively.
Multifamily
The table below presents the amortized cost basis of 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 and are defined as follows:
n"Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower;
n"Special mention" has administrative issues that may affect future repayment prospects but does not have current credit weaknesses;
n"Substandard" has a weakness that jeopardizes the timely full repayment; and
n"Doubtful" has a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions.

Freddie Mac 1Q 2020 Form 10-Q 88

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Table 4.8 - Amortized Cost Basis of Multifamily Held-for-Investment Loans by Credit Quality Indicator by Vintage
  March 31, 2020 December 31, 2019
  Year of OriginationTotal Total
(In millions) 20202019201820172016PriorRevolving Loans 
Category:           
Pass 
$1,110

$8,516

$1,361

$941

$687

$3,327
$2,060

$18,002
 
$17,227
Special mention 
37
29
20

92

178
 141
Substandard 
2
19
8
5
76

110
 121
Doubtful 







 
Total 
$1,110

$8,555

$1,409

$969

$692

$3,495

$2,060

$18,290
 
$17,489

Past Due Status
The tables below present the amortized cost basis of our single-family and multifamily loans, held-for-investment, by payment status.
Table 4.9 - Amortized Cost Basis of Held -for-Investment Loans by Payment Status
  March 31, 2020
(In millions) Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
TotalThree Months or More Past Due, and Accruing
Non-accrual With No Allowance(2)
Single-family:        
20- and 30-year or more, amortizing fixed-rate 
$1,682,763

$16,596

$3,190

$5,251

$1,707,800

$—

$370
15-year amortizing fixed-rate 245,198
1,172
165
238
246,773

5
Adjustable-rate 34,133
260
41
82
34,516

3
Alt-A, interest-only, and option ARM 11,877
501
144
375
12,897

86
Total single-family 1,973,971
18,529
3,540
5,946
2,001,986

464
Total multifamily 18,290



18,290

13
Total single-family and multifamily 
$1,992,261

$18,529

$3,540

$5,946

$2,020,276

$—

$477
  December 31, 2019
(In millions) CurrentOne
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure
(1)
TotalNon-accrual
Single-family:       
20- and 30-year or more, amortizing fixed-rate 
$1,653,113

$15,481

$3,326

$5,348

$1,677,268

$5,822
15-year amortizing fixed-rate 242,177
1,131
175
240
243,723
252
Adjustable-rate 36,537
238
45
89
36,909
104
Alt-A, interest-only, and option ARM 12,690
489
161
417
13,757
205
Total single-family 1,944,517
17,339
3,707
6,094
1,971,657
6,383
Total multifamily 17,489



17,489
13
Total single-family and multifamily 
$1,962,006

$17,339

$3,707

$6,094

$1,989,146

$6,396
(1)
Includes $1.7 billion and $1.8 billion of single-family loans that were in the process of foreclosure as of March 31, 2020 and December 31, 2019, respectively.
(2)Loans with no allowance primarily represent those loans that were previously charged-off and therefore the collateral value is sufficiently in excess of the amortized cost to result in recovery of the entire amortized cost basis if the property were foreclosed upon or otherwise subject to disposition.
FHFA requires us to purchase loans out of consolidated trusts if they are delinquent for 120 days, and we have the option to purchase sooner under certain circumstances (e.g., imminent default and seller breaches of representations and warranties). Our practice generally has been to purchase loans from consolidated trusts when the loans have been delinquent for 120 days

Freddie Mac 1Q 2020 Form 10-Q 89

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



or more. In April 2020, we announced that FHFA has instructed us to maintain loans in payment forbearance plans (including COVID-19 payment forbearance plans) in mortgage-backed security pools for at least the duration of the forbearance plan.  
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. A concession is deemed granted when, as a result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at the original contractual interest rate. As appropriate, we also consider other qualitative factors in determining whether a concession is deemed granted, including whether the borrower's modified interest rate is consistent with that of a non-troubled borrower. We do not consider restructurings that result in an insignificant delay in payment to be a concession. We generally consider a delay in monthly amortizing payments of three months or less to be insignificant. A concession typically includes one or more of the following being granted to the borrower:
nA trial period where the expected permanent modification will change our expectation of collecting all amounts due at the original contract rate;
nA delay in payment that is more than insignificant;
nA reduction in the contractual interest rate;
nInterest forbearance for a period of time that is more than insignificant or forgiveness of accrued but uncollected interest amounts;
nPrincipal forbearance that is more than insignificant; and
nDischarge of the borrower's obligation in Chapter 7 bankruptcy.
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the unique facts and circumstances of each loan. This assessment considers qualitative factors such as whether the borrower's modified interest rate is consistent with that of a non-troubled borrower having a similar credit profile at the time of modification. In certain cases, for maturing loans we may provide short-term loan extensions of up to one year with no changes to the effective borrowing rate. In other cases, we may make more significant modifications of terms for borrowers experiencing financial difficulty, such as reducing the interest rate, extending the maturity for longer than one year, providing principal forbearance, or some combination of these terms.
Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related to COVID-19. Specifically, the CARES Act provides that a qualifying financial institution may elect to suspend (1) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Section 4013 of the CARES Act applies to any modification related to an economic hardship as a result of the COVID-19 pandemic, including a forbearance arrangement, an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, that occurs during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or the date that is 60 days after the declaration of the national emergency related to the COVID-19 pandemic ends for a loan that was not more than 30 days past due as of December 31, 2019. We have elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act.
In addition, Section 4022 and Section 4023 of the CARES Act require us to offer forbearance to certain single-family and multifamily borrowers, respectively, with an economic hardship related to COVID-19. Recent guidance issued by federal banking regulators and endorsed by the FASB staff allows entities to use a practical expedient to conclude that borrowers who receive relief through government-mandated modification or deferral programs related to COVID-19 are not experiencing financial difficulty and, therefore, such modifications or deferral programs should not be accounted for as TDRs. We have elected to apply this practical expedient to the forbearance programs we are offering under Section 4022 and Section 4023 of the CARES Act, as such programs are government-mandated deferral programs related to COVID-19, and therefore we will not account for such modifications as TDRs.
We recognize an allowance for credit losses on TDRs as discussed in the Allowance for Credit Losses section above. We recognize interest income at the modified interest rate, subject to our non-accrual policy as discussed in the Interest Income section above, with all other changes in the present value of expected future cash flows being recognized as a component of benefit (provision) for credit losses on our condensed consolidated statements of comprehensive income (loss).
Of the single-family loans with modifications that were classified as TDRs during 1Q 2020 and 1Q 2019, respectively:
n14% and 8% involved interest rate reductions and, in certain cases, term extensions;
n19% and 23% involved principal forbearance in addition to interest rate reductions and, in certain cases, term extensions;
nThe average term extension was 187 and 164 months; and
nThe average interest rate reduction was 0.3% and 0.1%.

Freddie Mac 1Q 2020 Form 10-Q 90

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Substantially all of our completed single-family loan modifications classified as a TDR during 1Q 2020 and 1Q 2019 resulted in a modified loan with a fixed interest rate.
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.
Table 4.10 - TDR Activity
  1Q 2020 1Q 2019
(Dollars in millions) Number of 
Loans
Post-TDR
Amortized Cost Basis
 Number of 
Loans
Post-TDR
Amortized Cost Basis
Single-family: (1)
      
20- and 30-year or more, amortizing fixed-rate 6,432

$1,127
 7,459

$1,200
15-year amortizing fixed-rate 729
72
 946
92
Adjustable-rate 97
17
 157
25
Alt-A, interest-only, and option ARM 166
24
 329
53
Total single-family 7,424
1,240
 8,891
1,370
Multifamily 

 

(1)
The pre-TDR amortized cost basis for single-family loans initially classified as TDR during 1Q 2020 and 1Q 2019 was $1.2 billion and $1.4 billion, respectively.
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 and includes loans that were reclassified from held-for-investment to held-for-sale after TDR modifications.
Table 4.11 - Payment Defaults of Completed TDR Modifications
  1Q 2020 1Q 2019
(Dollars in millions) Number of Loans
Post-TDR
Amortized Cost Basis
 Number of Loans
Post-TDR
Amortized Cost Basis
Single-family:      
20- and 30-year or more, amortizing fixed-rate 2,504

$427
 3,856

$409
15-year amortizing fixed-rate 119
14
 125
7
Adjustable-rate 29
4
 34
3
Alt-A, interest-only, and option ARM 164
32
 310
44
Total single-family 2,816
477
 4,325
463
Multifamily 

 

In addition to modifications, loans may be 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 2020 and 1Q 2019, 1,026 and 1,464, respectively, of such loans (with a post-TDR amortized cost basis of $0.1 billion and $0.2 billion, respectively) experienced a payment default within a year after the loss mitigation activity occurred.
Prior Period Allowance for Credit Losses and Related Information
Under the previous incurred loss impairment methodology that was effective prior to January 1, 2020, we assessed loan impairment on a collective basis unless we considered the loan to be impaired. We assessed loan impairment on an individual basis when, based on current information, it was probable that we would not receive all amounts due (including both principal and interest) in accordance with the contractual terms of the original loan agreement. For additional information, see our 2019 Annual Report.




Freddie Mac 1Q 2020 Form 10-Q 91

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents our allowance for loan losses and our recorded investment in loans held-for-investment by impairment evaluation methodology.
Table 4.12 - Net Investment in Loans
  December 31, 2019
(In millions) Single-familyMultifamilyTotal
Recorded investment:    
Collectively evaluated 
$1,936,208

$17,408

$1,953,616
Individually evaluated 35,449
81
35,530
Total recorded investment 1,971,657
17,489
1,989,146
Ending balance of the allowance for loan losses:    
Collectively evaluated (1,350)(12)(1,362)
Individually evaluated (2,872)
(2,872)
Total ending balance of the allowance (4,222)(12)(4,234)
Net investment in loans 
$1,967,435

$17,477

$1,984,912

The table below presents the UPB, recorded investment, related allowance for loan losses, average recorded investment, and interest income recognized for individually impaired loans.
Table 4.13 - Individually Impaired Loans
  December 31, 2019 1Q 2019
(In millions) UPB
Recorded
Investment
Associated
Allowance
 Average Recorded InvestmentInterest 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 
$2,431

$1,927
N/A
 
$2,686

$73

$4
15-year amortizing fixed-rate 21
20
N/A
 21


Adjustable-rate 169
169
N/A
 224
3

Alt-A, interest-only, and option ARM 847
727
N/A
 981
18
1
Total with no allowance recorded 3,468
2,843
N/A
 3,912
94
5
With an allowance recorded: (2)
        
20- and 30-year or more, amortizing fixed-rate 28,824
28,667

($2,416) 35,338
484
57
15-year amortizing fixed-rate 616
625
(13) 686
6
1
Adjustable-rate 131
130
(7) 147
1
1
Alt-A, interest-only, and option ARM 3,315
3,184
(436) 4,325
62
7
Total with an allowance recorded 32,886
32,606
(2,872) 40,496
553
66
Combined single-family:        
20- and 30-year or more, amortizing fixed-rate 31,255
30,594
(2,416) 38,024
557
61
15-year amortizing fixed-rate 637
645
(13) 707
6
1
Adjustable-rate 300
299
(7) 371
4
1
Alt-A, interest-only, and option ARM 4,162
3,911
(436) 5,306
80
8
Total single-family 36,354
35,449
(2,872) 44,408
647
71
Multifamily:        
With no allowance recorded (1)
 86
81
N/A
 66
1

With an allowance recorded 


 16


Total multifamily 86
81

 82
1

Total single-family and multifamily 
$36,440

$35,530

($2,872) 
$44,490

$648

$71
(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.

Freddie Mac 1Q 2020 Form 10-Q 92

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 4.14 - Delinquency Rates
(Dollars in millions) December 31, 2019
Single-family:  
Non-credit-enhanced portfolio  
Serious delinquency rate 0.70%
Total number of seriously delinquent loans 42,485
Credit-enhanced portfolio:(1)
  
Primary mortgage insurance:  
   Serious delinquency rate 0.79%
   Total number of seriously delinquent loans 15,261
Other credit protection:(2)
  
   Serious delinquency rate 0.40%
   Total number of seriously delinquent loans 18,143
Total single-family:  
Serious delinquency rate 0.63%
Total number of seriously delinquent loans 70,162
Multifamily: (3)
  
Non-credit-enhanced portfolio:  
Delinquency rate %
UPB of delinquent loans 
$2
Credit-enhanced portfolio:  
Delinquency rate 0.09%
UPB of delinquent loans 
$244
Total multifamily:  
Delinquency rate 0.08%
UPB of delinquent loans 
$246
(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.
Non-Cash Investing and Financing Activities
During 1Q 2020 and 1Q 2019, we acquired $73.2 billion and $37.0 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 $15.1 billion and $6.1 billion of loans from sellers in guarantor swap transactions and $0.5 billion and $0.4 billion of loans from sellers in cash execution transactions during 1Q 2020 and 1Q 2019, respectively, to satisfy advances to lenders that were recorded in other assets on our condensed consolidated balance sheets.

Freddie Mac 1Q 2020 Form 10-Q 93

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


NOTE 5
Guarantees and Other Off-Balance Sheet Credit Exposures
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 guarantees to non-consolidated VIEs and other third parties. This table does not include certain of 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 enhancements. See Note 6 for additional information on our credit enhancements.
Table 5.1 - Financial Guarantees
  March 31, 2020
December 31, 2019
(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 
$27,696

$379
39

$26,818

$361
40
Other mortgage-related guarantees 7,943
183
30
7,492
182
30
Total single-family 
$35,639

$562
  
$34,310

$543
 
Multifamily:        
Securitization activity guarantees 
$254,459

$3,310
39 
$252,167

$3,333
39
Other mortgage-related guarantees 10,427
440
34 9,989
416
34
Total multifamily 
$264,886

$3,750
  
$262,156

$3,749
 
Other guarantees measured at fair value 31,599
659
30 24,965
253
30
Fannie Mae securities backing Freddie Mac resecuritization products 39,549

30 27,408

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 enhancements. 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 and, as a result, the notional value is included. 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 and excludes our allowance for credit losses on off-balance sheet credit exposures. For other guarantees measured at fair value, this amount represents the fair value of the contract.
The table below shows the payment status of the mortgage loans underlying our guarantees that are not measured at fair value.
Table 5.2 – UPB of Loans Underlying Our Guarantees by Payment Status
  March 31, 2020
(In millions) Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure
Total
Single-family 
$35,362

$1,985

$660

$861

$38,868
Multifamily 304,903
9
12
254
305,178
Total 
$340,265

$1,994

$672

$1,115

$344,046
Other Off-Balance Sheet Credit Exposures
In addition to our guarantees, we enter into other agreements that expose us to off-balance sheet credit risk, primarily related to our multifamily business, including certain purchase commitments that are not accounted for as derivative instruments, unfunded lending arrangements, and other commitments. These agreements may require us to transfer cash before or upon settlement of our contractual obligation. The total notional value of these other off-balance sheet credit exposures was $20.3 billion and $17.1 billion at March 31, 2020 and December 31, 2019, respectively.

Freddie Mac 1Q 2020 Form 10-Q 94

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Upon adoption of CECL on January 1, 2020, we began recognizing an allowance for credit losses on off-balance sheet credit exposures for our guarantees that are not measured at fair value and other off-balance sheet arrangements based on expected credit losses over the contractual period in which we are exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. We include this allowance for credit losses on off-balance sheet credit exposures within other liabilities on our condensed consolidated balance sheets, with changes recognized through benefit (provision) for credit losses on our condensed consolidated statements of comprehensive income (loss).
Our methodologies for estimating the allowance for credit losses on off-balance sheet credit exposures for our single-family and multifamily guarantees are generally consistent with our methodologies for estimating the allowance for credit losses for single-family mortgage loans and multifamily mortgage loans, respectively. Many of our guarantees have credit enhancement provided by subordination that exceeds the amount of expected credit losses. See Note 4 for additional information on our allowance for credit losses methodologies and Note 6 for additional information on our guarantee credit enhancements. We have not recorded an allowance for credit losses on our guarantees of Fannie Mae securities due to the support provided to Fannie Mae by the U.S. government, the importance of Fannie Mae to the liquidity and stability of the U.S. housing market, and the long history of zero credit losses on Fannie Mae securities.
The allowance for credit losses on off-balance sheet credit exposures was $108 million and $51 million as of March 31, 2020 and December 31, 2019, respectively.

Freddie Mac 1Q 2020 Form 10-Q 95

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


NOTE 6
Credit Enhancements
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 recognized on our condensed consolidated balance sheets.
Our adoption of CECL on January 1, 2020 did not result in significant changes to our accounting policies for credit enhancements. Upon adoption of CECL, we continue to consider expected recoveries from attached credit enhancements in measuring the allowance for credit losses, resulting in a reduction in the recognized provision for credit losses by the amount of the expected recoveries. We also continue to recognize expected recoveries from freestanding credit enhancements separately in other assets on our condensed consolidated balance sheets, with an offsetting reduction to credit enhancement (expense) benefit, net, at the same time that we recognize an allowance for credit losses on the covered loans, measured on the same basis as the allowance for credit losses on the covered loans. See Note 6 in our 2019 Annual Report for additional information on our significant accounting policies for credit enhancements.
Adoption of CECL resulted in an increase of $0.3 billion in our expected recovery receivable balance as the amount of expected recoveries from freestanding credit enhancements increased in conjunction with the increase in expected losses on the covered mortgage loans. Upon adoption of CECL, we measure credit losses on our expected recovery receivables based on our estimate of current expected credit losses over the contractual term of the contract. For information about counterparty credit risk associated with mortgage insurers and other credit enhancement providers, see Note 14.
Credit Enhancement (Expense) Benefit, Net
Credit enhancement (expense) benefit, net primarily relates to freestanding credit enhancements. We do not typically recognize separate expenses for attached credit enhancements, as attached credit enhancements are accounted for on a net basis with the underlying financial instruments. The expenses associated with debt with embedded credit enhancements are generally recorded in interest expense. Refer to Note 8 for additional information on debt with embedded credit enhancements. The table below presents the components of credit enhancement (expense) benefit, net.
Table 6.1 - Components of Credit Enhancement (Expense) Benefit, Net
(In millions) 1Q 20201Q 2019
Premiums, amortization, and transaction costs 
($231)
($162)
Expected recoveries 467
4
Credit enhancement (expense) benefit, net 
$236

($158)


Freddie Mac 1Q 2020 Form 10-Q 96

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Single-Family Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our single-family credit enhancements.
Table 6.2 - Single-Family Credit Enhancements
   March 31, 2020 December 31, 2019
(In millions) Credit Enhancement Accounting Treatment
Total Current and Protected UPB(1)
Maximum Coverage 
Total Current and Protected UPB(1)
Maximum Coverage
Primary mortgage insurance Attached
$427,467

$109,003
 
$421,870

$107,690
STACR: (2)
       
  Trust notes

 Freestanding395,689
12,802
 288,323
9,739
  Debt notes Debt510,742
14,532
 536,036
15,373
Insurance/reinsurance (3)
 Freestanding907,873
10,442
 863,149
10,157
Subordination:       
  Non-consolidated VIEs (4)
 Attached26,479
4,708
 25,443
4,545
  Consolidated VIEs (5)
 Debt17,884
792
 19,498
854
Lender risk-sharing Freestanding29,222
5,923
 24,078
5,657
Other Primarily attached879
874
 1,056
1,051
Total single-family credit enhancements   
$159,076
  
$155,066
(1)Underlying loans may be covered by more than one form of credit enhancement.
(2)Total current and protected UPB represents the UPB of the assets included in the reference pool. Maximum coverage amount represents the outstanding balance held by third parties.
(3)As of March 31, 2020 and December 31, 2019, substantially all of our counterparties posted sufficient collateral on our ACIS transactions to meet the minimum collateral requirements of the ACIS program. Minimum collateral requirements are assessed on each deal based on a combination of factors, including counterparty credit risk of the reinsurer, as well as the structure and risk profile of the transaction. Other insurance/reinsurance transactions have similar collateral requirements.
(4)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. Maximum coverage represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
(5)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. 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 1Q 2020 Form 10-Q 97

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Multifamily Credit Enhancements

The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our multifamily credit enhancements.
Table 6.3 - Multifamily Credit Enhancements
   March 31, 2020 December 31, 2019
(In millions) Credit Enhancement Accounting Treatment
Total Current and Protected UPB(1)
Maximum Coverage 
Total Current and Protected UPB(1)
Maximum Coverage
Subordination:       
Non-consolidated VIEs (2) 
 Attached
$253,565

$40,527
 
$251,008

$40,262
Consolidated VIEs (3)
 Debt1,800
200
 1,800
200
Lender risk-sharing (4)
 Freestanding2,295
380
 2,529
381
Insurance/reinsurance (5)
 Freestanding2,764
127
 2,769
127
SCR debt notes (6)
 Debt2,431
122
 2,470
123
Other (4)
 Attached454
454
 467
467
Total multifamily credit enhancements   
$41,810
  
$41,560
(1)Underlying loans may be covered by more than one form of credit enhancement.
(2)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. Maximum coverage represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
(3)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. Maximum coverage amount represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
(4)Maximum coverage represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.
(5)As of March 31, 2020 and December 31, 2019, the counterparties to our insurance/reinsurance transactions have complied with the minimum collateral requirements. Minimum collateral requirements are assessed on each deal based on a combination of factors, including counterparty credit risk of the reinsurer, as well as the structure and risk profile of the transaction.
(6)Total current and protected UPB represents the UPB of the assets included in the reference pool. Maximum coverage amount represents the outstanding balance of the SCR notes held by third parties.
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.

Freddie Mac 1Q 2020 Form 10-Q 98

Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


NOTE 7
Investment Securities
The table below summarizes the fair values of our investments in debt securities by classification.
Table 7.1 - Investment Securities
(In millions) March 31, 2020December