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Management's Discussion and Analysis Consolidated Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS This discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements and accompanying notes. We have three primary sources of revenue: n Net interest income - Primarily consists of guarantee net interest income in Single-Family. We consolidate most of our Single-Family securitization trusts and, therefore, we recognize the loans held by the trust and the debt securities issued by the trust on our consolidated balance sheet. The difference between the interest income on these loans and the interest expense on the related debt represents the guarantee fees we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. n Guarantee income - Primarily consists of guarantee income in Multifamily. We do not consolidate most of our Multifamily securitization trusts, and therefore, we do not recognize the loans held by the trust or the debt securities issued by the trust on our consolidated balance sheet. Rather, we separately account for our guarantee to the trust and recognize the revenue from our guarantee as guarantee income. n Investment gains (losses), net - Primarily consist of gains on sale of mortgage loans, net of interest-rate risk management activities, from our purchase and securitization activities in Multifamily. Because we do not consolidate most of our Multifamily securitization trusts, we account for most of our Multifamily securitizations as sales of the underlying loans. Net investment gains may fluctuate significantly from period-to-period based on the pricing of our new multifamily loan purchases, the volume and nature of our investment, funding, and hedging activities, and changes in market conditions, such as interest rates and market spreads. We have two primary expense items: n Credit-related expenses - Primarily consist of benefit (provision) for credit losses, credit enhancement expense, benefit for credit enhancement recoveries, and REO operations expense. Benefit (provision) for credit losses primarily represents changes in expected credit losses on our single-family mortgage loans held-for-investment. Credit enhancement expense and benefit for credit enhancement recoveries include the costs we incur to transfer credit risk and the changes in expected recoveries, respectively, from certain contracts that are accounted for as freestanding credit enhancements. See MD&A - Our Business Segments - Single-Family - Products and Activities, MD&A - Our Business Segments - Multifamily - Products and Activities, and Note 6 for additional information on our accounting for credit enhancements. REO operations expense represents expenses related to foreclosed properties. n Operating expenses - Primarily consist of administrative expenses, the legislated 10 basis point fee, and other expenses we incur to run our business.FREDDIE MAC | 2021 Form 10-K 18
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Management's Discussion and Analysis Consolidated Results of Operations
The table below compares our consolidated results of operations for the past
three years.
Table 1 - Summary of Consolidated Statements of Comprehensive Income (Loss)
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Net interest income $17,580 $12,771 $11,848 $4,809 38 % $923 8 %
Guarantee income 1,032 1,442 1,089 (410) (28) 353 32
Investment gains (losses), net 2,746 1,813 818 933 51 995 122
Other income (loss) 593 633 323 (40) (6) 310 96
Net revenues 21,951 16,659 14,078 5,292 32 2,581 18
Benefit (provision) for credit 1,041 (1,452) 746 2,493 172 (2,198)
(295)
losses
Credit enhancement expense (1,518) (1,058) (749) (460) (43) (309)
(41)
Benefit for (decrease in) credit (542) 323 41 (865) (268) 282
688
enhancement recoveries REO operations income (expense) (12) (149) (229) 137 92 80
35
Credit-related income (expense) (1,031) (2,336) (191) 1,305 56 (2,145) (1,123) Administrative expense (2,651) (2,535) (2,564) (116) (5) 29 1 Legislated 10 basis point fee expense (2,342) (1,836) (1,617) (506) (28) (219) (14) Other expense (728) (723) (657) (5) (1) (66) (10) Operating expense (5,721) (5,094) (4,838) (627) (12) (256) (5) Income (loss) before income tax 15,199 9,229 9,049 5,970 65 180
2
(expense) benefit Income tax (expense) benefit (3,090) (1,903) (1,835) (1,187) (62) (68) (4) Net income (loss) 12,109 7,326 7,214 4,783 65 112 2 Total other comprehensive income (loss), (489) 205 573 (694) (339) (368)
(64)
net of taxes and reclassification adjustments Comprehensive income (loss)$11,620 $7,531 $7,787 $4,089 54 % ($256 )
(3) %
See Critical Accounting Estimates for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for a summary of our accounting policies and the related notes in which information about them can be found. Net Revenues Net Interest Income Net interest income consists of guarantee net interest income, investments net interest income, and income (expense) from hedge accounting. n We refer to the net interest income generated by our consolidated securitization trusts as guarantee net interest income. Guarantee net interest income primarily consists of the guarantee fees in Single-Family, as we consolidate most of our Single-Family securitization trusts, and consists of three components: l Contractual net interest income, which is equal to the difference between the interest income on loans held by consolidated trusts and the interest expense on debt securities issued by consolidated trusts. This amount represents the ongoing contractual monthly guarantee fee we receive for managing the credit risk associated with mortgage loans held by consolidated trusts. l The legislated 10 basis point fee on single-family loans that is remitted toTreasury as required by law. l Deferred fee income, which primarily consists of recognition of premiums and discounts on mortgage loans and debt securities of consolidated trusts and the fees that we receive or pay when we acquire single-family loans, which represent a portion of the guarantee fee compensation we receive for managing the credit risk associated with mortgage loans held by consolidated trusts. These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument and may vary significantly from period to period, primarily based on changes in actual prepayments on the underlying loans. Increases in actual prepayments result in a faster rate of deferred fee income recognition, while decreases in actual prepayments result in a slower rate of deferred fee income recognition. In addition, there is a difference in the timing of deferred fee income recognitionFREDDIE MAC | 2021 Form 10-K 19
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Management's Discussion and Analysis Consolidated Results of Operations
between debt securities of consolidated trusts and the underlying loans due to
the payment delay associated with the pass-through of principal payments on the
underlying loans to the security holders.
n We refer to the net interest income generated by our investments portfolio as
investments net interest income. Investments net interest income primarily
consists of the difference between the interest income earned on the assets in
our investments portfolio and the interest expense incurred on the liabilities
used to fund those assets.
n Income (expense) from hedge accounting primarily consists of amortization of
previously deferred hedge accounting basis adjustments and the earnings mismatch
on qualifying fair value hedge relationships, which is equal to the difference
between fair value changes for the hedging instrument, including the accrual of
periodic cash settlements, and fair value changes for the hedged item
attributable to the risk being hedged. See Note 9 for additional information on
hedge accounting.
The table below presents the components of net interest income.
Table 2 - Components of Net Interest Income
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Guarantee net interest income:
Contractual net interest income $8,736 $5,232 $4,034 $3,504 67% $1,198
30%
Net interest income related to the legislated 10 basis point fee 2,397 1,884 1,590 513 27 294 18 Deferred fee income 4,874 3,787 2,436 1,087 29 1,351 55 Total guarantee net interest income 16,007 10,903 8,060 5,104 47 2,843
35
Investments net interest income 3,068 4,100 4,040 (1,032) (25) 60 1 Income (expense) from hedge accounting (1,495) (2,232) (252) 737 33 (1,980) (786) Net interest income$17,580 $12,771 $11,848 $4,809 38%$923 8% Key Drivers: n Guarantee net interest income l 2021 vs. 2020 - Increased primarily due to continued mortgage portfolio growth, higher average portfolio guarantee fee rates, and higher deferred fee income recognition in Single-Family. l 2020 vs. 2019 - Increased primarily due to continued mortgage portfolio growth coupled with higher contractual guarantee fee rates in Single-Family. n Investments net interest income l 2021 vs. 2020 - Decreased primarily due to a decline in the size of the mortgage-related investments portfolio, partially offset by lower funding costs. l 2020 vs. 2019 - Increased primarily due to lower funding costs, partially offset by a change in our investment mix as the lower-yielding other investments portfolio represented a larger percentage of our total investments portfolio. n Income (expense) from hedge accounting l 2021 vs. 2020 - Expense decreased primarily due to lower amortization of hedge accounting-related basis adjustments driven by a decline in the unamortized balance. l 2020 vs. 2019 - Expense increased primarily due to higher amortization of hedge accounting-related basis adjustments driven by higher prepayments, partially offset by higher income related to accruals of periodic cash settlements on derivatives in hedging relationships. FREDDIE MAC | 2021 Form 10-K 20
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Management's Discussion and Analysis Consolidated Results of Operations
Net Interest Yield Analysis
The table below presents an analysis of interest-earning assets and
interest-bearing liabilities. To calculate the average balances, we generally
use a daily weighted average of amortized cost. When daily average balance
information is not available, such as for mortgage loans, we use monthly
averages. Mortgage loans on non-accrual status, where interest income is
generally recognized when collected, are included in the average balances.
Table 3 - Analysis of Net Interest Yield
Year Ended December 31,
2021 2020 2019
Interest Interest Interest
Average Income Average Average Income Average Average Income Average
(Dollars in millions) Balance (Expense) Rate Balance (Expense) Rate Balance (Expense) Rate
Interest-earning assets:
Cash and cash equivalents $62,042 $8 0.01 % $24,428 $30 0.12 % $8,925 $187 2.10 %
Securities purchased under agreements to 75,425 48 0.06 94,350 354 0.38 56,465 1,284 2.27
resell
Investment securities 56,211 2,261 4.02 71,842 2,581 3.59 70,104 2,737 3.90
Mortgage loans(1) 2,622,952 59,130 2.25 2,149,787 59,290 2.76 1,969,775 68,583 3.48
Other assets 6,049 80 1.32 4,752 85 1.79 2,933 104 3.55
Total interest-earning assets 2,822,679 61,527 2.18 2,345,159 62,340 2.66 2,108,202 72,895 3.46
Interest-bearing liabilities:
Debt securities of consolidated trusts held 2,538,757 (42,209) (1.66) 2,020,908 (46,281) (2.29) 1,822,411 (53,980) (2.96)
by third parties
Debt of Freddie Mac:
Short-term debt 10,157 - - 75,668 (606) (0.80) 85,492 (1,910) (2.23)
Long-term debt 227,415 (1,738) (0.76) 218,447 (2,682) (1.23) 192,100 (5,157) (2.68)
Total debt of Freddie Mac 237,572 (1,738) (0.73) 294,115 (3,288) (1.12) 277,592 (7,067) (2.55)
Total interest-bearing liabilities 2,776,329 (43,947) (1.58) 2,315,023 (49,569) (2.14) 2,100,003 (61,047) (2.91)
Impact of net non-interest-bearing funding 46,350 - 0.02 30,136 - 0.03 8,199 - 0.01
Total funding of interest-earning assets 2,822,679 (43,947) (1.56) 2,345,159 (49,569) (2.11) 2,108,202 (61,047) (2.90)
Net interest income/yield $17,580 0.62 % $12,771 0.55 % $11,848 0.56 %
(1) Loan fees included in interest income were
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Management's Discussion and Analysis Consolidated Results of Operations
Net Interest Income Rate / Volume Analysis
The table below presents a rate and volume analysis of our net interest income.
Our net interest income reflects the reversal of interest income accrued, net of
interest received on a cash basis, related to mortgage loans that are on
non-accrual status.
Table 4 - Net Interest Income Rate / Volume Analysis
Variance Analysis
2021 vs. 2020 2020 vs. 2019
(Dollars in millions) Rate(1) Volume(1) Total Change Rate(1) Volume(1) Total Change
Interest-earning assets:
Cash and cash equivalents ($43 ) $21 ($22 ) ($249 ) $92 ($157 )
Securities purchased under agreements to
resell (252) (54) (306) (1,450) 520 (930)
Investment securities 826 (1,146) (320) 36 (192) (156)
Mortgage loans (11,660) 11,500 (160) (15,145) 5,852 (9,293)
Other assets (16) 11 (5) (66) 47 (19)
Total interest-earning assets (11,145) 10,332 (813) (16,874) 6,319 (10,555)
Interest-bearing liabilities:
Debt securities of consolidated trusts held 15,245 (11,173) 4,072 13,447 (5,748) 7,699
by third parties
Debt of Freddie Mac:
Short-term debt 324 282 606 1,105 199 1,304
Long-term debt 1,050 (106) 944 3,105 (630) 2,475
Total debt of Freddie Mac 1,374 176 1,550 4,210 (431) 3,779
Total interest-bearing liabilities 16,619 (10,997) 5,622 17,657 (6,179) 11,478
Net interest income $5,474 ($665 ) $4,809 $783 $140 $923
(1) The total change variances are allocated between rate and volume based on
the relative size of each variance.
Guarantee Income
Guarantee income relates primarily to our Multifamily securitizations, as we do
not consolidate most of our Multifamily securitization trusts. For additional
details on our Multifamily securitizations, see MD&A - Our Business Segments -
Multifamily - Products and Activities - Loan Purchase, Securitization, and
Guarantee Activities.
Guarantee income consists of the following:
n Contractual guarantee fees - Consists of the fees earned from guarantees
issued to third parties and securitization trusts that we do not consolidate.
n Guarantee obligation amortization - Represents the amortization of the
initial fair value of the guarantee, which is typically equal to the
compensation we received for issuing the guarantee, over the term of the
guarantee as we are released from risk.
n Guarantee asset fair value changes - Represents the change in fair value of
our right to receive contractual guarantee fees. Because our Multifamily loans
contain prepayment protection, declining interest rates generally result in a
higher guarantee asset fair value, with the opposite effect occurring when
interest rates increase.
FREDDIE MAC | 2021 Form 10-K 22
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Management's Discussion and Analysis Consolidated Results of Operations
The table below presents the components of guarantee income.
Table 5 - Components of Guarantee Income
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Contractual guarantee fees $1,217 $1,023 $910 $194 19 % $113 12 %
Guarantee obligation amortization 1,148 977 813 171 18 164 20
Guarantee asset fair value changes (1,333) (558) (634) (775) (139) 76 12
Guarantee income $1,032 $1,442 $1,089 ($410 ) (28) % $353 32 %
Key Drivers:
n 2021 vs. 2020 - Decreased as continued growth in our Multifamily guarantee
portfolio was offset by the impacts of higher interest rates on the fair values
of our guarantee assets.
n 2020 vs. 2019 - Increased primarily driven by continued growth in our
Multifamily guarantee portfolio, coupled with lower fair value losses on our
guarantee assets due to lower interest rates.
Investment Gains (Losses), Net
Net investment gains primarily consist of the gains on sale of mortgage loans
from our multifamily loan purchase and securitization activities. Net investment
gains also include revenues from sales of single-family delinquent and
reperforming loans and gains and losses on investments in mortgage-related and
other investments securities. These amounts are shown net of gains and losses
from the related debt funding and interest-rate risk management activities, as
applicable. Net investment gains can vary significantly from period-to-period
based on a number of factors, such as:
n Pricing of new multifamily mortgage loans;
n The nature and volume of our investment, funding, and interest-rate risk
management activities, including the volume of multifamily loan purchase
commitments and mortgage loans for which we have elected the fair value option;
the volume of held-for-sale multifamily loans measured at lower-of-cost-or-fair
value; the volume of held-for-sale single-family mortgage loans; the size of our
investments portfolios and volume of sales of available-for-sale securities; the
volume and type of debt selected for repurchase based on our investment and
funding strategies, including our efforts to support the liquidity and price
performance of our mortgage-related securities; and changes in the composition
of our derivative portfolio; and
n Changes in market conditions, such as interest rates, market spreads, and
implied volatility.
Derivative instruments are a key component of our interest-rate risk management
strategy. We use derivatives to economically hedge the interest-rate risk of our
financial assets and liabilities and manage our exposure to interest-rate risk
on an economic basis to a low level as measured by our models. In addition, we
routinely enter into commitments to purchase and sell mortgage loans and
mortgage-related securities. The majority of these commitments are accounted for
as derivative instruments. For additional information on derivative instruments,
see Note 9.
We align our derivative portfolio to economically hedge the changing duration of
our assets and liabilities and apply fair value hedge accounting to certain
single-family mortgage loans and long-term debt to reduce our GAAP earnings
variability. As a result, interest-rate-related fair value gains and losses that
we recognize on financial instruments that we measure at fair value generally
have offsetting impacts from the derivative instruments that we use to
economically hedge interest-rate risk. For more information about our
interest-rate risk management activities and the sensitivity of reported GAAP
earnings to those activities, see MD&A - Risk Management - Market Risk.
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Management's Discussion and Analysis Consolidated Results of Operations
The table below presents the components of investment gains (losses), net.
Table 6 - Investment Gains (Losses), Net
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Single-Family $361 ($112 ) $300 $473 422 % ($412 ) (137 %)
Multifamily 2,385 1,925 518 460 24 1,407 272
Investment gains (losses), net $2,746 $1,813 $818 $933 51 % $995 122 %
Key Drivers:
n 2021 vs. 2020 - Increased primarily due to higher gains in Multifamily from
higher pricing margins for new loan purchases and greater spread tightening,
partially offset by a smaller volume of new loan purchases as a result of a
reduced Multifamily loan purchase cap in 2021.
n 2020 vs. 2019 - Increased primarily due to higher gains in Multifamily from
higher pricing margins and greater volume of new loan purchases.
Credit-Related Expense
Benefit (Provision) for Credit Losses
Our benefit (provision) for credit losses relates primarily to single-family
loans held-for-investment and can vary substantially from period to period based
on a number of factors, such as changes in actual and forecasted house prices
and interest rates, borrower prepayments and delinquency rates, events such as
pandemics, the type and volume of our loss mitigation and foreclosure activity,
and government assistance provided to borrowers. See MD&A - Critical Accounting
Estimates for additional information.
The table below presents the components of benefit (provision) for credit
losses.
Table 7 - Benefit (Provision) for Credit Losses
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Single-Family $919 ($1,320 ) $749 $2,239 170 % ($2,069 ) (276) %
Multifamily 122 (132) (3) 254 192 (129) (4,300)
Benefit (provision) for credit
losses $1,041 ($1,452 ) $746 $2,493 172 % ($2,198 ) (295) %
Single-Family
n 2021 vs. 2020 - A benefit for credit losses in 2021 compared to a provision
for credit losses in 2020 driven by the following factors:
l A reserve release due to reduced expected credit losses related to COVID-19
during 2021 as economic conditions improved. Our provision for credit losses
increased during 2020 due to the increase in expected credit losses related to
the economic effects of the pandemic.
l This was partially offset by an increase in expected losses on new
single-family loans due to growth in our Single-Family mortgage portfolio. We
recognize expected credit losses at the time of loan acquisition.
n 2020 vs. 2019 - A provision for credit losses in 2020 compared to a benefit
for credit losses in 2019 primarily driven by the following factors:
l A provision for credit losses due to:
-Increased expected credit losses related to COVID-19 - Our provision for credit
losses increased due to the increase in expected credit losses related to the
economic effects of the COVID-19 pandemic.
-Portfolio growth - The expected losses on new single-family loans increased due
to growth in our Single-Family mortgage portfolio. We recognize expected credit
losses at the time of loan acquisition.
l This was partially offset by a decrease in expected losses driven by growth
in realized and forecasted house prices and declines in forecasted interest
rates.
FREDDIE MAC | 2021 Form 10-K 24
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Management's Discussion and Analysis Consolidated Results of Operations
Multifamily
n 2021 vs. 2020 - A benefit for credit losses in 2021 compared to a provision for credit losses in 2020 driven by improved actual and forecasted economic factors. n 2020 vs. 2019 - An increase in provision due to higher expected credit losses as a result of the COVID-19 pandemic. Credit Enhancement Expense Credit enhancement expense primarily relates to certain single-family CRT transactions that are accounted for as freestanding credit enhancements and includes the premiums paid to transfer credit risk to third parties and transaction and other costs incurred to enter into those transactions.Key Drivers : n 2021 vs. 2020 and 2020 vs. 2019 - Increased$460 million and$309 million , respectively, primarily due to higher outstanding cumulative volumes of CRT transactions. See MD&A - Our Business Segments - Single-Family - Products and Activities and MD&A - Our Business Segments - Multifamily - Products and Activities for additional information on our credit enhancements. Benefit for (Decrease in) Credit Enhancement Recoveries Benefit for (decrease in) credit enhancement recoveries primarily relates to certain single-family CRT transactions that are accounted for as freestanding credit enhancements and represents changes in expected recoveries from those transactions. We recognize expected recoveries from freestanding credit enhancements at the same time that we recognize an allowance for credit losses on the covered loans, measured on the same basis as the allowance for credit losses on the covered loans.Key Drivers : n 2021 vs. 2020 - Decreased$865 million as a result of the corresponding decrease in expected credit losses. n 2020 vs. 2019 - Increased$282 million as a result of the corresponding increase in expected credit losses due to the COVID-19 pandemic.FREDDIE MAC | 2021 Form 10-K 25
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Management's Discussion and Analysis Consolidated Balance Sheets Analysis
CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
Table 8 - Summarized Consolidated Balance Sheets
December 31, Year Over Year Change
(Dollars in millions) 2021 2020 $ %
Assets:
Cash and cash equivalents $10,150 $23,889 ($13,739 ) (58) %
Securities purchased under
agreements to resell 71,203 105,003 (33,800) (32)
Subtotal 81,353 128,892 (47,539) (37)
Investment securities, at fair
value 53,015 59,825 (6,810) (11)
Mortgage loans, net 2,848,109 2,383,888 464,221 19
Accrued interest receivable, net 7,474 7,754 (280) (4)
Deferred tax assets, net 6,214 6,557 (343) (5)
Other assets 29,421 40,499 (11,078) (27)
Total assets $3,025,586 $2,627,415 $398,171 15 %
Liabilities and Equity:
Liabilities:
Accrued interest payable $6,268 $6,210 $58 1 %
Debt 2,980,185 2,592,546 387,639 15
Other liabilities 11,100 12,246 (1,146) (9)
Total liabilities 2,997,553 2,611,002 386,551 15
Total equity 28,033 16,413 11,620 71
Total liabilities and equity $3,025,586 $2,627,415 $398,171 15 %
Key Drivers:
As of December 31, 2021 compared to December 31, 2020 :
n Cash and cash equivalents and securities purchased under agreements to resell
decreased on a combined basis primarily due to a decrease in trust cash driven
by lower loan prepayments and a decline in our operating cash due to a lower
cash window purchase forecast and continued funding of maturities, calls, and
buybacks of debt of Freddie Mac without issuing new debt.
n Mortgage loans, net and debt increased primarily due to the increase in the
size of the Single-Family mortgage portfolio.
n Other assets decreased primarily due to lower servicer receivables driven by
a decrease in loan prepayments.
FREDDIE MAC | 2021 Form 10-K 26
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Management's Discussion and Analysis Our Portfolios
OUR PORTFOLIOS
In connection with the change in our reportable segments, we updated the
definitions of our portfolio balances and aligned the definitions across our two
reportable segments. Prior periods have been revised to conform to the current
period presentation.
Mortgage Portfolio
Our mortgage portfolio includes assets held by both business segments and
consists of:
n Securitized mortgage loans - Loans held by securitization trusts that issue
securities that we guarantee.
n Unsecuritized mortgage loans
l Securitization pipeline and other loans - Single-family and multifamily loans
that we have purchased for cash and aggregate on our balance sheet prior to
securitization and other multifamily loans we intend to hold for the foreseeable
future.
l Seasoned loans - Delinquent and modified single-family loans that we have
purchased from securitization trusts. Certain of these loans have re-performed,
either on their own or through modification or other loss mitigation activity.
n Other - Primarily consists of other mortgage-related guarantees.
The table below presents the UPB of our mortgage portfolio by segment.
Table 9 - Mortgage Portfolio
December 31, 2021 December 31, 2020
(In millions) Single-Family Multifamily Total Single-Family Multifamily Total
Securitized mortgage loans:
Held by consolidated trusts $2,706,514 $18,757 $2,725,271 $2,204,936 $12,305 $2,217,241
Held by nonconsolidated trusts 33,340 362,627 395,967 34,932 331,860 366,792
Total securitized mortgage loans 2,739,854 381,384 3,121,238 2,239,868 344,165
2,584,033
Unsecuritized mortgage loans: Securitization pipeline and other loans 21,189 22,771 43,960 51,040 33,407 84,447 Seasoned loans 20,594 - 20,594 26,303 - 26,303 Total unsecuritized mortgage loans 41,783 22,771 64,554 77,343 33,407 110,750 Other 10,587 10,508 21,095 9,215 10,775 19,990 Total mortgage portfolio$2,792,224 $414,663 $3,206,887 $2,326,426 $388,347 $2,714,773 Guarantee Portfolio Our guarantee portfolio primarily consists of mortgage-related securities guaranteed byFreddie Mac in exchange for guarantee fees. This amount differs from the securitized mortgage loans amount included in the mortgage portfolio because of two primary factors: (1) it includes only the UPB of securities guaranteed byFreddie Mac and excludes the UPB of any unguaranteed securities issued by securitization trusts and (2) it reflects timing differences between the receipt of mortgage payments and the pass-through of those payments to security holders. The other category primarily consists of other mortgage-related guarantees. FREDDIE MAC | 2021 Form 10-K 27
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Management's Discussion and Analysis Our Portfolios
The table below presents the guarantee portfolio by segment.
Table 10 - Guarantee Portfolio
December 31, 2021 December 31, 2020 (In millions) Single-Family Multifamily Total Single-Family Multifamily Total Guaranteed mortgage-related securities: Issued by consolidated trusts$2,744,899 $18,883 $2,763,782 $2,273,736 $12,305 $2,286,041 Issued by nonconsolidated trusts 27,538 318,756 346,294 29,300 289,056 318,356 Total guaranteed mortgage-related securities 2,772,437 337,639 3,110,076 2,303,036 301,361 2,604,397 Other 10,587 10,508 21,095 9,215 10,775 19,990 Total guarantee portfolio$2,783,024 $348,147 $3,131,171 $2,312,251 $312,136 $2,624,387 Our guarantee portfolio excludes guarantees of Fannie Mae securities and other similar transactions in which we do not directly guarantee mortgage credit risk in exchange for guarantee fees. See Note 5 for additional information on our guarantee activities. Investments Portfolio Our investments portfolio consists of our mortgage-related investments portfolio and other investments portfolio. Mortgage-Related Investments Portfolio We primarily use our mortgage-related investments portfolio to provide liquidity to the mortgage market and support our loss mitigation activities. Our mortgage-related investments portfolio includes assets held by both business segments and consists of unsecuritized mortgage loans and mortgage-related securities. We primarily invest in mortgage-related securities that we issue or guarantee, although we may also invest in other agency mortgage-related securities. The Purchase Agreement limits the size of our mortgage-related investments portfolio to a maximum amount of$250 billion , which will be reduced to$225 billion onDecember 31, 2022 . The calculation of mortgage assets subject to the Purchase Agreement cap includes the UPB of mortgage assets and 10% of the notional value of interest-only securities. We are also subject to additional limitations on the size and composition of our mortgage-related investments portfolio pursuant to FHFA guidance. For additional information on the restrictions on our mortgage-related investments portfolio, see Conservatorship and Related Matters. The table below presents the details of our mortgage-related investments portfolio. Table 11 - Mortgage-Related Investments Portfolio December 31, 2021 December 31, 2020 (In millions) Single-Family Multifamily Total Single-Family Multifamily Total Unsecuritized mortgage loans$41,783 $22,771 $64,554 $77,343 $33,407 $110,750 Mortgage-related securities 43,357 3,100 46,457 67,254 4,180 71,434 Mortgage-related investments portfolio$85,140 $25,871 $111,011 $144,597 $37,587 $182,184 10% of notional amount of$12,517 $6,586 interest-only securities Mortgage-related investments portfolio 123,528
188,770
for purposes of Purchase Agreement cap
Other Investments Portfolio Our other investments portfolio, which includes the liquidity and contingency operating portfolio, is primarily used for short-term liquidity management, collateral management, and asset and liability management. The assets in the other investments portfolio are primarily allocated to the Single-Family segment. See Liquidity and Capital Resources for additional information on our other investments portfolio.FREDDIE MAC | 2021 Form 10-K 28
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Management's Discussion and Analysis Our Business Segments
OUR BUSINESS SEGMENTS
As shown in the table below, we have two reportable segments, which are based on
the way our chief operating decision maker manages our business.
During 2021, our chief operating decision maker began making decisions about
allocating resources and assessing segment performance based on two reportable
segments, Single-Family and Multifamily. In prior periods, we managed our
business based on three reportable segments, Single-Family Guarantee,
Multifamily, and Capital Markets. As our mortgage-related investments portfolio
has declined over time, our capital markets activities have become increasingly
focused on supporting our Single-Family and Multifamily businesses. As a result,
we determined that, effective in 2021, our Capital Markets segment should no
longer be considered a separate reportable segment, and our chief operating
decision maker no longer reviews separate financial results or discrete
financial information for our capital markets activities. Substantially all of
the revenues and expenses that were previously directly attributable to our
Capital Markets segment are now included in our Single-Family segment, while
certain administrative expenses and other centrally-incurred costs previously
allocated to the Capital Markets segment are now allocated between the
Single-Family and Multifamily segments using various methodologies depending on
the nature of the expense.
In connection with this change, we also changed the measure of segment profit
and loss for each segment to be based on net income and comprehensive income
calculated using the same accounting policies we use to prepare our general
purpose financial statements in conformity with generally accepted accounting
principles. The financial results of each reportable segment include directly
attributable revenue and expenses. We allocate interest expense and other
funding and hedging-related costs and returns on certain investments to each
reportable segment using a funds transfer pricing process. We fully allocate to
each reportable segment the administrative expenses and other centrally-incurred
costs that are not directly attributable to a particular segment using various
methodologies depending on the nature of the expense. As a result, the sum of
each income statement line item for the two reportable segments is equal to that
same income statement line item for the consolidated entity. We have
discontinued the reclassifications of certain activities between various line
items that were included in our previous measure of segment profit and loss.
Prior period information has been revised to conform to the current period
presentation. See Note 15 for additional information on the change in our
segment reporting presentation.
Segment Description
Reflects results from our purchase,
securitization, and guarantee of
single-family loans, our investments in single-family loans and
Single-Family mortgage-related securities, the management of Single-Family mortgage
credit risk and market risk, and any results of our treasury function
that are not allocated to each segment.
Reflects results from our purchase,
securitization, and guarantee of
multifamily loans, our investments in multifamily loans and
Multifamily mortgage-related securities, and the management of Multifamily
mortgage credit risk and market risk.
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Management's Discussion and Analysis Our Business Segments
Segment Net Income (Loss) and Comprehensive Income (Loss)
The graphs below show our net income (loss) and comprehensive income (loss) by
segment.
Segment Net Income (Loss)
(In millions)[[Image Removed: fmcc-20211231_g20.jpg]]
Segment Comprehensive Income (Loss)
(In millions) [[Image Removed: fmcc-20211231_g21.jpg]]
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Management's Discussion and Analysis Our Business Segments | Single-Family
Single-Family Business Overview Our Single-Family segment provides liquidity and support to the single-family market through a variety of activities that include the purchase, securitization, and guarantee of single-family loans originated by lenders. Central to our mission is our commitment to helping more families attain affordable and sustainable housing and to increasing equitable access to housing finance. TheU.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders, and a secondary mortgage market that links lenders and investors. The size of theU.S. residential mortgage market is affected by many factors, including changes in interest rates, unemployment rates, homeownership rates, house prices, the supply of housing, lender preferences regarding credit risk, and borrower preferences regarding mortgage debt. In accordance with our Charter, we participate in the secondary mortgage market. The mix of loan products we purchase is affected by several factors, including the volume of loans meeting the requirements of our Charter, the volume meeting our risk appetite and originated according to our purchase standards, and the loan purchase and securitization activity of other financial institutions. Our primary business model is to acquire loans that lenders originate and then pool those loans into guaranteed mortgage-related securities that transfer interest-rate, prepayment, and liquidity risk to investors and can be sold in the capital markets. We consolidate most of our Single-Family securitization trusts and, therefore, we recognize the loans held by the trust and the debt securities issued by the trust on our balance sheet and recognize the guarantee fees we receive as net interest income. To reduce our exposure under our guarantees, we transfer credit risk on a portion of our Single-Family mortgage portfolio to the private market in certain instances. The returns we generate from these activities are primarily derived from the guarantee fees we receive in exchange for providing our guarantee of the principal and interest payments of the issued mortgage-related securities. The diagram below illustrates our primary business model.[[Image Removed: fmcc-20211231_g22.jpg]] Products and Activities Our Single-Family business primarily consists of activities related to providing market liquidity by purchasing and securitizing mortgage loans and issuing guaranteed mortgage-related securities, transferring credit risk, performing loss mitigation activities, and investing in mortgage-related and other investments. Certain of our loan products and programs have been designed to address affordability challenges, particularly in underserved markets. Loan Purchase, Securitization, and Guarantee Activities Cash Window Transactions One of the primary ways we acquire mortgage loans and provide liquidity to our Single-Family lender customers is by purchasing loans for aggregation in our securitization pipeline through our cash window. In these transactions, we purchase mortgage loans from our customers in exchange for cash consideration. We enter into forward commitments with lenders in advance of the loan purchase date to purchase loans through our cash window at a fixed price for our securitization pipeline, allowing lenders to offer borrowers the opportunity to lock in the interest rate on the mortgage prior to loan origination. We refer to the loan as being in our securitization pipeline for the period of time between loan purchase and securitization.FREDDIE MAC | 2021 Form 10-K 31 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
We typically economically hedge the market risk exposure of our securitization pipeline by entering into forward sale commitments and obtain permanent financing for the loans in our securitization pipeline after a short aggregation period by securitizing the loans into guaranteed mortgage-related securities. We sell the resulting securities to third-party investors, typically through cash auctions, and may also retain certain of the securities in our mortgage-related investments portfolio prior to selling them to third parties. The Purchase Agreement requires us to purchase loans for cash consideration; operate this cash window with non-discriminatory pricing; and comply with directives, regulations, restrictions, or other requirements prescribed by FHFA related to equitable secondary market access by community lenders. InSeptember 2021 , the$1.5 billion Purchase Agreement limit on cash window volumes that was to begin onJanuary 1, 2022 was suspended. We will continue to manage cash window activities in accordance with our risk limits and guidance from FHFA. For additional information about the Purchase Agreement, see MD&A - Conservatorship and Related Matters. The diagram below shows the process for acquiring and securitizing loans in our cash window transactions. [[Image Removed: fmcc-20211231_g23.jpg]]FREDDIE MAC | 2021 Form 10-K 32
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Management's Discussion and Analysis
Our Business Segments | Single-Family
Guarantor Swap Transactions In addition to cash window transactions, another primary way we acquire loans and provide liquidity to our Single-Family lender customers is by securitizing loans into guaranteed mortgage-related securities in guarantor swap transactions. Our largest guarantor swap customers are primarily large mortgage banking companies and commercial banks. In these transactions, we purchase mortgage loans from our customers in exchange for a security backed by those same loans, as shown in the diagram below: [[Image Removed: fmcc-20211231_g24.jpg]] Advances to Lenders We also provide liquidity to certain of our small and medium-sized lenders through our early funding programs, where we advance funds to lenders for mortgage loans prior to the loans being pooled and securitized. In some cases, the early funded mortgages are ultimately delivered through cash window purchase transactions. We account for these transactions as advances that are fully collateralized by the mortgage loans and recognize the associated fees as interest income on the advances from the early funding date to the final settlement date. Securitization Products We offer the following types of securitization products to our customers. Level 1 Securitization Products The securities we issue in cash window securitizations and guarantor swap transactions are Level 1 Securitization Products, which are pass-through securities that represent undivided beneficial interests in trusts that hold pools of loans. We issue the following types of Level 1 Securitization Products: n UMBS - Single-class pass-through securities issued through the CSP with a 55-day payment delay for TBA-eligible fixed-rate mortgage loans. The UMBS is a single (common) security that is issued by either Fannie Mae or us. The UMBS market is designed to enhance the overall liquidity of TBA-eligibleFreddie Mac and Fannie Mae securities by supporting their fungibility without regard to which company is the issuer.SIFMA permits UMBS TBA contracts to be settled by delivery of UMBS issued by eitherFreddie Mac or Fannie Mae under its good-delivery guidelines. n 55-day MBS - Single-class pass-through securities issued through the CSP with a 55-day payment delay for non-TBA-eligible fixed-rate mortgage loans. n ARM PCs - Single-class pass-through securities with a 75-day payment delay for ARM products. We do not use the CSP to issue ARM PCs. In prior years, we also issued Gold PCs, which were single-class pass-through securities with a 45-day payment delay for fixed-rate mortgage loans. We discontinued the issuance of Gold PCs in 2019. Existing Gold PCs that are not entirely resecuritized are eligible for exchange into UMBS (for TBA-eligible securities) or 55-day MBS (for non-TBA-eligible securities).FREDDIE MAC | 2021 Form 10-K 33 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
All Level 1 Securitization Products are backed only by mortgage loans that we have acquired. We offer (or previously offered) all of the above products through both guarantor swap and cash window programs. We also periodically use Level 1 Securitization Products to securitize certain reperforming loans subsequent to purchasing them from the original securities pool, depending on market conditions, business strategy, credit risk considerations, and operational efficiency. When we issue a Level 1 Securitization Product, we retain the credit risk of the underlying mortgage loans by guaranteeing the principal and interest payments of the issued securities and transfer the interest-rate, prepayment, and liquidity risks of those loans to the investors in the securities. For our fixed-rate Level 1 Securitization Products, we guarantee the timely payment of principal and interest. For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying loans, and we also guarantee the full and final payment of principal, but not the timely payment of principal. In exchange for our guarantee of Level 1 securitization products, we receive guarantee fees that are commensurate with the aggregate risks assumed and that we expect will, over the long-term, provide income that exceeds the credit-related and administrative expenses on the underlying loans and also provide a return on the capital that would be needed to support the related credit risk. The guarantee fees charged on new acquisitions generally consist of: n A contractual monthly fee paid as a percentage of the UPB of the underlying loan, including the legislated 10 basis point fee and n Fees we receive or pay when we acquire a loan, which include credit fees and buy-up and buy-down fees. Credit fees are calculated based on credit risk factors such as the loan product type, loan purpose, LTV ratio, and credit score, and are charged to compensate us for higher levels of risk in some loan products. Buy-up and buy-down fees are payments made or received to buy up or buy down, respectively, the monthly contractual guarantee fee and are paid in conjunction with the formation of a security to provide for a uniform net coupon rate for the mortgage pool underlying the security. In general, we must obtain FHFA's approval to implement significant across-the-board changes to our credit fees. In addition, from time to time, FHFA issues directives or guidance to us affecting the levels of guarantee fees that we may charge. InJanuary 2022 , FHFA announced targeted increases toFreddie Mac's and Fannie Mae's credit fees for certain high balance loans and second home loans, effective for deliveries and acquisitions beginningApril 1, 2022 . In order to issue mortgage-related securities, we establish trusts pursuant to ourMaster Trust agreements and place the mortgage loans in the trust, which issues securities backed by those mortgage loans. The servicer administers the collection of borrowers' payments on their loans and remits the collected funds to us. We administer the distribution of payments to the investors in the mortgage-related securities, net of any applicable guarantee fees. When we securitize mortgage loans using trusts,Freddie Mac typically functions in its capacity as depositor, guarantor, administrator, and trustee of the trusts. We consolidate our Single-Family Level 1 Securitization Product trusts and recognize the mortgage loans held by and debt issued by those trusts on our consolidated balance sheets. As a result, we recognize guarantee fees for these products as the difference between the interest income on the loans held by the trusts and the interest expense on the debt issued by the trusts. This amount is referred to as guarantee net interest income. When a borrower prepays a loan that we have securitized, the outstanding balance of the security owned by investors is reduced by the amount of the prepayment. If the borrower becomes delinquent, we continue to make the applicable payments to the investors in the mortgage-related securities pursuant to our guarantee until we purchase the loan out of the securitization trust. We have the option to purchase specified loans, including certain delinquent loans, from the trust at a purchase price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously distributed. At the instruction of FHFA, we purchase loans from trusts when they reach 24 months of delinquency, except for loans that meet certain criteria (e.g., permanently modified or foreclosure referral), which may be purchased sooner. Many delinquent loans are purchased from trusts before they reach 24 months of delinquency under one of the exceptions provided. We must obtain FHFA's approval to implement changes to our policy to purchase loans from trusts. We implemented the 24-month policy onJanuary 1, 2021 . Prior to that time, in accordance with FHFA instruction, we generally purchased loans from trusts if they were delinquent for 120 days, subject to certain exceptions. Resecuritization Products Resecuritization products represent beneficial interests in pools of Level 1 Securitization Products and certain other types of mortgage assets. We create these securities by using Level 1 Securitization Products or our previously issued resecuritization products as the underlying collateral. We leverage the issuance of these securities to expand the range of investors in our mortgage-related securities to include those seeking specific security attributes. Similar to our Level 1 Securitization Products, we guarantee the payment of principal and interest to the investors in our resecuritization products. We do not charge a guarantee fee for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced, although we typically receive a transaction fee as compensation for creating the security and future administrative responsibilities. We use the CSP for many of the securities administration activities for our resecuritization products. We have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities, which are separately guaranteed by Fannie Mae, in our commingled resecuritization products, our guarantee covers timely payment of principal and interest on such products from the underlying Fannie MaeFREDDIE MAC | 2021 Form 10-K 34 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
securities. If Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, we would be responsible for making the payment. We do not currently charge an incremental guarantee fee to commingle Fannie Mae collateral in resecuritization transactions, although we may do so in the future. However, we are required to hold incremental capital for our guarantees of Fannie Mae securities under the ERCF. All of the cash flows from the collateral underlying our resecuritization products are generally passed through to investors in these securities. We do not issue resecuritization products that have concentrations of credit risk beyond those embedded in the underlying assets. In many of our resecuritization transactions, securities dealers or investors deliver mortgage assets in exchange for the resecuritization product. In certain cases, we may also transfer our own mortgage assets in exchange for the resecuritization product. The diagram below provides a general example of how we create resecuritization products. [[Image Removed: fmcc-20211231_g25.jpg]] We offer the following types of resecuritization products: n Single-class resecuritization products - Involve the direct pass through of all cash flows of the underlying collateral to the beneficial interest holders and include: l Supers - Resecuritizations of UMBS and certain other mortgage securities. This structure allows commingling ofFreddie Mac and Fannie Mae collateral, where newly issued or exchanged UMBS and Supers issued by us or Fannie Mae may be commingled to back Supers issued by us. Fannie Mae also issues Supers. Supers can be backed by: -UMBS and/or other Supers issued by us or Fannie Mae; -Existing TBA-eligible Fannie Mae "MBS" and/or "Megas"; and/or -UMBS and Supers that we have issued in exchange for TBA-eligible PCs and Giant PCs that have been delivered to us in response to our offer to exchange 45-day payment delay securities for corresponding 55-day payment delay securities. l Giant MBS - Resecuritizations of: -Newly issued 55-day MBS and/or Giant MBS; and/or -55-day MBS and/or Giant MBS that we have issued in exchange for non-TBA-eligible PCs and non-TBA-eligible Giant PCs that have been delivered to us in response to our offer to exchange 45-day payment delay securities for corresponding 55-day payment delay securities. l Giant PCs - Resecuritizations of previously issued PCs or Giant PCs. Although we no longer issue Gold PCs, existing Gold PCs may continue to be resecuritized into Giant PCs. In addition, ARM PCs may continue to be resecuritized into ARM Giant PCs. Fixed-rate Giant PCs are eligible for exchange into Supers (for TBA-eligible securities) or Giant MBS (for non-TBA-eligible securities).FREDDIE MAC | 2021 Form 10-K 35 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
n Multiclass resecuritization products l REMICs - Resecuritizations of previously issued mortgage securities that divide all cash flows of the underlying collateral into two or more classes of varying maturities, payment priorities, and coupons. This structure allows commingling of TBA-eligibleFreddie Mac and Fannie Mae collateral. l Strips - Resecuritizations of previously issued Level 1 Securitization Products or single-class resecuritization products and issuance of stripped securities, including principal-only and interest-only securities or floating rate and inverse floating rate securities, backed by the cash flows from the underlying collateral. This structure allows commingling of TBA-eligibleFreddie Mac and Fannie Mae collateral. Other Securitization Products We securitize certain seasoned loans in transactions where we issue guaranteed senior securities and unguaranteed subordinated securities. The collateral for these structures primarily consists of reperforming loans. The unguaranteed subordinated securities absorb first losses on the related loans. After securitization, we do not control the servicing, and the loans are not serviced in accordance with our Guide. In prior years, we offered additional types of securitization products to our customers, including senior subordinate securitization structures backed by recently originated loans and other securitization products collateralized by non-Freddie Mac mortgage-related securities. We no longer offer these products on a regular basis and have not entered into these types of transactions recently. We also periodically offer other securitization products backed by other mortgage-related assets, such as excess servicing fees and buy-up cash flows. Other Mortgage-Related Guarantees We also offer a guarantee on mortgage assets held by third parties, in exchange for guarantee fees, without securitizing those assets. These arrangements, referred to as long-term standby commitments, obligate us to purchase seriously delinquent loans that are covered by those commitments. From time to time, we have consented to the termination of our long-term standby commitments and simultaneously entered into guarantor swap transactions with the same counterparty, issuing securities backed by many of the same loans. CRT Activities To reduce our credit risk exposure, we engage in various types of credit enhancements, including CRT transactions and other credit enhancements. We define CRT transactions as those arrangements where we actively transfer the credit risk exposure on mortgages that we own or guarantee. We define other credit enhancements as those arrangements, such as traditional primary mortgage insurance, where we do not actively take part in the transfer of the credit risk exposure. Our CRT transactions are designed to reduce the amount of required capital related to credit risk, to transfer portions of credit losses on groups of previously acquired loans to third-party investors, and to reduce the risk of future losses to us when borrowers default. The costs we incur in exchange for this credit protection effectively reduce our guarantee income from the associated mortgages. Each CRT transaction is designed to transfer a certain portion of the credit risk that we assume for loans with certain targeted characteristics. Risk positions may be transferred to third-party investors through one or more CRT transactions. The risk transfer could occur prior to, or simultaneously with, our purchase of the loan (i.e., front-end coverage) or after the purchase of the loan (i.e., back-end coverage). As CRT has become part of our normal business activities, we have established the following programs to regularly transfer portions of credit risk to diversified investors: STACR and ACIS Offerings Our two primary CRT programs are STACR and ACIS. n STACR - Our primary Single-Family securities-based credit risk sharing vehicle.STACR Trust note transactions transfer risk to the private capital markets through the issuance of unguaranteed notes using a third-party trust. In a STACR transaction, we create a reference pool of loans from our Single-Family mortgage portfolio, and a third-party trust issues credit notes linked to the reference pool. The trust makes periodic payments of principal and interest on the notes to noteholders, but is not required to repay principal to the extent that the note balance is reduced as a result of specified credit events on the mortgage loans in the related reference pool. We make payments to the trust to support payment of the interest due on the notes. The amount of risk transferred in each transaction affects the amounts we are required to pay. We receive payments from the trust that otherwise would have been made to the noteholders to the extent there are certain defined credit events on the mortgage loans in the related reference pool. The note balance is reduced by the amount of the payments to us, thereby transferring the related credit risk of the loans in the reference pool to the note investors. Generally, the note balance is also reduced based on principal payments that occur on the loans in the reference pool. The diagram below illustrates a typical STACR transaction.FREDDIE MAC | 2021 Form 10-K 36 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
[[Image Removed: fmcc-20211231_g26.jpg]] n ACIS - Our primary insurance-based credit risk sharing vehicle. ACIS transactions are insurance policies we enter into with global insurance and reinsurance companies to cover a residual portion of credit risk on the STACR or standalone reference pools. We pay monthly premiums to the insurers or reinsurers in exchange for claim coverage on their portion of the reference pool. We require our ACIS counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies. We have established programmatic offerings of STACR and ACIS transactions to regularly transfer credit risk on a targeted population of recently acquired mortgage loans (on-the-run transactions). The targeted loan population for on-the-run transactions is recently acquired fixed-rate mortgage loans with maturity terms greater than 20 years and LTV ratios between 60% and 97%, excluding loans acquired under our relief refinance programs, government guaranteed loans, and loans that do not meet certain eligibility criteria. Our typical on-the-run transactions are issued on a monthly basis and provide back-end coverage for loans that have been recently acquired and/or securitized into Level 1 Securitization Products. In a typical on-the-run transaction, we transfer to third-party investors a portion of the credit risk between a specified attachment point and a detachment point which may vary based on numerous factors, such as the type of collateral and market conditions. We generally retain the initial loss position and at least 5% of the credit risk of all the positions sold to align our interests with those of the investors. We also retain all of the senior credit risk position. Currently, on-the-run STACR transactions typically have a 20-year maturity and on-the-run ACIS transactions typically have a 12.5-year maturity. The diagram below illustrates a typical on-the-run STACR and ACIS structure. [[Image Removed: fmcc-20211231_g27.jpg]] In addition to our regularly issued on-the-run transactions, we also periodically execute "off-the-run" STACR and ACIS transactions that provide back-end coverage on certain loans that are not in the on-the-run transaction targeted loan population. For example, we offer STACR and ACIS transactions that provide coverage on certain relief refinance loans, STACRFREDDIE MAC | 2021 Form 10-K 37 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
and ACIS transactions that provide coverage on unissued portions of the reference pools related to previous STACR and ACIS transactions, and ACIS transactions that provide coverage on loans with 15-year maturities not related to any STACR offering. Prior to 2018, the majority of our STACR transactions were structured as unsecured debt issued directly by us (STACR debt notes) rather than as debt issued by a trust. These transactions operate similarly toSTACR Trust notes, except that we make payments of principal and interest on the issued STACR debt notes. Similar toSTACR Trust notes, in a STACR debt transaction, we are not required to repay principal to the extent that the notional credit risk position is reduced as a result of a specified credit event on a loan in the reference pool. For certain STACR debt notes issued in prior years (generally STACR debt notes issued prior to 2015), losses are allocated to the notional amounts of the credit risk positions based on calculated losses using a predefined formula when the loans experience a credit event, which predominantly occurs when a loan becomes 180 days delinquent. As a result, in these transactions, we receive reimbursement of losses based on these calculated loss amounts rather than based on actual losses. While we may issue STACR debt notes in the future, we expect to predominantly issueSTACR Trust notes. See Note 8 for additional information on these debt issuances. We monitor the costs and benefits provided by the CRT coverage we have obtained on a regular basis. We may periodically terminate certain CRT transactions, through the exercise of contractual call options, repurchases of outstanding securities, or other means, if we determine prior to contractual maturity that they are no longer economically sensible. Additional Offerings We also transfer credit risk through issuance of senior subordinated securitization structures backed by seasoned loans, additional types of insurance transactions, and risk-sharing arrangements with certain single-family lenders. For additional information on Single-Family mortgage loan credit enhancements, see MD&A - Risk Management - Credit Risk - Single-Family Mortgage Credit Risk - Transferring Credit Risk toThird-Party Investors . We also periodically sell certain delinquent loans that we have previously repurchased from securitization trusts. See Note 4 for additional information on sales of mortgage loans. Loss Mitigation Activities Servicers perform loss mitigation activities as well as foreclosures on loans that they service for us. Our loss mitigation strategy emphasizes early intervention by servicers in delinquent loans and offers alternatives to foreclosure by providing servicers with default management programs designed to manage delinquent loans and to assist borrowers in maintaining homeownership or facilitate foreclosure alternatives. We offer a variety of borrower assistance programs, including refinance programs for certain eligible loans and loan workout activities for struggling borrowers. Our loan workouts include both home retention options and foreclosure alternatives. Relief Refinance Program Our relief refinance initiative allows eligible homeowners whose loans we already own or guarantee to refinance with more favorable terms (such as reduction in payment, reduction in interest rate, or movement to a more stable loan product) and without the need to obtain additional mortgage insurance. The relief refinance initiative provides liquidity for borrowers who are current on their mortgages but are unable to refinance because their LTV ratios exceed our standard refinance limits. The Enhanced Relief RefinanceSM program has been suspended until further notice for mortgages with applications dated on or afterJuly 1, 2021 and all mortgages with settlement dates afterAugust 31, 2021 . Loan Workout Activities Home Retention Options When refinancing is not practicable, we require our servicers first to evaluate the loan for a forbearance plan, repayment plan, payment deferral plan, or loan modification, because our level of recovery on a loan that reperforms is often higher than for a loan that proceeds to a foreclosure alternative or foreclosure. Although workout options are often less costly than a foreclosure, we incur costs as a result of our loss mitigation activities. Specifically, payment deferral plans result in non-interest-bearing balances we have to finance for the life of the mortgage, resulting in economic costs as a result of this program. Additionally, we incur economic losses on loan modifications that involve an interest rate reduction or principal forbearance, and we incur expenses related to incentive fees we pay to servicers for certain successfully completed loan workouts. We offer the following types of home retention options: n Forbearance plans - Arrangements that require reduced or no payments during a defined period that provides borrowers additional time to return to compliance with the original mortgage terms or to implement another type of loan workout option. n Repayment plans - Contractual plans that allow borrowers a specific period of time to return to current status by paying the normal monthly payment plus additional agreed upon delinquent amounts. Repayment plans must have a term greaterFREDDIE MAC | 2021 Form 10-K 38 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
than one month and less than or equal to 12 months and the monthly repayment plan payment amount must not exceed 150% of the contractual mortgage payment. n Payment deferral plans - Arrangements that allow borrowers to return to current status by deferring delinquent principal and interest into a non-interest-bearing principal balance that is due at the earlier of the payoff date, maturity date, or sale of the property. The remaining mortgage term, interest rate, payment schedule, and maturity date remain unchanged and no trial period plan is required. The number of months of payments deferred varies based upon the type of hardship the borrower is experiencing. n Loan modifications - Contractual plans that may involve changing the terms of the loan, adding outstanding indebtedness, such as delinquent interest, to the UPB of the loan, or a combination of both, including principal forbearance. Our modification programs generally require completion of a trial period of at least three months prior to receiving the modification. If a borrower fails to complete the trial period, the loan is considered for our other workout activities. These modification programs offer eligible borrowers extension of the loan's term up to 480 months and a fixed interest rate. Servicers are paid incentive fees for each completed modification, and there are limits on the number of times a loan may be modified. Our primary loan modification program is the Freddie Mac Flex Modification® program, which targets a 20% payment reduction through interest rate reduction, term extension, and principal forbearance. Under the Freddie Mac Flex Modification program, borrowers must complete a 90-day trial period plan prior to permanent modification. Pursuant to FHFA guidance and the CARES Act, we have offered mortgage payment relief options to borrowers affected by the COVID-19 pandemic. Among other things, we are offering forbearance of up to 18 months to single-family borrowers experiencing a financial hardship and a payment deferral plan that allows a borrower to defer up to 18 months of payments for eligible homeowners 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. The types of loss mitigation options available to borrowers impacted by the COVID-19 pandemic may be revised by further FHFA guidance or federal government regulation. Foreclosure Alternatives When a seriously delinquent single-family loan cannot be resolved through an economically sensible home retention option, we typically seek to pursue a foreclosure alternative before we pursue a foreclosure sale. We pay servicers incentive fees for each completed foreclosure alternative. In some cases, we provide cash relocation assistance to the borrower, while allowing the borrower to exit the home in an orderly manner. We offer the following types of foreclosure alternatives: n Short sale - The borrower sells the property for less than the total amount owed under the terms of the loan. A short sale is preferable to a borrower because we provide limited relief to the borrower from repaying the entire amount owed on the loan. A short sale allows us to avoid the costs we would otherwise incur to complete the foreclosure and subsequently sell the property. n Deed in lieu of foreclosure - The borrower voluntarily agrees to transfer title of the property to us without going through formal foreclosure proceedings. When we are unable to successfully execute a loan workout and the loan remains delinquent, we may ultimately pursue foreclosure. In a foreclosure, we may acquire the underlying property and later sell it, using the proceeds of the sale to reduce our losses. For additional information on our loss mitigation and foreclosure activities, see MD&A - Our Business Segments - Single-Family - Business Results and MD&A - Risk Management - Credit Risk - Single-Family Mortgage Credit Risk.FREDDIE MAC | 2021 Form 10-K 39 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
Investing Activities
We primarily use our Single-Family mortgage-related investments portfolio to provide liquidity to the mortgage market by purchasing loans for our securitization pipeline and by purchasing delinquent and modified loans from securitization trusts. We also invest in agency mortgage-related securities. We manage the portfolio's risk-versus-return profile using our internal economic framework and make appropriate risk and capital management decisions to effectively execute our strategy and be responsive to market conditions. For additional information on our mortgage-related investments portfolio, see MD&A - Our Portfolios - Investments Portfolio - Mortgage-Related Investments Portfolio. We may use our Single-Family mortgage-related investments portfolio to undertake various activities to support our presence in the agency securities market or to support the liquidity of our securities, including their price performance relative to comparable Fannie Mae securities. Depending upon market conditions, there may be substantial variability in any period in the total amount of securities we purchase or sell. The purchase or sale of agency securities could, at times, adversely affect the price performance of our securities relative to comparable Fannie Mae securities. We may incur costs to support our presence in the agency securities market and to support the liquidity and price performance of our securities. For more information, see Risk Factors - Market Risks - A significant decline in the price performance of or demand for our UMBS could have an adverse effect on the volume and/or profitability of our Single-Family business activity. For additional information on the limits on the mortgage-related investments portfolio established by the Purchase Agreement and by FHFA, see MD&A - Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness. In addition, we may forgo certain investment opportunities for a variety of reasons, including the limit on the size of our mortgage-related investments portfolio or the risk that an accounting treatment may create earnings variability. Our company-wideTreasury function primarily includes issuing, calling, and repurchasing debt ofFreddie Mac , managing our other investments portfolio, and managing interest-rate risk, which includes monitoring and economically hedging interest-rate risk for the entire company, primarily through the use of derivative instruments. We use a funds transfer pricing process to allocate debt funding costs and interest-rate risk management gains and losses to specific assets and liabilities included in each segment. The residual financial impact of our company-wideTreasury function and interest-rate risk management function is primarily allocated to the Single-Family segment. For additional information on the company-wideTreasury function, see MD&A - Liquidity and Capital Resources. For additional information on interest-rate risk management, see MD&A - Risk Management - Market Risk. Customers Our Single-Family customers are investors in our mortgage-related securities, CRT offerings, and other debt, including banks and other depository institutions, insurance companies, money managers, central banks, pension funds, state and local governments, REITs, and brokers and dealers. We also maintain relationships with dealers in our guaranteed mortgage-related securities and other debt securities. Our unsecured other debt securities and structured mortgage-related securities are initially purchased by dealers and redistributed to their customers. Our Single-Family customers also include financial institutions that originate, sell, and perform the ongoing servicing of loans for new or existing homeowners. These companies include mortgage banking companies, commercial banks, regional banks, community banks, credit unions, HFAs, savings institutions, and non-depository financial institutions. Many of these companies are both sellers and servicers for us. We enter into loan purchase agreements with many of our Single-Family customers that outline the terms under which we agree to purchase loans from them over a period of time. For most of the loans we purchase, the guarantee fees are not specified contractually. Instead, we bid for some or all of the lender's loan volume on a monthly basis at a guarantee fee that we specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly. We acquire a significant portion of our loans from several lenders that are among the largest originators in theU.S. In addition, a significant portion of our single-family loans is serviced by several large servicers. The following charts show the concentration of our 2021 Single-Family purchase volume by our largest sellers and our Single-Family loan servicing by our largest servicers as ofDecember 31, 2021 . None of our Single-Family sellers or servicers had a 10% or greater share during 2021.
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Management's Discussion and Analysis
Our Business Segments | Single-Family
Percentage of Single-Family Purchase Volume
[[Image Removed: fmcc-20211231_g28.jpg]]
Percentage of Single-Family Servicing Volume(1)
[[Image Removed: fmcc-20211231_g29.jpg]]
(1) Percentage of servicing volume is based on the total Single-Family mortgage
portfolio, which includes loans where we do not exercise servicing control.
However, loans where we do not exercise servicing control are not included for
purposes of determining the concentration of servicers who serviced more than
10% of our Single-Family mortgage portfolio.
For additional information about seller and servicer concentration risk and our
relationships with our seller and servicer customers, see MD&A - Risk Management
- Counterparty Credit Risk - Sellers and Servicers and Note 16.
Competition
We operate in a competitive market by varying our pricing for different
customers, loan products, and underwriting characteristics. We seek to maintain
a broad-ranging mix of loan quality for the loans we purchase. However, sellers
may elect to retain loans with better credit characteristics. A seller's
decision to retain these loans, or its decision concerning the loans it sells to
Freddie Mac based on the credit standards and pricing policies of other
secondary market participants, could result in Freddie Mac purchasing loans with
a more adverse credit profile.
Our principal competitors in Single-Family are Fannie Mae, FHA/VA (with Ginnie
Mae securitization), and other financial institutions that retain or securitize
loans, such as commercial and investment banks, dealers, and savings
institutions. Our competitors in Single-Family also include firms that invest in
loans and mortgage-related assets and issue corporate debt, including Fannie
Mae, REITs, supranationals (international institutions that provide development
financing for member countries), commercial and investment banks, dealers,
savings institutions, insurance companies, the Federal Farm Credit Banks, the
FHLBs, and non-bank loan aggregators, who are both our customers and
competitors. The conservatorship, including direction provided to us by our
Conservator, may affect our ability to compete. The areas in which we and Fannie
Mae compete have been limited as we have been required by FHFA to align certain
of our Single-Family mortgage purchase offerings, servicing, and securitization
practices with Fannie Mae to achieve market acceptance of the UMBS. FHFA has
also placed limits on our and Fannie Mae's ability to compete with each other on
pricing.
FREDDIE MAC | 2021 Form 10-K 41
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Management's Discussion and Analysis
Our Business Segments | Single-Family
Business Results
The graphs, tables, and related discussion below present the business results of our Single-Family segment. New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose and Average
GuaranteeFee Rate (1) Charged on New Acquisitions (UPB in billions, guarantee fee rate in bps)[[Image Removed: fmcc-20211231_g30.jpg]] (1)Guarantee fee rate calculation excludes the legislated 10 basis point fee and includes deferred fees recognized over the estimated life of the related loans. We enhanced our estimation methodology related to recognition of buy-up fees in 2019. Number of Families Helped to Own a Home and Average Loan UPB of New Acquisitions (Loan count in thousands) [[Image Removed: fmcc-20211231_g31.jpg]] n As a key player in the secondary mortgage market, we maintain a consistent market presence by providing lenders with a constant source of liquidity for conforming loan products. Our loan purchase and guarantee activity increased in 2021 compared to 2020 primarily due to an increase in home purchase volume, higher house price appreciation, and an increase in our share of the GSE volume. n The average guarantee fee rate charged on new acquisitions consists of the contractual guarantee fee rate and deferred fee income, including the expected gains (losses) from buy-up and buy-down fees, recognized over the estimated life of the related loans using our expectations of prepayments and other liquidations. The average guarantee fee rate charged on new acquisitions increased in 2021 compared to 2020 primarily due to the adverse market refinance fee we began to charge inDecember 2020 . InJuly 2021 , FHFA instructed us to eliminate this fee for loan deliveries effectiveAugust 1, 2021 . n InSeptember 2021 , certain requirements in the Purchase Agreement related to our cash window activities, acquisitions of single-family loans with certain LTV, DTI, and credit score characteristics at origination, and acquisitions of single-family loans secured by second homes or investment properties were suspended. We will continue to manage these activities in accordance with our risk limits and guidance from FHFA. For additional information, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments -September 2021 Letter Agreement withTreasury .FREDDIE MAC | 2021 Form 10-K 42 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
n We continued working to improve equitable access to affordable and sustainable housing. For example, our Home Possible® and Home One® initiatives offer down payment options as low as 3% and are designed to help qualified borrowers with limited savings buy a home. We purchased approximately 186,000 loans under these initiatives in 2021. Our Refi Possible® initiative provides more flexibilities to help low- and moderate-income borrowers take advantage of the current low interest rate environment by refinancing their mortgages and lowering their monthly mortgage payments. We also continue to implement programs that support responsibly broadening access to affordable housing by: l Improving the effectiveness of pre-purchase and early delinquency counseling for borrowers; l Implementing the Duty to Serve Underserved Markets plan; l Implementing the Equitable Housing Finance plan; l Developing and implementing a plan to increase and preserve sustainable mortgage purchase and refinance credit for all qualified borrowers; l Increasing support for first-time home buyers; and l Introducing securitization products focused on addressing affordable and energy efficiency challenges. While we are responsibly expanding our programs and outreach capabilities to better serve low- and moderate-income borrowers and underserved markets, these loans may result in increased credit risk. Expanding access to affordable housing will continue to be a top priority in 2022. See MD&A - Regulation and Supervision -Federal Housing Finance Agency - Duty to Serve Underserved Markets Plan for more information. Single-Family Mortgage Portfolio
Single-Family Mortgage Portfolio and Average Guarantee
Mortgage Portfolio as ofDecember 31 , (UPB in billions, guarantee fee rate in bps)[[Image Removed: fmcc-20211231_g32.jpg]] (1)Guarantee fee rate calculation excludes the legislated 10 basis point fee. As ofDecember 31,2021 , excludes$47 billion in UPB primarily related to loans that we do not consolidate. Single-Family Loans as ofDecember 31 , (Loan count in millions) [[Image Removed: fmcc-20211231_g33.jpg]] n The Single-Family mortgage portfolio grew$466 billion , or 20%, year-over-year driven by higher new business activity. Additionally, continued house price appreciation contributed to new business acquisitions having a higher average loan size compared to older vintages that continued to run off. n 2021 vs. 2020 - The average guarantee fee rate charged on the Single-Family mortgage portfolio increased as older vintages with lower charged guarantee fee rates were replaced by acquisitions of new loans with higher charged guarantee fee rates, including the adverse market refinance fee we began to charge inDecember 2020 . InJuly 2021 , FHFA instructed us to eliminate this fee for loan deliveries effectiveAugust 1, 2021 .FREDDIE MAC | 2021 Form 10-K 43 -------------------------------------------------------------------------------- Management's Discussion and Analysis
Our Business Segments | Single-Family
CRT Activities
We transfer credit risk on a portion of our Single-Family mortgage portfolio to
the private market, reducing the risk of future losses to us when borrowers
default. The graphs below show the issuance amounts associated with CRT
transactions for loans in our Single-Family mortgage portfolio.
UPB Covered by New CRT Issuance
(In billions) [[Image Removed: fmcc-20211231_g34.jpg]]
New CRT Issuance Maximum Coverage
(In billions)[[Image Removed: fmcc-20211231_g35.jpg]]
n During 2021, 2020, and 2019, 63%, 62%, and 71%, respectively, 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%).
n The UPB of mortgage loans covered by CRT transactions issued in 2021
increased significantly compared to 2020 due to the recovery of the CRT markets
from the impact of the COVID-19 pandemic and the increase in loan acquisition
activity. The related maximum coverage also increased but was proportionally
lower than the increase in UPB of mortgage loans covered by CRT transactions due
to the improved credit quality of the covered loans, which reduced the amount of
credit coverage we required on those loans.
n We evaluate and update our CRT strategy as needed depending on our business
strategy, market conditions, and regulatory requirements. We expect the issuance
amounts of our CRT transactions to increase in 2022.
See MD&A - 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.
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Management's Discussion and Analysis
Our Business Segments | Single-Family
Loss Mitigation Activities
The following graph provides details about our completed single-family loan
workout activities. The forbearance data included below is limited to loans in
forbearance that are past due based on the loans' original contractual terms and
excludes both loans for which we do not control servicing and loans included in
certain legacy transactions, as the forbearance data for such loans is either
not reported to us by the servicers or is otherwise not readily available to us.
Completed Loan Workout Activity
(UPB in billions, number of loan workouts in
thousands)[[Image Removed: fmcc-20211231_g36.jpg]]
(1)Other includes repayment plans, loan modifications, and foreclosure
alternatives.
n Completed loan workout activity includes forbearance plans where borrowers
fully reinstated the loan to current status during or at the end of the
forbearance period, payment deferral plans, loan modifications, successfully
completed repayment plans, short sales, and deeds in lieu of foreclosure.
Completed loan workout activity excludes active loss mitigation activity that
was ongoing and had not been completed as of the end of the year, such as
forbearance plans that had been initiated but not completed and trial period
modifications. There were approximately 67,000 loans in active forbearance plans
and 22,000 loans in other active loss mitigation activity as of December 31,
2021 .
n We continue to help struggling families retain their homes or otherwise avoid
foreclosure through loan workouts. Our loan workout activity decreased in 2021
compared to 2020 primarily driven by the decrease in completed forbearance plans
related to the COVID-19 pandemic, partially offset by the increase of payment
deferral plans related to the COVID-19 pandemic.
n Pursuant to FHFA guidance and the CARES Act, we have offered mortgage relief
options for certain borrowers affected by the COVID-19 pandemic. Among other
things, we have offered forbearance of up to 18 months to single-family
borrowers
experiencing a financial hardship, either directly or indirectly, related to the
COVID-19 pandemic. We have also offered a payment deferral plan that allows a
borrower to defer up to 18 months of payments for eligible homeowners 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. The length of available forbearance or payment deferral plans may be
extended or the terms of forbearance or payment deferral plans revised by
further FHFA guidance or government regulation.
See MD&A - Risk Management for additional information on our loan workout
activities.
FREDDIE MAC | 2021 Form 10-K 45
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Management's Discussion and Analysis
Our Business Segments | Single-Family
Financial Results
The table below presents the components of net income and comprehensive income
for our Single-Family segment.
Table 12 - Single-Family Segment Financial Results
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Guarantee net interest income $15,745 $10,762 $7,999 $4,983 46 % $2,763
35 %
Investments net interest income 2,023 3,062 2,917 (1,039) (34) 145
5
Income (expense) from hedge accounting (1,495) (2,232) (252) 737 33 (1,980) (786) Net interest income 16,273 11,592 10,664 4,681 40 928 9 Non-interest income 954 457 560 497 109 (103) (18) Net revenues 17,227 12,049 11,224 5,178 43 825 7 Benefit (provision) for credit losses 919 (1,320) 749 2,239 170 (2,069)
(276)
Credit enhancement expense (1,470) (1,036) (734) (434) (42) (302)
(41)
Benefit for (decrease in) credit enhancement recoveries (523) 305 41 (828) (271) 264
644
REO operations income (expense) (12) (149) (229) 137 92 80
35
Credit-related income (expense) (1,086) (2,200) (173) 1,114 51 (2,027) (1,172) Operating expense (5,070) (4,543) (4,294) (527) (12) (249) (6) Income (loss) before income tax (expense) benefit 11,071 5,306 6,757 5,765 109 (1,451)
(21)
Income tax (expense) benefit (2,251) (1,094) (1,370) (1,157) (106) 276 20 Net income (loss) 8,820 4,212 5,387 4,608 109 (1,175) (22) Total other comprehensive income (loss), net of taxes and reclassification adjustments (379) 104 472 (483) (464) (368)
(78)
Comprehensive income (loss)$8,441 $4,316 $5,859 $4,125 96 % ($1,543 ) (26) % Key Business Drivers: n 2021 vs. 2020 l Higher net interest income primarily due to the continued growth in the Single-Family mortgage portfolio, higher average guarantee fee rates on this portfolio, and higher deferred fee income recognition. l Lower credit-related expense primarily driven by a shift to benefit for credit losses as a result of a credit reserve release due to improving economic conditions, partially offset by a decrease in credit enhancement recoveries. Credit-related expense in 2020 was primarily driven by the negative economic effects of the COVID-19 pandemic. n 2020 vs. 2019 l Higher net interest income primarily due to the continued growth in the Single-Family mortgage portfolio, higher average guarantee fee rates on this portfolio, and higher deferred fee income recognition. l Higher credit-related expense primarily due to benefit (provision) for credit losses shifting to a provision driven by higher expected credit losses as a result of the COVID-19 pandemic and portfolio growth, partially offset by growth in realized and forecasted house prices and declines in forecasted interest rates during 2020. FREDDIE MAC | 2021 Form 10-K 46
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Management's Discussion and Analysis Our Business Segments | Multifamily
Multifamily Business Overview Our Multifamily segment provides liquidity and support to the multifamily mortgage market through a variety of activities that include the purchase, securitization, and guarantee of multifamily loans originated by our Optigo® network of approved lenders. Our support of the multifamily mortgage market occurs through all economic cycles and is especially important during periods of economic stress. During these periods, we serve a critical countercyclical role by providing liquidity when many other capital providers exit the market. Central to our mission is our commitment to support greater access to quality, affordable, and sustainable rental housing, particularly in underserved markets. Through our support of the multifamily mortgage market, borrowers can obtain lower financing costs, which can benefit renters through lower rental rates and/or improved services or amenities. Multifamily loans are typically originated by our Optigo lenders without recourse to the borrower, making repayment dependent on the cash flows generated by the underlying property. Cash flows generated by a property are significantly influenced by vacancy and rental rates, as well as conditions in the local rental market, the physical condition of the property, the quality of property management, and the level of operating expenses. The overall market demand for multifamily loans is generally affected by local and regional economic factors, such as unemployment rates, construction cycles, property prices, preferences for homeownership versus renting, and the relative affordability of single-family homes, as well as certain macroeconomic factors, such as interest rates. Our primary business model is to acquire loans that lenders originate and then pool those loans into mortgage-related securities that transfers all of the interest-rate and liquidity risk and a portion of the credit risk to third-party investors and that can be sold in the capital markets. In our typical multifamily securitization, we guarantee the senior securities but do not guarantee the subordinate securities, thereby transferring a portion of the credit risk on the underlying loans to third party investors as part of the securitization process. We do not consolidate most of our Multifamily securitization trusts. As a result, we account for most of our Multifamily securitizations as sales of the underlying loans and recognize the guarantee fees we receive in exchange for our guarantee of the senior securities as guarantee income. For multifamily loans where we do not transfer credit risk through the securitization process, we may pursue other strategies designed to transfer all or a portion of the loan's credit risk to third parties, including the execution of other CRT products. The returns we generate from our business activities are primarily derived from (1) the net interest income we earn on the loans prior to their securitization, (2) the gains on sale of mortgage loans, net of interest-rate risk management activities, from our purchase and securitization activities and (3) the ongoing guarantee fees we receive in exchange for providing our guarantee on the senior securities. We evaluate these factors collectively to assess the profitability of any given transaction and to maximize our returns. Products and Activities
Our Multifamily business consists of activities related to purchasing and
securitizing mortgage loans and issuing mortgage-related securities,
transferring credit risk, and investing in mortgage-related and other
investments.
Loan Purchase, Securitization, and Guarantee Activities
Loan Purchase Our Optigo network allows lenders to offer borrowers a variety of loan products for the acquisition, refinance, and/or rehabilitation of multifamily properties. While our Optigo lenders originate the loans that we purchase, we use a prior-approval underwriting approach. Under this approach, we maintain credit discipline by completing our own underwriting, credit review, and legal review for each loan prior to issuing a loan purchase commitment, including reviewing third-party appraisals and performing cash flow analysis. This helps us maintain credit discipline throughout the process. Certain of our products have been designed to support increased access to affordable housing, including in underserved markets. Our primary multifamily loan products include the following: n Conventional loans - Financing that includes fixed-rate and floating-rate loans, loans in lease-up and with moderate property upgrades, manufactured housing community loans, senior housing loans, student housing loans, supplemental loans, and certain Green Advantage loans. n Targeted affordable housing loans - Financing provided to borrowers in underserved areas that have restricted units affordable to households with low income (earning 80% or less of AMI) and very-low income (earning 50% or less of AMI) and that typically receive government subsidies. n Small balance loans - Financing provided to small rental property borrowers for the acquisition or refinance of multifamily properties. Financing ranges from$1 million to$7.5 million and is focused on affordable or workforce housing properties from 5 to 50 units.FREDDIE MAC | 2021 Form 10-K 47
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Management's Discussion and Analysis Our Business Segments | Multifamily
The amount and type of multifamily loans that we purchase is significantly influenced by the Multifamily loan purchase cap that is established by FHFA. InOctober 2021 , FHFA announced that the 2022 Multifamily loan purchase cap for the Multifamily business will be$78 billion , up from$70 billion in 2021. FHFA will continue to require at least 50% of the Multifamily new business activity to be mission-driven, affordable housing and, in 2022, such definitions will include loans on affordable units in cost-burdened renter markets and loans to finance energy and water efficiency improvements with units affordable to renters at or below 60% of AMI. In 2022, FHFA also will require at least 25% of the Multifamily new business activity to be affordable to renters at or below 60% of AMI, up from 20% in 2021. The purchase cap is subject to reassessment throughout the year by FHFA to determine whether an increase in the cap is appropriate based on a stronger than expected overall market. InSeptember 2021 , certain requirements that were added to the Purchase Agreement pursuant to theJanuary 2021 Letter Agreement related to our multifamily loan purchase activity were suspended. For additional information, see MD&A - Conservatorship and Related Matters - Limits on Our Multifamily Loan Purchase Activity. We continue to support the multifamily mortgage market's LIBOR transition efforts. SinceSeptember 2020 , we have successfully quoted, purchased, and securitized new floating rate loans indexed to SOFR. The loans indexed to SOFR have been used as collateral in our SOFR-based bond offerings, thereby adding liquidity to the market and facilitating the transition to SOFR. Our process for purchasing multifamily loans generally begins with a loan purchase commitment. Prior to issuing a commitment to purchase a multifamily loan, we negotiate with the lender the specific economic terms and conditions of our commitment, including the loan's purchase price, index, and mortgage spread. We price our loans to achieve an initial pricing margin that we generally expect to realize at securitization. Decisions related to the commitment price and/or mortgage spread will affect our initial pricing margin and are generally influenced by our current business strategy, the type of loan that we acquire (i.e., the loan product and whether it qualifies as mission-driven), the amount available under the loan purchase cap, current securitization spreads, and changing market conditions. We also offer lenders an option to lock theTreasury index component of their fixed rate loans anytime during the quote or underwriting process. This option enables borrowers, through our lenders, to lock the most volatile part of their coupon, thereby providing an enhanced level of risk mitigation against interest-rate volatility. The index lock period offered for most loans is 60 days and is generally followed by a loan purchase commitment. At the time we commit to purchase a multifamily loan, we preliminarily determine our intent with respect to that loan. For commitments to purchase fixed-rate loans that we intend to sell (i.e., held-for-sale commitments), we elect the fair value option and therefore recognize and measure these commitments at fair value in our consolidated financial statements. We do not elect the fair value option for held-for-sale commitments to purchase floating-rate loans or loans that we intend to hold for the foreseeable future (i.e., held-for-investment commitments), including loans that we intend to securitize using trusts that we consolidate, and therefore these commitments are not recognized in our consolidated financial statements. As a result, we recognize the initial pricing margin, which is based on the price we would receive to sell the mortgage loans in a typical securitization transaction, at the commitment date for commitments we measure at fair value and generally at the time of securitization for held-for-sale loans where we do not elect the fair value option. Similarly, we recognize changes in fair value subsequent to the commitment date in earnings as they occur for commitments and loans we measure at fair value and at the time of securitization for held-for-sale loans where we do not elect the fair value option. We do not recognize any changes in fair value or gains at the time of securitization for loans or commitments that we classify as held-for-investment, including loans that we intend to securitize using trusts that we consolidate. Our multifamily commitments and loans are subject to changes in fair value due to changes in interest-rates and changes in K Certificate benchmark spreads, which are market-quoted spreads over a referenced benchmark rate. We economically hedge our interest-rate exposure from multifamily commitments and loans, including index lock agreements, primarily by entering into pay-fixed interest-rate swaps. As a result, we typically have minimal exposure to earnings variability from changes in interest rates, as the changes in fair value of the loans and commitments attributable to changes in interest rates generally have offsetting effects from the changes in fair value of the associated interest-rate risk management derivatives. However, index lock agreements temporarily create interest rate-related earnings variability as we economically hedge the interest-rate risk created by the index lock agreement prior to entering into an offsetting loan purchase commitment. This temporary exposure is typically fully offset when we enter into the associated loan purchase commitment, as the fair value of the commitment reflects changes in the index rate that have occurred since we entered into the index lock agreement. As our ability to manage spread risk is more limited than our ability to manage interest rate risk, we typically have significant exposure to earnings variability due to changes in K Certificate benchmark spreads. We enter into certain transactions to manage this exposure, including the following: n When-Issued K-Deal (WI K-Deal) Certificates - In a WI K-Deal Certificate transaction, we forward sell a K Certificate security that will be issued in the future to a WI K-Deal trust at a fixed price, thereby reducing our exposure to future changes in interest rates and K Certificate benchmark spreads. n Spread-related derivatives - We purchase or enter into certain spread-related derivatives including the purchase of swaptions on credit indices providing some protection against adverse movements in K Certificate benchmark spreads.FREDDIE MAC | 2021 Form 10-K 48
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Management's Discussion and Analysis Our Business Segments | Multifamily
Securitization Products We securitize substantially all of the loans we purchase after a short holding period, which generally ranges between two and four months, as we aggregate sufficient loans with similar terms and risk characteristics. For the period of time between loan purchase and securitization, we refer to the loan as being in our securitization pipeline. We enter into various types of securitizations that generally result in the transfer of all of the underlying collateral's interest-rate and liquidity risk, and a portion of the credit risk to third parties. Our securitization products provide liquidity to the multifamily mortgage market, with certain bond issuances being focused on addressing affordable housing challenges and supporting broader environmental, social, and sustainability goals. In our typical securitizations, we guarantee the issued senior securities. 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 guarantee income that is expected to exceed the credit-related and administrative expenses of the underlying loans. Structural deal features, such as term, type of underlying loan product, and subordination levels, generally influence the deal's risk profile, which ultimately affects the guarantee fee rate we set at the time of securitization. We do not consolidate most of our Multifamily securitization trusts. As a result, we account for most of our Multifamily securitizations as sales of the underlying loans and recognize the guarantee fees we receive as guarantee income. For guarantees to nonconsolidated entities or other third parties, we generally recognize a guarantee asset at inception. This asset, which represents the right to collect contractual guarantee fees, is recorded at fair value with subsequent changes in fair value recognized in earnings. The fair value of our guarantee assets may vary significantly from period-to-period based on changes in market conditions, including interest rates and credit spreads. Because our multifamily loans contain prepayment protection, decreasing interest rates generally result in higher guarantee asset fair values, with the opposite effect occurring when interest rates increase. See Note 5 for additional information on our accounting for guarantees. Our typical securitization structure and level of subordination are designed to achieve appropriate economic returns when we sell loans for securitization. Depending on the securitization product and subordination levels selected, we may realize a higher (lower) gain on sale, but recognize lower (higher) ongoing guarantee income. K Certificates and SB Certificates Our primary securitization products are K Certificate and SB Certificate transactions, which transfer all of the interest-rate and liquidity risk and a portion of the credit risk of the underlying collateral. The structures of these transactions typically involve the issuance of senior, mezzanine, and subordinated securities that represent undivided beneficial interests in trusts that hold pools of multifamily loans that we previously purchased. In a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization trust that issues senior, mezzanine, and subordinated securities, and simultaneously purchase and place the senior securities into aFreddie Mac securitization trust that issues guaranteed K Certificates. In these transactions, we guarantee the senior securities, but do not issue or guarantee the mezzanine or subordinated securities. n K Certificates - Regularly issued structured pass-through securities backed by recently originated multifamily loans. This product offers investors a wide range of structural and collateral options that provide for stable cash flows and a structured credit enhancement. While the amount of guarantee fee we receive may vary by collateral type, it is generally fixed for those K Certificate series that we issue with regular frequency (e.g., 7- and 10-year fixed-rate K Certificates and floating rate K Certificates). The guarantee fees received on recently issued standard K Certificates range between 40 basis points and 45 basis points. The guarantee fee on K Certificates that we do not issue on a regular basis, such as our single-sponsor K Certificates, is determined based on the specific risks associated with the underlying collateral and the structure of the securitization, including tranche sizes and risk distribution. n SB Certificates - Regularly issued securities typically backed by multifamily small balance loans that we underwrite at loan origination and purchase prior to securitization. Similar to our K Certificate transactions, a non-Freddie Mac trust will issue the senior classes of securities, which we guarantee, as well as the unguaranteed subordinated securities. However, unlike our K Certificate transactions, while we may purchase a portion of the senior securities, we generally do not place those securities into aFreddie Mac trust. The guarantee fee we receive in these transactions is generally 35 basis points. The volume of our K Certificate and SB Certificate securitizations is generally influenced by the product mix and size of our securitization pipeline, along with market demand for multifamily securities. We do not typically consolidate the securitization trusts used in these transactions and therefore account for these securitizations as sales of the underlying loans.
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Management's Discussion and Analysis Our Business Segments | Multifamily
The diagram below shows a typical K Certificate transaction.
[[Image Removed: fmcc-20211231_g37.jpg]]
Other Securitization Products Our other securitization products involve the issuance of pass-through securities that represent beneficial interests in trusts that hold pools of multifamily loans. The collateral for these securitizations may include loans underwritten and purchased by us at loan origination and loans we do not own prior to securitization and that we underwrite after (rather than at) origination. Our largest other securitization product is PCs, which are fully guaranteed securities. In these transactions, we securitize multifamily loans into pass-through securities that are similar in structure to Single-Family Level 1 Securitization Products. Since we guarantee the timely payment of scheduled principal and interest and direct loss mitigation activities, we consolidate the securitization trusts used in these PC transactions and therefore do not account for PC securitizations as sales of the underlying loans. Certain other securitization products are not consolidated as we do not direct loss mitigation activities and therefore account for those securitizations as sales of the underlying loans. Other Mortgage-Related Guarantees We also guarantee mortgage-related assets held by third parties in exchange for guarantee fees, without securitizing those assets. For example, we provide guarantees on certain tax-exempt multifamily housing revenue bonds secured by low- and moderate-income multifamily loans. CRT Activities We primarily transfer credit risk to third parties through subordination, which is created through our securitization products described above. In addition to subordination, we enter into other types of CRT transactions to transfer to third parties all or a portion of the credit risk of certain loans that are not covered by subordination. Other CRT Products For multifamily assets for which we have not transferred credit risk through securitization, we may pursue other strategies to reduce our credit risk exposure. Our other CRT products include the following: n MCIP - insurance coverage underwritten by a group of insurers and/or reinsurers that generally provide first loss and/or mezzanine loss credit protection. These transactions are similar in structure to ACIS contracts purchased in Single-Family, except the reference pool, in addition to loans, may include bonds underlying our other mortgage-related guarantees. When specific credit events occur, we receive compensation from the insurance policy up to an aggregate limit based on actual losses. We require our counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies.FREDDIE MAC | 2021 Form 10-K 50
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Management's Discussion and Analysis Our Business Segments | Multifamily
nSCR Trust notes - a securities-based credit risk sharing vehicle similar toSTACR Trust notes in Single-Family. In aSCR Trust notes transaction, we create a reference pool of loans from our Multifamily mortgage portfolio and a trust issues notes linked to the reference pool. The trust makes periodic payments of principal and interest on the notes to noteholders, but is not required to repay principal to the extent the note balance is reduced as a result of specified credit events on the mortgage loans in the reference pool. We make payments to the trust to support the interest due on the notes. The amount of risk transferred in each transaction affects the amounts we are required to pay. We receive payments from the trust that otherwise would have been made to the noteholders to the extent that a defined credit event occurs on the mortgage loans in the reference pool. The note balance is reduced by any payments made to us, thereby transferring the related credit risk of the loans in the reference pool to the noteholders. Generally, the note balance is also reduced based on principal payments that occur on the loans in the reference pool. We previously issued SCR debt notes that are generally similar in structure to Single-Family STACR debt notes. In addition to our other CRT products, we engage in whole loan sales, including sales of loans to funds to which we may also provide secured financing, to eliminate our interest-rate risk, liquidity risk, and credit risk exposure to certain loans. For additional information on multifamily credit enhancements, see MD&A - Risk Management - Multifamily Mortgage Credit Risk - Transferring Credit Risk toThird Party Investors . Investing Activities We primarily use our Multifamily mortgage-related investments portfolio to provide liquidity to the multifamily mortgage market by purchasing loans for our securitization pipeline. We may also hold certain multifamily mortgage loans or agency mortgage-related securities as investments. Depending on market conditions and our business strategy, we may purchase or sell guaranteed K Certificates or SB Certificates at issuance or in the secondary market, including interest-only securities. Through our ownership of the interest-only securities, we are exposed to the market risk on the loans underlying our securitizations. We also invest in certain non-mortgage investments, including LIHTC partnerships and other secured lending activities. From time to time, we may undertake certain activities to support the liquidity of K Certificates and SB Certificates. For more information, see Risk Factors - Market Risk - The profitability of our multifamily business could be adversely affected by a significant decrease in demand for our K Certificates and SB Certificates. Also, we may undertake certain actions to support the overall multifamily mortgage market, including the market's LIBOR transition efforts. Customers Our Multifamily customers include both investors in our securitization products and other CRT products, as well as financial institutions that originate and sell multifamily mortgage loans to us for aggregation and securitization. Investors include banks and other financial institutions, insurance companies, money managers, hedge funds, pension funds, state and local governments, and broker dealers. Our multifamily loan purchases are generally sourced through our Optigo network of approved lenders, who are primarily non-bank real estate finance companies and banks. Many of these lenders are both sellers and servicers to us. The following charts show the concentration of our 2021 Multifamily new business activity by our largest sellers and loan servicing by our largest servicers as ofDecember 31, 2021 . Any seller or servicer with a 10% or greater share is listed separately.FREDDIE MAC | 2021 Form 10-K 51
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Management's Discussion and Analysis Our Business Segments | Multifamily
Percentage of New Business Activity[[Image Removed: fmcc-20211231_g38.jpg]]
Percentage of Servicing Volume(1) [[Image Removed: fmcc-20211231_g39.jpg]] (1) Percentage of servicing volume is based on the total multifamily mortgage portfolio. Competition We compete on the basis of price, service, and products, including our use of certain securitization structures. Our principal competitors in the multifamily mortgage market are Fannie Mae, FHA, commercial and investment banks, CMBS conduits, savings institutions, and life insurance companies.FREDDIE MAC | 2021 Form 10-K 52
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Management's Discussion and Analysis Our Business Segments | Multifamily
Business Results
The graphs, tables, and related discussion below present the business results of
our Multifamily segment.
New Business Activity
New Business Activity
(In billions)
Total Number of Units Financed
(In thousands)
[[Image Removed: fmcc-20211231_g40.jpg]]
[[Image Removed: fmcc-20211231_g41.jpg]]
n As of December 31, 2021 , the total Multifamily new business activity was
equal to the FHFA 2021 loan purchase cap of $70.0 billion . Approximately 57% of
this activity, based on UPB, was mission-driven, affordable housing, with
approximately 26% being affordable to renters at or below 60% of AMI, exceeding
FHFA's minimum requirements (50% and 20%, respectively).
n While broader economic activity and demographic trends have contributed to
higher demand for multifamily mortgage financing, our new business activity was
lower in 2021 compared to 2020 due to a reduced FHFA loan purchase cap.
n Outstanding commitments, including index lock agreements and commitments to
purchase or guarantee multifamily assets, were $19.5 billion and $18.7 billion
as of December 31, 2021 and December 31, 2020 , respectively. The outstanding
commitments as of December 31, 2021 indicate a strong pipeline for 2022.
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Management's Discussion and Analysis Our Business Segments | Multifamily
Multifamily Mortgage Portfolio and Guarantee Portfolio
Mortgage Portfolio
(In billions) [[Image Removed: fmcc-20211231_g42.jpg]]
Guarantee Portfolio
(In billions) [[Image Removed: fmcc-20211231_g43.jpg]]
n Our Multifamily mortgage and guarantee portfolios increased as of December
31, 2021 compared to December 31, 2020 primarily due to ongoing loan purchase
and securitization activities. We expect continued growth in these portfolios as
our purchase and securitization activities should outpace loan payoffs.
n The average guarantee fee rate on our guarantee portfolio increased as of
December 31, 2021 and December 31, 2020 , respectively, and the average remaining
guarantee term was eight years as of December 31, 2021 and December 31, 2020 .
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.
n In addition to our Multifamily mortgage portfolio, we own equity interests in
LIHTC fund partnerships with carrying values totaling $2.0 billion and $1.4
billion as of December 31, 2021 and December 31, 2020 , respectively. In
September 2021 , FHFA announced that Freddie Mac may invest up to $850 million
annually in the LIHTC market, an increase from the previous limit of $500
million .
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Management's Discussion and Analysis Our Business Segments | Multifamily
CRT Activities
UPB Covered by New CRT Issuance New CRT Issuance Maximum Coverage
(In billions) (In billions)
[[Image Removed: fmcc-20211231_g44.jpg]]
[[Image Removed: fmcc-20211231_g45.jpg]]
n As of December 31, 2021 , we had cumulatively transferred a substantial amount
of the expected and stressed credit risk on the Multifamily mortgage portfolio
primarily through subordination in our securitizations. In addition, all of our
securitization activities shifted the interest rate and liquidity risk
associated with the underlying collateral away from Freddie Mac to third-party
investors.
n The UPB of CRT transactions issued during 2021 increased compared to 2020 as
we securitized the large securitization pipeline from December 31, 2020 , along
with a significant portion of the 2021 new loan purchase activity. Our CRT
issuance activity also included several SCR Trust note transactions linked to
reference pools of assets acquired prior to 2021. Despite the increased CRT UPB,
our maximum coverage amount remained flat due to lower average subordination
levels on our K Certificate transactions issued during 2021. The lower
subordination levels are still expected to absorb a substantial amount of
expected and stressed credit losses.
n As part of our securitization-related CRT activities, we generally guarantee
the issued senior securities, thereby retaining the most senior-level credit
risk. In exchange for retaining this credit risk exposure we receive an ongoing
guarantee fee.
We evaluate and update our risk transfer strategy as needed depending on our
business strategy, market conditions, and regulatory requirements. See MD&A -
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 | 2021 Form 10-K 55
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Management's Discussion and Analysis Our Business Segments | Multifamily
Financial Results
The table below presents the components of net income and comprehensive income
for our Multifamily segment.
Table 13 - Multifamily Segment Financial Results
Year Over Year Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
(Dollars in millions) 2021 2020 2019 $ % $ %
Net interest income $1,307 $1,179 $1,184 $128 11 % ($5 ) - %
Guarantee income 918 1,330 1,045 (412) (31) 285 27
Investment gains (losses), net 2,385 1,925 518 460 24 1,407 272
Other income (loss) 114 176 107 (62) (35) 69 64
Net revenues 4,724 4,610 2,854 114 2 1,756 62
Credit-related income (expense) 55 (136) (18) 191 140 (118) (656)
Operating expense (651) (551) (544) (100) (18) (7) (1)
Income (loss) before income tax (expense)
benefit 4,128 3,923 2,292 205 5 1,631 71
Income tax (expense) benefit (839) (809) (465) (30) (4) (344) (74)
Net income (loss) 3,289 3,114 1,827 175 6 1,287 70
Total other comprehensive income (loss),
net of taxes and reclassification
adjustments (110) 101 101 (211) (209) -
-
Comprehensive income (loss)$3,179 $3,215 $1,928 ($36 ) (1) %$1,287 67 % Key Drivers: n 2021 vs. 2020 l Lower guarantee income as continued growth in our guarantee portfolio was offset by the impacts of higher interest rates on the fair values of our guarantee assets. l Increase in net investment gains primarily due to higher pricing margins for new loan purchases and greater spread tightening, partially offset by a smaller volume of new loan purchases as a result of a reduced Multifamily loan purchase cap in 2021. n 2020 vs. 2019 l Increase in guarantee income driven by continued growth in our guarantee portfolio, coupled with lower fair value losses on our guarantee assets due to lower interest rates. l Increase in net investment gains primarily due to higher pricing margins and greater volume of new loan purchases. l Increase in credit-related expense due to higher expected credit losses as a result of the negative economic effects of the COVID-19 pandemic.
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Management's Discussion and Analysis Risk Management
RISK MANAGEMENT Overview To achieve our mission of providing liquidity, stability, and affordability to theU.S. housing market, we take risks as an integral part of our business activities. Risk is the possibility that events will occur that adversely affect our financial strength, operational resiliency, and the achievement of our mission, strategic, and business objectives. Risk can manifest itself in many ways and the responsibility for risk management resides at all levels of the company. We seek to take risks in a safe and sound, well-controlled manner to earn acceptable risk-adjusted returns on a corporate-wide, divisional, and, where applicable, transaction basis. Our goal is to maintain an effective risk culture where employees are risk aware, collaborative, transparent, and individually accountable for their decisions, and conduct business in an effective, legal, and ethical manner. We utilize a risk taxonomy to define, classify, and report risks that we face in operating our business. These risks have the potential to adversely affect our current or projected financial and operational resilience. Risks are classified into the following categories: n Credit Risk; n Market Risk; n Liquidity Risk; n Operational Risk; n Strategic Risk; n Reputation Risk; and n Legal Risk. These risks are factored into our business decisions, as appropriate, with strategic, reputation, and legal risks managed outside of the three lines of defense (which is referenced below). For more discussion of these and other risks facing our business, see Risk Factors. See Liquidity and Capital Resources for a discussion of liquidity risk. Enterprise Risk Framework The enterprise risk framework is a key component for how we manage risk to achieve our mission, strategic, and business objectives. The enterprise risk framework: n Defines risk roles and responsibilities across the three lines of defense and n Promotes accountability and transparency in risk management decisions and execution. The framework includes the following components: n Risk Governance - Risk governance defines the way in which we manage risk across the company by articulating specific roles and responsibilities across the three lines of defense, including escalation and reporting. It is formalized through the delegations of authority, corporate risk policies and standards, and the risk governance structure at the division, enterprise, and Board levels. l Delegations of Authority - The Board of Directors delegates authority to the CEO, who then delegates to members of executive management. l Corporate Risk Policies and Standards - Corporate risk policies and standards define roles and responsibilities with respect to risk management, establish limits to risk taking authority, and set forth escalation and reporting requirements. l Risk Governance Structure - The risk governance structure consists of management- and Board-level committees with roles and responsibilities formalized in their charters. n Risk Culture - An effective risk culture promotes an environment where employees who take and manage risks for the company are risk aware, collaborative, and transparent.Freddie Mac employees are held accountable for their decisions, and must conduct business in a legal, ethical, and effective manner. Our risk culture is supported by performance objectives and compensation programs that appropriately balance risk and return and motivate employees to conduct business in compliance with our established risk appetite and corporate risk policies and standards. n Risk Appetite - Risk appetite is the level of risk, both in aggregate and by risk type, within the company's risk capacity that the Board of Directors and management are willing to assume to achieve the company's strategic goals. The risk appetite is integrated and aligned with the strategic plans for the company and each business division. The risk appetite is approved by the Board of Directors and then by FHFA as Conservator, which may change our risk appetite, including risk limits.FREDDIE MAC | 2021 Form 10-K 57
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Management's Discussion and Analysis Risk Management
n Risk Identification, Assessment, Control, and Monitoring - We use a risk taxonomy to define, classify, and report risks that are associated with our business model and that we face in our day-to-day operations. Our risk management program is supported through enterprise-wide practices and processes designed to identify, assess, control, monitor, and report on all risks, including emerging risks and top risks. Our risk assessment process considers the inherent and residual risk levels that inform our risk profile and allows us to identify and monitor risks. We have issue management processes established in order to manage the remediation of identified process deficiencies and/or control weaknesses. n Risk Reporting - Our risk management framework requires accurate and timely reporting needed for managing risks. Regular reporting is provided to senior management and to the Board of Directors, or appropriate Board committees, at an aggregate level to provide a comprehensive view of the company's risk position, its adherence to established Board limits and management thresholds, emerging and top risks and an assessment of the control environment, risk drivers, stress testing and scenario analysis, and issues and their remediation status. FHFA has increased supervisory expectations related to how risk is managed and overseen by management and the Board of Directors, and specifically the role of ERM to provide independent risk oversight and effective challenge. As a result, we must continue to invest in our risk management practices to meet these expectations. Enterprise Risk Governance Structure We manage risk using a three-lines-of-defense risk management model and governance structure that includes enterprise-wide oversight by the Board of Directors and its committees, the CRO, and the CCO. The information and diagram below present the responsibilities associated with our three-lines-of-defense risk management model and our risk governance structure. The risk governance structure also includes division risk committees to actively discuss and monitor division-specific risk profiles, risk decisions, and risk appetite metrics, limits and thresholds, and risk type committees to oversee specific risk types that are present in and span across business lines. For more information on the role of the Board of Directors and its committees, see Directors, Corporate Governance, and Executive Officers - Corporate Governance - Board of Directors and Board Committee Information.FREDDIE MAC | 2021 Form 10-K 58
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Management's Discussion and Analysis Risk Management
[[Image Removed: fmcc-20211231_g46.jpg]]FREDDIE MAC | 2021 Form 10-K 59
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Management's Discussion and Analysis Risk Management
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 our Single-Family mortgage portfolio and n Multifamily mortgage credit risk, through our ownership or guarantee of loans in our Multifamily mortgage portfolio. Counterparty credit risk is the risk associated with the inability or failure of a counterparty to meet its contractual obligations. In the sections below, we provide a general discussion of our enterprise risk framework and current risk environment for mortgage credit risk, including natural disaster and climate risk, and for counterparty credit risk. Allowance for Credit Losses Upon the adoption of CECL onJanuary 1, 2020 , we recognized an increase to the opening balance of the allowance for credit losses. 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. For Single-Family credit exposures 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. For further information on our accounting policies and methods for estimating our allowance for credit losses and related management judgments, see MD&A - Critical Accounting Estimates. For Multifamily credit exposures under CECL, we estimate the allowance for credit losses 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 generally 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 expected recoveries from attached credit enhancements. Management adjustments may be necessary to our model output to take into consideration current economic events and other external factors. Under CECL, upon reclassification from held-for-investment to held-for-sale, we perform a collectability assessment. When we determine that a loan to be reclassified has experienced a 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 reclassification.
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Management's Discussion and Analysis Risk Management
The table below presents a summary of key allowance for credit losses ratios and
the changes in our allowance for credit losses.
Table 14 - Allowance for Credit Losses Ratios
December 31, 2021 December 31, 2020 December 31, 2019
(Dollars in millions) Single-Family Multifamily Total Single-Family Multifamily Total Single-Family Multifamily Total
Allowance for credit losses:
Beginning balance $6,353 $200 $6,553 $5,233 $68 $5,301 $6,176 $15 $6,191
Provision (benefit) for credit losses (919) (122) (1,041) 1,320 132 1,452 (749) 3 (746)
Charge-offs(1) (1,107) - (1,107) (592) - (592) (1,737) - (1,737)
Recoveries collected 197 - 197 210 - 210 452 - 452
Net charge-offs (910) - (910) (382) - (382) (1,285) - (1,285)
Other(2) 916 - 916 182 - 182 126 - 126
Ending balance $5,440 $78 $5,518 $6,353 $200 $6,553 $4,268 $18 $4,286
Components of ending balance of allowance for credit losses:
Mortgage loans held-for-investment
$4,913 $34 $4,947 $5,628 $104 $5,732 $4,222 $12 $4,234 Advances of pre-foreclosure costs 450 - 450 536 - 536 - - - Accrued interest receivable on mortgage 24 - 24 140 - 140 - - -
loans
Off-balance sheet credit exposures 53 44 97 49 96 145 46 6 52 Total ending balance$5,440 $78 $5,518 $6,353 $200 $6,553 $4,268 $18 $4,286 Loan balances(3): Non-accrual loans$18,650 $-$18,650 $13,677 $-$13,677 $6,370 $13 $6,383 Total loans outstanding 2,806,535 26,743 2,833,278 2,333,991 21,977 2,355,968 1,971,657 17,489 1,989,146 Average loans outstanding during the 2,597,016 23,736 2,620,752 2,113,212 19,546 2,132,758 1,921,198 15,414 1,936,612 year Ratios: Allowance for credit losses(4) to total 0.18 % 0.13 % 0.17 % 0.24 % 0.47 % 0.24 % 0.21 % 0.07 % 0.21 % loans outstanding Non-accrual loans to total loans 0.66 - 0.66 0.59 - 0.58 0.32 0.07 0.32
outstanding
Allowance for credit losses(5) to 26.34 NM 26.53 41.15 NM 41.91 66.28 92.31 66.33 non-accrual loans Net charge-offs to average loans 0.04 - 0.03 0.02 - 0.02 0.07 - 0.07 outstanding (1)The Single-Family mortgage portfolio in 2021, 2020 and 2019 includes charge-offs of$0.1 billion ,$0.3 billion and$1.3 billion , respectively, related to the transfer of loans from held-for-investment to held-for-sale. (2)Primarily includes capitalization of past due interest related to non-accrual loans that receive payment deferral plans and loan modifications. (3)Based on amortized cost basis of held-for-investment loans. (4)Represent allowance for credit losses on total held-for-investment loans. (5)NM - not meaningful due to the non-accrual loans balance rounding to zero. n 2021 vs. 2020 l The ratio of allowance for credit losses to total loans outstanding decreased as the allowance for credit losses decreased due to the reserve release driven by reduced expected credit losses related to the COVID-19 pandemic. This was partially offset by growth in our Single-Family mortgage portfolio as newly acquired loans had a higher ratio than the existing portfolio. l The ratio of non-accrual loans to total loans outstanding increased as we placed certain loans in forbearance plans on non-accrual status. FREDDIE MAC | 2021 Form 10-K 61
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Management's Discussion and Analysis Risk Management
l The ratio of allowance for credit losses to non-accrual loans decreased as we placed certain loans in forbearance plans on non-accrual status. n 2020 vs. 2019 l The ratio of non-accrual loans to total loans outstanding increased as the increase in the number of loans we placed on non-accrual status outpaced the growth in our Single-Family mortgage portfolio. l The ratio of allowance for credit losses to non-accrual loans decreased as the increase in the allowance for credit losses was offset by the increase in the number of loans we placed on non-accrual status. See Note 6 for additional information on our allowance for credit losses and Note 4 for additional information on our non-accrual policy. The table below shows the contractual principal payments due by specified timeframe for held-for-investment loans outstanding as ofDecember 31, 2021 . Table 15 - Principal Amounts Due for Held-for-Investment Loans December 31, 2021 Due in One Year or Due after One Year Due after Five Years (In millions) Less through Five Years through 15 Years Due after 15 Years Total Single-Family: Fixed-rate$87,916 $376,616 $1,011,848 $1,243,084 $2,719,464 Adjustable-rate 874 3,683 10,110 8,720 23,387 Total Single-Family 88,790 380,299 1,021,958 1,251,804 2,742,851 Multifamily: Fixed-rate 186 3,937 17,971 1,510 23,604 Adjustable-rate 933 1,610 510 - 3,053 Total Multifamily 1,119 5,547 18,481 1,510 26,657
Cost basis adjustments 63,770 Total$2,833,278
Single-Family Mortgage Credit Risk
We manage our exposure to Single-Family mortgage credit risk, which is a type of consumer credit risk, using the following principal strategies: n Maintaining prudent underwriting standards and quality control practices and managing seller/servicer performance; n Transferring credit risk to third-party investors; n Monitoring loan performance and characteristics; n Engaging in loss mitigation activities; and n Managing foreclosure and REO activities. Maintaining Prudent Underwriting Standards and Quality Control Practices and Managing Seller/Servicer Performance We employ multiple strategies to maintain loan quality: n Underwriting standards, as published in our Guide and incorporated in Freddie Mac Loan Advisor®, establish the requirements for eligibility, documentation, and representations and warranties; n Loan quality control practices, including post-close credit review and the remedy management repurchase process, help to validate that the loan origination process is acceptable to us and loans are produced to perform at or above expected levels; and n Seller/servicer management, including review of their in-house quality control as well as our loan performance monitoring, helps to maintain quality control for loans sold and/or serviced by third parties. Underwriting Standards We use a delegated underwriting process in connection with our acquisition of single-family loans whereby we set eligibility and underwriting standards, and sellers represent and warrant to us that loans they sell to us meet these standards. Our eligibilityFREDDIE MAC | 2021 Form 10-K 62
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Management's Discussion and Analysis Risk Management
and underwriting standards are used to assess loans based on a number of characteristics. Limits are established on the purchase of loans with certain higher risk characteristics. These limits are designed to balance our credit risk exposure while supporting affordable housing in a responsible manner. Our purchase guidelines generally provide for: n A maximum original LTV ratio of 97% for creditworthy first-time homebuyers and for a targeted segment of creditworthy borrowers meeting certain AMI requirements under our affordable housing initiatives; n A maximum original LTV ratio of 95% for all other home purchase and no cash-out refinance loans; and n A maximum original LTV ratio of 80% for cash-out refinance loans. Loan Advisor is our main tool for assessing loan eligibility and documentation. Loan Advisor is a set of integrated software applications and services designed to give lenders access to our view of risk, loan quality, and eligibility during the origination process, which promotes efficient commerce between lenders andFreddie Mac . As a key component of Loan Advisor, Loan Product Advisor® (LPA) takes advantage of proprietary data models and intelligent automation to help lenders validate that submitted loans meet our underwriting standards. LPA features innovative tools and offerings leveraging algorithms to enhance the origination process and generates an assessment of a loan's credit risk and overall quality. Historically, the majority of our purchase volume was assessed using either LPA, Fannie Mae's comparable software Desktop Underwriter (DU), or the seller's proprietary automated underwriting system. We have implemented steps to require the loans we purchase to be assessed by one ofFreddie Mac's proprietary underwriting software tools, LPA or Loan Quality Advisor®, prior to purchase. Substantially all of the loans we purchase are now assessed byFreddie Mac's proprietary underwriting software, helping validate their compatibility with our risk appetite. With Loan Advisor, lenders can actively monitor representation and warranty relief earlier in the mortgage loan production process. Loan Advisor offers limited representation and warranty relief for certain loan components that satisfy automated data analytics related to appraisal quality, valuation, borrower assets, and borrower income. In general, limited representation and warranty relief is only offered when information provided by lenders is validated through the use of independent data sources. If we discover that the representations or warranties related to a loan were breached (i.e., that contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include the ability to require the seller or servicer to repurchase the loan at its current UPB, reimburse us for losses realized with respect to the loan after consideration of any other recoveries, and/or indemnify us. Our current remedies framework provides for the categorization of loan origination defects for loans with settlement dates on or afterJanuary 1, 2016 . Among other items, the framework provides that "significant defects" will result in a repurchase request or a repurchase alternative, such as recourse or indemnification. Under our current selling and servicing representation and warranty framework for our mortgage loans, we relieve sellers of repurchase obligations for breaches of certain selling representations and warranties for certain types of loans, including: n Loans that have established an acceptable payment history for 36 months (12 months for relief refinance loans) of consecutive, on-time payments after purchase, subject to certain exclusions and n Loans that have satisfactorily completed a quality control review. An independent dispute resolution process for alleged breaches of selling or servicing representations and warranties on our loans allows for a neutral third party to render a decision on demands that remain unresolved after the existing appeal and escalation processes have been exhausted. Quality Control Practices We employ a quality control process to review loan underwriting documentation for compliance with our standards using both random and targeted samples. We also perform quality control reviews of many delinquent loans and review loans that have resulted in credit losses before the representations and warranties are relieved. Sellers may appeal our ineligible loan determinations prior to repurchase of the loan. We use a standard quality control process that facilitates more timely reviews and is designed to identify breaches of representations and warranties early in the life of the loan. Proprietary tools, such as Quality Control Advisor®, provide greater transparency into our customer quality control reviews. Appraisal Waivers SinceJune 2017 , we have permitted sellers to originate certain eligible loans without a traditional appraisal by leveraging our proprietary models, along with historical data and public records through our Loan Product Advisor® Automated Collateral Evaluation (ACE). For mortgaged properties meeting certain qualifications as specified in the Guide, the property value (purchase price for purchase transactions and borrower provided estimated value for refinances) and condition are assessed using ACE. ACE uses our in-house automated valuation model, Home Value Explorer® (HVE). HVE was built and is periodically enhanced for the express purpose of managing collateral risk atFreddie Mac . ACE leverages statistically based, empirically derived confidence scores to assess collateral risk. House price appreciation during the COVID-19 pandemic has increasedFREDDIE MAC | 2021 Form 10-K 63
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Management's Discussion and Analysis Risk Management
uncertainty for HVE, house price appreciation models, and traditional valuation methods, including appraisals. House prices have appreciated markedly despite the lagging performance of underlying fundamentals such as the unemployment rate and other economic indicators. In response to the COVID-19 pandemic, inMarch 2020 , we introduced expanded eligibility of ACE waivers to include no cash-out refinance with LTV ratios up to 90%, cash-out refinances for primary residences with LTV ratios up to 70%, and second homes with LTV ratios up to 60%. During the pandemic, homeowners and appraisers expressed concerns with appraisers entering properties, which potentially could stall the process of closing loans. As a result of this expansion, combined with a historically high refinance market (ACE waivers are granted more often for refinanced loans), ACE waiver usage increased from approximately 11% during 2019 to 40% during 2020, and averaged 39% during 2021. We monitor the size of ACE waivers relative to Fannie Mae's appraisal waivers to reduce prepayment misalignment risk in UMBS. Managing Seller/Servicer Performance We actively monitor seller and servicer performance, including compliance with our standards. We maintain approval standards for our seller/servicers, which include requiring our sellers to maintain an in-house quality control program with written procedures that operates independently of the seller's underwriting and origination functions. We monitor servicer performance using our Servicer Success Scorecard. In addition, we perform servicing and loan modification quality control reviews on selected servicers through random sampling of delinquent loans and executed loan modifications. Temporary Underwriting Changes Due to the COVID-19 Pandemic We announced temporary changes in our underwriting standards due to the COVID-19 pandemic, which may negatively affect the expected performance of purchased loans that were underwritten under these temporary changes. Many of these temporary changes have either expired or, in certain cases, been made permanent. In March andMay 2020 , we introduced a number of temporary measures to help provide sellers with the clarity and flexibility to continue to lend in a prudent and responsible manner during the COVID-19 pandemic. The flexibility we allowed in demonstrating a borrower's current employment status has expired and is not applicable to loan applications dated on or afterMay 1, 2021 . The option to verify the borrower's employment via email was included permanently in our Guide onApril 7, 2021 . The following temporary measures have expired and are not applicable to loan applications dated on or afterAugust 11, 2021 : n Requiring income and asset documentation to be dated closer to the loan closing date in order to verify the most up-to-date information is being used to support the borrower's ability to repay and n Establishing underwriting restrictions applicable to a borrower's accounts containing stocks, stock options, and mutual funds due to then current market volatility. The following temporary measures are in effect until further notice: n Requiring verification that the business is open and operating for self-employed borrowers; n Requiring mortgages to be sold toFreddie Mac within six months of the note date; and n Verifying that any mortgage that a borrower has is current or is brought current via reinstatement or by making at least three consecutive timely payments under a loss mitigation program. The temporary measure that required additional income documentation for self-employed borrowers expired onFebruary 2, 2022 for most mortgages. In March andApril 2020 , we announced loan processing flexibilities to expedite loan closings and help keep homebuyers, sellers, and appraisers safe during the COVID-19 pandemic. These flexibilities expired and are not applicable to loan applications dated on or afterJune 1, 2021 . They included: n Allowing desktop appraisals or exterior-only inspection appraisals for certain purchase transactions; n Allowing exterior-only appraisals for certain no cash-out refinances; n Allowing desktop appraisals on new construction properties (purchase transactions); n Allowing flexibility on demonstrating that construction has been completed; and n Allowing flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws). The following temporary flexibilities have expired and are not applicable to loan applications dated on or afterMay 1, 2021 : n Offering flexibility in condominium project reviews and n Expanding the use of powers of attorney and remote online notarizations. Permanent updates to our requirements for the use of powers of attorney were included in our Guide and are effective for applications dated on or afterJune 30, 2021 . Some of these changes in our underwriting standards due to the COVID-19 pandemic may negatively affect the expected performance of loans purchased while these changes are in effect. The pandemic may also strain sellers' ability to increaseFREDDIE MAC | 2021 Form 10-K 64
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Management's Discussion and Analysis Risk Management
their operational capacity to handle the historically high volume of refinance mortgages while maintaining proper quality control, which may further impact the credit quality of the loans we purchase during the affected periods. In addition, the CARES Act requires creditors to report to credit bureaus that loans in relief programs, such as forbearance plans, repayment plans, and loan modification programs, are current as long as the loans were current prior to entering into the relief programs and the borrowers remain in compliance with the programs. This credit reporting requirement applies to all mortgage relief programs entered into betweenJanuary 31, 2020 and the date that is 120 days after the declaration of the national emergency related to the COVID-19 pandemic ends. As a result, our ability to evaluate purchases of new loans may be adversely affected as credit scores may not fully reflect the impact of relief programs, offered by us or other creditors, into which borrowers may have entered. We announced inApril 2020 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 in order to help provide liquidity to the mortgage market and allow originators to keep lending. This temporary measure was extended to include mortgage loans with note dates on or afterApril 1, 2020 and on or beforeDecember 31, 2020 and with settlement dates on or beforeFebruary 28, 2021 . The purchases of such loans have been insignificant. We also temporarily halted the purchase of negotiated bulk transactions and the purchase of flow loans with more than six months seasoning inMay 2020 . At the instruction of FHFA, we implemented a 50 basis point adverse market refinance fee for refinance mortgages, excluding those with low balances and certain product types, with settlement dates on or afterDecember 1, 2020 . InJuly 2021 , FHFA instructed us to eliminate this fee for loan deliveries effectiveAugust 1, 2021 . Underwriting Restrictions Related to Purchase Agreement The Purchase Agreement requires us to limit our acquisition of certain single-family mortgage loans as follows: n A maximum of 6% of purchase money mortgages and 3% of refinance mortgages over the preceding 52-week period can have two or more of the following characteristics at origination: combined LTV ratio greater than 90%; debt-to-income ratio greater than 45%; and FICO or equivalent credit score less than 680. n Acquisitions of single-family mortgage loans secured by either second homes or investment properties are limited to 7% of the single-family mortgage loan acquisitions over the preceding 52-week period. n Subject to such exceptions as FHFA may prescribe to permit us to acquire single-family mortgage loans that are currently eligible for acquisition, we were required to implement byJuly 1, 2021 a program reasonably designed to ensure that each single-family mortgage loan acquired is: (1) a qualified mortgage; (2) exempt from theCFPB's ability-to-repay requirements; (3) secured by an investment property, subject to the restrictions above; (4) a refinancing with streamlined underwriting for high LTV ratios; (5) a loan with temporary underwriting flexibilities due to exigent circumstances, as determined in consultation with FHFA; or (6) secured by manufactured housing. InSeptember 2021 , the Purchase Agreement limits on our acquisitions of single-family loans with certain LTV, DTI, and credit score characteristics at origination and on our acquisitions of single-family loans secured by second homes or investment properties were suspended. For additional information, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments -September 2021 Letter Agreement withTreasury .FREDDIE MAC | 2021 Form 10-K 65
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Management's Discussion and Analysis Risk Management
Loan Purchase Credit Characteristics
We monitor and evaluate market conditions that could affect the credit quality
of our single-family loan purchases. The graphs below show the credit profile of
the single-family loans we purchased or guaranteed.
Weighted Average Original LTV Ratio
[[Image Removed: fmcc-20211231_g47.jpg]]
Weighted Average Original Credit Score[[Image Removed: fmcc-20211231_g48.jpg]]
(1)Weighted average original credit score is based on three credit bureaus
(Equifax, Experian, and TransUnion ).
The table below contains additional information about the single-family loans we
purchased or guaranteed.
Table 16 - Single-Family New Business Activity
Year Ended December 31,
2021 2020 2019
(Dollars in billions) Amount % of Total Amount % of Total Amount % of Total
20- and 30-year or more amortizing
fixed-rate $1,042 86 % $919 85 % $405 89 %
15-year amortizing fixed-rate 173 14 167 15 43 10
Adjustable-rate 5 - 4 - 5 1
Total $1,220 100 % $1,090 100 % $453 100 %
Percentage of purchases
DTI ratio > 45% 11 % 10 % 14 %
Original LTV ratio > 90% 11 11 19
Transaction type:
Cash window 43 61 48
Guarantor swap 57 39 52
Property type:
Detached single-family houses and
townhouses 93 93 92
Condominium or co-op 7 7 8
Occupancy type:
Primary residence 93 94 92
Second home 3 3 4
Investment property 4 3 4
Loan purpose:
Purchase 35 30 55
Cash-out refinance 25 18 18
Other refinance 40 52 27
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Management's Discussion and Analysis Risk Management
Transferring Credit Risk to
Types of Credit Enhancements
Our Charter requires coverage by specified credit enhancements or participation
interests on single-family loans with LTV ratios above 80% at the time of
purchase. Most of our loans with LTV ratios above 80% are protected by primary
mortgage insurance, which provides loan-level protection against loss up to a
specified amount, the premium for which is typically paid by the borrower.
Generally, an insured loan must be in default and the borrower's interest in the
underlying property must have been extinguished, such as through a short sale or
foreclosure sale, before a claim can be filed under a primary mortgage insurance
policy. The mortgage insurer has a prescribed period of time within which to
process a claim and make a determination as to its validity and amount.
In addition to obtaining credit enhancements required by our Charter, we also
enter into various CRT transactions in which we transfer mortgage credit risk to
third parties. The table below contains a summary of the types of credit
enhancements we use to transfer credit risk on our single-family loans. See MD&A
- Our Business Segments - Single-Family - Products and Activities for more
information on our CRT transactions.
Category Products CRT Coverage type Accounting treatment
Primary mortgage insurance Primary mortgage insurance No Front-end Attached
STACR STACR Trust notes Yes Back-end Freestanding
STACR debt notes Yes Back-end Debt
Insurance/reinsurance ACIS Yes Back-end Freestanding
Other insurance/reinsurance products Yes Front-end Freestanding
Senior subordinate securitization structures Yes Back-end Guarantee
backed by seasoned loans (nonconsolidated)
Other Senior subordinate securitization structures
backed by recently originated loans Yes Back-end Debt
(consolidated)
Lender risk-sharing Yes Front-end Freestanding
Single-Family Mortgage Portfolio CRT Issuance
The table below provides the UPB of the mortgage loans covered by CRT
transactions issued during the periods presented as well as the maximum coverage
provided by those transactions.
Table 17 - Single-Family Mortgage Portfolio CRT Issuance
Year Ended December 31,
2021 2020 2019
(In millions) UPB(1) Maximum Coverage(2) UPB(1) Maximum Coverage(2) UPB(1) Maximum Coverage(2)
STACR $574,705 $11,024 $427,155 $11,141 $203,239 $6,671
Insurance/reinsurance 465,043 7,885 422,719 4,181 210,650 2,687
Other 5,094 1,062 15,563 2,379 43,888 3,526
Less: UPB with more than one (216,386) - (388,340) (769) (203,239) (723)
type of CRT
Total CRT Issuance $828,456 $19,971 $477,097 $16,932 $254,538 $12,161
(1)Represents the UPB of the assets included in the associated reference pool or
securitization trust, as applicable. Prior periods have been revised to conform
to the current period presentation.
(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.
FREDDIE MAC | 2021 Form 10-K 67
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Management's Discussion and Analysis Risk Management
Single-Family Mortgage Portfolio Credit Enhancement Coverage Outstanding
The table below provides information on the UPB and maximum coverage associated
with credit-enhanced loans in our Single-Family mortgage portfolio.
Table 18 - Single-Family Mortgage Portfolio Credit Enhancement Coverage
Outstanding
December 31, 2021
(Dollars in millions) UPB(1) % of Portfolio Maximum Coverage(2)
Primary mortgage insurance(3) $545,293 20 % $135,330
STACR 1,024,013 37 32,641
Insurance/reinsurance 914,003 33 16,209
Other 42,273 1 10,598
Less: UPB with multiple credit enhancements and
other reconciling items(4) (1,034,546) (38) -
Single-Family mortgage portfolio - credit-enhanced 1,491,036 53 194,778
Single-Family mortgage portfolio -
non-credit-enhanced 1,301,188 47 N/A
Total $2,792,224 100 % $194,778
December 31, 2020
(Dollars in millions) UPB(1) % of Portfolio Maximum Coverage(2)
Primary mortgage insurance(3) $472,881 20 % $116,973
STACR 853,733 37 29,665
Insurance/reinsurance 876,815 38 11,586
Other 50,275 2 11,384
Less: UPB with multiple credit enhancements and
other reconciling items(4) (1,101,461) (47) -
Single-Family mortgage portfolio - credit-enhanced 1,152,243 50 169,608
Single-Family mortgage portfolio -
non-credit-enhanced 1,174,183 50 N/A
Total $2,326,426 100 % $169,608
(1)Represents the current UPB of the assets included in the associated reference
pool or securitization trust, as applicable. Prior periods have been revised to
conform to the current period presentation.
(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.
(3)Amounts exclude certain loans for which we do not control servicing, as the
coverage information for these loans is not readily available to us.
(4)Other reconciling items primarily include timing differences in reporting
cycles between the UPB of certain CRT transactions and the UPB of the underlying
loans.
Our maximum coverage as a percentage of the UPB associated with credit-enhanced
loans decreased to 13% as of December 31, 2021 from 15% as of December 31, 2020 ,
driven by the improved credit quality of the covered loans, which reduced the
amount of credit coverage we required on those loans.
Credit Enhancement Coverage Characteristics
The table below provides the serious delinquency rates for the credit-enhanced
and non-credit-enhanced loans in our Single-Family mortgage portfolio. The
credit-enhanced categories are not mutually exclusive as a single loan may be
covered by both primary mortgage insurance and other credit enhancements.
Table 19 - Serious Delinquency Rates for Credit-Enhanced and Non-Credit-Enhanced
Loans in Our Single-Family Mortgage Portfolio
December 31, 2021 December 31, 2020
(% of portfolio based on UPB)(1) % of Portfolio SDQ Rate % of Portfolio SDQ Rate
Credit-enhanced:
Primary mortgage insurance 20 % 1.79 % 21 % 3.77 %
CRT and other 47 1.24 41 3.22
Non-credit-enhanced 47 0.93 50 2.13
Total N/A 1.12 N/A 2.64
(1)Excludes loans underlying certain securitization products for which
loan-level data is not available.
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Management's Discussion and Analysis Risk Management
The table below provides information on the amount of credit enhancement
coverage by year of origination associated with loans in our Single-Family
mortgage portfolio.
Table 20 - Credit Enhancement Coverage by Year of Origination
December 31, 2021 December 31, 2020
% of UPB with Credit % of UPB with Credit
(Dollars in millions) UPB Enhancement UPB Enhancement
Year of Loan Origination
2021 $1,059,299 40 % N/A N/A
2020 867,122 68 $971,092 36 %
2019 157,971 71 276,302 73
2018 66,149 78 118,668 80
2017 88,800 72 147,856 75
2016 and prior 552,883 46 812,508 49
Total $2,792,224 53 $2,326,426 50
The following table provides information on the characteristics of the loans in
our Single-Family mortgage portfolio without credit enhancement.
Table 21 - Single-Family Mortgage Portfolio Without Credit Enhancement(1)
December 31, 2021 December 31, 2020 (Dollars in millions) UPB % of Portfolio UPB % of Portfolio Low current LTV ratio(1)(2)$968,315 35 %$784,150 34 % Short-term(1)(3) 73,947 2 81,681 3 CRT pipeline(1)(4) 239,330 9 276,611 12 Other(1)(5) 19,596 1 31,741 1 Single-Family mortgage portfolio - non-credit-enhanced$1,301,188 47 %$1,174,183 50 % (1)Loans with multiple characteristics are assigned to categories in this table based on the following order: low current LTV ratio, short-term, and CRT pipeline. (2)Represents loans with current LTV ratio less than or equal to 60%. (3)Represents loans with an original maturity of 20 years or less. (4)Represents recently acquired loans that are targeted to be included in on-the-run CRT transactions and have not been included in a reference pool. (5)Primarily includes government guaranteed loans, ARM loans, loans with a current LTV ratio greater than 97%, loans that fail the delinquency requirements for CRT transactions, and relief refinance loans and loans that were acquired before the inception of our CRT programs in 2013. Credit Enhancement Expenses and Recoveries The recognition of expenses and recoveries associated with credit enhancements in our consolidated financial statements depends on the type of credit enhancement. Expected recoveries from attached credit enhancements, mainly primary mortgage insurance, reduce the amount of the provision for credit losses on the covered loans. There is no separate credit enhancement expense or expected credit enhancement recovery for attached credit enhancements. Rather, the cost of the credit enhancement is reflected in our financial results as lower revenue, as we charge a lower guarantee fee for loans covered by these types of credit enhancements than we would otherwise charge for a similar loan without credit enhancement. If the loan proceeds to a loss event, we derecognize the loan and associated allowance for credit losses and recognize a receivable for the expected primary mortgage insurance proceeds. Similarly, we do not recognize a provision for credit losses on guarantees protected by subordination unless expected credit losses exceed the amount of subordination. Expected recoveries from freestanding credit enhancements do not reduce the provision for credit losses on the covered loans but are recognized separately, at the same time that we recognize an allowance for credit losses on the covered loans, as a reduction to non-interest expense measured on the same basis as the allowance for credit losses on the covered loans. We recognize the payments we make to transfer credit risk under freestanding credit enhancements, primarilySTACR Trust notes and insurance/reinsurance transactions, as credit enhancement expense when incurred. In prior years, we obtained credit enhancement through the issuance of credit-linked debt, primarily STACR debt notes. We recognize the cost of these transactions as interest expense. We no longer issue credit-linked debt as part of our primary CRT strategy and therefore expect the effect of these transactions on our financial results to become less significant over time. FREDDIE MAC | 2021 Form 10-K 69 -------------------------------------------------------------------------------- Management's Discussion and Analysis Risk Management See MD&A - Consolidated Results of Operations and MD&A - Our Business Segments - Single-Family for additional information on credit enhancement expense. The table below presents the details of the credit enhancement recovery receivables we have recognized within other assets on our consolidated balance sheet. Table 22 - Single-Family Credit Enhancement Receivables (In millions) December 31, 2021 December 31, 2020 Freestanding credit enhancement expected recovery receivables, net of allowance$114 $653 Primary mortgage insurance receivables(1), net of allowance 76 74 Total credit enhancement receivables$190 $727 (1)Excludes$433 million and$444 million of deferred payment obligations associated with unpaid claim amounts as ofDecember 31, 2021 andDecember 31, 2020 , respectively. We have reserved substantially all of these unpaid amounts as collectability is uncertain. Monitoring Loan Performance and Characteristics We review loan performance, including delinquency statistics and related loan characteristics, in conjunction with housing market and economic conditions, including economic effects associated with the COVID-19 pandemic, to assess credit risk when estimating our allowance for credit losses. We also use this information to determine if our pricing and eligibility standards reflect the risk associated with the loans we purchase and guarantee. We review the payment performance of our loans to facilitate early identification of potential problem loans, which could inform our loss mitigation strategies. We also review performance metrics for additional loan characteristics that may expose us to concentrations of credit risk. FREDDIE MAC | 2021 Form 10-K 70 -------------------------------------------------------------------------------- Management's Discussion and Analysis Risk Management Loan Characteristics The table below contains a description of some of the credit characteristics that we monitor for loans in our Single-Family mortgage portfolio. Credit Characteristic Description
Impact on Credit Quality
Ratio of the UPB of the loan to the value of • Measures ability of the underlying property to
the underlying property collateralizing the cover our exposure on the loan
loan. Original LTV ratio is measured at loan • Higher LTV ratios indicate higher risk, as
LTV ratio origination, while CLTV ratio is defined as proceeds from sale of the property may not
the ratio of the current loan UPB to the cover our exposure on the loan
estimated current property value. • Lower LTV ratios indicate borrowers are more
likely to repay
Statistically-derived number that may • Borrowers with higher credit scores are
indicate a borrower's likelihood to repay generally more likely to repay or have the
debt. Original credit score represents each ability to refinance their loans than those
borrower's FICO score at the time of with lower scores
Credit score origination or our purchase, while current
credit score represents each borrower's most
recent FICO score, which is obtained by
Freddie Mac as of the first month of the most
recent quarter
Indicates how the borrower intends to use the • Cash-out refinancings, which increase the LTV
Loan purpose proceeds from a loan (i.e., purchase,
ratios, generally have a higher risk of default
cash-out refinance, or other refinance) than loans originated in purchase or other
refinance transactions
• Detached single-family houses and townhouses
are the predominant type of single-family
Indicates whether the property is a detached property
Property type single-family house, townhouse, condominium, • Condominiums historically have experienced
or co-op greater volatility in house prices than
detached single-family houses, which may expose
us to more risk
Indicates whether the borrower intends to use • Loans on primary residence properties tend to
Occupancy type the property as a primary residence, second have lower credit risk than loans on second
home, or investment property homes or investment properties
Indicates the type of loan based on key loan • Loan products that contain terms which result
terms, such as the contractual maturity, type in scheduled changes in monthly payments may
Product type of interest rate, and payment characteristics result in higher risk
of the loan • Shorter loan terms result in faster repayment
of principal and may indicate lower risk
• Second liens can increase the risk of default
Indicates whether the underlying property is
Second liens covered by more than one loan at the time of • Borrowers are free to obtain second-lien
origination financing after origination, and we are not
entitled to receive notification when a
borrower does so
• Borrowers with lower DTI ratios are generally
Ratio of the borrowers' total monthly debt more likely to repay their loans than those
payments to gross monthly income. One with higher DTI ratios, holding all other
DTI ratio indicator of the creditworthiness of the factors equal
borrowers, as it measures borrowers' ability • DTI ratios are at the time of origination and
to manage monthly payments and repay debts may not be indicative of the borrowers' current
credit worthiness
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Management's Discussion and Analysis Risk Management
The tables below contain details of the characteristics of the loans in our
Single-Family mortgage portfolio.
Table 23 - Credit Quality Characteristics of Our Single-Family Mortgage
Portfolio
December 31, 2021
Current Current
Original Credit Current Credit Original LTV LTV Ratio
(Dollars in billions) UPB Score (1) Score (1)(2) LTV Ratio Ratio >100%
Single-Family mortgage portfolio year of
origination:
2021 $1,059 752 751 71 % 66 % - %
2020 867 760 769 71 56 -
2019 158 746 751 76 55 -
2018 66 736 736 76 52 -
2017 89 741 746 75 46 -
2016 and prior 553 737 752 75 36 -
Total $2,792 751 756 72 55 -
December 31, 2020
Current Current
Original Credit Current Credit Original LTV LTV Ratio
(Dollars in billions) UPB Score (1) Score (1)(2) LTV Ratio Ratio >100%
Single-Family mortgage portfolio year of
origination:
2020 $971 760 758 71 % 68 % - %
2019 276 747 754 77 67 -
2018 119 739 739 77 62 -
2017 148 742 747 75 56 -
2016 187 748 758 73 49 -
2015 and prior 625 737 750 75 41 -
Total $2,326 749 754 74 58 -
(1)Original credit score is based on three credit bureaus (Equifax, Experian,
and TransUnion ). Current credit score is based on Experian only.
(2)Credit scores for certain recently acquired loans may not have been updated
by the credit bureau since the loan acquisition, and therefore, the original
credit scores also represent the current credit scores.
FREDDIE MAC | 2021 Form 10-K 72
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Management's Discussion and Analysis Risk Management
Table 24 - Characteristics of the Loans in Our Single-Family Mortgage Portfolio
Year Ended December 31,
2021 2020 2019
(Dollars in billions) Amount % of Total Amount % of Total Amount % of Total
20- and 30-year or more amortizing $2,359 84 % 1,950 84 % 1,689 85 %
fixed-rate
15-year amortizing fixed-rate 393 14 326 14 241 12
Adjustable-rate 21 1 26 1 37 2
Alt-A, interest-only, and option ARM 19 1 24 1 27 1
Total $2,792 100 % $2,326 100 % $1,994 100 %
Percentage of portfolio based on UPB
Original LTV ratio range:
60% and below 25 % 22 % 18 %
Above 60% to 80% 51 51 52
Above 80% to 90% 11 12 12
Above 90% to 100% 12 13 16
Above 100% 1 2 2
Portfolio weighted average original 72 74 76
LTV ratio
Current LTV ratio range:
60% and below 58 51 51
Above 60% to 80% 35 37 35
Above 80% to 90% 5 10 9
Above 90% to 100% 2 2 5
Above 100% - - -
Portfolio weighted average current LTV 55 58 59
ratio
Original credit score(1):
740 and above 65 64 61
700 to 739 20 20 21
680 to 699 7 7 7
660 to 679 4 4 5
620 to 659 3 4 4
Less than 620 1 1 2
Portfolio weighted average original 751 749 745
credit score
Current credit score(1)(2):
740 and above 70 70 66
700 to 739 15 15 16
680 to 699 5 5 5
660 to 679 4 3 4
620 to 659 4 4 4
Less than 620 2 3 5
Portfolio weighted average current 756 754 749
credit score
DTI ratio:
Above 45% 14 14 15
Portfolio weighted average DTI ratio 34 35
35
Property type: Detached single-family houses and 93 92 92 townhouse Condominium or co-op 7 8 8 Occupancy type at origination: Primary residence 91 90 90 Second home 4 4 4 Investment property 5 6 6 Loan purpose: Purchase 36 38 46 Cash-out refinance 22 19 20 Other refinance 42 43 34 (1)Original credit score is based on three credit bureaus (Equifax, Experian, andTransUnion ). Current credit score is based on Experian only. (2)Credit scores for certain recently acquired loans may not have been updated by the credit bureau since the loan acquisition, and therefore, the original credit scores also represent the current credit scores. FREDDIE MAC | 2021 Form 10-K 73 -------------------------------------------------------------------------------- Management's Discussion and Analysis Risk Management AtDecember 31, 2021 , approximately 4% of our loans had second-lien financing by the originator or other third party at origination, and these loans comprised approximately 9% of our seriously delinquent loan population. It is likely that additional borrowers have post-origination second-lien financing. 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 used the terms subprime and Alt-A in this Form 10-K, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We have not historically characterized the loans in our Single-Family mortgage portfolio as either prime or subprime for purposes of evaluating credit risk, and we do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our Single-Family mortgage portfolio. To evaluate credit risk, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. There are also several types of loans that contain terms which result in scheduled changes in the borrower's monthly payments after specified initial periods, such as option ARM and interest-only loans. These products may result in higher credit risk because the payment changes may increase the borrower's monthly payment, resulting in a higher risk of default. Only a small percentage of our Single-Family mortgage portfolio consists of option ARM, Alt-A, and interest-only loans. We fully discontinued purchases of option ARM loans in 2007, Alt-A loans in 2009, and interest-only loans in 2010. The following table presents the combination of credit score and CLTV ratio attributes of loans in our Single-Family mortgage portfolio. Table 25 - Single-Family Mortgage Portfolio Attribute Combinations December 31, 2021 CLTV ? 60 CLTV > 60 to 80 CLTV > 80 to 90 CLTV > 90 to 100 CLTV > 100 All Loans (Original Credit score) % of Portfolio SDQ Rate % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate % Modified(2) < 620 0.8 % 6.69 % 0.2 % 11.68 % - % NM - % NM - % NM 1.0 % 7.50 % 8.5 % 620 to 679 4.4 3.29 2.3 3.05 0.3 2.56 % 0.1 2.57 % - NM 7.1 3.22 3.7 ? 680 51.9 0.80 32.3 0.78 5.3 0.54 2.3 0.25 - NM 91.8 0.78 0.6 Not available 0.1 6.58 - NM - NM - NM - NM 0.1 6.85 18.7 Total 57.2 % 1.19 34.8 % 1.04 5.6 % 0.77 2.4 % 0.47 - % NM 100.0 % 1.12 1.0 December 31, 2020 CLTV ? 60 CLTV > 60 to 80 CLTV > 80 to 90 CLTV > 90 to 100 CLTV > 100 All Loans (Original Credit score) % of Portfolio SDQ Rate % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate(1) % of Portfolio SDQ Rate % Modified(2) < 620 0.9 % 9.27 % 0.3 % 14.96 % 0.1 % 18.74 % - % NM - % NM 1.3 % 11.00 % 10.2 % 620 to 679 4.2 5.93 2.5 7.93 0.5 8.17 0.1 7.92 % - NM 7.3 6.64 7.1 ? 680 45.4 1.83 34.5 2.31 8.9 2.37 2.4 0.96 0.1 12.56 % 91.3 2.00 0.6 Not available 0.1 7.96 - NM - NM - NM - NM 0.1 8.79 16.9 Total 50.6 % 2.46 37.3 % 2.94 9.5 % 2.90 2.5 % 1.69 0.1 % 18.11 100.0 % 2.64 1.4 (1)NM - not meaningful due to the percentage of the portfolio rounding to zero. (2)Primarily includes loans modified through the Freddie Mac Flex Modification program. Certain of the loan attributes shown above may indicate a higher risk of default. For example, loans with LTV ratios over 90% or credit scores below 620 may be higher risk. A single loan may fall within more than one risk category. Certain combinations of loan attributes can indicate an even higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. Geographic Concentrations We purchase mortgage loans from across theU.S. However, local economic conditions can affect the borrower's ability to repay and the value of the underlying collateral, leading to concentrations of credit risk in certain geographic areas. In addition, certain states and municipalities may pass laws that limit our ability to foreclose or evict and make it more difficult and costly to manage our risk. See Note 16 for more information about the geographic distribution of our Single-Family mortgage portfolio.
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Management's Discussion and Analysis Risk Management
Delinquency Rates
We report Single-Family delinquency rates based on the number of loans in our
Single-Family mortgage portfolio that are past due as reported to us by our
servicers as a percentage of the total number of loans in our Single-Family
mortgage portfolio.
The chart below shows the delinquency rates of mortgage loans in our
Single-Family mortgage portfolio.
Single-Family Delinquency Rates [[Image Removed: fmcc-20211231_g49.jpg]]
The percentages of loans that were one month past due and two months past due
increased in early 2020 due to the COVID-19 pandemic and have trended back
towards pre-pandemic levels as the impact of the pandemic on early-stage
delinquencies has started to stabilize. The percentage of loans one month past
due can be volatile due to seasonality and other factors that may not be
indicative of default. As a result, the percentage of loans two months past due
tends to be a better early performance indicator than the percentage of loans
one month past due.
Our Single-Family serious delinquency rate decreased to 1.12% as of December 31,
2021 , compared to 2.64% as of December 31, 2020 as borrowers continued to exit
forbearance and complete loan workout solutions that returned their mortgages to
current status. In addition, 56% of the seriously delinquent loans at December
31, 2021 were covered by credit enhancements that are designed to partially
reduce our credit risk exposure to these loans. See Note 4 for additional
information on the payment status of our single-family mortgage loans.
Loans in COVID-19 Related Forbearance Plans
Pursuant to FHFA guidance and the CARES Act, we have offered mortgage relief
options for borrowers affected by the
COVID-19 pandemic. Among other things, we have offered forbearance of up to 18
months to single-family borrowers experiencing a financial hardship, either
directly or indirectly, related to the COVID-19 pandemic. We have also offered a
payment deferral plan that allows a borrower to defer up to 18 months of
payments for eligible homeowners 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. The CARES Act requires our
servicers to report to credit bureaus that loans in mortgage relief programs,
such as forbearance plans, repayment plans, and loan modification programs, are
current as long as the loans were current prior to entering into the mortgage
relief programs and the borrowers remain in compliance with the programs. This
credit reporting requirement applies to all mortgage relief programs entered
into between January 31, 2020 and the date that is 120 days after the
declaration of the national emergency related to the COVID-19 pandemic ends. Our
ability to monitor the credit quality of loans in our Single-Family mortgage
portfolio may be adversely affected as credit scores may not reflect the impact
of relief programs, offered by us or other creditors, into which borrowers may
have entered.
For the purpose of reporting delinquency rates, we report single-family loans in
forbearance as delinquent during the forbearance period to the extent that
payments are past due based on the loan's original contractual terms,
irrespective of the forbearance plan.
FREDDIE MAC | 2021 Form 10-K 75
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Management's Discussion and Analysis Risk Management
The table below presents payment status information of our single-family loans
in forbearance based on the loans' original contractual terms.
Table 26 - Single-Family Loans in Forbearance Plans by Payment Status(1)
December 31, 2021 Two Three One Month Past
Months Months to Six Months Greater Than Six
(Dollars in millions)
Current Due
Past Due Past Due(2) Months Past Due(2) Total
UPB
$1,553 $1,474 $1,233 $3,713 $7,890 $15,863 Number of loans (in thousands) 8 7 6 18 36 75 As a percentage of our Single-Family mortgage 0.06 % 0.05 % 0.05 % 0.13 % 0.28 % 0.57 % portfolio(3) December 31, 2020 Two Three Months Months to Six Greater Than Six (Dollars in millions) Current One Month Past Due
Past Due Months Past Due(2) Months Past Due(2) Total
UPB
$8,907 $5,443 $4,372 $15,366 $35,144 $69,232 Number of loans (in thousands) 44 28 22 75 155 324 As a percentage of our Single-Family mortgage 0.37% 0.23% 0.18% 0.63% 1.29% 2.70% portfolio(3) (1)Excludes certain loans for which we do not control servicing and loans underlying certain legacy transactions, as the forbearance information for these loans is either not reported to us by the servicers or is otherwise not readily available to us. These loans represented approximately 1.6% and 2.0% of the Single-Family mortgage portfolio as ofDecember 31, 2021 andDecember 31, 2020 , respectively. (2)The UPB of loans in forbearance that were three months or more past due and continuing to accrue interest was$5.9 billion and$42.2 billion , respectively, as ofDecember 31, 2021 andDecember 31, 2020 . (3)Based on loan count. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, 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, do 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 government-mandated modification or deferral programs related to the COVID-19 pandemic are not TDRs as the lender did not choose to grant a concession to the borrower. As a result, substantially all of the forbearance and other relief programs we have been offering because of COVID-19 have not been accounted for as TDRs. We generally place single-family loans on non-accrual status when the loan becomes three monthly payments past due. For loans in active forbearance plans that were current prior to receiving forbearance, we continue to accrue interest income while the loan is in forbearance and is three or more monthly payments past due when we believe the available evidence indicates that collectability of principal and interest is reasonably assured based on management judgment, taking into consideration additional factors, the most important of which is the current LTV ratio. When we accrue interest on loans that are three or more monthly payments past due, we measure an allowance for expected credit losses on unpaid accrued interest receivable balances such that the balance sheet reflects the net amount of interest we expect to collect. The balance of accrued interest receivable, net of allowance for credit losses, recognized on our consolidated balance sheet related to loans in COVID-19 forbearance plans was$0.2 billion and$1.1 billion as ofDecember 31, 2021 andDecember 31, 2020 , respectively. See Note 4 for additional information on our accounting policies for forbearance programs related to the COVID-19 pandemic. Prior to expiration of a borrower's forbearance plan, servicers are required to contact the borrower to determine how the payments missed during the forbearance period will be repaid. We require servicers to follow a defined loss mitigation hierarchy to determine which options to offer to borrowers. This hierarchy is determined based on certain factors, such as the borrowers' delinquency status, reasons for delinquency, loan types, and types of hardships. Borrowers are not required to repay all past due amounts in a single lump sum. Upon expiration of the forbearance plan, borrowers may reinstate the loan or enter into either a repayment plan, a payment deferral plan, or a trial period plan pursuant to a loan modification. If the borrower is not eligible for any of the home retention options, we may seek to pursue a foreclosure alternative or foreclosure. As a result of loans exiting COVID-19 related forbearance plans through payment deferral plans or loan modifications during 2021 and 2020, we deferred$1.4 billion and$0.4 billion , respectively, of delinquent interest into non-interest-bearing principal balances that are due at the earlier of the payoff date, maturity date, or sale of the property. FREDDIE MAC | 2021 Form 10-K 76 -------------------------------------------------------------------------------- Management's Discussion and Analysis Risk Management
The table below presents a summary of single-family loans that received
forbearance plans and were past due based on the loans' original contractual
terms at some point during the forbearance period.
Table 27 - Single-Family Loans that Received Forbearance Plans(1)
(Loan count in thousands)
December 31, 2021 December 31, 2020 Active forbearance plan at end of period 67 280
Forbearance plan exits(2) (from
Reinstatement(3) 263 189 Pay-off 67 39 Payment deferral plan 374 166 Other(4) 87 43 Total forbearance plan exits(5) 791 437
Total single-family loans that received forbearance plans(6) (from
858 717
(1)Excludes certain loans for which we do not control servicing and loans underlying certain legacy transactions, as the forbearance information for these loans is either not reported to us by the servicers or is otherwise not readily available to us. These loans represented approximately 1.6% and 2.0% of the Single-Family mortgage portfolio as ofDecember 31, 2021 andDecember 31, 2020 , respectively. (2)Represents the exit path the borrower took upon exit from the forbearance plan, which could be during or at the end of the forbearance period. (3)Includes forbearance plans where the borrower brought the mortgage current during forbearance. (4)Primarily includes forbearance plans where the borrowers remained delinquent and the exit paths were not determined at the end of the forbearance periods. Also includes other exit paths such as repayment plans, modifications, and foreclosure alternatives. (5)86% and 83% of loans that received and subsequently exited forbearance plans were current, paid off, or sold as ofDecember 31, 2021 andDecember 31, 2020 , respectively. (6)Based on number of forbearance plans. A loan may be included more than once if it received more than one forbearance plan during the period. Engaging in Loss Mitigation Activities We offer a variety of borrower assistance programs, including refinance programs for certain eligible loans and loan workout activities for struggling borrowers. See MD&A - Our Business Segments - Single-Family for more information on our loss mitigation activities. Relief Refinance Program The following table includes information about the performance of our relief refinance mortgage portfolio. Table 28 - Single-Family Relief Refinance Loans December 31, 2021 December 31, 2020 (Dollars in millions) UPB Loan Count SDQ Rate UPB Loan Count SDQ Rate Above 125% Original LTV$8,084 61,100 2.69 %$11,972 83,439 4.41 % Above 100% to 125% Original LTV 15,538 116,683 2.51 23,064 159,542 4.33 Above 80% to 100% Original LTV 27,035 222,332 2.05 38,994 293,582 3.88 80% and below Original LTV 40,442 460,777 1.36 55,291 575,708 2.70 Total$91,099 860,892 1.79$129,321 1,112,271 3.38 Loan Workout Activities The table below contains credit characteristic data on our single-family modified loans. Table 29 - Credit Characteristics of Single-Family Modified Loans December 31, 2021 December 31, 2020 (Dollars in billions) UPB % of Portfolio CLTV Ratio SDQ Rate UPB % of Portfolio CLTV Ratio SDQ Rate Loan modifications(1) $21.9 1 % 51 % 14.65 % $27.6 1 % 58 % 22.39 %
(1)Primarily includes loans modified through the Freddie Mac Flex Modification
program and excludes certain loans for which we do not control servicing.
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Management's Discussion and Analysis Risk Management
The table below contains information about the payment performance of modified
loans in our Single-Family mortgage portfolio, based on the number of loans that
were current or paid off one year and, if applicable, two years after
modification.
Table 30 - Payment Performance of Single-Family Modified Loans(1)
Quarter of Loan Modification Completion
4Q 2020 3Q 2020 2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019 1Q 2019
Current or paid off 83 % 70 % 64 % 59 % 57 % 57 % 57 % 67 %
one year after modification:
Current or paid off N/A N/A N/A N/A 65 64 61 58
two years after modification:
(1)Primarily includes loans modified through the Freddie Mac Flex Modification
program and excludes certain loans for which we do not control servicing.
Managing Foreclosure and REO Activities
In a foreclosure, we may acquire the underlying property and later sell it, using the proceeds of the sale to reduce our losses. We typically acquire properties as a result of borrower defaults and subsequent foreclosures or deeds in lieu of foreclosure on loans that we own or guarantee. We evaluate the condition of, and market for, newly acquired REO properties, determine if repairs will be performed and manage such repairs, determine occupancy status and whether there are legal or other issues to be addressed, and determine our sale or disposition strategy. When we sell REO properties, we typically provide an initial period where we consider offers by owner occupants and entities engaged in community stabilization activities before offers by investors. We also consider disposition strategies, such as auctions, as appropriate to improve collateral recoveries and/or when traditional sales strategies (i.e., marketing viaMultiple Listing Service and a real estate agent) may not be as effective. We are subject to various state and local laws that affect the foreclosure process. The pace and volume of REO acquisitions are affected not only by the delinquent loan population but also by when we can initiate the foreclosure process and the length of the process. These factors extend the time it takes for loans to be foreclosed upon and for the underlying properties to transition to REO. Our management of REO properties is also governed by federal fair housing/fair lending requirements. We are revising our REO repair program to increase the number of homes we refurbish so as to attract more owner-occupant buyers. Pursuant to FHFA guidance and the CARES Act, we were required to suspend COVID-19-related foreclosures, other than for vacant or abandoned properties, until July 31, 2021, and COVID-19-related REO evictions until September 30, 2021. As a result of these suspensions, the volume of our foreclosure sales decreased from 13,000 in 2019 to 4,000 in 2020 and 3,000 in 2021. After July 31, 2021, servicers implementedCFPB foreclosure regulations issued on June 28, 2021, which established temporary protections for borrowers affected by the COVID-19 pandemic through December 31, 2021. Delays in Foreclosure Process and Average Length of Foreclosure Process Our serious delinquency rates and credit losses may be adversely affected by delays in the foreclosure process, particularly in states where a judicial foreclosure process is required. Foreclosures generally take longer to complete in such states, resulting in concentrations of delinquent loans in those states, as shown in the table below. At December 31, 2021, loans in states with a judicial foreclosure process comprised 37% of our Single-Family mortgage portfolio.FREDDIE MAC | 2021 Form 10-K 78 -------------------------------------------------------------------------------- Management's Discussion and Analysis Risk Management
The table below presents the length of time our loans have been seriously
delinquent, by jurisdiction type.
Table 31 - Seriously Delinquent Single-Family Loans by Jurisdiction
Year Ended December 31,
2021 2020 2019
Aging, by locality Loan Count % Loan Count % Loan Count %
Judicial states
<= 1 year 33,252 23 % 132,103 42 % 26,063 37 %
> 1 year and <= 2 years 30,896 21 9,627 3 7,416 11
> 2 years 7,271 5 6,072 2 5,336 8
Non-judicial states
<= 1 year 37,426 25 158,563 50 24,997 36
> 1 year and <= 2 years 34,975 24 6,659 2 3,928 5
> 2 years 3,402 2 2,283 1 1,981 3
Combined
<= 1 year 70,678 48 290,666 92 51,060 73
> 1 year and <= 2 years 65,871 45 16,286 5 11,344 16
> 2 years 10,673 7 8,355 3 7,317 11
Total 147,222 100 % 315,307 100 % 69,721 100 %
The longer a loan remains delinquent, the greater the associated costs we incur.
Loans that remain delinquent for more than one year, and are not in active
forbearance plans, are more challenging to resolve as many of these borrowers
may not be in contact with the servicer, may not be eligible for loan
modifications, or may determine that it is not economically beneficial for them
to enter into a loan modification due to the amount of costs incurred on their
behalf while the loan was delinquent. We expect the portion of our credit losses
related to loans in states with judicial foreclosure processes will remain high
as loans awaiting court proceedings in those states transition to REO or other
loss events. The number of our single-family loans delinquent for more than one
year increased 211% during 2021.
Our servicing guidelines do not allow initiation of the foreclosure process on a
primary residence until a loan is at least 121 days delinquent, regardless of
where the property is located. However, we evaluate the timeliness of
foreclosure completion by our servicers based on the state where the property is
located. Our servicing guide provides for instances of allowable foreclosure
delays in excess of the expected timelines for specific situations involving
delinquent loans, such as when the borrower files for bankruptcy or appeals a
denial of a loan modification.
The table below presents average completion times for foreclosures of our
single-family loans.
Table 32 - Average Length of Foreclosure Process for Single-Family Loans
Year Ended December 31,
(Average days) 2021 2020 2019
Judicial states
Florida 1,262 1,037 1,143
New Jersey 1,179 983 1,089
New York 1,653 1,800 1,765
All other judicial states 889 669 692
Judicial states, in aggregate 970 802 872
Non-judicial states, in aggregate 827 537 520
Total
916 690 730
As indicated in the table above, the average length of the foreclosure process
for our single-family loans generally increased in 2021 compared to 2020 as
loans impacted by the COVID-19 pandemic and related foreclosure moratorium
awaited court proceedings before transitioning to REO or other loss events.
Our REO inventory continued to decline in 2021, although at a slower pace than
in 2020, primarily due to FHFA guidance and the CARES Act, which required us to
suspend certain foreclosures and evictions due to the COVID-19 pandemic. In
addition to significantly slower new REO inflows, increased buyer demand
resulting from low interest rates and a housing shortage kept REO dispositions
at a steady pace. Foreclosure and eviction suspensions began to end in 3Q 2021,
and our REO inventory began to increase in 4Q 2021. Even in the absence of these
unique circumstances, the decline of our REO inventory continued to be driven in
part by the improved credit quality of our portfolio, effective loss mitigation
and REO disposition strategies, and
FREDDIE MAC | 2021 Form 10-K 79
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Management's Discussion and Analysis Risk Management
a large proportion of property sales to third parties at foreclosure.
Third-party sales at foreclosure auction allow us to avoid the REO property
expenses that we would have otherwise incurred if we held the property in our
REO inventory until disposition.
The table below shows our Single-Family REO activity.
Table 33 - Single-Family REO Activity
Year Ended December 31,
2021 2020 2019
(Dollars in millions) Number of Properties Amount Number of Properties Amount Number of Properties Amount
Beginning balance - REO 1,766 $199 4,989 $565 7,100 $780
Additions 1,693 159 2,361 214 7,910 786
Dispositions (1,844) (179) (5,584) (580) (10,021) (1,001)
Ending balance - REO 1,615 179 1,766 199 4,989 565
Beginning balance, valuation allowance (1) (10) (11)
Change in valuation allowance (2) 9 1
Ending balance, valuation allowance (3) (1) (10)
Ending balance - REO, net $176 $198 $555
Collateral Deficiency Ratios
Collateral deficiency ratios are the percentages of our realized losses when
loans are resolved by the completion of REO dispositions and third-party
foreclosure sales or short sales. Collateral deficiency ratios are calculated as
the amount of our recognized losses divided by the aggregate UPB of the related
loans. The amount of recognized losses is equal to the amount by which the UPB
of the loans exceeds the amount of sales proceeds from disposition of the
properties, net of capitalized repair and selling expenses, if applicable.
Collateral deficiency excludes recoveries from credit enhancements and certain
expenses and costs related to the foreclosure process that are recognized on our
consolidated financial statements, such as property taxes, homeowner's insurance
premiums, property maintenance costs, and the cost of funding the loans after
they are repurchased from the associated security pool. Our overall loss
severity is typically higher than the collateral deficiency when these items are
included.
The table below presents Single-Family collateral deficiency ratios.
Table 34 - Single-Family Collateral Deficiency Ratios
Year Ended December 31,
2021 2020 2019
REO dispositions and third-party foreclosure sales 6.8 % 20.4 % 21.7 %
Short sales 19.1 22.6 24.5
Our collateral deficiency ratios declined during 2021 compared to 2020,
primarily driven by house price appreciation as well as effective cost control
and disposition strategies.
REO Property Status
A significant portion of our REO portfolio is unable to be marketed at any given
time because the properties are occupied, involved in legal matters (e.g.,
bankruptcy or other litigation), or subject to a redemption period, which is a
post-foreclosure period during which borrowers may reclaim a foreclosed
property. Redemption periods increase the average holding period of our
inventory by as much as 10% or more. As of December 31, 2021, approximately 36%
of our REO properties were unable to be marketed because the properties were
occupied, located in states with a redemption period, or subject to other legal
matters. Another 29% of the properties were being prepared for sale (i.e.,
valued, marketing strategies determined, and repaired). As of December 31, 2021,
approximately 22% of our REO properties were listed and available for sale, and
13% of our inventory was pending the settlement of sales. Though it varied
significantly by state, the average holding period of our single-family REO
properties, excluding any redemption period, was 284 days and 250 days for our
REO dispositions during 2021 and 2020, respectively.
FREDDIE MAC | 2021 Form 10-K 80
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Management's Discussion and Analysis Risk Management
Multifamily Mortgage Credit Risk
We manage our exposure to multifamily mortgage credit risk, which is a type of commercial real estate credit risk, using the following principal strategies: n Maintaining policies and procedures for new business activity, including prudent underwriting standards; n Managing our portfolio, including loss mitigation activities; and n Transferring credit risk to third-party investors. Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting Standards We use a prior approval underwriting approach for multifamily loans, completing our own underwriting, credit review, and legal review for each new loan prior to issuing a loan purchase commitment. This helps us maintain credit discipline throughout the process. Our underwriting standards focus on the LTV ratio and DSCR, which estimates a borrower's ability to repay the loan using the secured property's cash flows, after expenses. A higher DSCR indicates lower credit risk. Our standards define maximum LTV ratios and minimum DSCRs that vary based on the characteristics and features of the loan. Loans are generally underwritten with a maximum original LTV ratio of 80% and a DSCR of greater than 1.25, assuming monthly payments that reflect amortization of principal. However, certain loans may have a higher LTV ratio and/or a lower DSCR, typically where this will serve our mission and contribute to achieving our affordable housing goals. Underwriting consideration is also given to other qualitative factors, such as borrower experience, the type of loan, location of the property, and the strength of the local market. Sellers provide certain representations and warranties regarding the loans they sell to us and are required to repurchase loans for which there has been a breach of representation or warranty. These representations and warranties are made as of the date the loan is sold toFreddie Mac , and unlessFreddie Mac agrees to an exception to the representation and warranty at purchase, the repurchase remedy may be claimed upon proof of the breach. However, repurchases of multifamily loans have been rare due to our underwriting approach, which is completed prior to issuance of a loan purchase commitment. Multifamily loans may be amortizing or interest-only (for the full term or a portion thereof) and have a fixed or variable rate of interest. Multifamily loans generally amortize over a thirty-year period, but have shorter contractual maturity terms than single-family loans, typically ranging from five to ten years. As a result, most multifamily loans require a balloon payment at maturity, making a borrower's ability to refinance or pay off the loan at maturity a key attribute. Some borrowers may be unable to refinance during periods of rising interest rates or adverse market conditions, increasing the likelihood of borrower default. Occasionally, we securitize loans or bonds contributed by third parties that are underwritten by us after origination. Prior to securitization, we are not exposed to the credit risk of these underlying loans or bonds. However, as we may guarantee some or all of the securities issued by the trusts used in these transactions, we effectively assume credit risk equal to the guaranteed UPB. Similar to our primary securitizations, these other securitizations generally provide for structural credit enhancements (e.g., subordination or other loss sharing arrangements) that allocate first loss exposure to third parties. Notwithstanding the effects of the COVID-19 pandemic on the multifamily market and broader economic environment, the credit quality of our multifamily new loan purchases and guarantees in 2021 remained consistent with prior periods. The graphs below show the original credit profile of the multifamily loans we purchased or guaranteed.FREDDIE MAC | 2021 Form 10-K 81
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Management's Discussion and Analysis Risk Management
Weighted Average Original LTV Ratio [[Image Removed: fmcc-20211231_g50.jpg]] Weighted Average Original DSCR [[Image Removed: fmcc-20211231_g51.jpg]]
The table below presents the percentage of our Multifamily new business activity
that had certain characteristics that may be considered higher risk.
Table 35 - Percentage of Multifamily New Business Activity With Higher Risk
Characteristics
Year Ended December 31,
2021 2020 2019
Original LTV ratio greater than 80%(1) 1 % 1 % 2 %
Original DSCR less than or equal to 1.10(1) 1
1 1
(1) Shown as a percentage of Multifamily new business activity.
Managing Our Portfolio, Including Loss Mitigation Activities
To help mitigate our potential losses, we generally require sellers to act as the primary servicer for loans they have sold to us, including property monitoring tasks beyond those typically performed by single-family servicers. We typically transfer the role of master servicer in our K Certificate transactions to third parties, while retaining that role in our SB Certificate transactions. Servicers for unsecuritized loans over $1 million must generally provide us with an assessment of the mortgaged property at least annually based on the servicer's analysis of the property as well as the borrower's financial statements. In situations where a borrower or property is in distress, the frequency of communications with the borrower may be increased. We rate servicing performance on a regular basis, and we may conduct on-site reviews to confirm compliance with our standards. Substantially all of our guarantees have first loss credit protection provided by subordination. As a result, our primary credit risk exposure stems from unsecuritized loans and consolidated loans underlying our PC securitizations. By their nature, loans awaiting securitization that we hold for sale remain on our balance sheet for a shorter period than loans we hold for investment. For unsecuritized loans, we may offer a workout option to give the borrower an opportunity to bring the loan current and retain ownership of the property, such as providing a short-term extension of up to 12 months. These arrangements are entered into with the expectation that we will recover our initial investment or minimize our losses. We do not enter into these arrangements in situations where we believe we would experience a loss in the future that is greater than or equal to the loss we would experience if we foreclosed on the property at the time of the agreement. Our multifamily loan modification and other workout activities on unsecuritized loans have been minimal in the last three years. For consolidated loans underlying our PC securitizations, we generally retain full credit risk exposure through our guarantee, although we may subsequently transfer a portion of that credit risk using other CRT products. Various federal, state, and local laws may affect our business processes and financial results. Future changes in these laws may adversely impact our borrowers or make it more difficult and costly for us to manage our credit risk. Rent restrictions and eviction moratoriums may adversely impact the cash flows generated by the underlying properties, while foreclosure moratoriums may limit our ability to pursue certain loss mitigation actions (e.g., foreclosure) upon a borrower default.
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Management's Discussion and Analysis Risk Management
Loans in COVID-19 Related Forbearance Plans Pursuant to FHFA guidance and the CARES Act,Freddie Mac and Fannie Mae offer multifamily borrowers mortgage forbearance with the condition that they suspend all evictions during the forbearance period for renters unable to pay rent. Under our forbearance program, which is available until otherwise instructed by FHFA, multifamily borrowers with a fully performing loan as of February 1, 2020 can defer their loan payments for up to 90 days by showing hardship as a consequence of the COVID-19 pandemic and by gaining lender approval. After the forbearance period, the borrower is required to repay the forborne loan amounts in no more than 12 equal monthly installments. In June 2020, in coordination with FHFA, we announced three supplemental forbearance relief options that servicers may use to assist borrowers that continue to be affected by the COVID-19 pandemic. These supplemental relief options added to the original tenant protections by providing flexibility to tenants to repay past due rent over time and not in a lump sum, and extended the prohibition on charging tenants fees and penalties for past due rent through both the forbearance and repayment periods. The three supplemental relief options include: (1) the option to delay the start of the repayment period following the initial forbearance period, (2) an extension of the repayment period, and (3) an extension of the forbearance period with an optional extended repayment period. In coordination with FHFA, we have implemented numerous protections for tenants as part of our forbearance program. In May 2020, pursuant to FHFA guidance, we introduced an online multifamily property lookup tool to help renters determine if they are temporarily protected from eviction due to nonpayment of rent during the COVID-19 national health emergency. In August 2020, we modified our forbearance program to introduce requirements for borrowers with a forbearance plan to provide notification to tenants of certain protections available to those tenants. In August 2021, we further modified our forbearance program to provide reminders to borrowers of the continuing applicability of the CARES Act requirement that tenants be given at least 30 days' notice to vacate, and to request that borrowers provide their tenants with information on tenant assistance resources. We report multifamily delinquency rates based on the UPB of loans in our Multifamily mortgage portfolio that are two monthly payments or more past due based on the loan's current contractual terms, or in the process of foreclosure, as reported by our servicers. Loans in forbearance are not considered delinquent as long as the borrower is in compliance with the forbearance agreement, including the agreed upon repayment plan. As of December 31, 2021 and December 31, 2020, the UPB of multifamily loans in our COVID-19 forbearance program was $1.7 billion and $7.8 billion, respectively. Since the inception of our COVID-19 forbearance program, 77.0% of loans, based on UPB, that received relief have exited forbearance through full repayment of the forborne amounts, while 17.8% remain active in either their forbearance or repayment periods. The remaining percentage exited our forbearance program through either delinquency or a third-party modification program. Of the loans that remain in our COVID-19 forbearance program, 68.7%, based on UPB, are in securitizations with first loss credit protection provided by subordination. The weighted average subordination level of securitizations with subordination that have loans in forbearance was 14.2% as of December 31, 2021. 13.0% of loans in forbearance are scheduled to mature prior to 2023. Transferring Credit Risk to Third-Party Investors Types of Credit Enhancements In connection with the acquisition, guarantee, and/or securitization of a loan or group of loans, we may obtain various forms of credit protection that reduce our credit risk exposure to the underlying mortgage borrower and reduce our required capital. For example, at the time of loan acquisition or guarantee, we may obtain recourse and/or indemnification protection from our lenders or sellers. After acquisition, we primarily reduce our credit risk exposure to the underlying borrower by using one of our securitization products. The following table summarizes our principal types of credit enhancements. See Our Business Segments - Multifamily - Business Overview - Products and Activities for additional information on our securitization and credit risk transfer products.FREDDIE MAC | 2021 Form 10-K 83
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Management's Discussion and Analysis Risk Management
Category Products CRT Coverage Type Accounting Treatment
Primary securitization products Yes Back-end Guarantee
Other securitization products:
Subordination • Securitizations of purchased collateral Yes Back-end Guarantee/Debt
• Securitizations of collateral contributed by third No Front-end Guarantee
parties
Securitizations in which we issue fully guaranteed Yes Front-end Freestanding
Lender risk-sharing securities and simultaneously enter into a separate
loss sharing agreement.
Insurance/reinsurance MCIP Yes Back-end Freestanding
SCR SCR Trust notes Yes Back-end Freestanding
SCR debt notes Yes Back-end Debt
Multifamily Mortgage Portfolio CRT Issuance
The table below provides the UPB of the mortgage loans covered by CRT
transactions issued during the periods presented as well as the maximum coverage
provided by those transactions.
Table 36 - Multifamily Mortgage Portfolio CRT Issuance
December 31,
2021 2020 2019
(In millions) UPB(1) Maximum Coverage(2) UPB(1) Maximum Coverage(2) UPB(1) Maximum Coverage(2)
Subordination $68,836 $5,079 $66,187 $5,741 $67,648 $8,011
SCR 14,502 827 - - - -
Insurance/reinsurance - - 2,646 65 1,873 84
Lender risk-sharing 1,015 110 1,568 217 1,263 149
Total CRT Issuance $84,353 $6,016 $70,401 $6,023 $70,784 $8,244
(1) Represents the UPB of the assets included in the associated reference pool
or securitization trust, as applicable.
(2) For subordination, represents the UPB of the securities that are held by
third parties at issuance and are subordinate to the securities we guarantee.
For SCR transactions, represents the UPB of securities held by third parties at
issuance. For insurance/reinsurance transactions, represents the aggregate limit
of insurance purchased from third parties at issuance. For lender risk-sharing,
represents the amount of loss recovery that is available subject to the terms of
counterparty agreements at issuance.
Multifamily Mortgage Portfolio Credit Enhancement Coverage Outstanding
While we obtain various forms of credit protection in connection with the
acquisition, guarantee, and/or securitization of a loan or group of loans, our
principal credit enhancement type is subordination, which is created through our
securitization transactions. As of December 31, 2021 and December 31, 2020, our
maximum coverage provided by subordination in nonconsolidated VIEs was
$43.9 billion and $42.8 billion, respectively.
The table below presents the UPB, delinquency rates, and forbearance rates for
both credit-enhanced and non-credit-enhanced loans underlying our Multifamily
mortgage portfolio.
Table 37 - Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our
Multifamily Mortgage Portfolio
December 31,
2021 2020
Forbearance Forbearance
(Dollars in millions) UPB Delinquency Rate Rate(1)(2) UPB Delinquency Rate Rate(1)(2)
Credit-enhanced:
Subordination $360,113 0.08 % 0.33 % $328,897 0.18 % 1.99 %
Other 28,565 0.16 0.77 17,352 0.17 2.73
Total credit-enhanced 388,678 0.08 0.36 346,249 0.18 2.03
Non-credit-enhanced 25,985 0.05 1.25 42,098 0.02 1.83
Total $414,663 0.08 0.42 $388,347 0.16 2.01
(1) Excludes loans granted forbearance outside of our COVID-19 forbearance
program. These loans represented less than 0.1% of the Multifamily mortgage
portfolio as of December 31, 2021 and December 31, 2020.
(2) Forbearance rate includes loans in a forbearance program, including loans
in their repayment period.
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Management's Discussion and Analysis Risk Management
Our securitizations remain our principal risk transfer mechanism. Through
securitizations, we have transferred a substantial amount of the expected and
stressed credit risk on the Multifamily mortgage portfolio, thereby reducing our
overall credit risk exposure and required capital.
The table below provides information on the level of subordination outstanding
on our securitizations with subordination.
Table 38 - Level of Subordination Outstanding
December 31,
2021 2020
(Dollars in millions) UPB Delinquency Rate Forbearance Rate UPB Delinquency Rate Forbearance Rate
Less than 10% $109,174 - % 0.01 % $53,220 0.04 % 0.15 %
10% or greater 250,939 0.11 0.47 275,677 0.20 2.35
Total $360,113 0.08 0.33 $328,897 0.18 1.99
Weighted average subordination
level 12 % 13 %
The increase in the "Less than 10%" level of subordination outstanding in 2021
was driven by ongoing issuances of typical K Certificate securitizations with
lower subordination levels. The lower subordination levels are still expected to
absorb a substantial amount of expected and stressed credit losses. We have not
experienced significant credit losses associated with our guarantees on our
primary securitizations.
In addition to the credit enhancements listed above, we have various other
credit enhancements related to our multifamily unsecuritized loans,
securitizations, and other mortgage-related guarantees, in the form of
collateral posting requirements, pool insurance, bond insurance, loss sharing
agreements, and other similar arrangements that along with the proceeds received
from the sale of the underlying mortgage collateral, are designed to enable us
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 paid under
our guarantee contracts and related recoveries pursuant to these agreements have
not been significant.
The table below contains details on the loans underlying our Multifamily
mortgage portfolio that are not credit enhanced.
Table 39 - Credit Quality of Our Multifamily Mortgage Portfolio Without Credit
Enhancement
December 31,
2021 2020
(Dollars in millions) UPB Delinquency Rate Forbearance Rate UPB Delinquency Rate Forbearance Rate
Unsecuritized loans:
Held-for-sale $12,596 0.07 % 0.48 % $21,794 0.04 % 0.85 %
Held-for-investment 7,180 - - 8,655 - 1.40
Securitized loans 4,097 - 6.42 6,711 - 6.84
Other mortgage-related guarantees 2,112 0.16 - 4,938 - 0.07
Total $25,985 0.05 1.25 $42,098 0.02 1.83
REO Activity
Our REO activity has remained low in the past several years as a result of the
strong property performance of our Multifamily mortgage portfolio. As of
December 31, 2021, and December 31, 2020, we had no REO properties.
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Management's Discussion and Analysis Risk Management
Natural Disaster and Climate Risk Management
Major natural or environmental disasters or other catastrophic events in an area where we own or guarantee mortgage loans, especially in densely populated geographic areas and in high-risk areas, such as coastal areas vulnerable to severe storms and flooding or areas prone to earthquakes or wildfires, expose us to credit risk in a variety of ways, including by damaging properties that secure loans in our mortgage portfolio and by negatively impacting the ability of borrowers to make payments on mortgage loans we own or guarantee. This could increase our serious delinquency rates and average loan loss severity in the affected areas. Historically, our losses from natural or environmental disasters have not been significant. We require all homes underlying single-family mortgages in our portfolio to have homeowner's insurance coverage throughout the life of the loan. In addition, for homes located in SFHAs, we also require flood insurance coverage. Sellers are required to determine whether homes underlying single-family mortgages are located in a SFHA and, if so, to confirm that flood insurance coverage exists at the time the loan is sold toFreddie Mac . Servicers are also required to confirm that flood insurance on these homes is maintained throughout the life of the loan and is in amounts needed to comply with federal government andFreddie Mac requirements. If a borrower fails to obtain and maintain required flood insurance coverage, servicers must directly place such coverage. In addition, our Single-Family segment reviews flood models from other third-party sources to help us assess potential or emerging flood risk exposure. We also have insurance requirements to address catastrophic risks relevant to the characteristics and location of properties securing multifamily loans we purchase. For properties located in SFHAs, we require flood insurance coverage. Furthermore, we require property insurance to cover earthquake damage if required by a seismic risk assessment.Freddie Mac reviews insurance compliance prior to loan purchase. We also review insurance compliance post-purchase and prior to securitization and require our seller/servicers to report details of insurance compliance annually. Our Multifamily segment uses property surveys, virtual maps, and environmental and property condition reports to identify properties that are potentially at higher risk for natural disasters related to flooding and earthquakes.Freddie Mac's loss exposure is further limited by the geographic diversity of our mortgage portfolio, borrower equity in the properties underlying mortgage loans, relief options for borrowers affected by natural disasters, our credit risk transfer products, and community support provided byFEMA and local and federal governments for areas affected by natural disasters. For additional information on the geographic diversity of our mortgage portfolio and our management of Single-Family and Multifamily mortgage credit risk, see Note 16 and MD&A - Risk Management - Credit Risk, respectively. An increased frequency and intensity of major natural disasters may be indicative of the impact of climate change and is expected to persist for the foreseeable future. In addition, significant long-term climate change effects could increase the vulnerability of areas to natural disasters as well as the impact of these events. In 2021, our Climate Advisory Group engaged leadership on climate matters to drive climate-related activities and facilitate cross-divisional collaboration and decision-making. We are also developing a corporate framework for incorporating climate risks into the existing risk management structure to help ensure that climate risk is considered in key business decisions. In December 2021, FHFA instructed us to designate climate change as a priority concern and actively consider its effects in our decision making and, to this end, included climate change as a priority forFreddie Mac in the 2022 Conservatorship Scorecard. We are exploring the role that we, along with FHFA and others, can play in helping to address climate risk. Developing solutions to these challenges is complicated by the range and diversity of affected stakeholders, the possible need for legislative or regulatory action, insurance industry capacity, and the need to balance risk mitigation, affordability, and sustainability. For additional information, see Risk Factors - Credit Risks - We are exposed to increased credit losses and credit-related expenses in the event of a major natural disaster, other catastrophic event, including a pandemic, or significant climate change effects. Counterparty Credit Risk We are exposed to counterparty credit risk as a result of our contracts with sellers and servicers, credit enhancement providers, financial intermediaries, clearinghouses, and other counterparties, as well as through our guarantees of Fannie Mae securities underlying commingled resecuritization transactions. We manage our exposure to counterparty credit risk using the following principal strategies: n Maintaining eligibility standards; n Evaluating creditworthiness and monitoring performance; and n Working with underperforming counterparties and limiting our losses from their nonperformance of obligations, when possible. In the sections below, we discuss our management of counterparty credit risk for each type of counterparty to which we haveFREDDIE MAC | 2021 Form 10-K 86
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Management's Discussion and Analysis Risk Management
significant exposure.
Sellers and Servicers
Overview
In our Single-Family business, we do not originate mortgage loans or have our
own loan servicing operation. Instead, we purchase loans from sellers and engage
servicers, which perform loan servicing functions on our behalf. We establish
underwriting and servicing standards for our sellers and servicers to follow and
have contractual arrangements with them under which they represent and warrant
that the loans they sell to us meet our standards and that they will service
loans in accordance with our standards. If we discover that the representations
or warranties related to a loan were breached (i.e., that contractual standards
were not followed), we can exercise certain contractual remedies to mitigate our
actual or potential credit losses. If our sellers or servicers lack appropriate
controls, experience a failure in their controls, or experience an operational
disruption, including as a result of financial stress, legal or regulatory
actions, or ratings downgrades, we could experience a decline in mortgage
servicing quality and/or be less likely to recover losses through lender
repurchases, recourse agreements, or other credit enhancements, where
applicable.
In our Multifamily business, we are exposed to the risk that multifamily sellers
and servicers could come under financial stress, which could potentially cause
degradation in the quality of the servicing they provide us, including their
monitoring of each property's financial performance and physical condition. This
could also, in certain cases, reduce the likelihood that we could recover losses
through lender repurchases, recourse agreements, or other credit enhancements,
where applicable. This risk primarily relates to multifamily loans that we hold
on our consolidated balance sheets where we retain all of the related credit
risk.
In addition, our Single-Family business is exposed to settlement risk from the
non-performance of sellers and servicers as a result of our forward settlement
loan purchase programs. For additional details, see Financial Intermediaries,
Clearinghouses, and Other Counterparties - Other Counterparties - Forward
Settlement Counterparties.
Maintaining Eligibility Standards
Our eligibility standards for sellers and servicers require the following: a
demonstrated operating history in residential mortgage origination and
servicing, or an eligible agent acceptable to us; a quality control program that
meets our standards; and sufficient net worth, capital, liquidity, and funding
sources, as well as adequate insurance coverage. We and Fannie Mae are
coordinating with FHFA to establish new eligibility rules for sellers and
servicers of single-family mortgages.
Evaluating Counterparty Creditworthiness and Monitoring Performance
We perform ongoing monitoring and review of our exposure to individual sellers
or servicers in accordance with our counterparty credit risk management
practices, including requiring our counterparties to provide regular financial
reporting to us. We also monitor and rate our sellers and servicers' compliance
with our standards and periodically review their operational processes. We may
disqualify or suspend a seller or servicer with or without cause at any time.
Once a seller or servicer is disqualified or suspended, we no longer purchase
loans originated by that counterparty and generally no longer allow that
counterparty to service loans for us, while seeking to transfer servicing of
existing portfolios.
As discussed in more detail in MD&A - Our Business Segments, we acquire a
significant portion of both our single-family and multifamily loan purchase
volume from several large lenders, and a large percentage of our loans are also
serviced by several large servicers.
We have significant exposure to non-depository and smaller depository financial
institutions in our Single-Family business. These institutions may not have the
same financial strength or operational capacity, or be subject to the same level
of regulatory oversight, as large depository institutions.
In recent years, non-depository institutions have made up a greater portion of
mortgage originations while depository institutions have declined as a portion
of the mortgage market. As a result, we are acquiring a greater portion of our
business from non-depository institutions.
The table below summarizes the concentration of our Single-Family mortgage
purchases acquired from non-depository sellers.
Table 40 - Single-Family Mortgage Purchases from Non-Depository Sellers
2021
2020
% of Purchases % of Purchases
Top five non-depository sellers 30 % 26 %
Other non-depository sellers 41 40
Total 71 % 66 %
For our single-family servicing, we utilize both depository institutions and
non-depository institutions. Some of these non-depository institutions service a
large share of our loans.
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Management's Discussion and Analysis Risk Management
The table below summarizes the concentration of non-depository servicers of our
Single-Family mortgage portfolio.
Table 41 - Single-Family Mortgage Portfolio Non-Depository Servicers
December 31, 2021 December 31, 2020
% of Seriously Delinquent % of Seriously Delinquent
% of Portfolio(1) Single-Family Loans % of Portfolio(1) Single-Family Loans
Top five non-depository servicers 19 % 17 % 18 % 17 %
Other non-depository servicers 35 32 30 28
Total 54 % 49 % 48 % 45 %
(1) Excludes loans where we do not exercise control over the associated
servicing.
For our mortgage-related securities, we guarantee the payment of principal and
interest, and when the underlying borrowers do not pay their mortgages, our
Guide requires single-family servicers to advance the missed mortgage interest
payments from their own funds for up to 120 days. After this time, we will make
the missed mortgage principal and interest payments to security holders until
the mortgages are no longer held by the securitization trust.
At the instruction of FHFA, we purchase loans from trusts when they reach 24
months of delinquency, except for loans that meet certain criteria (e.g.,
permanently modified or foreclosure referral), which may be purchased sooner.
Many delinquent loans are purchased from trusts before they reach 24 months of
delinquency under one of the exceptions provided. We must obtain FHFA's approval
to implement changes to our policy to purchase loans from trusts. We implemented
the 24-month policy on January 1, 2021. Prior to that time, in accordance with
FHFA instruction, we generally purchased loans from trusts if they were
delinquent for 120 days, subject to certain exceptions.
In addition to principal and interest payments, borrowers are also responsible
for other expenses such as property taxes and homeowner's insurance premiums.
When borrowers do not pay these expenses, our Guide generally requires
single-family servicers to advance the funds for these expenses in order to
protect or preserve our interest in or legal right to the properties. These
advances are ultimately collectible from the borrowers. If the borrowers
reperform through loan workout activities, the missed payments and incurred
expenses will be collected from the borrowers. Should the borrower not reinstate
the loan, we will reimburse the servicer for the advanced amounts at completion
of foreclosures or loan workout activities.
We monitor and review the financial stability of our non-depository
counterparties. However, if these counterparties experience financial
difficulty, we could see a decline in mortgage servicing quality and/or be less
likely to recover losses.
Working with Underperforming Seller and Servicer Counterparties and Limiting Our
Losses from Their Nonperformance of Obligations, When Possible
Seller and servicer performance is actively managed for both single-family and
multifamily loans. We actively manage the current quality of loan originations
of our largest single-family sellers by performing loan quality control sampling
reviews and communicating loan defect rates and the causes of those defects to
such sellers on a monthly basis. If necessary, we work with these sellers to
develop an appropriate plan of corrective action.
We use a variety of tools and techniques to engage our single-family sellers and
servicers and limit our losses, including the following:
n Repurchases and other remedies - For certain violations of our single-family
selling or servicing policies, we can require the counterparty to repurchase
loans or provide alternative remedies, such as reimbursement of realized losses
or indemnification, and/or suspend or terminate the selling and servicing
relationship. The UPB of loans subject to repurchase requests issued to our
single-family sellers and servicers was $1.3 billion and $0.5 billion at
December 31, 2021 and December 31, 2020, respectively. The increase in
repurchase requests is due to increased loan purchase volume during the year and
a trend of higher defect rates in 2021. See Note 16 for additional information
about loans subject to repurchase requests.
n Incentives and compensatory fees - We pay various incentives to single-family
servicers for completing workouts of problem loans. We also assess compensatory
fees if single-family servicers do not achieve certain benchmarks with respect
to servicing delinquent loans.
n Servicing transfers - From time to time, we may facilitate the transfer of
servicing as a result of poor servicer performance, or for certain groups of
single-family loans that are delinquent or are deemed at risk of default, to
servicers that we believe have the capabilities and resources necessary to
improve the loss mitigation associated with the loans. We may also facilitate
the transfer of servicing on loans at the request of the servicer.
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, including principal and interest payments related
to loans in forbearance. For the majority of our K Certificate transactions, we
utilize one of three large depository institutions as master servicer. For SB
Certificate securitizations and a smaller number of K Certificate
securitizations, 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 multifamily loans
purchased and held in our mortgage-related investments portfolio, the
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Management's Discussion and Analysis Risk Management
primary servicers are not required to advance funds in the event of payment
shortfalls and therefore do not present significant counterparty credit risk
from this source.
Credit Enhancement Providers
Overview
We have exposure to credit enhancement providers through certain credit
enhancements we obtain on single-family loans. If any of our credit enhancement
providers fail to fulfill their obligations, we may not receive reimbursement
for credit losses to which we are contractually entitled pursuant to our credit
enhancements.
With respect to primary mortgage insurers, we currently cannot differentiate
pricing based on counterparty strength or revoke a primary mortgage insurer's
status as an eligible insurer without FHFA approval. Further, we generally do
not select the insurance provider on a specific loan, because the selection is
made by the lender at the time the loan is originated. Accordingly, we are
limited in our ability to manage our concentration risk with respect to primary
mortgage insurers.
As part of our insurance/reinsurance CRT transactions, we regularly obtain
insurance coverage from global insurers and reinsurers. These transactions
incorporate features designed to increase the likelihood that we will recover on
the claims we file with the insurers and reinsurers. In each transaction, we
require the individual insurers and reinsurers to post collateral to cover
portions of their exposure, which helps to promote certainty and timeliness of
claim payment.
While private mortgage insurance companies are required to be monoline (i.e., to
participate solely in the mortgage insurance business, although the holding
company may be a diversified insurer), our insurers and reinsurers generally
participate in multiple types of insurance businesses, which helps to diversify
their risk exposure.
Maintaining Eligibility Standards
We maintain eligibility standards for mortgage insurers and other insurers and
reinsurers. Our eligibility requirements include financial requirements
determined using a risk-based framework and are designed to promote the ability
of mortgage insurers to fulfill their intended role of providing consistent
liquidity throughout the mortgage cycle. Our mortgage insurers are required to
submit audited financial information and certify compliance with the Private
Mortgage Insurer Eligibility Requirements on an annual basis. Our eligibility
requirements also include operational requirements.
Evaluating Counterparty Creditworthiness and Monitoring Our Exposure
We monitor our exposure to individual insurers by performing periodic analysis
of the ability of each insurer to remain solvent under various adverse economic
conditions. Monitoring performance and potentially identifying underperformance
allows us to plan for loss mitigation. 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
December 31, 2021. 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 42 - Single-Family Primary Mortgage Insurers
December 31, 2021
Credit Rating
(In millions) Credit Rating(1) Outlook(1) UPB Coverage(2)
Arch Mortgage Insurance Company A Negative $104,008 $26,045
Mortgage Guaranty Insurance
Corporation (MGIC) BBB+ Stable 103,818 25,928
Radian Guaranty Inc. (Radian) BBB+ Stable 98,884 23,949
Essent Guaranty, Inc. BBB+ Stable 83,077 20,747
Enact(3) BBB Stable 84,462 20,834
National Mortgage Insurance (NMI) BBB Stable 67,603 17,001
Others N/A N/A 3,441 826
Total $545,293 $135,330
(1)Ratings and outlooks are for the corporate entity to which we have the
greatest exposure. Latest rating available as of December 31, 2021. Represents
the lower of S&P and Moody's credit ratings and outlooks stated in terms of the
S&P equivalent.
(2)Coverage amounts exclude coverage primarily related to certain loans for
which we do not control servicing, and may include coverage provided by
consolidated affiliates and subsidiaries of the counterparty.
(3)Enact was previously known as Genworth Mortgage Insurance Corporation .
Although the financial condition of our mortgage insurers improved in recent
years, there is still a risk that some of these counterparties may fail to fully
meet their obligations under a stress economic scenario because they are
monoline entities primarily exposed to mortgage credit risk.
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Management's Discussion and Analysis Risk Management
Except for those insurers under regulatory supervision, which no longer issue
new coverage, we continue to acquire new loans with mortgage insurance from the
mortgage insurers shown in the table above. For more information about
counterparty credit risk associated with mortgage insurers, see Note 16.
The table below displays the concentration of our single-family credit risk
exposure to our ACIS counterparties.
Table 43 - Single-Family ACIS Counterparties
December 31, 2021 December 31, 2020
(Dollars in billions) Maximum Coverage(1) % of Total Maximum Coverage(1) % of Total
Top five ACIS counterparties $6.8 43 % $5.3 48 %
All other ACIS counterparties 8.9 57 5.8 52
Total $15.7 100 % $11.1 100 %
(1)Represents maximum coverage exclusive of the collateral posted to secure the
counterparties' obligations.
As of December 31, 2021 and December 31, 2020, our ACIS counterparties posted
collateral of $4.1 billion and $2.4 billion, respectively. There is a
possibility that, if our ACIS counterparties become insolvent, a third-party
involved in the restructure process could cancel a contract or contracts and
prevent us from accessing collateral for future claims despite current
collateral provisions. We have taken steps to reduce the associated legal risk.
For more information on our single-family CRT transactions, see MD&A - Our
Business Segments - Single-Family - Business Overview - Products and Activities
- CRT Activities, and MD&A - Risk Management - Single-Family Mortgage Credit
Risk - Transferring Credit Risk to Third-Party Investors.
Fannie Mae
We have counterparty credit risk exposure to Fannie Mae through our ability to
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. If Fannie Mae were to fail to make a payment on a
Fannie Mae security that we resecuritized, we would be responsible for making
the payment to the securities holders. Our pricing does not currently reflect
any incremental credit, liquidity, or operational risk associated with our
guarantee of resecuritized Fannie Mae securities. We will be dependent on FHFA,
Fannie Mae, and Treasury (pursuant to Fannie Mae's and our respective Purchase
Agreements with Treasury ) to avoid a liquidity event or default.
For additional information on commingled resecuritizations and the associated
risks, see MD&A - Our Business Segments - Single-Family and Risk Factors.
Financial Intermediaries, Clearinghouses, and Other Counterparties
Derivative Counterparties
We use cleared derivatives, exchange-traded derivatives, OTC derivatives, and
forward sales and purchase commitments to mitigate risk, and are exposed to the
non-performance of each of the related financial intermediaries and
clearinghouses. Our financial intermediaries and clearinghouse credit exposure
relates principally to interest-rate derivative contracts. We maintain internal
standards for approving new derivative counterparties, clearinghouses, and
clearing members.
n Cleared and exchange-traded derivatives - Cleared and exchange-traded
derivatives expose us to counterparty credit risk of central clearinghouses and
our clearing members. The use of cleared and exchange-traded derivatives
mitigates our counterparty credit risk exposure to individual counterparties
because a central counterparty is substituted for individual counterparties, and
changes in the value of open contracts are settled daily via payments made
through the clearinghouse. We are required to post initial and variation margin
to the clearinghouses. The amount of initial margin we must post for cleared and
exchange-traded derivatives may be based, in part, on S&P or Moody's credit
rating of our long-term senior unsecured debt securities. Our obligation to post
margin may increase as a result of the lowering or withdrawal of our credit
rating by S&P or Moody's and/or of changes in the counterparty's exposure
generated by the derivative transactions.
n OTC derivatives - OTC derivatives expose us to counterparty credit risk of
individual counterparties because these transactions are executed and settled
directly between us and each counterparty, exposing us to potential losses if a
counterparty fails to meet its contractual obligations. When a counterparty in
OTC derivatives that is subject to a master netting agreement has a net
obligation to us with a market value above an agreed upon threshold, if any, the
counterparty is obligated to deliver collateral in the form of cash, securities,
or a combination of both, to satisfy its obligation to us under the master
netting agreement. Our OTC derivatives also require us to post collateral to
counterparties in accordance with agreed-upon thresholds, if any, when we are in
a derivative liability position. The collateral posting thresholds we assign to
our OTC counterparties, as well as the ones they assign to us, are generally
based on S&P or Moody's credit rating. The
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Management's Discussion and Analysis Risk Management
lowering or withdrawal of our or our counterparty's credit rating by S&P or Moody's may increase our or our counterparty's obligation to post collateral, depending on the amount of the counterparty's exposure toFreddie Mac with respect to the derivative transactions. Only OTC derivatives transactions executed prior to March 1, 2017 are subject to collateral posting thresholds. Based upon regulations that took effect March 1, 2017, OTC derivative transactions executed or materially amended after that date require posting of variation margin without the application of any thresholds. Our OTC derivative transactions became subject to new initial margin requirements on September 1, 2021. Evaluating Counterparty Creditworthiness and Monitoring Performance Over time, our exposure to derivative counterparties varies depending on changes in fair values, which are affected by changes in interest rates and other factors. Due to risk limits with certain counterparties, we may be forced to execute transactions with lower returns with other counterparties when managing our interest-rate risk. We manage our exposure through master netting and collateral agreements and stress-testing to evaluate potential exposure under possible adverse market scenarios. Collateral is typically transferred within one business day based on the values of the related derivatives. We regularly review the market values of the securities pledged to us, primarily agency andU.S. Treasury securities, to manage our exposure to loss. We conduct additional reviews of our exposure when market conditions dictate or certain events affecting an individual counterparty occur. When non-cash collateral is posted to us, we require collateral in excess of our exposure to satisfy the net obligation to us in accordance with the counterparty agreement. In the event a counterparty defaults, our economic loss may be higher than the uncollateralized exposure of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective fashion (e.g., due to a significant interest rate movement during the period or other factors). We could also incur economic losses if non-cash collateral posted to us by the defaulting counterparty cannot be liquidated at prices that are sufficient to recover the amount of such exposure. The table below compares the gross fair value of our derivative asset positions after counterparty netting with our net exposure to these positions after considering cash and non-cash collateral held. Table 44 - Derivative Counterparty Credit Exposure December 31, 2021 Fair Value - Fair Value - Gain Positions, (Dollars in millions) Number of Counterparties Gain Positions Net of Collateral OTC interest-rate swap and swaption counterparties (by rating): A+, A, or A- 7 $1,233 $20 Cleared and exchange-traded derivatives 2 56 94 Total 9 $1,289 $114 Approximately 98% of our exposure at fair value for OTC interest-rate swap and option-based derivatives, excluding amounts related to our posting of cash collateral in excess of our derivative liability determined at the counterparty level, was collateralized at December 31, 2021. The remaining exposure was primarily due to market movements between the measurement of a derivative at fair value and our receipt of the related collateral, as well as exposure amounts below the then applicable counterparty collateral posting threshold, if any. The concentration of our derivative exposure among our primary OTC derivative counterparties remains high and could further increase. Other Counterparties We enter into other types of transactions in the ordinary course of business that expose us to counterparty credit risk, including those below. An individual counterparty may be included in more than one transaction type below. n Other investments - We are exposed to the non-performance of institutions relating to other investments (including non-mortgage-related securities and cash and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the institution be evaluated using our internal rating model prior to our entering into such transactions. We monitor the financial strength of these institutions and may use collateral maintenance requirements to manage our exposure to individual counterparties. The major financial institutions with which we transact regarding our other investments (including non-mortgage-related securities and cash and cash equivalents) include other GSEs,Treasury , theFederal Reserve Bank of New York , GSD/FICC, highly-rated supranational institutions, depository and non-depository institutions, brokers and dealers, and government money market funds. For more information on our other investments portfolio, see MD&A - Liquidity and Capital Resources. We utilize the GSD/FICC as a clearinghouse to transact many of our trades involving securities purchased under agreements to resell, securities sold under agreements to repurchase, and other non-mortgage related securities. As a clearing member of GSD/FICC, we are required to post initial and variation margin payments and are exposed to the counterparty credit risk of GSD/FICC (including its clearing members). In the event a clearing member fails and causes losses to the GSD/FICC clearing system, we could be subject to the loss of the margin that we have posted to the GSD/ FREDDIE MAC | 2021 Form 10-K 91
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Management's Discussion and Analysis Risk Management
FICC. Moreover, our exposure could exceed that amount, as members are generally required to cover losses caused by defaulting members on a pro rata basis. n Forward settlement counterparties - We are exposed to the non-performance (settlement risk) of counterparties relating to the forward settlement of loans and securities (including agency debt, agency residential mortgage-backed securities, and cash window loans). Our policies require that the counterparty be evaluated using our internal counterparty rating model prior to our entering into such transactions. We monitor the financial strength of these counterparties and may use collateral maintenance requirements or offsetting transactions to manage our exposure to individual counterparties. We also execute forward purchase and sale commitments of mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes and utilize the MBSD/FICC as a clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the counterparty credit risk of the organization. In the event a clearing member fails and causes losses to the MBSD/FICC clearing system, we could be subject to the loss of the margin that we have posted to the MBSD/FICC. Moreover, our exposure could exceed the amount of margin we have posted to the MBSD/FICC, as clearing members are generally required to cover losses caused by defaulting members on a pro rata basis. As of December 31, 2021, the gross fair value of such forward purchase and sale commitments that were in derivative asset positions was $64 million. n Secured lending activities - As part of our other investments portfolio, we enter into secured lending arrangements to provide financing for certainFreddie Mac securities and other assets related to our guarantee businesses. These transactions differ from those we use for liquidity purposes, as the borrowers may not be major financial institutions, potentially exposing us to the institutional credit risk of these institutions. We also provide liquidity to certain of our small and medium-sized lenders through our early funding programs, where we advance funds to lenders for mortgage loans prior to the loans being pooled and securitized. In some cases, the early funded mortgages are ultimately delivered through cash window purchase transactions. Document Custodians We use third-party document custodians to provide loan document certification and custody services for the loans that we purchase and securitize. In many cases, our sellers and servicers or their affiliates also serve as document custodians for us. Our ownership rights to the loans that we own or that back our securitization products could be challenged if a seller or servicer intentionally or negligently pledges, sells, or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial losses to us. When a seller or servicer, or one of its affiliates, acts as a document custodian for us, the risk that our ownership interest in the loans may be adversely affected is increased, particularly in the event the seller or servicer were to become insolvent. To manage these risks, we establish qualifying standards for our document custodians and maintain legal and contractual arrangements that identify our ownership interest in the loans. We also monitor the financial strength of our document custodians on an ongoing basis in accordance with our counterparty credit risk management framework, and we require transfer of documents to a different third-party document custodian if we have concerns about the solvency or competency of the document custodian.
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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. Market risk can adversely affect future cash flows, or economic value, as well as earnings and net worth. The primary sources of interest-rate risk are from our investments in mortgage-related assets, the debt we issue to fund these assets, and our Single-Family guarantees. Our mortgage-related assets are held in both business segments and consist of unsecuritized mortgage loans and mortgage-related securities. Typically, an existing loan or bond investment in our investments portfolio is worth less to an investor when interest rates (yields) rise and worth more when they decline. For a majority of our single-family mortgage-related assets, the borrower has the option to make unscheduled principal payments at any time before maturity without incurring a prepayment penalty. Thus, our mortgage-related asset portfolio is also exposed to uncertainty as to when borrowers will exercise their option and pay the outstanding principal balance of their loans. We face similar (and in most cases directionally opposite) exposure related to unsecured debt. Unsecured debt is typically worth less to an investor when interest rates (yields) rise and worth more when they decline. In addition, we issue debt with embedded options, such as an option to call, which provides us flexibility concerning the timing of our debt maturities. Our Single-Family guarantee market risk exposure results from upfront fees (including buy-downs), buy-ups, and float. Upfront fees are cash we receive at loan acquisition as compensation for our guarantee. From an interest-rate risk standpoint, receiving upfront fees increases risk as the actual prepayment rate of the loans we purchase may be different than our original estimates and may vary based on changes in interest rates. As interest rates decrease, loans typically prepay more quickly, resulting in accelerated recognition of upfront fees in earnings and a higher annualized rate of income. The opposite occurs as interest rates increase, resulting in slower recognition of upfront fees in earnings and a lower annualized rate of income. We incorporate upfront fees in our interest-rate risk metrics by assuming upfront fees are equivalent to the sale of an interest-only security, allowing for modeling and aggregation of the interest-rate exposure of upfront fees with the rest of our interest-rate exposures. Conversely, buy-ups are treated as the purchase of an interest-only security as they represent the excess borrower interest payments remaining from the securitization process that we effectively purchase from the seller. Interest-rate risk related to float arises from the timing differences between the borrowers' principal payments on the loans and the reduction of the security balance. This can lead to significant interest expense if the interest amount paid to a security investor is higher than the reinvestment amount earned by the securitization trust on payments received from borrowers and paid to us as trust management income. In general, as interest rates decrease and prepayments increase, this expense toFreddie Mac increases. Conversely, as interest rates increase and prepayments decrease, this expense toFreddie Mac decreases. We actively manage our economic exposure to interest rate fluctuations. 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. Our models include the possibility of future negative interest rate scenarios and that risk is included in our hedging framework. Management of Market Risk We employ risk management practices that seek to maintain certain interest-rate characteristics of our assets and liabilities within our risk limits through a number of different strategies, including: n Asset selection and structuring, such as acquiring or structuring mortgage-related securities with certain expected prepayment and other characteristics; n Issuance of both callable and non-callable unsecured debt; and n Use of interest-rate derivatives, including swaps, swaptions, and futures. Our use of derivatives is an important part of our strategy to manage interest-rate risk. When deciding to use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty credit risks, and our overall risk management strategy. See MD&A - Risk Management - Counterparty Credit Risk and Risk Factors for more discussion of our market risk exposures, including those related to derivatives, institutional counterparties, and other market risks.FREDDIE MAC | 2021 Form 10-K 93
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Management's Discussion and Analysis Risk Management
Although we have limited ability to manage spread risk, we employ the following
strategies:
n Limiting the size of our assets that are exposed to spread risk;
n Using short-TBA positions to hedge certain assets, primarily loans acquired
through our cash window that are awaiting securitization and portions of our
agency mortgage-related securities portfolio; and
n Entering into certain transactions and spread-related derivatives to offset
our spread exposures.
Interest-Rate Risk
Interest-rate risk is the economic risk related to adverse changes in the level
or volatility of interest rates. A change in the level of interest rates
(represented by a parallel shift of the yield curve, all else constant) exposes
our assets and liabilities to risk, potentially affecting expected future cash
flows and their present values. This is reflected in our PVS-L and duration gap
disclosures. Similarly, changes in the shape or slope of the yield curve (often
reflecting changes in the market's expectation of future interest rates) expose
our assets and liabilities to risk, potentially affecting expected future cash
flows and their present values. This is reflected in our PVS-YC disclosure.
Volatility risk is the risk that changes in the market's expectation of the
magnitude of future variations in interest rates will adversely affect our
economic value. We are exposed to volatility risk in both our mortgage-related
assets and liabilities, especially in instruments with embedded options.
Measurement of Interest-Rate Risk
We calculate our exposure to changes in interest rates for our interest-rate
sensitive assets and liabilities using effective duration and effective
convexity, based on our models.
n Effective duration measures the percentage change in the price of financial
instruments from a 100 basis point change in interest rates. Financial
instruments with positive duration increase in value as interest rates decline.
Conversely, financial instruments with negative duration increase in value as
interest rates rise.
n Effective convexity measures the change in effective duration for a 100 basis
point change in interest rates. Effective duration is not constant over the
entire yield curve and effective convexity measures how effective duration
changes over large changes in interest rates.
Together, effective duration and effective convexity provide a measure of an
instrument's overall price sensitivity to changes in interest rates. We utilize
the concepts of effective duration and effective convexity in calculating our
primary interest-rate risk measures: duration gap and PVS.
n Duration gap - The net effective duration of our overall portfolio of
interest-rate sensitive assets and liabilities is expressed in months as our
duration gap. 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. For example, assets with a
six-month duration and liabilities with a five-month duration would result in a
positive duration gap of one month.
The table below shows various duration gap measurements and the effects that
changes in interest rates would generally have on portfolio value.
Negative Duration Gap Zero Duration Gap
Positive Duration Gap
Asset Duration < Liability
Asset Duration > Liability
Duration Asset Duration = Liability Duration
Duration
Net portfolio will increase in Net portfolio economic value will Net portfolio will increase in
value when interest rates rise be unchanged. The change in the value when interest rates fall
and decrease in value when value of assets from an and decrease in value when
interest rates fall. instantaneous move in interest interest rates rise.
rates, either up or down, would be
expected to be accompanied by an
equal and offsetting change in the
value of liabilities.
We actively measure and manage our duration gap exposure. In addition to
duration gap management, we also measure and manage the price sensitivity of our
portfolio to a number of different specific interest rate changes along the
yield curve. The price sensitivity of an instrument to specific changes in
interest rates is known as the instrument's key rate duration risk. By managing
our duration exposure both in aggregate through duration gap and to specific
changes in interest rates through key rate duration, we expect to limit our
exposure to interest rate changes for a wide range of interest rate yield curve
scenarios.
n PVS - PVS is an estimate of the change in the present value of the cash flows
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's value to a 50 basis point parallel movement in interest rates
(PVS-L) and the other to a nonparallel movement (PVS-YC), resulting from a 25
basis point change in slope of the yield curve. The 50 basis point shift and 25
basis point change in slope of the yield curve used for our PVS measures reflect
reasonably possible near-term changes that we believe provide a meaningful
measure of our
FREDDIE MAC | 2021 Form 10-K 94
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Management's Discussion and Analysis Risk Management
interest-rate risk sensitivity.
To calculate PVS, the interest rate shock is applied to the duration (and
convexity for PVS-L) of all interest-rate sensitive financial instruments. The
resulting change in value for the aggregate portfolio is computed for both the
up-rate and down-rate shock, and whichever produces the more adverse outcome is
the PVS. In cases where both the up rate and down rate shocks result in a
positive effect, the PVS is zero. PVS results are shown on a pre-tax basis.
Interest-Rate Risk Results
Beginning in October 2021, we transitioned from LIBOR to SOFR in measuring the
company's interest-rate risk. As a result, for periods after September 30, 2021,
the measurement of the price sensitivity and valuation of our assets and
liabilities uses the SOFR curve instead of the LIBOR yield curve. This change
did not have a significant impact on measurement of our interest-rate risk or
our financial results.
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 table below also provides PVS-L estimates assuming
an immediate 100 basis point shift in the yield curve. The interest-rate
sensitivity of a mortgage portfolio varies across a wide range of interest
rates.
Table 45 - PVS-YC and PVS-L Results Assuming Shifts of the Yield Curve
December 31, 2021 December 31, 2020
PVS-YC PVS-L PVS-YC PVS-L
(In millions) 25 bps 50 bps 100 bps 25 bps 50 bps 100 bps
Assuming shifts of the yield curve,
(gains) losses on:(1)
Assets:
Investments(2) $368 $3,531 $7,101 ($314) $3,837 $7,979
Guarantees(2)(3) (242) (1,181) (1,830) 193 (1,828) (3,559)
Total assets 126 2,350 5,271 (121) 2,009 4,420
Liabilities 18 (2,385) (4,870) (54) (3,237) (7,503)
Derivatives (144) 94 (217) 185 1,180 2,839
Total $- $59 $184 $10 ($48) ($244)
PVS $- $59 $184 $10 $- $-
(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)Prior periods were revised to conform to the current period presentation as
securitized buy-ups were reclassified from Investments to Guarantees.
(3)Represents the interest-rate risk from our Single-Family guarantees, which
include buy-ups, float, and upfront fees (including buy-downs).
Table 46 - Duration Gap and PVS Results
Year Ended December 31,
2021 2020
(Duration gap in months, dollars in Duration PVS-YC PVS-L Duration PVS-YC PVS-L
millions) Gap 25 bps 50 bps Gap 25 bps 50 bps
Average 0.2 $8 $50 0.5 $11 $73
Minimum (1.2) - - (0.7) - -
Maximum 1.0 45 200 1.5 44 275
Standard deviation 0.4 7 44 0.4 8 68
The disclosure in our Monthly Volume Summary reports, which are available on our
website www.freddiemac.com/investors/financials/monthly-volume-summaries.html,
reflects the average of the daily PVS-L, PVS-YC, and duration gap estimates for
a given reporting period (a month, a quarter, or a year).
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Management's Discussion and Analysis Risk Management
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 yield curve for the periods
presented, would have been higher if we had not used derivatives.
Table 47 - PVS-L Results Before Derivatives and After Derivatives
PVS-L (50 bps)
Before After Effect of
(In millions) Derivatives Derivatives Derivatives
December 31, 2021 (1) $508 $59 ($449)
December 31, 2020 (1) 601 - (601)
(1)Before derivatives, our adverse PVS-L rate movement is -50 bps whereas after
derivatives our adverse PVS-L rate movement is +50 bps.
Spread Risk
Spread risk is the risk that yields in different asset classes may not move together and may adversely affect our economic value. This risk arises principally because interest rates on our mortgage-related investments may not move in tandem with interest rates on our financial liabilities and derivatives, potentially affecting the effectiveness of our hedges. We are exposed to the following types of market spread risk: n Market spread risk arising from mortgage-related investments, including loans and securities, and certain non-mortgage investments; n Market spread risk arising from our use of LIBOR-, SOFR-, andTreasury -based instruments in our risk management activities; and n Market spread risk arising from the difference in time between when we commit to purchase a mortgage loan through our pipeline path and when we either securitize the loan or hedge it by using forward TBA securities or derivatives. During this time, market spreads can widen, causing losses due to changes in fair value. Spread duration measures the percentage change in the price of financial instruments from a change in spread over the benchmark interest rates. Unlike effective duration, spread duration typically only impacts the discounting of an instrument's cash flows, and not the underlying cash flows themselves. This discounting impact creates a measure that is typically positive, where the instrument increases in value as spreads decline and decreases in value as spreads widen. Limitations of Interest-Rate Risk Measures While we believe that PVS and duration gap are useful risk management tools, they should be understood as estimates rather than as precise measurements. Mis-estimation of economic market risk could result in over or under hedging of interest-rate risk, significant economic losses, and an adverse impact on earnings. The limitations of our economic market risk measures include the following: n Our PVS and duration gap estimates are determined using models that involve our judgment of interest-rate and prepayment assumptions. n There could be times when we hedge differently than our model estimates during the period, such as when we are making changes or market updates to these models. n PVS and duration gap do not capture the potential effect of certain other market risks, such as changes in volatility and market spread risk. The effect of these other market risks can be significant. n Our sensitivity analyses for PVS and duration gap contemplate only certain movements in interest rates and are performed at a particular point in time based on the estimated fair value of our existing portfolio. n Although the mortgage-related investments portfolio and Single-Family guarantees are the primary sources of interest-rate risk to the company, other core businesses also contribute to our interest-rate risk and may be managed differently. We have certain assets that have a relatively short holding period. As a result, we may manage the risk of these assets based on their disposition, while our risk measures use long-term cash flows. Hedging these businesses at times requires additional assumptions concerning risk metrics to accommodate changes in pricing that may not be related to the future cash flow of the assets. This could create a perceived risk exposure as the hedged risk may differ from the modeled risk. n The choice of the benchmark rate used to model and hedge our positions is a significant assumption. The effectiveness of our hedges ultimately depends on how closely the different instruments (assets, liabilities, and derivatives) react to the underlying chosen benchmark. In the simplest example, all instruments would have interest-rate risk based on the same underlying benchmark, in our case, the swap rate. In practice, however, different instruments react differently versus the benchmark rate, which creates a market spread between the benchmark rate and the instrument. As the market spreads of these instruments move differently, our ability to predict the behavior of each instrument relative to the others is reduced, potentially affecting the effectiveness of our hedges.FREDDIE MAC | 2021 Form 10-K 96
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Management's Discussion and Analysis Risk Management
n Our reported measurements do not include the sensitivity to interest-rate changes of net worth and the following assets and liabilities: l Credit guarantee activities - We currently do not hedge the interest-rate exposure of our credit guarantees except for the interest-rate exposure related to upfront fees (including buy-downs), buy-ups, float, and STACR debt notes. l Other assets and other liabilities - We do not include other miscellaneous assets and liabilities, primarily deferred tax assets, accounts payable and receivable, and non-cash basis adjustments. Earnings Sensitivity to Market Risk The GAAP accounting treatment for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when interest rates and spreads change. We manage this variability of GAAP earnings, which may not reflect the economics of our business, using fair value hedge accounting. 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, our GAAP financial results are subject to significant earnings variability from period to period based on changes in market conditions. Based upon the composition of our financial assets and liabilities, including derivatives, at December 31, 2021, we would generally recognize fair value losses when interest rates increase if we did not apply fair value hedge accounting. In an effort to reduce our GAAP earnings variability and better align our GAAP results with the economics of our business, we elect hedge accounting for certain single-family mortgage loans and certain debt instruments. We use LIBOR as our benchmark interest rate for our fair value hedge accounting and intend to use SOFR in the future as we transition away from LIBOR. 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 before-tax results of this evaluation are shown in the table below. Table 48 - Earnings Sensitivity to Changes in Interest Rates (In millions) December 31, 2021 December 31, 2020 Interest Rate Scenarios Parallel yield curve shifts: +100 basis points $16.7 $97.9 -100 basis points (16.7) (97.9) Non-parallel yield curve shifts - long-term interest rates: +100 basis points (27.3) (10.9) -100 basis points 27.3 10.9 Non-parallel yield curve shifts - short-term and medium-term interest rates: +100 basis points 44.0 108.7 -100 basis points (44.0) (108.7) 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. In addition, after dedesignation of a fair value hedging relationship, the amount of amortization of the fair value hedging basis adjustment associated with the previously designated hedged item that we recognize in a period may differ from the change in fair value of the previously designated hedging instrument during that period, which may create variability in our earnings. See Risk Factors - Market FREDDIE MAC | 2021 Form 10-K 97
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Management's Discussion and Analysis Risk Management
Risks - Changes in interest rates could negatively affect the fair value of financial assets and liabilities, our results of operations, and our net worth for additional information. Spread-Related Earnings Sensitivity We have limited ability to manage our spread risk exposure and, therefore, the volatility of market spreads may contribute to significant GAAP earnings variability. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen. Certain accounting elections we make, such as election of the fair value option, may affect the amount of spread volatility recognized in our results of operations. Transition from LIBOR In March 2021, theICE Benchmark Administration Limited , the administrator of LIBOR, confirmed its intention to cease publishing the 1-week and 2-monthU.S. Dollar LIBOR setting after December 2021 and to cease publishing the other most widely used tenors ofU.S. Dollar LIBOR after June 2023. TheU.K. Financial Conduct Authority , which regulates LIBOR publication, announced that it would not compel panel bank submissions after those dates.Freddie Mac has exposure to LIBOR, including financial instruments that mature after or extend beyond June 2023. Our exposure arises from floating rate securities that we historically issued, loans and securities we acquired (including loans we subsequently resecuritized), and derivatives we entered into that reference LIBOR. To manage the risk related to the LIBOR transition and prepare for and continue progress towards an orderly transition from LIBOR, we have formed LIBOR transition committees across businesses, functions, and products to develop appropriate strategies to address this transition. Senior management and the committees are working with FHFA on our plans for transition implementation. We also provide ongoing public communications, updates, and education about the status of this transition. TheFederal Reserve Board and theFederal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC), a group of private-market participants, to help ensure a successful transition fromU.S. Dollar LIBOR to a more robust reference rate. TheFederal Reserve Bank of New York began publishing the ARRC's recommended alternative, SOFR, in April 2018. Various industry groups have continued working to implement plans and documentation to facilitate a transition to SOFR as the new market-accepted benchmark. We have been a member of the ARRC since 2018 and have participated in many of its working groups. We support the ARRC's recommendation to replaceU.S. Dollar LIBOR with SOFR and have taken steps to transition to that reference rate. We have issued SOFR-based debt securities and executed SOFR-based securitizations and interest-rate derivatives transactions. We purchase single-family ARMs and multifamily floating-rate loans indexed to SOFR, and effective January 1, 2021, we no longer purchase single-family ARMs and multifamily floating-rate loans tied to LIBOR. Beginning July 1, 2021, we ceased issuing multifamily LIBOR-based securities. We continue to work with our customers, investors, and servicers to prepare to transition existing LIBOR-based ARM products containing ARRC-recommended fallback language to SOFR-based ARM products. In addition, in 4Q 2021, we transitioned from LIBOR to SOFR in measuring our interest-rate risk. For a discussion of the risks related to the LIBOR transition, see Risk Factors - Market Risks - The discontinuance of LIBOR could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. A transition to an alternative reference interest rate could present operational problems and subject us to possible litigation risk. We may be unable to take a consistent approach across our financial products.FREDDIE MAC | 2021 Form 10-K 98
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Management's Discussion and Analysis Risk Management
Operational Risk 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. Operational risk events include breakdowns related to people, process, and/or technology that could result in financial loss, legal actions, regulatory fines, and reputational harm. Operational Risk Management and Risk Profile Our operational risk management methodology includes risk identification, measurement, monitoring, control, and reporting. When operational risk events are identified, our policies require that the events be documented and analyzed to determine whether changes are required in our systems, people, and/or processes to mitigate the risk of future events. In order to evaluate and monitor the risks associated with business processes, each business line periodically completes an assessment using the RCSA methodology. The methodology is designed to identify and assess the business line's exposure to operational risk and determine if action is required to manage the risk to an acceptable level. In addition to the RCSA process, we employ several tools to identify, measure, and monitor operational risks, including loss event data, key risk indicators, root cause analysis, and testing. Our operational risk methodology requires that the primary responsibility for managing both the day-to-day risk and longer-term or emerging risks lies with the business divisions, with independent oversight performed by the second line of defense. We continue to face heightened operational risk and expect the risk to remain elevated for the near term. This elevated risk profile is due to the layering impact of several factors including: legacy systems requiring upgrade for operational resiliency; reliance on manual processes and models; volume and complexity of business initiatives, including new initiatives we are pursuing as required by the Conservatorship Scorecard; external events such as cybersecurity attacks, other security incidents, and third-party failures; and issues requiring remediation. Other factors contributing to our heightened operational risk are discussed in Risk Factors - Operational Risks. We also continue to manage other operational risks, such as compliance risk. While our operational risk profile remains elevated, we are continuing to strengthen our operational control environment by building out our operational risk resources within the first and second lines of defense. Operational Resiliency Risk Operational resiliency risk is the risk of the inability of an organization to quickly adapt to disruptions while maintaining continuous business operations and safeguarding its people, assets, and overall reputation. The inability to manage resiliency risk of our critical processes and supporting technology can negatively impact our ability to meet our business objectives. Our operational resiliency risk has increased as a result of the COVID-19 pandemic and is being managed through operational changes. For select applications, we have successfully completed the infrastructure migration to the cloud, enabling near continuous availability across primary and alternate data centers. However, further improvements are underway to reduce resiliency risk of our business critical processes. These improvements are designed to enable stability of business critical processes and meet the desired recovery time objectives. CSP We continue to make investments to support the ongoing development and maintenance of the CSP. The CSP is owned and operated by CSS, which is jointly owned byFreddie Mac and Fannie Mae. While we exercise influence over CSS through our representation on the CSS Board of Managers, we do not control its day-to-day operations.Freddie Mac , Fannie Mae, FHFA, and CSS continue to work together to monitor the operational effectiveness of the platform. We rely on CSS and the CSP for the operation of many of our single-family securitization activities. Our business activities would be adversely affected and the market forFreddie Mac securities would be disrupted if the CSP were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us. As the CSP has an operational dependency on Fannie Mae to administerFreddie Mac issued commingled securities, an operational failure at Fannie Mae could also adversely impact the ability of CSS to perform its obligations toFreddie Mac . In the event of a CSS operational failure, we may be unable to issue certain new single-family mortgage-related securities, and investors in mortgage-related securities hosted on the CSS platform may experience payment delays. For additional information, see Risk Factors - Operational Risks - A failure in our operational systems or infrastructure, or those of third parties, could impair our ability to provide market liquidity, disrupt our business, damage our reputation, and cause financial losses.FREDDIE MAC | 2021 Form 10-K 99
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Management's Discussion and Analysis Risk Management
Cybersecurity Risk
Our operations rely on the secure, accurate, and timely receipt, storage, transmission, and other processing of confidential and other information (including personal information) in our systems and networks and in those of our customers, counterparties, service providers, and financial institutions. Cybersecurity risks for companies like ours have increased significantly in recent years. Like many companies and government entities, from time to time we have been, and expect to continue to be, the target of attempted cyberattacks and other information security threats, including those from nation-state and nation-state supported actors. We continue to invest in the cybersecurity area to strengthen our capabilities to prevent, detect, respond to and mitigate risk, and protect our systems, networks, and other technology assets against unauthorized attempts to access confidential or other information (including personal information) or to disrupt or degrade our business operations. We have obtained insurance coverage relating to cybersecurity risks. However, this insurance may not be sufficient to provide adequate loss coverage or the insurer may deny coverage for a particular claim, and such insurance may not always be available to us on commercially reasonable terms or at all. Although to date we have not experienced any cyberattacks resulting in significant impact to our company, there is no assurance that our cybersecurity risk management program will prevent cyberattacks from having significant impacts in the future. Insider threats also remain a significant risk as the workforce diversifies to include contractors, remote workers, and part-time employees. Our third-party vendors and their supply chain connections remain another significant risk. While we have strengthened our capabilities over critical third-party monitoring and surveillance with continued focus on detecting deliberate actions such as malicious exploitation, theft or destruction of data (including personal information), or the compromise of our systems or networks, our control over the security posture of our third-party vendors and their supply chain connections remains limited. For additional information, see Risk Factors - Operational Risks - Potential cybersecurity threats are changing rapidly and advancing in sophistication. We may not be able to protect our systems and networks, or the confidentiality of our confidential or other information (including personal information), from cyberattacks and other unauthorized access, disclosure, and disruption. Third-Party Risk Third party risk is the risk of failure of an individual or entity engaged to deliver a product, service, or process to, or on behalf of,Freddie Mac . We rely on third parties, and their supply chains, to support critical processes and core functions, and are exposed to operational risks as a result of this reliance. These third parties could experience, directly or through their supply chains, failures due to process breakdowns, technology outages, cyberattacks and other security incidents, adverse financial conditions, or other disruptions. We are enhancing our enterprise capabilities to manage third-party operational risks. While we continue to mature our program, we may be exposed to associated elevated risks. Our use of third parties increases exposure to data breaches through third parties that access and store our data (including personal information) and their supply chains. Efforts are underway to improve our controls and procedures related to third-party data sharing. We have not experienced significant issues with our third-party vendors, service providers, sellers, servicers, or other counterparties during the COVID-19 pandemic. We have increased our monitoring of third parties with which we do business that we deem to be critical to our operations; however, our control over their security posture remains limited. We are also working to strengthen our processes related to identifying material subcontractors and service providers of the third parties with which we do business and managing the associated operational risk. In addition to credit risk exposure, sellers and servicers expose us to operational risk, including operational resilience, information, and reporting risks. Sellers and servicers also expose us to compliance risk resulting from non-compliance with applicable laws, regulations, and FHFA supervisory or conservator requirements. For additional information on our monitoring of our sellers and servicers and related risks, see MD&A - Risk Management - Counterparty Credit Risk and Risk Factors - Operational Risks - We rely on third parties, or their vendors and other business partners, for certain important functions. Any failures by those parties to deliver products or services, or to manage risks effectively, could disrupt our business operations, or expose us to other operational risks. Model Risk Model risk is the potential for adverse consequences from model errors or decisions based on the incorrect use or application of model outputs. The unprecedented events surrounding the COVID-19 pandemic have 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 projections. These can include, but are not limited to, projections of mortgage rates, house prices, credit defaults, yields, prepayments, and interest rates. In response, we are mitigating 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 policyFREDDIE MAC | 2021 Form 10-K 100
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Management's Discussion and Analysis Risk Management
changes. However, these adjustments incorporate subjectivity and may be based upon judgment. 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 consolidated financial statements. Model development, changes to existing models, and model risks are managed in each business line according to our three-lines-of-defense framework. New model development and changes to existing models undergo a review process. Each business periodically reviews model performance, embedded assumptions, limitations, and modeling techniques, and updates its models as it deems appropriate. ERM independently validates the work done by the business lines (e.g., conducting independent assessments of ongoing monitoring results, model risk ratings, performance monitoring, and reporting against thresholds and alerts). Given the importance and complexity of models in our business, model development may take significant time to complete. Delays in our model development process could affect our ability to make sound business and risk management decisions, and increase our exposure to risk. We have procedures designed to mitigate this risk. For additional information, see 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. Compliance Risk Compliance risk is the risk of non-compliance with applicable laws, regulations, FHFA supervisory or conservator requirements, trustee agreement requirements or ethical standards (collectively, regulatory obligations). We have established a compliance program, leveraging the three lines of defense enterprise risk framework, to oversee and manage compliance risk, including effective challenge of our business areas' compliance with such obligations, as appropriate. We maintain policies and procedures that provide the governance framework for the identification, measurement, monitoring, testing, reporting, and remediation of compliance issues. We have continued to enhance our overall compliance program, including risk assessments, monitoring, testing, and reporting to address regulatory concerns requiring the strengthening of these areas. To the extent additional concerns are identified, we will continue to coordinate with FHFA and our internal auditors to assess the impact and remediate these concerns, as appropriate. For additional information relating to our compliance program, see Risk Factors - Legal and Compliance Risks. Effectiveness of Our Disclosure Controls and Procedures Management, including our CEO and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021. As of that date, we had one material weakness related to conservatorship, which remained unremediated, causing us to conclude that our disclosure controls and procedures were not effective at a reasonable level of assurance. For additional information, see Controls and Procedures.FREDDIE MAC | 2021 Form 10-K 101
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Management's Discussion and Analysis Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES Overview 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. We are required to comply with minimum short-, medium-, and long-term liquidity requirements established by FHFA. These requirements are based on cash flows needed under a stressed scenario that assumes, among other things, that for short- and medium-term debt, we may not have access to funding from the market for an extended period of time and therefore must fund our cash needs utilizing certain liquid assets in our portfolio. The minimum liquidity requirements have four components: n A 30-day cash flow stress test that assumes we continue to provide liquidity to the market while holding a $10 billion buffer above outflows; n A 365-day metric that requires us to hold liquidity to meet our expected cash outflows over 365 days and to continue to provide liquidity to the market under certain stress conditions; n A specified minimum long-term debt to less-liquid asset ratio. Less-liquid assets are those that are not eligible to be pledged as collateral to the FICC; and n A requirement that we fund our assets with liabilities that have a specified minimum term relative to the term of the assets. These updated liquidity requirements have been effective since December 1, 2020 and have resulted in higher funding costs and negatively affected our net interest income during 2021. In addition, they have impacted the size and the allowable investments in our other investments portfolio. Sources and Uses of Funds Our primary source of funding for the assets on our balance sheet is the issuance of debt. In addition to the funding provided by issuing debt, our other sources of funds include: n Principal payments on and sales of securities and loans that we own; n Repurchase transactions; n Interest income on securities and loans that we own; n Guarantee fees (inclusive of fees that we receive at the time we purchase a loan); and n Net worth. We use these sources to fund the assets on our balance sheet. Our primary uses of funds include: n Principal payments upon the maturity, redemption, or repurchase of our debt; n Payments of interest on our debt and other expenses; n Purchases of mortgage loans, including purchases of seriously delinquent or modified loans underlying our securities, mortgage-related securities, and other investments; and n Payments related to derivative contracts and posting or pledging of collateral to third parties in connection with secured financing and daily trade activities. In addition to the sources and uses of cash described above, we are involved in various legal proceedings, including those discussed in Legal Proceedings, which may result in a need to use cash to settle claims or pay certain costs or receipt of cash from settlements. Our securities and other obligations are not guaranteed by theU.S. government and do not constitute a debt or obligation of theU.S. government or any agency or instrumentality thereof, other thanFreddie Mac . We continue to manage our debt issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase Agreement.FREDDIE MAC | 2021 Form 10-K 102
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Management's Discussion and Analysis Liquidity and Capital Resources
Liquidity Management Framework The support provided byTreasury pursuant to the Purchase Agreement enables us to have adequate liquidity to conduct our normal business activities. However, the costs and availability of our debt funding could vary for a number of reasons, including the uncertainty about the future of the GSEs and any future downgrades in our credit ratings or the credit ratings of theU.S. government. We make extensive use of theFederal Reserve's payment system in our business activities. TheFederal Reserve requires that we fully fund our accounts at theFederal Reserve Bank of New York to the extent necessary to cover cash payments on our debt and mortgage-related securities each day, before theFederal Reserve Bank of New York , acting as our fiscal agent, will initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through theFederal Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may cause our account to be overdrawn, potentially resulting in penalties and reputational harm. Maintaining sufficient liquidity is of primary importance to, and a cost of, our business. Under our liquidity management practices and policies, we: n Manage intraday cash needs and provide for the contingency of an unexpected cash demand; n Maintain cash and non-mortgage investments to enable us to meet ongoing cash obligations for a limited period of time, assuming no access to unsecured debt markets; n Maintain unencumbered securities with a value greater than or equal to the largest projected daily cash shortfall for an extended period of time, assuming no access to unsecured debt markets; and n Manage the maturity of our unsecured debt based on our asset profile. To facilitate cash management, we forecast cash outflows and inflows using assumptions and models. These forecasts help us to manage our liabilities with respect to the timing of our cash flows. Differences between actual and forecasted cash flows have resulted in higher costs from issuing a higher amount of debt than needed or unexpectedly needing to issue debt, and may do so in the future. Differences between actual and forecasted cash flows also could result in our account at theFederal Reserve Bank of New York being overdrawn. We maintain daily cash reserves to manage this risk. Liquidity Profile Primary Sources of Liquidity The following table lists the sources of our liquidity, the balances as of the dates shown, and a brief description of their importance toFreddie Mac . Our ability to maintain sufficient liquidity, including by pledging mortgage-related and other securities as collateral to other institutions, could cease or change rapidly and the cost of the available funding could increase significantly due to changes in market interest rates, market confidence, operational risks, and other factors. Table 49 - Liquidity Sources Balance(1) at Balance(1)
at
(In millions) December 31, 2021 December 31, 2020 Description
• Other Investments $80,262 $95,894 • The liquidity and contingency operating
Portfolio - Liquidity and portfolio, included within our other
Contingency Operating investments portfolio, is primarily used for
Portfolio short-term liquidity management.
• Mortgage Loans and 43,393 67,562 • The liquid portion of our mortgage-related
Mortgage- investments portfolio can be pledged or sold
Related Securities - for liquidity purposes. The amount of cash
Liquid we may be able to successfully raise may be
Portion of the Mortgage- substantially less than the balance.
Related Investments
Portfolio
(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.
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Management's Discussion and Analysis Liquidity and Capital Resources
Other Investments Portfolio
The table below summarizes the balances in our other investments portfolio,
which includes the liquidity and contingency operating 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 other investments portfolio
is primarily used for short-term liquidity management, cash and other
investments held by consolidated trusts, and other investments, which include
investments in debt securities used to pledge as collateral, LIHTC partnerships,
and secured lending activities.
Table 50 - Other Investments Portfolio
December 31, 2021 December 31, 2020
Liquidity and Liquidity and
Contingency Contingency
Operating Total Other Investments Operating Total Other Investments
(In millions) Portfolio Custodial Account Other Portfolio(1) Portfolio Custodial Account Other Portfolio(1)
Cash and cash equivalents $8,455 $1,596 $99 $10,150 $6,509 $17,380 $- $23,889
Securities purchased under 43,729 34,000 807 78,536 65,753 38,487 763 105,003
agreements to resell
Non-mortgage related securities 28,078 - 4,695 32,773 23,632 - 3,321 26,953
Other assets - - 8,194 8,194 - - 7,252 7,252
Total $80,262 $35,596 $13,795 $129,653 $95,894 $55,867 $11,336 $163,097
(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 $3.5 billion
and $3.1 billion as of December 31, 2021 and December 31, 2020, respectively.
The liquidity and contingency operating portfolio also included collateral
posted to us in the form of cash primarily by derivatives counterparties of $1.2
billion and $2.8 billion as of December 31, 2021 and December 31, 2020,
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.
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 agency securities.
In addition, we hold certain single-family loans and multifamily loans that
could be securitized and would then be available for sale or for use as
collateral for repurchase agreements. Due to the large size of our portfolio of
liquid assets, the amount of mortgage-related assets that we may successfully
sell or borrow against in the event of a liquidity crisis or significant market
disruption may be substantially less than the amount of mortgage-related assets
we hold. There would likely be insufficient market demand for large amounts of
these assets over a prolonged period of time, which would limit our ability to
sell or borrow against these assets.
We hold other mortgage assets, but given their characteristics, they may not be
available for immediate sale or for use as collateral for repurchase agreements.
These assets principally consist of single-family delinquent and modified loans.
We are subject to limits on the amount of mortgage assets we can sell in any
calendar month without review and approval by FHFA and, if FHFA so determines,
Treasury . See Conservatorship and Related Matters - Limits on Our
Mortgage-Related Investments Portfolio and Indebtedness for additional details.
FREDDIE MAC | 2021 Form 10-K 104
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Management's Discussion and Analysis Liquidity and Capital Resources
Primary Sources of Funding
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third parties or debt ofFreddie Mac . The following table lists the sources and balances of our funding as of the dates shown and a brief description of their importance toFreddie Mac . Table 51 - Funding Sources (In millions) December 31, 2021(1) December 31, 2020(1) Description • Debt of Freddie Mac $177,131 $284,370 • Debt of Freddie Mac is used to fund our business activities. • Debt Securities of 2,803,054 2,308,176 • Debt securities of consolidated trusts are Consolidated Trusts 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 to purchase modified or seriously delinquent loans from the trusts. (1)Represents carrying value of debt balances after consideration of offsetting arrangements. Debt of Freddie Mac We issue debt ofFreddie Mac to fund our operations. Competition for funding can vary with economic, financial market, and regulatory environments. The amount, type, and term of debt issued is based on a variety of factors and is designed to meet our ongoing cash needs and to comply with our Liquidity Management Framework. We may use the following types of products as part of our funding and liquidity management activities: n Securities sold under agreements to repurchase - Collateralized short-term borrowings where we sell securities to a counterparty with an agreement to repurchase those securities at a future date. n Discount notes and Reference Bills® - We issue short-term instruments with maturities of one year or less. These products are generally sold on a discounted basis, paying principal only at maturity. Reference Bills are auctioned to dealers on a regular schedule, while discount notes are issued in response to investor demand and our cash needs. n Medium-term notes - We issue a variety of fixed-rate and variable-rate medium-term notes, including callable and noncallable securities, and zero-coupon securities, with various maturities. n Reference Notes® securities - Reference Notes securities are non-callable fixed-rate securities, which we generally issue with original maturities greater than or equal to two years. As of December 31, 2021, our aggregate indebtedness, calculated as the par value of debt ofFreddie Mac , was $181.7 billion, which was below the current $300.0 billion debt cap limit imposed by the Purchase Agreement. The Purchase Agreement debt limit cap will decrease to $270.0 billion on January 1, 2023 as a result of the decrease in the Mortgage Asset limit under the Purchase Agreement to $225.0 billion on December 31, 2022. Our aggregate indebtedness to meet our funding needs is constrained by the debt cap limit. We disclose the amount of our indebtedness on this basis monthly under the caption "Indebtedness Pursuant to the Purchase Agreement - Total Debt Outstanding" in our Monthly Volume Summary reports, which are available on our website at www.freddiemac.com/investors/financials/monthly-volume-summaries.html. To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities. Changes or perceived changes in the government's support of us could have a severe negative effect on our access to the debt markets and on our debt funding costs. In addition, any change in applicable legislative or regulatory exemptions, including those described in Regulation and Supervision, could adversely affect our access to some debt investors, thereby potentially increasing our debt funding costs. FREDDIE MAC | 2021 Form 10-K 105
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Management's Discussion and Analysis Liquidity and Capital Resources
The table below summarizes the par value and the average rate of debt ofFreddie Mac securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls, and payments for repurchases. We call, exchange, or repurchase our outstanding debt securities from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt securities. Table 52 - Debt of Freddie Mac Activity Year Ended December 31, 2021 2020 (Dollars in millions) Par Value Average Rate(1) Par Value Average Rate(1) Short-term: Beginning balance $4,955 1.31 % $101,237 1.92 % Issuances 22,050 0.04 162,290 1.02 Repayments (24,569) 0.15 (16,608) 1.40 Maturities (2,436) 1.49 (241,964) 1.40 Ending balance - - 4,955 1.31 Securities sold under agreement to repurchase 7,333 (0.10) - - Offsetting arrangements (7,333) - Securities sold under agreement to repurchase, net - - - - Total short-term debt - - 4,955 1.31 Long-term: Beginning balance 281,386 1.12 171,876 2.65 Issuances 1,090 0.60 304,087 0.69 Repayments (58,067) 0.70 (159,945) 1.64 Maturities (42,794) 1.06 (34,632) 1.88 Total long-term debt 181,615 1.11 281,386 1.12 Total debt of Freddie Mac, net $181,615 1.11 % $286,341 1.12 % (1)Average rate is weighted based on par value. Our outstanding total debt ofFreddie Mac balance decreased primarily due to a lower mortgage-related investments portfolio balance and lower cash window purchase volume. In 2020, we replaced a majority of our short-term debt with longer-term callable and non-callable debt to comply with the minimum liquidity requirements established by FHFA. As a result of this funding mix change, our funding cost has increased. Our callable debt provides us with the option to repay the outstanding principal balance of the debt prior to its contractual maturity date. As of December 31, 2021, $62 billion of the outstanding $69 billion of callable debt may be called within one year, not including callable debt due to contractually mature within one year. Maturity and Redemption Dates The following table presents the debt ofFreddie Mac 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 ofFreddie Mac . Table 53 - Maturity and Redemption Dates As of December 31, 2021 (Par value in billions) Contractual Maturity Date Earliest Redemption Date Debt ofFreddie Mac (1): 1 year or less $56 $118 1 year through 2 years 39 36 2 years through 3 years 13 2 3 years through 4 years 35 12 4 years through 5 years 5 - Thereafter 32 12 STACR and SCR debt(2) 9 9 Total debt of Freddie Mac $189 $189 (1)Includes payables related to securities sold under agreements to repurchase that we offset against receivables related to securities purchased under agreements to resell on our consolidated balance sheets, when such amounts meet the conditions for offsetting in the accounting guidance. (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. FREDDIE MAC | 2021 Form 10-K 106
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Management's Discussion and Analysis Liquidity and Capital Resources
Debt Securities of Consolidated Trusts
The largest component of debt on our consolidated balance sheets is debt securities of consolidated trusts, which relates to securitization transactions that we consolidate for accounting purposes. We primarily issue this type of debt by securitizing mortgage loans to fund the majority of our Single-Family activities. When we consolidate securitization trusts, we recognize on our consolidated balance sheets the assets held by the trusts, the majority of which are mortgage loans, and the debt securities issued by the trusts, the majority of which are Level 1 Securitization Products. Debt securities of consolidated trusts represent our liability to third parties that hold beneficial interests in our consolidated securitization trusts. 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. For more information on our purchases of loans from trusts, see Our Business Segments - Single-Family - Business Overview. At December 31, 2021, our estimated net exposure to these debt securities (including the amounts that are due toFreddie Mac for debt securities of consolidated trusts that we purchased) is recognized as the allowance for credit losses on mortgage loans held by consolidated trusts. See Note 6 for details on our allowance for credit losses. The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts. Table 54 - Activity for Debt Securities of Consolidated Trusts Held by Third Parties Year Ended December 31, (In millions) 2021 2020 Beginning balance $2,240,602 $1,854,802 Issuances 1,532,367 1,231,008 Extinguishments (1,040,913) (845,208) Ending balance 2,732,056 2,240,602 Unamortized premiums and discounts 70,998 67,574 Debt securities of consolidated trusts held by third parties $2,803,054 $2,308,176 Credit Ratings Our ability to access the capital markets and other sources of funding, as well as our cost of funds, may be affected by our credit ratings. The table below indicates our credit ratings as of January 31, 2022. Table 55 - Freddie Mac Credit Ratings Nationally Recognized Statistical Rating Organization S&P Moody's Fitch Senior long-term debt AA+ Aaa AAA Short-term debt A-1+ P-1 F1+ Preferred stock(1) D Ca C Outlook Stable Stable Negative (1)Does not include senior preferred stock issued toTreasury . Our credit ratings and outlooks are primarily based on the support we receive fromTreasury and, therefore, are affected by changes in the credit ratings and outlooks of theU.S. government. A security rating is not a recommendation to buy, sell, or hold securities. It may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. FREDDIE MAC | 2021 Form 10-K 107
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Management's Discussion and Analysis Liquidity and Capital Resources
Contractual Obligations
Our contractual obligations affect our liquidity and capital resource needs and primarily include the debt (and associated interest payments) and derivative liabilities recognized on our consolidated balance sheets. We also have contractual obligations recognized in other liabilities on our consolidated balance sheets, including payments to our qualified and non-qualified defined contribution plans and other benefit plans, and future cash payments due under our obligations to make delayed equity contributions to LIHTC partnerships. We also have contractual obligations associated with our commitments to purchase loans and mortgage-related securities from third parties, most of which are accounted for as derivatives, as well as certain off-balance sheet obligations that are legally binding and enforceable, including guarantees, unfunded lending arrangements, and obligations to advance funds upon the occurrence of certain events. See Off-Balance Sheet Arrangements for additional information on the potential effects of our off-balance sheet obligations on our liquidity and capital resources. The amount and timing of payments due related to debt ofFreddie Mac is discussed in Primary Sources of Funding. Most of our purchase commitments are scheduled to occur within the next 12 months. The amount and timing of certain other of our contractual obligations is uncertain, including future payments of principal and interest related to debt securities of consolidated trusts held by third parties, STACR and SCR transactions, cash settlements on derivative agreements not yet accrued, guarantee payments, and commitments to advance funds under certain off-balance sheet arrangements. Off-Balance Sheet Arrangements We enter into certain business arrangements that are not recorded on our consolidated balance sheets or that may be recorded in amounts that differ from the full contractual or notional amount of the transaction that affect our short- and long-term liquidity needs. Certain of these arrangements present credit risk exposure. See MD&A - Risk Management - Credit Risk for additional information on our credit risk exposure on off-balance sheet arrangements. Guarantees We have certain off-balance sheet arrangements related to our securitization and other mortgage-related guarantee activities. Our off-balance sheet arrangements related to securitization activities primarily consist of guaranteed K Certificates and SB Certificates. Our guarantee of these securitization activities and other mortgage-related guarantees may result in liquidity needs to cover potential cash flow shortfalls from borrower defaults. As of December 31, 2021 and December 31, 2020, the outstanding UPB of these guarantees was $366.0 billion and $337.0 billion, respectively. In addition to our securitization and other mortgage-related guarantees, we have certain other guarantees that are accounted for as derivative instruments and are recognized on our consolidated balance sheets at fair value. See Note 9 for additional information on these guarantees, which are not included in the totals above. We have the ability to 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 liquidity exposure as we do not have control over the Fannie Mae collateral. As of December 31, 2021 and December 31, 2020, the total amount of our off-balance sheet exposure related to Fannie Mae securities backing Freddie Mac resecuritization products was approximately $111.2 billion and $85.8 billion, respectively. Commitments We have entered into certain commitments, including commitments to purchase securities under agreements to resell, commitments to purchase multifamily loans, and unfunded multifamily lending arrangements, that are not recorded on our consolidated balance sheets. As of December 31, 2021 and December 31, 2020, these commitments totaled $16.5 billion and $59.2 billion in notional amount, respectively. We have elected the fair value option for certain of our commitments to purchase multifamily loans. We also have entered into other commitments to purchase or sell mortgage loans or mortgage-related securities that are accounted for as derivative instruments. These commitments are recognized on our consolidated balance sheets at fair value and are not included in the totals above. See Note 9 for additional information on these commitments. In addition, in connection with certain of our multifamily other mortgage-related guarantee arrangements and other securitization products, we have provided commitments to advance funds, commonly referred to as "liquidity guarantees," which were $4.2 billion and $4.8 billion at December 31, 2021 and December 31, 2020, respectively. These guarantees require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. At both December 31, 2021 and December 31, 2020, there were no liquidity guarantee advances outstanding. FREDDIE MAC | 2021 Form 10-K 108
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Management's Discussion and Analysis Liquidity and Capital Resources
Cash Flows
n 2021 vs. 2020 - Cash and cash equivalents (including restricted cash and cash equivalents) decreased by $13.7 billion from $23.9 billion as of December 31, 2020 to $10.2 billion as of December 31, 2021, primarily due to a decrease in trust cash driven by lower loan prepayments and a decline in our operating cash due to a lower cash window purchase forecast and continued funding of maturities, calls, and buybacks of debt of Freddie Mac without issuing new debt. n 2020 vs. 2019 - Cash and cash equivalents (including restricted cash and cash equivalents) increased by $18.7 billion from $5.2 billion as of December 31, 2019 to $23.9 billion as of December 31, 2020, primarily due to higher loan prepayments and our transition to comply with updated minimum liquidity requirements established by FHFA. Capital Resources Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. We entered into the Purchase Agreement with Treasury, under which we issued to Treasury both senior preferred stock and a warrant to purchase 79.9% of our common stock outstanding on a fully diluted basis on the date of exercise. Under the Purchase Agreement, Treasury made a commitment to provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. Obtaining equity funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to avoid being placed into receivership by FHFA and to maintain the confidence of the debt markets as a very high-quality credit, upon which our business model is dependent. The amount of available funding remaining under the Purchase Agreement was $140.2 billion as of December 31, 2021, which will be reduced by any future draws. In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk and to make business decisions, while in conservatorship, utilizing a risk-based CCF, a capital system with detailed formulae provided by FHFA. In December 2020, FHFA published a final rule that establishes the ERCF as a new enterprise regulatory capital framework for Freddie Mac and Fannie Mae. The ERCF, which went into effect in February 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order. Pursuant to the final rule, we are required to comply with the regulatory capital reporting requirements under the ERCF in 2022, with our initial quarterly capital report due by May 30, 2022, 60 days after the last day of the first quarter. Pursuant to the Purchase Agreement, we will not have a dividend requirement to Treasury on the senior preferred stock until our Net Worth Amount exceeds the amount of adjusted total capital necessary to meet capital requirements and buffers set forth in the ERCF. Based on our Net Worth Amount of $28.0 billion as of December 31, 2021, no dividend is payable to Treasury for the quarter ended December 31, 2021. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference on the senior preferred stock. Our cumulative senior preferred stock dividend payments totaled $119.7 billion as of December 31, 2021. The aggregate liquidation preference of the senior preferred stock owned by Treasury was $98.0 billion as of December 31, 2021. The aggregate liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter through the Capital Reserve End Date, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. In addition, to the extent that we draw additional funds in the future, the aggregate liquidation preference will increase by the amount of those draws. For additional information on the Purchase Agreement, warrant and senior preferred stock, including our dividend requirement on the senior preferred stock and the commitment fee to be paid to Treasury after the Capital Reserve End Date, see MD&A - Conservatorship and Related Matters, Note 2, and Note 12. FREDDIE MAC | 2021 Form 10-K 109
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Management's Discussion and Analysis Liquidity and Capital Resources
We invest our retained earnings primarily in short-term investments. The table
below presents activity related to our net worth.
Table 56 - Net Worth Activity
Year Ended December 31,
(In millions) 2021 2020 2019
Ending balance, December 31 $16,413 $9,122 $4,477
Cumulative-effect adjustment (1) - (240) -
Beginning balance, January 1 16,413 8,882 4,477
Comprehensive income (loss) 11,620 7,531 7,787
Capital draws from Treasury - - -
Senior preferred stock dividends declared - - (3,142)
Total equity / net worth $28,033 $16,413 $9,122
Aggregate draws under Purchase Agreement $71,648 $71,648 $71,648
Aggregate cash dividends paid to Treasury 119,680 119,680 119,680
Liquidation preference of the senior preferred stock 97,959 86,539 79,322
(1)Cumulative-effect adjustment related to our adoption of CECL on January 1,
2020.
FREDDIE MAC | 2021 Form 10-K 110
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Management's Discussion and Analysis Conservatorship and Related Matters
CONSERVATORSHIP AND RELATED MATTERS Supervision of Our Company During Conservatorship FHFA has broad powers when acting as our Conservator. Upon its appointment, the Conservator immediately succeeded to all rights, titles, powers, and privileges of Freddie Mac and of any stockholder, officer, or director of Freddie Mac with respect to Freddie Mac 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. Under the GSE Act, the Conservator may take any actions it determines are necessary to put us in a safe and solvent condition and appropriate to carry on our business and preserve and conserve our assets and property. The Conservator's powers include the ability to transfer or sell any of our assets or liabilities, subject to certain limitations and post-transfer notice provisions, without any approval, assignment of rights or consent of any party. However, the GSE Act provides that loans and mortgage-related assets that have been transferred to a Freddie Mac securitization trust must be held by the Conservator for the beneficial owners of the trust and cannot be used to satisfy our general creditors. We conduct our business subject to the direction of FHFA as our Conservator. The Conservator has authorized the Board of Directors to oversee management's conduct of our business operations so we can operate in the ordinary course. The directors serve on behalf of, exercise authority as provided by, and owe their fiduciary duties of care and loyalty to the Conservator. The Conservator retains the authority to withdraw or revise the authority it has provided at any time. The Conservator also retains certain significant authorities for itself and has not provided them to the Board of Directors. The Conservator continues to provide strategic direction for the company and directs the efforts of the Board of Directors and management to implement its strategy. Many management decisions are subject to review and/or approval by FHFA and management frequently receives direction from FHFA on various matters involving day-to-day operations. Our current business objectives reflect direction we have received from the Conservator, including in the Conservatorship Scorecards. At the direction of the Conservator, we have made changes to certain business practices that are designed to provide support for the mortgage market in a manner that serves our mission and other non-financial objectives. Given our mission and the important role our Conservator has placed on Freddie Mac in addressing housing and mortgage market conditions, we sometimes take actions that could have a negative impact on our business, operating results, or financial condition. Certain of these actions are intended to help homeowners and the mortgage market. Purchase Agreement, Warrant, and Senior Preferred Stock In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury. Under the Purchase Agreement, we issued to Treasury both senior preferred stock and a warrant to purchase common stock. The Purchase Agreement, warrant, and senior preferred stock do not contain any provisions causing them to terminate or cease to exist upon the termination of conservatorship. The conservatorship, Purchase Agreement, warrant, and senior preferred stock materially limit the rights of our common and preferred stockholders (other than Treasury). Pursuant to the Purchase Agreement, which we entered into through FHFA, in its capacity as Conservator, on September 7, 2008, we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock with an initial liquidation preference of $1 billion and a warrant to purchase, for a nominal price, shares of our common stock equal to 79.9% of the total number of shares outstanding. The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of Treasury's commitment to provide funding to us under the Purchase Agreement. We did not receive any cash proceeds from Treasury as a result of issuing the senior preferred stock or the warrant. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited, and we will not be able to do so for the foreseeable future, if at all. The Purchase Agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected on our GAAP consolidated balance sheet for the applicable fiscal quarter, provided that the aggregate amount funded under the Purchase Agreement may not exceed Treasury's commitment. The amount of any draw will be added to the aggregate liquidation preference of the senior preferred stock and will reduce the amount of available funding remaining. Deficits in our net worth have made it necessary for us to make substantial draws on Treasury's funding commitment under the Purchase Agreement, with the majority of these draws occurring from 2008 to 2011. In addition, increases in our Net Worth Amount since December 2017 have been, or will be, added to the aggregate liquidation preference of the senior preferred stock. The liquidation preference of the senior preferred stock will continue to be increased at the end of each fiscal quarter through the Capital Reserve End Date, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. As of December 31, 2021, the aggregate liquidation preference of the senior preferred stock was $98.0 billion, and the amount of available funding remaining under the Purchase Agreement was $140.2 billion, which will be reduced by any future draws. Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative 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 FREDDIE MAC | 2021 Form 10-K 111
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Management's Discussion and Analysis Conservatorship and Related Matters
by, and paid at the direction of, the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board of Directors. We have had a net worth sweep dividend requirement to Treasury on the senior preferred stock since the first quarter of 2013, which was implemented pursuant to 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. The applicable Capital Reserve Amount is currently the amount of adjusted total capital necessary to meet capital requirements and buffers set forth in the ERCF. This Capital Reserve Amount will remain in effect until the last day of the second consecutive fiscal quarter during which we have reached and maintained such level of capital (the Capital Reserve End Date). As a result, we will not have another dividend requirement on the senior preferred stock until we have built sufficient capital to meet the capital requirements and buffers set forth in the ERCF. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period until the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and the applicable Capital Reserve Amount would thereafter be zero. After the Capital Reserve End Date, our dividend requirement to Treasury on the senior preferred stock will be an amount equal to the lesser of (1) 10% per annum on the then-current liquidation preference of the senior preferred stock and (2) a quarterly amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. As a result, after the Capital Reserve End Date, all or significant portions of our future profits will be distributed to Treasury, and the holders of our common stock and non-senior preferred stock will not receive benefits that could otherwise flow from such profits. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period after the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference. Immediately following such failure and for all dividend periods thereafter until the dividend period following the date on which we shall have paid in cash full cumulative dividends, the dividend amount will be 12% per annum on the then-current liquidation preference of the senior preferred stock. This would not affect our ability to draw funds from Treasury under the Purchase Agreement. The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. We are not permitted to redeem the senior preferred stock prior to the termination of Treasury's funding commitment under the Purchase Agreement. We are also required under the Purchase Agreement to pay a quarterly commitment fee to Treasury, which was to be determined in an amount mutually agreed to by us and Treasury with reference to the market value of Treasury's funding commitment as then in effect. However, this commitment fee requirement has been suspended since January 1, 2013 and until the Capital Reserve End Date. We and Treasury, in consultation with the Chairman of the Federal Reserve, will mutually agree on a periodic commitment fee that we will pay for Treasury's remaining funding commitment with respect to the five-year period commencing on the first January 1 after the Capital Reserve End Date. The Purchase Agreement and warrant also contain covenants that significantly restrict our business and capital activities. For example, the Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without the prior written consent of Treasury: n Pay dividends on our equity securities, other than the senior preferred stock or warrant, or repurchase our equity securities; n Issue any additional equity securities, except in limited instances; n Exit from conservatorship, except in limited circumstances; n Sell, transfer, lease, or otherwise dispose of any assets, other than dispositions for fair market value in the ordinary course of business, consistent with past practices, and in other limited circumstances; and n Issue any subordinated debt. In addition, the Purchase Agreement requires us to comply with the ERCF as published in December 2020, disregarding any subsequent amendment or other modification to that rule. For more information on the Purchase Agreement covenants, see Note 2, and for related risks, see Risk Factors - Conservatorship and Related Matters. Limits on Our Mortgage-Related Investments Portfolio and Indebtedness Our ability to acquire and sell mortgage assets is significantly constrained by limitations under the Purchase Agreement and other limitations imposed by FHFA: n Since 2014, we have been managing the mortgage-related investments portfolio so that the UPB of our mortgage assets does not exceed 90% of the cap under the Purchase Agreement, which reached $250 billion as of December 31, 2018. In February 2019, FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times. In November 2019, FHFA instructed 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. The Purchase Agreement cap on our mortgage-related investments portfolio will be lowered from $250 billion to $225 billion at the end of 2022. Since January 2021, the calculation of mortgage assets FREDDIE MAC | 2021 Form 10-K 112
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Management's Discussion and Analysis Conservatorship and Related Matters
subject to the Purchase Agreement cap also includes 10% of the notional value of
interest-only securities. Our mortgage-related investments portfolio was $123.5
billion as of December 31, 2021, including $12.5 billion representing 10% of the
notional amount of the interest-only securities we held as of December 31, 2021.
n With respect to the composition of our mortgage-related investments
portfolio, FHFA instructed us to: (1) reduce the amount of agency MBS we hold to
no more than $50 billion by June 30, 2021 and no more than $20 billion by June
30, 2022, with all dollar caps to be based on UPB; and (2) reduce the UPB of our
existing portfolio of collateralized mortgage obligations (CMOs), which are also
sometimes referred to as REMICs, to zero by June 30, 2021. We will have a
holding period limit to sell any new CMO tranches created but not sold at
issuance. CMOs do not include tranches initially retained from reperforming
loans senior subordinate securitization structures.
n Under the Purchase Agreement, we may not incur indebtedness that would result
in the par value of our aggregate indebtedness exceeding 120% of the amount of
mortgage assets we are permitted to own on December 31 of the immediately
preceding calendar year. Our debt cap under the Purchase Agreement has been $300
billion since January 1, 2019. As of December 31, 2021, our aggregate
indebtedness for purposes of the debt cap was $181.7 billion. Our debt cap under
the Purchase Agreement will decrease to $270 billion on January 1, 2023 as a
result of the decrease in the mortgage assets limit under the Purchase Agreement
to $225 billion on December 31, 2022.
n FHFA has indicated that any portfolio sales should be commercially reasonable
transactions that consider impacts to the market, borrowers, and neighborhood
stability.
Our decisions with respect to managing the mortgage-related investments
portfolio affect our business segments. In order to achieve all of our portfolio
goals, it is possible that we may forgo economic opportunities in one business
segment in order to pursue opportunities in the other business segment.
Our results against the limits imposed on our mortgage-related investments
portfolio and aggregate indebtedness for the year ended December 31, 2021 are
shown below.
Mortgage Assets(1) as of December 31,
(In billions)
[[Image Removed: fmcc-20211231_g52.jpg]]
(1) 2021 and 2020 include 10% of the notional value of certain interest-only
securities owned by Freddie Mac. 2020 has been revised to conform to the current
presentation.
Indebtedness as of December 31,
(In billions)
[[Image Removed: fmcc-20211231_g53.jpg]]
FREDDIE MAC | 2021 Form 10-K 113
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Management's Discussion and Analysis Conservatorship and Related Matters
Limits on Our Secondary Market Activities and Single-Family Loan Acquisitions The Purchase Agreement restricts our secondary market activities and single-family loan acquisitions: n Secondary Market Activities - We cannot vary the pricing or any other term of the acquisition of a single-family loan based on the size, charter type, or volume of business of the seller of the loan and are required to: l Offer to purchase loans for cash consideration and operate this cash window with non-discriminatory pricing; and l Comply with directives, regulations, restrictions, or other requirements prescribed by FHFA related to equitable secondary market access by community lenders. n Single-Family Loan Acquisitions - We are required to limit our acquisition of certain single-family mortgage loans. l Subject to such exceptions as FHFA may prescribe to permit us to acquire single-family mortgage loans that are currently eligible for acquisition, we were required to implement a program reasonably designed to ensure that each single-family mortgage is: -A qualified mortgage; -Expressly exempt from the CFPB's ability-to-repay requirements; -Secured by an investment property, subject to the related Purchase Agreement restriction described below, which has been suspended; -A refinancing with streamlined underwriting for high LTV ratios; -A loan with temporary underwriting flexibilities due to exigent circumstances, as determined in consultation with FHFA; or -Secured by manufactured housing. The Purchase Agreement also includes restrictions on the volume of our cash window activities, acquisitions of single-family loans with certain LTV, DTI, and credit score characteristics at origination, and acquisitions of single-family loans secured by second homes or investment properties, but these requirements have been suspended until the later of September 14, 2022 and six months after Treasury so notifies Freddie Mac. For additional information on the suspended Purchase Agreement requirements, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments - September 2021 Letter Agreement with Treasury. We will continue to manage these activities in accordance with our risk limits and guidance from FHFA. Limits on Our Multifamily Loan Purchase Activity The amount and type of multifamily loans that we purchase are significantly influenced by the loan purchase cap established by FHFA for our multifamily business. In October 2021, FHFA announced that the 2022 loan purchase cap for the multifamily business will be $78 billion, up from $70 billion in 2021. FHFA will continue to require at least 50% of the Multifamily new business activity to be mission-driven, affordable housing. FHFA has changed certain definitions of mission-driven, affordable housing and, in 2022, such definitions will include loans on affordable units in cost-burdened renter markets and loans to finance energy and water efficiency improvements with units affordable to renters at or below 60% of AMI. In 2022, FHFA also will require at least 25% of the Multifamily new business activity to be affordable to renters at or below 60% of AMI, up from 20% in 2021. The loan purchase cap is subject to reassessment by FHFA throughout the year to determine whether an increase in the cap is appropriate based on a stronger than expected overall market. To prevent market disruption, if FHFA determines the actual size of the market is smaller than was initially projected, FHFA will not reduce the cap. For additional information on the Multifamily loan purchase cap, see MD&A - Our Business Segments - Multifamily - Products and Activities - Loan Purchase. The Purchase Agreement also includes restrictions on our multifamily loan purchase activity, but these Purchase Agreement restrictions have been suspended until the later of September 14, 2022 and six months after Treasury so notifies Freddie Mac. For additional information, see MD&A - Regulation and Supervision - Legislative and Regulatory Developments - September 2021 Letter Agreement with Treasury. FREDDIE MAC | 2021 Form 10-K 114
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Management's Discussion and Analysis Conservatorship and Related Matters
FHFA's Strategic Plan: Fiscal Years 2021-2024 and Conservatorship Scorecard In October 2020, FHFA released its Strategic Plan for fiscal years 2021-2024. This Strategic Plan establishes the goals needed for FHFA to fulfill its statutory duties. This Strategic Plan formalizes the direction of FHFA, and its regulated entities, by updating FHFA's mission, vision, and values, and by establishing three new strategic goals: n Ensuring safe and sound regulated entities through world-class supervision; n Fostering competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets; and n Positioning FHFA as a model of operational excellence by strengthening its workforce and infrastructure. In February 2021, FHFA released the 2021 Conservatorship Scorecard. The purpose of this Scorecard is to ensure that the Enterprises and CSS focus on their core mission responsibilities, operate in a manner appropriate for entities in conservatorship with limited capital buffers, and undertake those activities necessary to support an exit from conservatorship. In August 2021, FHFA removed the following two objectives from the 2021 Conservatorship Scorecard: (1) Roadmap Toward End of Conservatorship: Continue to provide support to FHFA as needed to develop a roadmap with milestones for exiting conservatorship, including the development of any capital restoration plans, and (2) Housing Market Reform and Alignment: Conduct such activities as directed by FHFA related to housing market reform. For more information on the 2021 Conservatorship Scorecard, see Executive Compensation - CD&A - Determination of 2021 At-Risk Deferred Salary - At-Risk Deferred Salary Based on Conservatorship Scorecard Performance. In November 2021, FHFA released the 2022 Conservatorship Scorecard. The purpose of this Scorecard is to hold the Enterprises and CSS accountable for fulfilling their core mission requirements by promoting sustainable and equitable access to affordable housing and operating in a safe and sound manner. For more information on the 2022 Conservatorship Scorecard, see our Current Report on Form 8-K filed on November 18, 2021. For more information on the conservatorship and related matters, see Regulation and Supervision, Risk Factors - Conservatorship and Related Matters, Note 2, Note 12, and Directors, Corporate Governance, and Executive Officers - Corporate Governance - Board of Directors and Board Committee Information - Authority of the Board of Directors and Board Committees. Equitable Housing Finance Plan On September 7, 2021, FHFA announced that Freddie Mac and Fannie Mae will be required to submit equitable housing finance plans to FHFA. These plans will cover a three-year period and will be updated annually. The plans are intended to identify and address barriers to sustainable housing opportunities, including the Enterprises' goals and action plans to advance equity in housing finance for the next three years. FHFA will also require the Enterprises to submit annual progress reports on the actions undertaken during the prior year to implement their plans. In December 2021, we submitted our 2022-2024 Equitable Housing Finance Plan to FHFA. FREDDIE MAC | 2021 Form 10-K 115
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Management's Discussion and Analysis Regulation and Supervision
REGULATION AND SUPERVISION In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our Charter and the GSE Act and to certain regulation by other government agencies. Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are not directly subject to such agencies' regulation or oversight, such as regulations that modify requirements applicable to the purchase or servicing of mortgages. Federal Housing Finance Agency FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac, Fannie Mae, and the FHLBs. Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some respects broader than, that of the federal banking agencies. FHFA is responsible for implementing the various provisions of the GSE Act that were added by the Reform Act. Receivership and Resolution Planning Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than our obligations or we have not been paying our debts as they become due, in each case for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has also advised us that, if, during such a 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination. In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent. Certain aspects of conservatorship and receivership operations of Freddie Mac, Fannie Mae, and the FHLBs are addressed in an FHFA rule on conservatorship and receivership. Among other provisions, FHFA generally will not permit payment of securities litigation claims during conservatorship, and claims by current or former shareholders arising as a result of their status as shareholders would receive the lowest priority of claim in receivership. In addition, administrative expenses of the conservatorship will be deemed to be administrative expenses of receivership and capital distributions may not be made during conservatorship, except as specified in the rule. In May 2021, FHFA published a final rule that requires Freddie Mac and Fannie Mae to develop credible resolution plans, also known as living wills. The purpose of the rule is to require each Enterprise to develop a resolution plan to facilitate its rapid and orderly resolution under FHFA's receivership authority in a manner that: (1) minimizes disruption in the national housing finance markets by providing for the continued operation of the core business lines of the Enterprise in receivership by a newly constituted LLRE; (2) preserves the value of the Enterprise's franchise and assets; (3) facilitates the division of assets and liabilities between the LLRE and the receivership estate; (4) ensures that investors in mortgage-backed securities guaranteed by the Enterprises and in Enterprise unsecured debt bear losses in accordance with the priority of payments established in the GSE Act, while minimizing unnecessary losses and costs to these investors; and (5) fosters market discipline by making clear that no extraordinary government support will be available to indemnify investors against losses or fund the resolution of an Enterprise. The rule also addresses procedural requirements related to the frequency and timing for submission of initial and subsequent resolution plans to FHFA. The rule provides a set of required and prohibited assumptions when developing the resolution plans, including assuming that receivership may occur under the severely adverse economic conditions provided by FHFA in conjunction with any stress testing required or another scenario provided by FHFA, not assuming the provision or continuation of extraordinary government support (including support under the Purchase Agreement), and reflecting statutory provisions that obligations and securities of the Enterprises are not guaranteed by the United States and do not constitute a debt or obligation of the United States. Our first resolution plan must be submitted to FHFA in April 2023. The appointment of FHFA as receiver would immediately terminate the conservatorship. In the event of receivership, the GSE Act requires FHFA, as the receiver, to organize a LLRE with respect to Freddie Mac. Among other requirements, the GSE Act provides that this LLRE: n Would succeed to Freddie Mac's Charter and thereafter operate in accordance with and subject to such Charter; n Would assume, acquire, or succeed to our assets and liabilities to the extent that such assets and liabilities are transferred FREDDIE MAC | 2021 Form 10-K 116
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Management's Discussion and Analysis Regulation and Supervision
by FHFA to the LLRE; and n Would not be permitted to assume, acquire, or succeed to any of our obligations to shareholders. Placement into receivership would likely have a material adverse effect on holders of our common stock and preferred stock, and could have a material adverse effect on holders of our debt securities and Freddie Mac mortgage-related securities. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. For more information on the risks to our business relating to receivership and uncertainties regarding the future of our business, see Risk Factors - Conservatorship and Related Matters. Capital Standards The GSE Act specifies certain capital requirements for us and authorizes FHFA to establish other capital requirements as well as to increase our minimum capital requirements or to establish additional capital and reserve requirements for particular purposes. In 2008, FHFA suspended capital classification of us during conservatorship, in light of the Purchase Agreement. In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk and to make business decisions utilizing a risk-based CCF, a capital system with detailed formulae provided by FHFA. We have used FHFA's CCF, and internal capital methodologies, where available, to measure risk for making economically effective decisions. The CCF includes specific requirements relating to risk on our book of business and modeled returns on our new acquisitions. In December 2020, FHFA published the ERCF, establishing a new regulatory capital framework for Freddie Mac and Fannie Mae. In accordance with FHFA guidance, we are transitioning the management of our business from the CCF to the ERCF. The ERCF establishes risk-based and leverage capital requirements for the Enterprises, and includes the following: n Supplemental capital requirements relating to the amount and form of the capital we hold, based largely on definitions of capital used in U.S. banking regulators' regulatory capital framework. The final rule includes leverage-based and risk-based requirements, which together determine the requirements for each tier of capital; n A requirement that we hold prescribed capital buffers that can be drawn down in periods of financial stress and then rebuilt over time as economic conditions improve. If we fall below the prescribed buffer amounts, we must restrict capital distributions such as stock repurchases and dividends, as well as discretionary bonus payments to executives, until the buffer amounts are restored; n A requirement to file quarterly public capital reports with FHFA starting in 2022, regardless of our status in conservatorship; n A requirement to maintain capital for operational and market risk, in addition to our credit risk; n Specific minimum percentages, or "floors," on the risk-weights applicable to single-family and multifamily exposures, which have the effect of increasing the capital required to be held for loans otherwise subject to lower risk weights; n Specific floors on the risk-weights applicable to retained portions of credit risk transfer transactions, which have the effect of decreasing the capital relief obtained from these transactions; and n Additional elements based on U.S. banking regulators' regulatory capital framework, including the phased implementation of advanced approaches as an alternative to the standardized approach for measuring risk weighted assets. The ERCF will require us to hold substantially more capital than prior requirements. Our current capital levels are significantly below the levels that would be required under the ERCF. The ERCF, which went into effect in February 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements in the ERCF will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order, and the compliance date for buffer requirements in the ERCF will be the date of termination of our conservatorship. With respect to the ERCF's advanced approaches requirements, the compliance date is January 1, 2025 or any later compliance date specified by FHFA. Pursuant to the final rule, we are required to comply with the regulatory capital reporting requirements under the ERCF in 2022, with our initial quarterly capital report due by May 30, 2022, 60 days after the last day of the first quarter. Further, the Purchase Agreement includes a covenant requiring us to comply with the ERCF disregarding any subsequent amendment or other modifications to the final rule. As a result, any amendments or FHFA-directed modifications to the ERCF may affect our compliance with this covenant. For additional information on these capital standards, see Note 19 and on risks related to non-compliance with the Purchase Agreement, see Risk Factors - Conservatorship and Related Matters - The Purchase Agreement and the terms of the senior preferred stock significantly limit our business activities. In the event of non-compliance with any Purchase Agreement covenants, Treasury may be entitled to specific performance, damages, and other remedies, and if the corrective actions we were to take were determined by FHFA to be insufficient, FHFA could impose penalties on us or take other remedial actions. Pursuant to an FHFA rule on stress testing of regulated entities, Freddie Mac and Fannie Mae are required to conduct annual stress tests using scenarios specified by FHFA to determine whether each Enterprise has sufficient capital to absorb losses as a result of adverse economic conditions. Under the rule, the Enterprises must publicly disclose the results of the stress test under the "severely adverse" scenario. In accordance with FHFA guidance, in August 2021, we disclosed the results of both our 2021 and 2020 "severely adverse" scenario stress tests. FREDDIE MAC | 2021 Form 10-K 117
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Management's Discussion and Analysis Regulation and Supervision
New Products
The GSE Act requires Freddie Mac and Fannie Mae to obtain the approval of FHFA before initially offering any product (as defined in the statute), subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice of any new activity that we consider not to be a product. While FHFA published an interim final rule on prior approval of new products to implement these statutory requirements in July 2009, it stated that permitting us to engage in new products is inconsistent with the goals of conservatorship and instructed us not to submit such requests under the interim final rule. In October 2020, FHFA published a proposed rule that, if adopted, will replace the interim final rule. The proposed rule outlines the process for FHFA review and timelines for approving a new product. It sets forth the criteria for evaluating whether a new product is within the Enterprise's Charter, is in the public interest, and is consistent with maintaining the safety and soundness of the Enterprise or the mortgage finance system. It also establishes a new three-part objective test for determining whether an activity is a new activity. Affordable Housing Goals We are subject to annual affordable housing goals. We view the purchase of loans that are eligible to count toward our affordable housing goals to be a principal part of our mission and business, and we are committed to facilitating the financing of affordable housing for very low-, low-, and moderate-income families. In light of the affordable housing goals, we may make adjustments to our strategies for purchasing loans, which could potentially increase our credit losses. These strategies could include entering into purchase and securitization transactions with lower expected economic returns than our typical transactions. In February 2010, FHFA stated that it does not intend for us to undertake uneconomic or high-risk activities in support of the housing goals nor does it intend for the state of conservatorship to be a justification for withdrawing our support from these market segments. FHFA housing goals applicable to our 2021 purchases consist of four goals and one subgoal for single-family owner-occupied housing, one multifamily affordable housing goal, and two multifamily affordable housing subgoals. Single-family goals are expressed as a percentage of the total number of eligible loans underlying our total single-family loan purchases, while the multifamily goals are expressed in terms of minimum numbers of units financed. Three of the single-family housing goals and the subgoal target purchase mortgage loans for low-income families, very low-income families, and/or families that reside in low-income areas. The single-family housing goals also include one goal that targets refinancing loans for low-income families. The multifamily affordable housing goal targets multifamily rental housing affordable to low-income families. The multifamily affordable housing subgoals target multifamily rental housing affordable to very low-income families and small (5- to 50-unit) multifamily properties affordable to low-income families. We may achieve a single-family or multifamily housing goal by meeting or exceeding the FHFA benchmark level for that goal (Benchmark Level). We also may achieve a single-family goal by meeting or exceeding the actual share of the market that meets the criteria for that goal (Market Level). If the Director of FHFA finds that we failed (or there is a substantial probability that we will fail) to meet a housing goal and that achievement of the housing goal was or is feasible, the Director may require the submission of a housing plan that describes the actions we will take to achieve the unmet goal. FHFA has the authority to take actions against us if we fail to submit a required housing plan, submit an unacceptable plan, fail to comply with a plan approved by FHFA, or fail to submit certain mortgage purchase data, information or reports as required by law. See Risk Factors - Legal And Regulatory Risks - We may make certain changes to our business in an attempt to meet our housing goals, duty to serve, and equitable housing finance requirements, which may adversely affect our profitability. Affordable Housing Goal Results and Housing Plan In December 2021, FHFA informed us that, for 2020, we achieved four of our five single-family affordable housing goals and all three of our multifamily goals. Because FHFA determined that we failed to meet one of our housing goals for 2020 and that achievement of that goal was feasible, FHFA required us to submit a housing plan that indicates how we plan to meet the missed goal during 2022 to 2024. We submitted our housing plan to FHFA in February 2022. Our performance on the goals, as determined by FHFA, is set forth in the table below. FREDDIE MAC | 2021 Form 10-K 118
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Management's Discussion and Analysis Regulation and Supervision
Table 57 - 2020 and 2019 Affordable Housing Goals Results
2020 2019
Affordable Housing Goals Benchmark Level Market Level Results Benchmark Level Market Level Results
Single-Family
Low-income home purchase goal 24 % 27.6 % 28.5 % 24 % 26.6 % 27.4 %
Very low-income home purchase goal 6 % 7.0 % 6.9 % 6 % 6.6 % 6.8 %
Low-income areas home purchase goal 18 % 22.4 % 21.8 % 19 % 22.9 % 22.9 %
Low-income areas home purchase subgoal 14 % 17.6 % 17.1 % 14 % 18.1 % 18.0 %
Low-income refinance goal 21 % 21.0 % 19.7 % 21 % 24.0 % 22.4 %
Multifamily
Low-income goal (units) 315,000 N/A 473,338 315,000 N/A 455,451
Very low-income subgoal (units) 60,000 N/A 107,105 60,000 N/A 112,773
Small multifamily (5-50 units)
low-income subgoal 10,000 N/A 28,142 10,000 N/A 34,847
We expect to report our performance with respect to the 2021 affordable housing
goals included in Table 58 below in March 2022. At this time, based on
preliminary information, we believe we met all five of our single-family goals
and all three of our multifamily goals. We expect that FHFA will make a final
determination on our 2021 performance following the release of market data in
2022.
2021-2024 Single-Family and 2021-2022 Multifamily Affordable Housing Goals
In December 2021, FHFA announced its higher benchmark levels for the
single-family affordable housing goals for Freddie Mac for 2022 to 2024. These
goals include two new single-family home purchase subgoals: a Minority Census
Tracts Home Purchase Subgoal and a Low-Income Census Tracts Home Purchase
Subgoal. These two new goals replace the previous low-income areas subgoal.
FHFA also announced its benchmark levels for the multifamily affordable housing
goals for Freddie Mac for 2022. In response to public comments on the proposed
affordable housing goals and the differential impact of COVID-19 on various
multifamily origination segments, the multifamily housing goals apply to 2022
only. In 2022, FHFA expects to engage in further rulemaking to establish the
multifamily benchmarks for 2023 and will notify the Enterprises of the
low-income areas home purchase goal benchmark level for 2022. FHFA also
established different benchmark levels for Freddie Mac and Fannie Mae for the
small multifamily low-income subgoal (23,000 for Freddie Mac and 17,000 for
Fannie Mae).
Our single-family and multifamily affordable housing goal benchmark levels for
2021 and our single-family affordable housing goal benchmark levels for
2022-2024 and multifamily affordable housing goal benchmark levels for 2022 are
set forth below.
Table 58 - 2021-2024 Single-Family and 2021-2022 Multifamily Affordable Housing
Goal Benchmark Levels
Benchmark
Benchmark Levels for
Affordable Housing Goals Levels for 2021 2022-2024
Single-Family
Low-income home purchase goal 24 % 28 % Very low-income home purchase goal 6 % 7 % Low-income areas home purchase goal 18 % TBD Low-income areas subgoal 14 % N/A Minority census tracts home purchase subgoal (new) N/A 10 % Low-income census tracts home purchase subgoal (new) N/A 4 % Low-income refinance goal 21 % 26 % Multifamily Low-income goal (units) 315,000 415,000 Very low-income subgoal (units) 60,000 88,000 Small multifamily (5-50 units) low-income subgoal (units) 10,000 23,000 FREDDIE MAC | 2021 Form 10-K 119
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Management's Discussion and Analysis Regulation and Supervision
Duty to Serve Underserved Markets Plan
The GSE Act establishes a duty for Freddie Mac and Fannie Mae to serve three underserved markets (manufactured housing, affordable housing preservation, and rural areas) by providing leadership in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low-, and moderate-income families in those markets. In December 2016, FHFA issued a final rule to implement our duty to serve these underserved markets. Under this rule, we are required to establish three-year plans that describe the activities and objectives we will undertake to serve each underserved market. Freddie Mac is currently operating under an underserved markets plan for 2018-2021. FHFA has evaluated our 2020 Duty to Serve performance under this plan and determined that we complied with our Duty to Serve requirements in all three underserved markets in 2020. As required by the FHFA Duty to Serve regulation, in May 2021, we submitted to FHFA a proposed Duty to Serve Underserved Markets Plan covering a three-year period from 2022 to 2024. In October 2021, we submitted to FHFA a revised proposed Plan that reflected FHFA feedback. On December 21, 2021, FHFA requested that Freddie Mac resubmit our Plan to address additional feedback. 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 such amount to certain housing funds. FHFA suspended this requirement when we were placed into conservatorship. However, in December 2014, FHFA terminated the suspension and instructed us to begin setting aside and paying amounts into those funds, subject to any subsequent guidance or instruction from FHFA. During 2021, we completed $1.3 trillion of new business purchases subject to this requirement and accrued $539.8 million of related expense, of which $350.9 million is related to the Housing Trust Fund administered by HUD and $188.9 million is related to the Capital Magnet Fund administered by Treasury. We are prohibited from passing through the costs of these allocations to the originators of the loans that we purchase. Portfolio Activities The GSE Act provides FHFA with the power to regulate the size and composition of our mortgage-related investments portfolio. The GSE Act requires FHFA to establish, by regulation, criteria governing portfolio holdings to ensure the holdings are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA adopted the portfolio holdings criteria established in the Purchase Agreement, as it may be amended from time to time, for so long as we remain subject to the Purchase Agreement. See Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness for more information. Department of Housing and Urban Development HUD has regulatory authority over Freddie Mac with respect to fair lending. All aspects of the credit or housing-related business practices of Freddie Mac are potentially subject to federal anti-discrimination laws, as well as state and local fair housing and fair lending statutes. In addition, the GSE Act prohibits discriminatory practices in our loan purchase activities, requires us to submit data to HUD to assist in its fair lending investigations of primary market lenders with which we do business, and requires us to undertake remedial actions against such lenders found to have engaged in discriminatory lending practices. HUD periodically reviews and comments on our underwriting and appraisal guidelines for consistency with the Fair Housing Act and the anti-discrimination provisions of the GSE Act. Department of the Treasury Treasury has significant rights and powers as a result of the Purchase Agreement. In addition, under our Charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures, and substantially identical types of unsecured debt obligations (including the interest rates and maturities of these securities), as well as new types of mortgage-related securities issued subsequent to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The Secretary of the Treasury has performed this debt securities approval function by coordinating GSE debt offerings with Treasury funding activities. Our Charter also authorizes Treasury to purchase Freddie Mac debt obligations not exceeding $2.25 billion in aggregate principal amount at any time. FREDDIE MAC | 2021 Form 10-K 120
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Management's Discussion and Analysis Regulation and Supervision
Consumer Financial Protection Bureau The CFPB regulates consumer financial products and services. The CFPB adopted a number of final rules relating to loan origination, finance, and servicing practices that generally went into effect in January 2014. The rules include an ability-to-repay rule, which requires loan originators to make a reasonable and good faith determination that a borrower has a reasonable ability to repay the loan according to its terms. This rule provides certain protection from liability for originators making loans that satisfy the definition of a qualified mortgage. The ability-to-repay rule applies to most loans acquired by Freddie Mac, and for loans covered by the rule, FHFA has directed us to limit our single-family acquisitions to loans that generally would constitute qualified mortgages under applicable CFPB regulations. The directive generally restricts us from acquiring loans that are not fully amortizing, have a term greater than 30 years, or have points and fees in excess of 3% of the total loan amount (or other threshold amount for loans of less than $114,847). Under CFPB rules, one category of qualified mortgages consists of loans that are eligible for purchase or guarantee by either Freddie Mac or Fannie Mae. Under the final rule, as amended in April 2021, this category of qualified mortgages will expire upon the earlier of the Enterprise's exit from conservatorship or the mandatory compliance date of final amendments to the definition of a qualified mortgage in the ability-to-repay rule (October 1, 2022), rather than on July 1, 2021. While the CFPB issued a final rule in October 2020 that extended the category of qualified mortgages that consists of loans that are eligible for purchase or guarantee by either Freddie Mac or Fannie Mae, FHFA provided that the Enterprises were only permitted to purchase such loans until August 31, 2021, provided the application received date for such loans was prior to July 1, 2021. In December 2020, the CFPB issued a final rule that amended the qualified mortgage definition by establishing pricing thresholds for loans to qualify as qualified mortgages, eliminated the DTI threshold and the standards for determining monthly debt and income under Appendix Q, and refined the general qualified mortgage definition to require lenders to consider and verify borrowers' income, assets, debts, and DTI or residual income. While the mandatory compliance date of these final amendments to the definition of qualified mortgage is October 1, 2022 the Enterprises adopted this policy on July 1, 2021 pursuant to FHFA directive. Under the amended ability-to-repay rule, qualified mortgages will include loans for which lenders consider and verify the borrower's income, assets, debts, and DTI or residual income, meet the newly established pricing thresholds, and satisfy the previously established requirements regarding product features, pricing, points, and fees. Securities and Exchange Commission We are subject to the reporting requirements applicable to registrants under the Exchange Act, including the requirement to file with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Although our common stock is required to be registered under the Exchange Act, we continue to be exempt from certain federal securities law requirements, including the following: n Securities we issue or guarantee are "exempted securities" and may be sold without registration under the Securities Act of 1933; n We are excluded from the definitions of "government securities broker" and "government securities dealer" under the Exchange Act; n The Trust Indenture Act of 1939 does not apply to securities issued by us; and n We are exempt from the Investment Company Act of 1940 and the Investment Advisers Act of 1940, as we are an "agency, authority, or instrumentality" of the U.S. for purposes of such Acts. Legislative and Regulatory Developments September 2021 Letter Agreement with Treasury On September 14, 2021, we, acting through FHFA as our Conservator, and Treasury entered into a letter agreement to suspend the following Purchase Agreement requirements related to our cash window activities, multifamily loan purchase activity, single-family loan acquisitions: n Cash Window Activity - Beginning on January 1, 2022, we are required to limit the volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters; n Multifamily New Business Activity - We are required to cap multifamily loan purchases at $80 billion in any 52-week period, subject to annual adjustment by FHFA based on changes in the Consumer Price Index. At least 50% of our multifamily loan purchases in any calendar year must be, at the time of acquisition, classified as mission-driven pursuant to FHFA guidelines; and n Single-Family Loan Acquisitions - We are required to limit our acquisition of certain single-family mortgage loans. l A maximum of 6% of purchase money mortgages and 3% of refinance mortgages over the preceding 52-week period can have two or more of the following characteristics at origination: combined LTV ratio greater than 90%; DTI ratio greater than 45%; and FICO or equivalent credit score less than 680. FREDDIE MAC | 2021 Form 10-K 121
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Management's Discussion and Analysis Regulation and Supervision
l We are required to limit acquisitions of single-family mortgage loans secured by either second homes or investment properties to 7% of the single-family mortgage loan acquisitions over the preceding 52-week period. Each such suspension shall terminate on the later of September 14, 2022 and six months after Treasury so notifies Freddie Mac. We will continue to manage these activities pursuant to our risk limits and FHFA guidance. Extension of Legislated 10 Basis Point Fee In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (TCCA) pursuant to which, at the direction of FHFA, we increased the guarantee fee by 10 basis points on all single-family residential mortgages delivered to us on or after April 1, 2012. Pursuant to the TCCA, the revenue generated by this fee increase is paid to Treasury. Although the guarantee fee provision of the TCCA expired on October 1, 2021, FHFA advised us to charge and remit this 10 basis point fee to Treasury with respect to single-family residential loans acquired by us before January 1, 2022. On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which extended our obligation to charge and remit to Treasury this 10 basis point fee on single-family residential mortgages delivered to us through October 1, 2032. FHFA Proposed Rules to Amend the ERCF On September 15, 2021, FHFA issued a notice of proposed rulemaking to amend the ERCF. The proposed amendments would refine the PLBA and the capital treatment of CRT transactions. Specifically, the proposed rule would replace the fixed PLBA equal to 1.5% of an Enterprise's adjusted total assets with a dynamic PLBA equal to 50% of the Enterprise's stability capital buffer (which is related to the Enterprise's relative share of total residential mortgage debt outstanding that exceeds 5%); replace the prudential floor of 10% on the risk weight assigned to any retained CRT exposure with a prudential floor of 5% on the risk weight assigned to any retained CRT exposure; and remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT exposures. On October 27, 2021, FHFA issued an additional notice of proposed rulemaking to amend the ERCF by introducing additional public disclosure requirements for the Enterprises. This proposed rule would implement quarterly quantitative and annual qualitative disclosure requirements for the Enterprises related to regulatory capital instruments, risk-weighted assets calculated under the ERCF's standardized approach, and risk management policies and procedures. On December 16, 2021, FHFA issued a notice of proposed rulemaking that would require Freddie Mac and Fannie Mae to develop, maintain, and submit annual capital plans to FHFA. Under the proposed rule the Enterprises' capital plans would be required to include the following: n An assessment of the expected sources and uses of capital over the planning horizon; n Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the Enterprise's internal scenarios, as well as under FHFA's scenarios; n A description of all planned capital actions over the planning horizon; n A discussion of how the Enterprise will, under expected and stressful conditions, maintain capital commensurate with its business risks and continue to serve the housing market; and n A discussion of any expected changes to the Enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity. The proposed rule also incorporates the determination of the stress capital buffer into the capital planning process and builds upon the existing supervisory expectation that the Enterprises incorporate forward-looking projections of revenue and losses to monitor and maintain their internal capital adequacy. FHFA is seeking comment on this proposed rule through February 25, 2022. We cannot predict whether and when FHFA will finalize these amendments to the ERCF or the content of any such amended rule that FHFA may adopt, or how this will affect our ability to comply with the covenant in the Purchase Agreement that requires us to comply with the ERCF as published in December 2020. Special Purpose Credit Programs On December 6, 2021, HUD's Office of General Counsel issued a legal opinion that publicly clarifies that special purpose credit programs that are lawful under the Equal Credit Opportunity Act and other federal laws generally do not violate the Fair Housing Act's antidiscrimination provisions. On December 20, 2021, FHFA Acting Director Sandra Thompson issued a statement urging financial institutions, including Freddie Mac, Fannie Mae, and the Federal Home Loan Banks, to consider special purpose credit programs to advance equitable outcomes and fairness in the housing finance system. FHFA Acting Director Thompson further noted that, in addition to contemplating special purpose credit programs of their own, Freddie Mac, Fannie Mae, and the Federal Home Loan Banks can impact the availability of these programs by providing liquidity and support for existing and future special purpose credit programs, within the umbrella of safety and soundness. FREDDIE MAC | 2021 Form 10-K 122
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Management's Discussion and Analysis Regulation and Supervision
Enterprise Fair Lending and Fair Housing Compliance
On December 20, 2021, FHFA released an advisory bulletin to provide FHFA's supervisory expectations and guidance to Freddie Mac and Fannie Mae on fair lending and fair housing compliance. FHFA considers ensuring Enterprise compliance with fair lending laws part of FHFA's obligation to further the purposes of the Fair Housing Act in its program of regulatory and supervisory oversight of the Enterprises and its responsibility to ensure that the Enterprises comply with applicable laws. FHFA's fair lending policy statement generally articulates its policy on fair lending and how FHFA uses its authorities to ensure compliance with fair lending laws. The Enterprises are subject to several associated fair lending requirements, such as requirements to obtain and maintain data relevant to ensuring compliance with fair lending laws, report certain information to FHFA pursuant to FHFA's reporting order on fair lending, include certain information related to fair lending in their annual housing reports, and comply with fair lending requirements associated with other FHFA processes and requirements. The Enterprises are also subject to HUD oversight related to fair housing. FHFA and HUD have signed a memorandum of understanding regarding cooperation and coordination with respect to fair housing and fair lending. In certain circumstances, FHFA will provide notification to HUD and the U.S. Department of Justice of information that suggests a violation of the Fair Housing Act or that indicates a possible pattern or practice of discrimination in violation of the Fair Housing Act. FREDDIE MAC | 2021 Form 10-K 123
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Management's Discussion and Analysis Critical Accounting Estimates
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to
make a number of judgments and assumptions that affect estimates of the reported
amounts within our consolidated financial statements. Critical accounting
estimates are 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 estimates could have a
material impact on our consolidated financial statements.
Our critical accounting estimates and policies relate to the Single-Family
allowance for credit losses. For additional information about our critical
accounting estimates and significant accounting policies, see the notes
accompanying our consolidated financial statements.
Single-Family Allowance for Credit Losses
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 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 and severity of expected
credit losses. 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 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. Changes in our
forecasts or the occurrence of actual economic conditions that differ
significantly from our forecasts may significantly affect the measurement of our
Single-Family allowance for credit losses.
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.
Changes in forecasted house price growth rates can have a significant effect on
our allowance for credit losses. Our estimate of expected credit losses
leverages an internally based model that uses a Monte Carlo simulation which
generates many possible house price scenarios for up to 40 years for each
metropolitan statistical area (MSA). These scenarios are used to estimate
loan-level expected future cash flows and credit losses based on each loan's
individual characteristics. The table below shows our nationwide forecasted
house price growth rates that were used in determining our allowance for credit
losses as of December 31, 2021 and as of December 31, 2020. These growth rates
are used as inputs to our models to develop the detailed forecasted life-of-loan
house price growth rates for each MSA. See Note 6 for additional information
regarding our current period benefit (provision) for credit losses and
estimation process.
Table 59 - Forecasted House Price Growth Rates
2022 2023
December 31, 2021 6.2 % 2.5 %
2021 2022
December 31, 2020 5.4 % 3.0 %
FREDDIE MAC | 2021 Form 10-K 124
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Risk Factors Risk Factors RISK FACTORS SUMMARY The summary of risks below provides an overview of the principal risks that could affect our business, financial condition, results of operations, cash flows, reputation, strategies, and/or prospects. This summary does not contain all of the information that may be important to you, and you should read the more detailed discussion of risks that follows this summary. Conservatorship and Related Matters n Freddie Mac's future is uncertain. n FHFA, as our Conservator, controls our business activities. We may be required to take actions that reduce our profitability, are difficult to implement, or expose us to additional risk. n The Purchase Agreement and the terms of the senior preferred stock significantly limit our business activities. In the event of non-compliance with any Purchase Agreement covenants, Treasury may be entitled to specific performance, damages, and other remedies, and if the corrective actions we were to take were determined by FHFA to be insufficient, FHFA could impose penalties on us or take other remedial actions. n If FHFA placed us into receivership, our assets would be liquidated. The liquidation proceeds might not be sufficient to pay claims outstanding against Freddie Mac, repay the liquidation preference of our preferred stock, or make any distribution to our common stockholders. n Our business and results of operations may be materially adversely affected if we are unable to attract and retain well-qualified and diverse employees across the company. The conservatorship, uncertainty of our future, and limitations on our executive and employee compensation put us at a disadvantage compared to other companies in attracting and retaining employees. In addition, we face increased competition for talented executives and other employees as a result of the increased availability of job opportunities in the current economy. COVID-19 Pandemic n The ongoing COVID-19 pandemic has significantly affected general economic conditions and the housing market. Our business and financial condition may be adversely affected by the effects of the COVID-19 pandemic. Credit Risks n We are subject to mortgage credit risk. Credit losses and costs related to this risk could adversely affect our financial results. n We face significant risks related to our delegated underwriting process for single-family loans, including risks related to data accuracy, mortgage fraud, and our sellers' origination operations. Changes to the process could increase our risks. n Declines in national or regional house prices or other adverse changes in the housing market could negatively affect both our Single-Family and Multifamily businesses. n We are exposed to counterparty credit risk with respect to our business counterparties. Our financial results may be adversely affected if one or more of our counterparties fail to meet their contractual obligations to us. n Our loss mitigation activities may be unsuccessful or costly and may adversely affect our financial results. n We have been, and will continue to be, adversely affected by delays and deficiencies in the single-family foreclosure process. n We are exposed to increased credit losses and credit-related expenses in the event of a major natural disaster, other catastrophic event, including a pandemic, or significant climate change effects. n Our CRT transactions may not be available to us in adverse economic conditions. These transactions also lower our profitability. Market Risks n Changes in interest rates could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. n Changes in market spreads could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. n A significant decline in the price performance of, or demand for, our UMBS could have an adverse effect on the volume and/or profitability of our new Single-Family business activity. n If the UMBS does not continue to receive widespread market acceptance, the liquidity and price performance of our Single-Family mortgage-related securities and our market share and profitability could be adversely affected. Commingling certain Fannie Mae securities in resecuritizations has increased our counterparty risk. FREDDIE MAC | 2021 Form 10-K 125
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Risk Factors
n The profitability of our Multifamily business could be adversely affected by a significant decrease in demand for our K Certificates and SB Certificates. n The discontinuance of LIBOR could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. A transition to an alternative reference interest rate could present operational problems and subject us to possible litigation risk. We may be unable to take a consistent approach across our financial products. Liquidity Risks n Our activities may be adversely affected by limited availability of financing and increased funding costs. n Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business. Operational Risks n A failure in our operational systems or infrastructure, or those of third parties, could impair our ability to provide market liquidity, disrupt our business, damage our reputation, and cause financial losses. n Potential cybersecurity threats are changing rapidly and advancing in sophistication. We may not be able to protect our systems and networks, or the confidentiality of our confidential or other information (including personal information), from cyberattacks and other unauthorized access, disclosure, and disruption. n We rely on third parties, or their vendors and other business partners, for certain important functions. Any failures by those third parties to deliver products or services, or to manage risks effectively, could disrupt our business operations, or expose us to other operational risks. n 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. Legal and Compliance Risks n Legislative or regulatory changes or actions could adversely affect our business activities and financial results. We face risk of non-compliance with our legal and regulatory obligations. n We may make certain changes to our business in an attempt to meet our housing goals, duty to serve, and equitable housing finance requirements, which may adversely affect our profitability. Conservatorship and Related Matters Freddie Mac's future is uncertain. Our future structure and role in the mortgage industry will be determined by the Administration, Congress, and FHFA. It is possible, and perhaps likely, that there will be significant changes that will materially affect our business model and results of operations. Some or all of our functions could be transferred to other institutions, and we could cease to exist as a stockholder-owned company. If any of these events occur, our shares could diminish in value, or cease to have any value. Our stockholders may not receive any compensation for such loss in value. Several bills were introduced in past sessions of Congress concerning the future status of Freddie Mac, Fannie Mae, and the mortgage finance system, including bills that provided for the wind down of Freddie Mac and Fannie Mae and modification of the terms of the Purchase Agreement. While none of these bills was enacted, it is possible that similar or new bills will be introduced and considered in the future. The conservatorship is indefinite in duration. The likelihood, timing, and circumstances under which we might emerge from conservatorship are uncertain. Our current capital levels are significantly below the levels that would be required under the ERCF. Under the Purchase Agreement, we cannot exit from conservatorship, other than in connection with receivership, unless all currently pending material litigation relating to the conservatorship and/or the Purchase Agreement has been resolved or settled and for two or more consecutive periods we have common equity tier 1 capital (which does not include our senior preferred stock) of at least 3% of our adjusted total assets. While we are increasing our net worth as a result of changes to our senior preferred stock dividend requirement, the increases in our net worth since September 30, 2019 have been or will be added to the aggregate liquidation preference of the senior preferred stock. In addition, our ability to increase our capital, other than through retained earnings, is limited, and it may not be possible for us to raise private capital on acceptable terms, if at all. Under the Purchase Agreement, we can raise up to $70.0 billion of capital through the issuance of common stock only after Treasury has exercised in full its warrant to purchase 79.9% of our common stock and pending material conservatorship-related litigation has been resolved or settled. Treasury's potential substantial equity ownership in our company, along with restrictions imposed on our business and post-recapitalization dividends and fees we will be required to pay to Treasury, will reduce our attractiveness as an investment opportunity for third-party investors. It is uncertain whether or when we will be able to retain or raise sufficient capital to permit an end to our conservatorship, and this may not happen for several years or at all. For additional information on the conservatorship, Purchase Agreement, and terms of the senior preferred stock, see Note 2. FREDDIE MAC | 2021 Form 10-K 126
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Treasury would be required to consent to the termination of our conservatorship other than as discussed above or in connection with receivership, and there can be no assurance Treasury would do so. Even if the conservatorship is terminated, we would remain subject to the Purchase Agreement and the terms of the senior preferred stock unless they are terminated or amended. Even if the conservatorship ends and the voting rights of common stockholders are restored, we could effectively remain under the control of the U.S. government because of the Purchase Agreement, Treasury's warrant to acquire nearly 80% of our common stock for nominal consideration, or Treasury's ownership of our common stock after it exercises its warrant. If Treasury exercises the warrant, the ownership interest of our existing common stockholders will be substantially diluted. FHFA, as our Conservator, controls our business activities. We may be required to take actions that reduce our profitability, are difficult to implement, or expose us to additional risk. We are under the control of FHFA, as our Conservator, and are not managed to maximize stockholder returns. FHFA determines our strategic direction. We face a variety of different, and sometimes competing, business objectives and FHFA-mandated activities, such as the initiatives we are pursuing under the Conservatorship Scorecards. Some of the activities FHFA has required us to undertake have been costly and/or difficult to implement, such as development and support of the CSP. The current Administration has not articulated a formal position on housing finance reform or the future of Freddie Mac and Fannie Mae. Nonetheless, the Administration and FHFA have indicated that their current areas of focus in the housing market include issues related to affordability, equity, sustainability, and climate. For example, in 4Q 2021, the Administration and FHFA announced actions to promote affordable and sustainable housing, and our 2022 Conservatorship Scorecard includes several objectives related to promoting sustainable and equitable housing finance markets, affordable housing opportunities, and consideration of climate risks. FHFA has required us to make changes to our business that have adversely affected our financial results and could require us to make additional changes at any time. For example, FHFA may require us to undertake activities that (1) reduce our profitability; (2) expose us to additional credit, market, funding, operational, and other risks; or (3) provide additional support for the mortgage market that serves our mission, but adversely affects our financial results. FHFA also has required us to take other actions that may adversely affect our business or financial results, such as requiring us to maintain increased liquidity and directing us to amend the CSS LLC agreement in a manner that limits our influence over CSS Board decisions. During conservatorship, the CSS Board Chair must be designated by FHFA, and all CSS Board decisions require the affirmative vote of the Board Chair. FHFA also has the right to appoint up to three additional CSS Board members. In October 2021, the three additional CSS Board members FHFA previously appointed left the CSS Board. If FHFA appoints three additional independent members, the CSS Board members we and Fannie Mae appoint could be outvoted by non-GSE designated Board members on any matter during conservatorship and on a number of significant matters after conservatorship. It is possible that FHFA may require us to make additional changes to the CSS LLC agreement, or may otherwise impose restrictions or provisions relating to CSS or the UMBS, that may adversely affect us. From time to time, FHFA has prevented us from engaging in business activities or transactions that we believe would be profitable, and it may do so again in the future. For example, FHFA has limited the size and composition of our mortgage-related investments portfolio and the amount and type of new single-family and multifamily loans we may acquire. We may be required to adopt business practices that help serve our mission and other non-financial objectives, but that may negatively affect our future financial results. Congress or FHFA may require us to set aside or otherwise pay monies to fund third-party initiatives, such as the existing requirement under the GSE Act that we allocate amounts for certain housing funds. FHFA also could require us to take actions that would adversely affect our ability to compete and innovate, such as through its proposed rule for new GSE products and activities; changing our risk appetite (including risk limits); and limiting our control over pricing. FHFA is also Conservator of Fannie Mae, our primary competitor. FHFA's actions, as Conservator of both companies, could require us and Fannie Mae to take a uniform approach to certain activities, limiting innovation and competition and possibly putting us at a competitive disadvantage because of differences in our respective businesses. FHFA also could limit our ability to compete with new entrants and other institutions. The combination of the restrictions on our business activities and our potential inability to generate sufficient revenue through our guarantee activities to offset the effects of those restrictions may have an adverse effect on our results of operations and financial condition. The Purchase Agreement and the terms of the senior preferred stock significantly limit our business activities. In the event of non-compliance with any Purchase Agreement covenants, Treasury may be entitled to specific performance, damages, and other remedies, and if the corrective actions we were to take were determined by FHFA to be insufficient, FHFA could impose penalties on us or take other remedial actions. The Purchase Agreement and the terms of the senior preferred stock place significant restrictions on our ability to manage our business, including limiting (1) our secondary market activities; (2) our single-family and multifamily loan acquisitions; (3) the amount of indebtedness we may incur; (4) the size of our mortgage-related investments portfolio; and (5) our ability to pay dividends, transfer certain assets, raise capital, pay down the liquidation preference of the senior preferred stock, and exit conservatorship. The Purchase Agreement also requires us to comply with the ERCF as published in December 2020, disregarding any subsequent amendment or other modification to that rule. FREDDIE MAC | 2021 Form 10-K 127
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The Purchase Agreement prohibits us from taking a variety of actions without Treasury's consent. Treasury has the right to withhold its consent for any reason. The restrictions on our business under the Purchase Agreement, senior status and net worth sweep dividend provisions of the senior preferred stock, and warrant held by Treasury could adversely affect our ability to attract capital from the private sector in the future, should we be in a position to do so. For more information, see Conservatorship and Related Matters - Freddie Mac's Future is Uncertain. In the event of non-compliance with any Purchase Agreement covenants, although such non-compliance would not affect our ability to draw from Treasury under the Purchase Agreement, Treasury may be entitled to specific performance, damages, and other such remedies as may be available at law or in equity. In addition, if the corrective actions we were to take or plan to take to comply with such covenants were determined by FHFA to be insufficient or unsuccessful, FHFA could impose penalties on us or take other remedial action. If FHFA placed us into receivership, our assets would be liquidated. The liquidation proceeds might not be sufficient to pay claims outstanding against Freddie Mac, repay the liquidation preference of our preferred stock, or make any distribution to our common stockholders. We can be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons set forth in the GSE Act. Several bills were introduced in past sessions of Congress that provided for Freddie Mac to be placed into receivership. In addition, FHFA could be required to place us into receivership if Treasury were unable to provide us with funding requested under the Purchase Agreement to address a deficit in our net worth. Treasury might not be able to provide the requested funding if, for example, the U.S. government were not fully operational because Congress had failed to approve funding or the government had reached its borrowing limit. For more information, see MD&A - Regulation and Supervision. Being placed into receivership would terminate our conservatorship. The purpose of receivership is to liquidate our assets and resolve claims against us. The appointment of FHFA as our receiver would terminate all rights and claims that our stockholders and creditors might have against our assets or under our Charter as a result of their status as stockholders or creditors, other than possible payment upon our liquidation. The GSE Act provides that, if we were placed into receivership, the mortgages underlying our mortgage-related securities (and the payments thereon) would be held for the benefit of the holders of those securities and not for the benefit of any receivership estate or LLRE. However, payments on the mortgages underlying our mortgage-related securities might not be sufficient to make full payments of principal and interest on the securities. If we were unable to fulfill our guarantee, the holders of our mortgage-related securities would experience delays in receiving payments because the relevant systems are not designed to make partial payments, and they could ultimately suffer losses on their investments to the extent the payments on the mortgages underlying our mortgage-related securities were not sufficient to make full payments of principal and interest on the securities. In addition, when administering the receivership claims process, FHFA could treat similarly situated creditors unequally, including treating creditors with claims related to senior unsecured debt securities and creditors with claims related to guarantee obligations on mortgage-related securities unequally, if FHFA determines such treatment is necessary to maximize the value of the assets of Freddie Mac, to maximize the present value return from the sale or other disposition of the assets of Freddie Mac, or to minimize the amount of any loss realized upon the sale or other disposition of the assets of Freddie Mac, as long as all creditors would receive at least as much as they would in a liquidation. During receivership or conservatorship, FHFA may take any authorized action that FHFA determines is in the best interest of Freddie Mac or FHFA, including the public that FHFA serves. If our assets were liquidated, the liquidation proceeds might not be sufficient to pay the secured and unsecured claims against us (including claims on our guarantees), repay the liquidation preference on any series of our preferred stock, or make any distribution to our common stockholders. Proceeds would first be applied to the secured and unsecured claims against us, the administrative expenses of the receiver, and the liquidation preference of the senior preferred stock. Any remaining proceeds would then be available to repay the liquidation preference of other series of preferred stock. Only after the liquidation preference of all series of preferred stock is repaid would any proceeds be available for distribution to the holders of our common stock. FREDDIE MAC | 2021 Form 10-K 128
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Our business and results of operations may be materially adversely affected if we are unable to attract and retain well-qualified and diverse employees across the company. The conservatorship, uncertainty of our future, and limitations on our executive and employee compensation put us at a disadvantage compared to other companies in attracting and retaining employees. In addition, we face increased competition for talented executives and other employees as a result of the increased availability of job opportunities in the current economy. Our business is highly dependent on the talents and efforts of our employees. The conservatorship, uncertainty of our future, and limitations on executive and employee compensation have had, and are likely to continue to have, an adverse effect on our ability to retain and recruit talent. Our voluntary employee turnover in 2021 increased slightly overall compared to historical experience, with a more notable increase at the officer level. If we are unable to attract and retain talent, our ability to manage our business effectively, implement strategic initiatives successfully and control operational risk would be adversely affected, and this ultimately would adversely affect our financial performance. Actions taken by Congress, FHFA, and Treasury to date, or that may be taken by them in the future, have had, and may continue to have, an adverse effect on our retention and recruitment of executives and other employees. We are subject to significant restrictions on the amount and type of compensation we may pay while under conservatorship. For example: n The Equity in Government Compensation Act of 2015 limits the compensation and benefits for our Chief Executive Officer to the same level in effect as of January 1, 2015 while we are in conservatorship or receivership. Accordingly, annual direct compensation for our Chief Executive Officer is limited to base salary at an annual rate of $600,000. n The Stop Trading on Congressional Knowledge Act of 2012, known as the STOCK Act, and related FHFA regulations prohibit our senior executives from receiving bonuses during conservatorship. n FHFA, as our Conservator, has the authority to approve the terms and amount of our executive compensation and may require us to make changes to our executive compensation program. FHFA has advised us that, given our conservatorship status, our executive compensation program is designed generally to provide for lower pay levels relative to large financial services firms that are not in conservatorship. FHFA has instructed us to benchmark to the lower end of the range of market compensation for new executive hires and compensation increase requests for existing executives, which limits our ability to offer market-competitive compensation to our executives if FHFA does not grant an exception. For additional information on restrictions on executive compensation, see Executive Compensation - CD&A - Other Executive Compensation Considerations - Legal, Regulatory, and Conservator Restrictions on Executive Compensation. n The terms of our senior preferred stock purchase agreement with Treasury contain specified restrictions relating to compensation, including a prohibition on selling or issuing equity securities without Treasury's prior written consent except under limited circumstances, which effectively eliminates our ability to offer equity-based compensation to our employees. These restrictions reduce our flexibility to offer competitive compensation, which adversely affects our ability to attract and retain executives and other employees. These restrictions also prohibit our ability to motivate and reward high performance with compensation structures that provide upside potential to our executives, putting us at a disadvantage to other companies in attracting and retaining executives. In addition, the uncertainty of potential action by Congress or the Administration with respect to our future - including whether we will exit conservatorship, how long it may take before we exit conservatorship, or whether housing finance reform will result in a significant restructuring of the company or the company no longer continuing to exist - also negatively affects our ability to recruit and retain executives and other employees. The cap on our Chief Executive Officer compensation continues to make retention and succession planning for this position difficult, and it may make it difficult to attract qualified candidates for this critical role in the future. We face competition from the financial services and technology industries, and from businesses outside of these industries, for well-qualified and diverse talent. The increased availability of job opportunities in the current economy has made the attraction and retention of executive and employee talent more competitive. If this increased competition persists and if we are unable to attract and retain executives and other employees with the necessary skills and talent, we would face increased operational risk. Leadership departures, or multiple such departures at approximately the same time, and challenges in integrating new leaders, could materially adversely affect our business, results of operations, and financial condition. COVID-19 Pandemic The ongoing COVID-19 pandemic has significantly affected general economic conditions and the housing market. Our business and financial condition may be adversely affected by the effects of the COVID-19 pandemic. Although the U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment. The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, has also contributed to rising inflationary pressures. The extent of the continuing impact of COVID-19 on the economic environment, the housing market, and our business depends on future developments, which are highly uncertain and difficult to predict, including, but not limited to, the duration and magnitude of the pandemic, the willingness of the government to provide financial assistance in response to the COVID-19 pandemic, the actions taken to contain the virus or treat its impact, the rate of distribution and administration of vaccines globally, the severity and duration of FREDDIE MAC | 2021 Form 10-K 129
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any resurgence of COVID-19 variants, and how quickly and to what extent economic and operating conditions and consumer and business spending can return to their pre-pandemic levels. Notwithstanding the negative effects of COVID-19 on the macroeconomic environment, house and multifamily property price growth, low mortgage rates, and strength in housing demand have contributed to a strong performance by the housing market. We cannot, however, exclude the risk that the housing sector's performance in the future may vary due to the many uncertainties driven by the ongoing COVID-19 pandemic and its impact on the economy as well as actions taken in response to the pandemic. Since the inception of the COVID-19 pandemic, Freddie Mac has taken several steps to support the mortgage market, such as forbearance for Freddie Mac-owned mortgages and other measures to assist homeowners, renters, multifamily property owners, lenders, and sellers. While we believe our initial actions have reduced our credit losses to date, it is possible that these actions or future actions may not ultimately be successful due to the ongoing impact of the COVID-19 pandemic or otherwise and, therefore, may negatively affect our financial condition and results of operations, perhaps significantly. Borrowers that obtain forbearance may be unable to resume making payments on their mortgage loans at the end of the forbearance period, which could result in losses. COVID-related foreclosure and eviction moratoriums have largely expired, and an elevated level of foreclosures and evictions could lead to higher operational costs and REO inventory. While our Single-Family serious delinquency rate has declined since its peak in 2020, we expect our Single-Family serious delinquency rate and the volume of our single-family loss mitigation activity to remain above pre-pandemic levels as a result of the pandemic and our forbearance programs. To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it has the effect of heightening many of the other risks described in this 2021 Annual Report on Form 10-K. Credit Risks We are subject to mortgage credit risk. Credit losses and costs related to this risk could adversely affect our financial results. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a loan we own or guarantee. This exposes us to the risk of credit losses and credit-related expenses, which could adversely affect our financial results. We are primarily exposed to mortgage credit risk with respect to the single-family and multifamily loans and securities reflected as assets on our consolidated balance sheets. We are also exposed to mortgage credit risk with respect to guaranteed securities and guarantee arrangements that are not reflected as assets on our consolidated balance sheets, including K Certificates, SB Certificates, and certain other senior subordinate securitization structures. We continue to have loans in our Single-Family mortgage portfolio with certain characteristics, that are typically associated with higher levels of credit risk. See MD&A - Risk Management - Single-Family Mortgage Credit Risk - Monitoring Loan Performance and Characteristics for additional information on the characteristics of the loans in our Single-Family mortgage portfolio. We also expect to continue acquiring loans with higher LTV ratios through our Home Possible and Home One initiatives, as well as loans with higher DTI ratios, generally up to 50%, which will increase our exposure to credit risk. Our efforts to increase eligible borrowers' access to single-family mortgage credit, including our affordable housing program and our plan for fulfilling our duty to serve underserved markets and recent FHFA requirements and guidance related to equitable housing, may expose us to increased mortgage credit risk. We face significant risks related to our delegated underwriting process for single-family loans, including risks related to data accuracy, mortgage fraud, and our sellers' origination operations. Changes to the process could increase our risks. We delegate to our sellers the underwriting for the single-family loans we purchase or securitize. Our contracts with sellers describe mortgage eligibility and underwriting standards, and the sellers represent and warrant to us that the loans they deliver to us meet these standards. We rely on the strength of our sellers' origination processes and controls. We perform risk-based audits to test our counterparties' control environments. However, our review may not detect weak operations that could lead to errors in seller decisions concerning, for example, correspondent approvals, property valuations, and insurance coverage. We do not independently verify most of the information provided to us before we purchase or securitize a loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower, property seller, broker, appraiser, title agent, loan officer, or lender) misrepresented facts about the borrower, property, or loan, or otherwise engaged in fraud. We review a sample of loans after we purchase them to determine if they comply with our contractual standards. However, our review may not detect any misrepresentations by the parties involved in the transaction, deter loan fraud, or reduce our exposure to these risks. We can exercise certain contractual remedies, including requiring repurchase of the loan, for loans that do not meet our standards. However, at the direction of FHFA, we have significantly revised our representation and warranty framework FREDDIE MAC | 2021 Form 10-K 130
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(including changes to remedies for certain defects) to relieve sellers of certain repurchase obligations with respect to single-family loans in specific cases. As a result, we may face greater exposure to credit and other losses under this revised framework, because our ability to seek recovery or repurchase from sellers is more limited, and we must identify breaches of representations and warranties early in the life of the loan. Our suite of tools, collectively referred to as Loan Advisor, offers limited representation and warranty relief for certain loan components that satisfy automated data analytics related to appraisal quality, collateral valuation, borrower assets, and borrower income. In general, limited representation and warranty relief is offered when information provided by the lender is validated against independent data sources. However, there is a risk that the enhanced tools and processes provided by Loan Advisor will not enable us to identify all breaches in a timely manner. In addition, there is a risk that data provided by the independent data sources is not accurate, impacting the representation and warranty relief decision. In turn, this could increase our exposure to credit and other losses. For more information, see MD&A - Risk Management - Single-Family Mortgage Credit Risk and MD&A - Risk Management - Operational Risk - Third-Party Risk. Declines in national or regional house prices or other adverse changes in the housing market could negatively affect both our Single-Family and Multifamily businesses. Our financial results and business volumes can be negatively affected by declines in house prices and other adverse changes in the housing market. This could (1) significantly increase our expected credit losses; (2) result in higher stress losses for both the Single-Family and Multifamily portfolios; (3) increase our losses on foreclosure alternatives, third-party sales, and dispositions of REO properties; (4) reduce our returns or result in losses on our Single-Family and Multifamily guarantee business, as default rates could be higher than we expected when we issued the guarantees; (5) negatively affect loan pricing, which could cause us to change our disposition strategies for our Single-Family delinquent and modified loans; or (6) adversely impact our ability to transfer credit risk. For more information regarding these risks, see MD&A - Risk Management - Credit Risk. The proportion of our refinance loan purchases to total loan purchases could decrease if mortgage interest rates increase. This could increase our exposure to mortgage credit risk, as refinance loans (particularly those that do not involve "cash-out") generally present less credit risk than purchase loans. Some of our seller/servicer counterparties are highly dependent on refinance loan volumes. A decrease in such volumes could adversely affect these counterparties, which could increase our exposure to counterparty credit risk. We are exposed to counterparty credit risk with respect to our business counterparties. Our financial results may be adversely affected if one or more of our counterparties fail to meet their contractual obligations to us. We depend on our institutional counterparties to provide services that are critical to our business. We face the risk that one or more of our counterparties may fail to meet their contractual obligations to us. Our major counterparties include sellers, servicers, credit enhancement providers, and counterparties to derivatives, short-term lending, and other funding transactions (e.g., cash and other investments transactions). For more information, see MD&A - Risk Management - Counterparty Credit Risk. Many of our major counterparties provide several types of services to us. The concentration of our exposure to our counterparties remains high. Efforts we take to reduce exposure to financially weak counterparties could increase the relative concentration of our exposure to other counterparties, increase our costs, and reduce our revenue. It is possible that our counterparties could experience challenging market conditions that could adversely affect their liquidity and financial condition and cause some of them to fail. Many of our counterparties are subject to increasingly complex regulatory requirements and oversight, which place additional stress on their resources and may affect their ability or willingness to do business with us. Credit risk related to Single-Family seller/servicers We are exposed to credit risk from the seller/servicers of our Single-Family loans, as described below. n A decline in servicing performance - A decline in a servicer's performance, such as delayed foreclosures or missed opportunities for foreclosure alternatives, could significantly affect our ability to mitigate credit losses and could affect the overall credit performance of our Single-Family mortgage portfolio. A large volume of seriously delinquent loans, the complexity of the servicing function, and heightened liquidity requirements are significant factors contributing to the risk of a decline in performance by servicers. Servicers may experience financial and other difficulties due to the advances they are required to make to us on delinquent single-family mortgages, including mortgages subject to forbearance plans. We could be adversely affected if our servicers lack appropriate controls, experience a failure in their controls, or experience a disruption in their ability to service loans, including as a result of legal or regulatory actions or ratings downgrades. We also are exposed to fraud by third parties in the loan servicing function, particularly with respect to short sales and other dispositions of non-performing assets. We could attempt to mitigate our exposure to a poorly performing servicer by terminating its right to service our loans; however, in a highly adverse economic environment, there could be scarce capacity in the marketplace and we may not be able to find successor servicers who have the capacity to service the affected loans and who are also willing to assume the representations and warranties of the terminated servicer. In addition, terminating a large servicer may not be feasible because of the operational and capacity challenges related to transferring large servicing portfolios. There is also a possibility that the performance of some loans may degrade during the transition to new servicers. During a period of FREDDIE MAC | 2021 Form 10-K 131
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heightened delinquencies, we may incur costs and potential increases in servicing fees if we replace a servicer with a high concentration of loans in default, which are more costly to service. We may also be exposed to concentrations of credit risk among certain servicers. n A failure by seller/servicers to fulfill their obligations to repurchase loans or indemnify us as a result of breaches of representations and warranties - While we may have the contractual right to require a seller or servicer to repurchase loans from us, it may be difficult, expensive, and time-consuming to enforce such repurchase obligations. We could enter into settlements to resolve repurchase obligations; however, the amounts we receive under any such settlements may be less than the losses we ultimately incur on the underlying loans. Under our representation and warranty framework, revised as directed by FHFA, we are required in some cases to utilize an alternative remedy, such as indemnification, in lieu of repurchase. The amount we recover under an alternative remedy may be less than the amount we could have recovered in a repurchase. n Increased exposure to non-depository and smaller financial institutions - A large volume of our single-family loans is acquired from and serviced by non-depository and smaller financial institutions. Some of these institutions may not have the same financial strength or operational capacity, or be subject to the same level of regulatory oversight, as large depository institutions. As a result, we face increased risk that these counterparties could fail to perform their obligations to us. In particular, non-depository servicers grew their servicing portfolios in the last several years as a result of higher originations. This appears to have resulted in operational strains that have subjected some of these servicers to regulatory scrutiny. This rapid growth could expose us to increased risks if any operational strain adversely affects these servicers' servicing performance or their financial strength. These institutions also service portfolios for other investors and guarantors (i.e., Fannie Mae and Ginnie Mae) and operational issues related to those portfolios could affect the performance of our portfolio. In addition, these servicers may not always have ready access to appropriate sources of liquidity to finance their operations, particularly during periods when the mortgage market is experiencing a downturn. If these servicers reduce their servicing portfolios, overall servicing capacity may be constrained. Our seller/servicers also have a significant role in servicing loans in our Multifamily mortgage portfolio. We are exposed to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause a decline in their servicing performance and cause us to terminate their right to service our loans, potentially resulting in further concentration of exposure to other seller/servicers. We are also exposed to settlement risk from the non-performance of sellers and servicers as a result of our forward settlement loan purchase programs in our Single-Family and Multifamily businesses. Credit risk related to counterparties to derivatives, funding, short-term lending, securities, and other transactions We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term lending, securities, securities purchased under agreements to resell, secured lending, forward settlement of loans and securities, and other transactions (e.g., cash and other investments transactions). These transactions are critical to our business, including our ability to: n Manage interest-rate risk and other risks related to our investments in mortgage-related assets; n Fund our business operations; and n Service our customers. We face the risk of operational failure of the clearing members, exchanges, clearinghouses, or other financial intermediaries we use to facilitate derivatives, short-term lending, securities, and other transactions. If a clearing member or clearinghouse were to fail, we could lose the collateral or margin posted with the clearing member or clearinghouse. We are a clearing member of the clearinghouses through which we execute mortgage-related and Treasury securities transactions. As a result, we could be subject to losses because we are required to participate in the coverage of losses incurred by other clearing members if they fail to meet their obligations to the clearinghouse. If our counterparties to short-term lending transactions fail, we are exposed to losses to the extent the transaction is unsecured or the collateral posted to us is insufficient. Credit risk related to mortgage insurers and other credit enhancement providers If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could increase. In addition, if a regulator determines that a mortgage insurer lacks sufficient capital to pay all claims when due, the regulator could take action that might affect the timing and amount of claim payments made to us. We face similar risks with respect to our counterparties on ACIS and comparable transactions. We cannot differentiate pricing based on the strength of a mortgage insurer or revoke a mortgage insurer's status as an eligible insurer without FHFA approval. In addition, we generally do not select the mortgage insurance provider on a specific loan because the selection is usually made by the lender at the time the loan is originated. As a result, we could acquire a concentration of risk to certain insurance providers. FREDDIE MAC | 2021 Form 10-K 132
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Our loss mitigation activities may be unsuccessful or costly and may adversely affect our financial results. Our loss mitigation activities, including the forbearance and other programs we have implemented in response to the COVID-19 pandemic, may not be successful. The costs we incur related to loan modifications and other loss mitigation activities have been, and could continue to be, significant. For example, we generally bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee, as well as all applicable servicer incentive fees for our single-family mortgage modifications. We could be required to make changes to our loss mitigation activities that could make these activities more costly to us. FHFA, as Conservator and regulator, may continue to issue directives and Advisory Bulletins to assist borrowers and align servicing practices for the GSEs. These directives and Advisory Bulletins could make these activities more costly to us, especially with regard to loan modification initiatives. FHFA may continue to issue these directives and Advisory Bulletins for a variety of reasons, including consumer relief and alignment of the prepayment behavior of our and Fannie Mae's respective UMBS. We have loans on trial period plans as required under certain loan modification programs. Some of these loans may fail to complete the trial period or fail to qualify for our other borrower assistance programs. For these loans, the trial period will have effectively delayed the foreclosure process and could increase our costs. The type of loss mitigation activities we pursue could affect prepayments on our Single-Family securities (e.g., UMBS, 55-day MBS, PCs, and REMICs), which could affect the value of these securities or the earnings from the assets in our mortgage-related investments portfolio. In addition, loss mitigation activities may adversely affect our ability to securitize, resecuritize, and sell the loans subject to those activities. We devote significant resources to our borrower assistance initiatives. The size and scope of these efforts may compete with other business opportunities or corporate initiatives. For more information on our loss mitigation activities, see MD&A - Our Business Segments - Single-Family - Business Results - Loss Mitigation Activities and MD&A - Risk Management - Single-Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities. We have been, and will continue to be, adversely affected by delays and deficiencies in the single-family foreclosure process. The average length of time for foreclosure of a Freddie Mac Single-Family loan has significantly increased since 2008, particularly in states that require a judicial foreclosure process, and may further increase. Delays in the foreclosure process could cause our expenses to increase. For example, properties awaiting foreclosure could deteriorate until we acquire them, resulting in increased expenses to repair and maintain the properties. Foreclosure process delays could also adversely affect trends in house prices regionally or nationally, which could adversely affect our financial results. Pursuant to FHFA guidance and the CARES Act, we were required to suspend COVID-19-related foreclosures, other than for vacant or abandoned properties, until July 31, 2021, and COVID-19-related REO evictions until September 30, 2021. These foreclosure and eviction moratoriums will result in higher costs and expenses for the affected properties. We are exposed to increased credit losses and credit-related expenses in the event of a major natural disaster, other catastrophic event, including a pandemic, or significant climate change effects. The occurrence, severity, and duration of a major natural or environmental disaster or other catastrophic event, including a pandemic, in an area where we own or guarantee mortgage loans, especially in densely populated geographic areas and in high-risk areas, such as coastal areas vulnerable to severe storms and flooding or areas prone to earthquake or wildfires, could increase our credit losses and credit-related expenses. A natural disaster or catastrophic event that either damages or destroys single-family or multifamily real estate underlying mortgage loans that we own or guarantee, or negatively affects the ability of borrowers to continue to make payments on mortgage loans that we own or guarantee, could increase our serious delinquency rates and average loan loss severity in the affected areas. Such events could generate credit losses and credit-related expenses and have a material adverse effect on our business and financial results. We may not have adequate insurance coverage for some of these natural disaster and catastrophic events. An increased frequency and intensity of major natural disasters may be indicative of the impact of climate change and are expected to persist for the foreseeable future. Although historically our losses from these events have not been significant, we remain exposed to risk, particularly in connection with geographically widespread weather events, changes in weather patterns, and significant climate change effects, such as rising sea levels, wildfires, and increased storms and flooding. Significant long-term climate change effects could increase the vulnerability of an area to natural disasters, which could discourage housing activity, decrease mortgage originations, and negatively affect house prices and property values in affected areas. Investors may place greater weight on these risks when making asset pricing decisions, which could increase our cost or ability to transfer risk. Increases in the intensity and frequency of natural disasters, particularly with respect to flooding in areas not designated as SFHAs (i.e., in areas where we do not require flood insurance), as well as any decrease in the willingness of insurers to provide coverage in certain areas for certain perils, will increase the foregoing risks. In addition, the unpredictability FREDDIE MAC | 2021 Form 10-K 133
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of natural disasters and the complexity of forecasting long-term climate change effects negatively affect our ability to forecast losses from such events. Further, actions taken by Congress, the Administration, and FHFA in response to climate change concerns may create transition risks that impact the housing market and our business. For example, policy actions to address climate change could result in a potentially disruptive transition away from carbon-intense industries. Such a transition could impact certain industries and regional economies, affecting the ability of borrowers in those industries or regions to pay their mortgage loans. Several bills have been introduced or legislation enacted in past sessions of Congress to address environmental matters, including climate change, and President Biden has indicated that addressing climate change will be a priority for the Administration. In addition, FHFA, as Conservator, has instructed us to designate climate change as a priority concern and actively consider its effects on our decision making and, to this end, included climate change as a priority for Freddie Mac in the 2022 Conservatorship Scorecard. FHFA may require us to undertake activities that promote environmental sustainability but that adversely affect our business or financial results. Our CRT transactions may not be available to us in adverse economic conditions. These transactions also lower our profitability. Our ability to transfer credit risk (and the cost to us of doing so) could change rapidly depending on market conditions. Adverse market conditions may result in insufficient investor demand for CRT transactions at acceptable prices. For example, our ability to transfer Single-Family credit risk was temporarily negatively affected by adverse market conditions resulting from the COVID-19 pandemic. It is possible that our CRT strategies may not prevent us from incurring substantial losses. For instance, it takes time to transfer risk and we are exposed to credit losses during this pipeline period. Additionally, some of our CRT transactions have early termination clauses or maturity dates that are earlier than the maturities of the reference mortgage loans, and we may also seek to terminate certain CRT transactions by repurchasing the related securities. We will be exposed to increased credit risk on the reference mortgage loans after termination of such transactions. Additionally, we retain a portion of the risk of future losses on loans covered by CRT transactions, including all or a portion of the first loss risk in most single-family and back-end multifamily transactions. The costs associated with CRT transactions are significant and may increase. For some CRT transactions, there may be a significant difference in time between when we recognize a credit loss in earnings and when we recognize the related recovery in earnings, and this lag could adversely affect our financial results in the earlier period. Changes in regulatory guidance, such as capital requirements under the ERCF, may cause us to modify our credit risk transfer activities. Market Risks Changes in interest rates could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. Our financial results can be significantly affected by changes in interest rates. Interest rates can fluctuate for many reasons, including changes in the fiscal and monetary policies of the federal government and its agencies as well as geopolitical events or changes in general economic conditions, such as increased inflation. Changes in interest rates could adversely affect the cash flows and prepayment rates on assets that we own and related debt and derivatives. In addition, changes in interest rates could adversely affect the prepayment rate or default rate on the loans that we guarantee. For example, when interest rates decrease, borrowers are more likely to prepay their loans by refinancing them at a lower rate. An increased likelihood of prepayment on the loans underlying our mortgage-related securities may adversely affect the value of these securities. We expect that the temporary reduction of interest rates to near zero will, gradually over the course of the next year, be reversed, with the Federal Reserve signaling its concerns with respect to inflation and tapering its purchases of mortgage and other securities. The timing and impact of this expected reversal of interest rates trends is unknown. Additionally, we may issue callable debt instruments to manage the duration and prepayment risk of expected cash flows of the mortgage assets we own. We may exercise the option to repay the outstanding principal balance when interest rates decrease. However, we may replace the called debt at a higher spread due to the market conditions at that time. In the event we decide not to call our debt, we may incur higher hedging costs. We incur costs as a result of our risk management activities, which may not be successful. Our interest-rate risk management activities are designed to reduce our economic exposure to changes in interest rates to a low level as measured by our models. However, the accounting treatment for certain of our assets and liabilities, including derivatives, creates variability in our earnings when interest rates fluctuate, as some assets and liabilities are measured at amortized cost and some are measured at fair value, while all derivatives are measured at fair value. While we use hedge accounting to attempt to reduce interest-rate- related earnings volatility, our hedge accounting programs may not be effective in reducing this variability. In addition, differences in amortization between our assets and the liabilities we use to fund them, including amortization of fair value hedging basis adjustments, may also be affected by changes in interest rates and prepayment rates and may contribute to earnings variability. FREDDIE MAC | 2021 Form 10-K 134
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Changes in market spreads could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. Changes in market conditions, including changes in interest rates, liquidity, prepayment, and/or default expectations and the level of uncertainty in the market for a particular asset class, may cause fluctuations in market spreads. Our financial results and net worth can be significantly affected by changes in market spreads, especially results driven by financial instruments that are measured at fair value. These instruments include trading securities, available-for-sale securities, derivatives, loans held-for-sale, and loans and debt with the fair value option elected. A narrowing or tightening of the market spreads on a given asset is typically associated with an increase in the fair value of that asset. Narrowing market spreads may reduce the number of attractive investment opportunities and could increase the cost of our activities to support the liquidity and price performance of our UMBS and other securities. Consequently, a tightening of the market spreads on our assets may adversely affect our future financial results and net worth. A widening of the market spreads on a given asset is typically associated with a decline in the fair value of that asset or tightening of the market spread on a given liability is typically associated with a decline in the fair value of that liability, which may adversely affect our near-term financial results and net worth. While wider market spreads may create favorable investment opportunities, our ability to take advantage of any such opportunities is limited due to various restrictions on our mortgage-related investments portfolio activities. See MD&A - Conservatorship and Related Matters for additional information on these restrictions. Changes in market spreads also affect the fair value of our debt with the fair value option elected. A narrowing or tightening of the market spreads on a given liability is typically associated with an increase in the fair value of that liability, which is recognized as a loss by us. A significant decline in the price performance of, or demand for, our UMBS could have an adverse effect on the volume and/or profitability of our Single-Family business activity. Our UMBS are an integral part of our loan purchase program. Our competitiveness in purchasing single-family loans from our sellers and the volume and profitability of our Single-Family business activity are directly affected by the price performance of UMBS issued by us relative to comparable Fannie Mae-issued UMBS. If our UMBS were to trade at a discount relative to comparable Fannie Mae securities due to prepayment performance or other factors, such a difference in relative pricing may create an incentive for sellers to conduct a disproportionate share of their single-family business with Fannie Mae. It is possible that a liquid market for our UMBS may not be sustained, which could adversely affect their price performance and our single-family market share. A significant reduction in our market share, and thus in the volume of loans that we securitize, or a reduction in the trading volume of our UMBS could reduce the liquidity of our UMBS. While we may decide to employ various strategies to support the liquidity and price performance of our UMBS, any such strategies may fail or adversely affect our business and financial results. We may cease any such activities at any time, or FHFA could require us to do so, which could adversely affect the liquidity and price performance of our UMBS. We may incur costs to support our presence in the agency securities market and to support the liquidity and price performance of our securities. Liquidity-related price differences could occur between UMBS issued by us and comparable Fannie Mae-issued UMBS due to factors that are largely outside of our control. For example, the level of the Federal Reserve's purchases and sales of agency mortgage-related securities, including any reduction in the Federal Reserve's purchases of mortgage-related securities undertaken to support financial markets during the COVID-19 pandemic, could affect the demand for and values of our UMBS. Therefore, any strategies we employ to reduce any liquidity-related price differences may not reduce or eliminate any such price differences over the long term. We may experience price differences with Fannie Mae on individual new production pools of TBA-eligible mortgages, particularly with respect to specified pools and our multilender securities. From time to time, we may need to adjust our pricing for a particular new production pool category or introduce new initiatives to maintain alignment and competitiveness with Fannie Mae with respect to the acquisition of such pools. Depending on the amount of pricing adjustments in any period, it is possible that they could adversely affect the profitability of our Single-Family business for that period. This risk is heightened with FHFA restrictions on our cash window volumes and on pooling, limiting our pooling flexibility and ability to manage alignment. For more information, see MD&A - Our Business Segments - Single-Family - Business Overview - Products and Activities. If the UMBS does not continue to receive widespread market acceptance, the liquidity and price performance of our Single-Family mortgage-related securities and our market share and profitability could be adversely affected. Commingling certain Fannie Mae securities in resecuritizations has increased our counterparty risk. As part of the combined UMBS market, we have been required by FHFA to align certain of our Single-Family mortgage purchase offerings, servicing, and securitization programs, policies and practices with Fannie Mae to achieve market acceptance of the UMBS. We cannot provide any assurance that these efforts will reduce the pricing disparities discussed above over the long-term. This alignment is more challenging during periods of increased refinances, automation, innovation, and change in the industry, such as we experienced in 2021. These alignment activities may adversely affect our business and our ability to compete with Fannie Mae. We may be required to further align our business processes with those of Fannie Mae. Uncertainty concerning the extent of the alignment between Freddie Mac's and Fannie Mae's mortgage purchase, servicing, FREDDIE MAC | 2021 Form 10-K 135
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and securitization programs, policies, and practices may affect the degree to which the UMBS receives widespread market acceptance. If investors do not continue to accept the fungibility of Freddie Mac and Fannie Mae UMBS and instead prefer Fannie Mae UMBS over Freddie Mac UMBS, this could affect the liquidity or market value of our Single-Family mortgage-related securities and have a significant adverse impact on our business, liquidity, financial condition, net worth, and results of operations, and could affect the liquidity or market value of our Single-Family mortgage-related securities. We have counterparty credit exposure to Fannie Mae due to investors' ability to commingle certain Freddie Mac and Fannie Mae securities in resecuritizations. When we resecuritize Fannie Mae securities, our guarantee of timely principal and interest extends to the underlying Fannie Mae securities. In the event that Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, Freddie Mac would be responsible for making the payment. We do not control or limit the amount of resecuritized Fannie Mae securities that we could be required to guarantee. We are dependent on FHFA, Fannie Mae, and Treasury (pursuant to Fannie Mae's and our respective Purchase Agreements with Treasury) to avoid a liquidity event or default. We have not modified our liquidity strategies to address the possibility of non-timely payment by Fannie Mae, but we may do so in the future. We and Fannie Mae both rely on the Federal Reserve Banks to make payments on our respective mortgage-related securities. As noted above, in the event that Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, Freddie Mac would be responsible for providing the Federal Reserve Banks with the funds to make the payment. If we failed to provide the Federal Reserve Banks with all funds to make such payment on such resecuritized Fannie Mae securities, the Federal Reserve Banks would not make any payment on any of our outstanding Freddie Mac-issued UMBS, Supers, REMICs, or other securities to be paid on that payment date, regardless of whether such Freddie Mac-issued securities were backed by Fannie Mae-issued securities. The ERCF requires us to hold capital to account for the counterparty credit risk of Fannie Mae. Given the resulting risk weights for commingled securities or crossholding of Enterprise UMBS, it is possible that the fungibility of UMBS will be reduced and that enterprise-specific markets will re-emerge. The ERCF risk weighting may cause each Enterprise to choose whether to stipulate delivery of its own UMBS or to provision excess capital to account for the risk of receiving the other Enterprise's UMBS. Further, the ERCF requirements may discourage the Enterprises from issuing commingled securities and may create incentives to resort to single-issuer resecuritizations, undermining the goal of fungibility of Freddie Mac and Fannie Mae UMBS. The profitability of our Multifamily business could be adversely affected by a significant decrease in demand for our K Certificates and SB Certificates. Our current Multifamily business model is highly dependent on our ability to finance purchased multifamily loans through securitization into K Certificates and SB Certificates. A significant decrease in demand for K Certificates and SB Certificates could have an adverse impact on the profitability of the Multifamily business to the extent that our holding period for the loans increases and we are exposed to credit, spread, and other market risks for a longer period of time or receive reduced proceeds from securitization. We employ various strategies to support the liquidity of our K Certificates and SB Certificates, but those strategies may fail or adversely affect our business. We may cease such activities at any time, or FHFA could require us to do so, which could adversely affect the liquidity and price performance of our K Certificates and SB Certificates. The discontinuance of LIBOR could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. A transition to an alternative reference interest rate could present operational problems and subject us to possible litigation risk. We may be unable to take a consistent approach across our financial products. In March 2021, ICE Benchmark Administration Limited, the administrator of LIBOR, confirmed its intention to cease publishing the 1-week and 2-month U.S. Dollar LIBOR settings after December 2021 and to cease publishing the other, most widely used, tenors of U.S. Dollar LIBOR after June 2023. The U.K. Financial Conduct Authority, which regulates LIBOR publication, announced that it would not compel panel bank submissions after those dates. Although the discontinuance of the U.S. Dollar LIBOR tenors that continue to be published is therefore expected in mid-2023, we are not able to predict whether SOFR, the ARRC-recommended alternative reference rate, will become the market-accepted replacement benchmark, or what impact such a transition may have on our business, results of operations, and financial condition. The transition from LIBOR could affect the financial performance of instruments we hold, require changes to hedging strategies, and adversely affect our financial performance. The transition could adversely affect the pricing, liquidity, value of, return on, and trading for a broad array of financial products that are included in our financial assets and liabilities. We have various financial products, including mortgage loans, mortgage-related securities, and derivatives, that are tied to LIBOR, and many of these products will mature after June 2023. While the documentation for certain of these products provides us with discretion to select an alternative reference rate if LIBOR is discontinued, there is a possibility of disputes, litigation, and other actions arising with customers, investors, and counterparties concerning, for example, our exercise of this discretion or the interpretation and enforceability of fallback language and related provisions. In certain other cases, the documentation limits our discretion to select an alternative reference rate if LIBOR is no longer available, representative, or viable, creating uncertainty and the risk of legal disputes. New York State has enacted legislation that is intended to minimize legal and FREDDIE MAC | 2021 Form 10-K 136
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economic uncertainty following U.S. Dollar LIBOR's cessation by replacing LIBOR references in certain contracts governed by New York law with a benchmark based on SOFR, including any spread adjustment, recommended by the Federal Reserve, the Federal Reserve Bank of New York or the ARRC. However, this legislation does not apply to all contracts, and it is uncertain whether the documentation for our products will allow those products to qualify for the legal protection against litigation contained in other proposed federal and state legislation dealing with the LIBOR transition. These potential challenges in implementing an alternative reference rate could result in customers, investors, and counterparties acquiring fewer products and entering into fewer transactions, which could result in losses or reputational damage or otherwise adversely affect our business. The large volume of products and transactions that may require changes to documentation, systems, or remediation could present substantial operational and legal challenges and result in significant costs. We may be unable to have a consistent approach to the LIBOR transition with respect to our products, including within a particular class of products, which could disrupt the market for those products. It is possible that actions we take in connection with the discontinuance of LIBOR, including the adoption of SOFR, could subject us to basis risk, monetary losses, and possible disputes and litigation. In addition, the transition could result in inquiries or other actions from regulators in respect of our preparation, readiness and transition plans. The use of SOFR as the alternative reference rate for LIBOR-based products may present certain market concerns. Among the concerns, although a term structure for SOFR has been developed, the ARRC-recommended scope of use of SOFR term rates is limited. SOFR represents an overnight, risk-free rate, whereas U.S. Dollar LIBOR has various tenors and reflects a credit risk component. It is still uncertain how soon acceptance and widespread market adoption of SOFR will occur, whether the use of overnight SOFR and SOFR averages will predominate over the use of SOFR term rates, whether SOFR will be more or less volatile than LIBOR during times of economic stress, and whether sufficient liquidity of SOFR-based products will develop. As described above, we have identified material exposures to LIBOR but cannot reasonably estimate the expected impact or other consequences of such exposure. For additional information regarding the actions we have taken to prepare for an orderly transition from LIBOR, see MD&A - Risk Management - Market Risk - Transition from LIBOR. Liquidity Risks Our activities may be adversely affected by limited availability of financing and increased funding costs. The amount, type, and cost of our unsecured funding directly affects our interest expense and results of operations. A number of factors could make such financing more difficult to obtain; more expensive; or unavailable on any terms, including market and other factors, changes in U.S. government support for us, and reduced demand for our debt securities. Market and Other Factors Our ability to obtain funding in the public unsecured debt markets or by selling or pledging mortgage-related and other securities as collateral to other institutions could change rapidly or cease. The cost of available funding could increase significantly due to changes in interest rates, market confidence, operational risks, regulatory requirements, or other factors. Prolonged wide market spreads on long-term debt could cause us to reduce our long-term debt issuances and increase our reliance on short-term and callable debt issuances. Such increased reliance on short-term and callable debt could increase the risk that we may be unable to refinance our debt when it becomes due and result in a greater use of derivatives. Greater derivatives use could increase the variability of our comprehensive income or increase our credit exposure to our counterparties. Additionally, we may incur higher hedging costs in the event that we decide not to call our debt. We may incur higher funding costs due to our liquidity management requirements, practices, and procedures, including FHFA minimum liquidity requirements that limit the size and the allowable investments in our other investments portfolio. Our practices and procedures may not provide us with sufficient liquidity to meet our ongoing cash obligations under all circumstances. In particular, we believe that our liquidity contingency plans may be inadequate or difficult to execute during a liquidity crisis or period of significant market turmoil. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be significantly impaired or eliminated, as our alternative sources of liquidity (e.g., cash and other investments) may not be sufficient to meet our liquidity needs. We have limited ability to use the less liquid assets in our mortgage-related investments portfolio as a significant source of liquidity (e.g., through sales or as collateral in secured borrowing transactions). We make extensive use of the Federal Reserve's payment system in our business activities. The Federal Reserve requires that we fully fund accounts at the Federal Reserve Bank of New York to the extent necessary to cover cash payments on our debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through the Federal Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may cause our account to be overdrawn, potentially resulting in penalties and reputational harm. Unlike certain of our competitors, we do not have access to the Federal Reserve's discount window. FREDDIE MAC | 2021 Form 10-K 137
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Changes in U.S. Government Support Treasury supports us through the Purchase Agreement and Treasury's ability to purchase up to $2.25 billion of our obligations under its permanent statutory authority. Changes or perceived changes in the U.S. government's support for us could have a severe negative effect on our access to the unsecured debt markets and our debt funding costs. Our access to the unsecured debt markets and the costs of our debt funding could be adversely affected by several factors relating to U.S. government support, including uncertainty about the future of the GSEs; any concerns by debt investors that we face increasing risk of being placed in receivership; and future draws that significantly reduce the amount of available funding remaining under the Purchase Agreement. Pursuant to the Purchase Agreement, it is possible that we may be required to pay a dividend to Treasury in the future that would cause us to fall below our capital requirements under the ERCF. In addition, we and Treasury are required to agree to a periodic commitment fee that we will pay to Treasury for a five-year period (after we have reached prescribed capital levels) in return for Treasury's remaining funding commitment. Reduced Demand for Debt Securities If investor demand for our debt securities were to decrease, our liquidity, business, and results of operations could be materially adversely affected. The willingness of investors to purchase and hold our debt securities can be influenced by many factors, including changes in the world economy, changes in inflation and exchange rates, and regulatory and political factors, as well as the availability of and investor preferences for other investments. We compete for debt funding with Fannie Mae, the FHLBs, and other institutions. Our funding costs and liquidity contingency plans may also be affected by changes in the amount of, and demand for, debt issued by Treasury. If investors were to reduce their purchases of our debt securities or divest their holdings, our funding costs could increase and our business activities could be curtailed. The market for our debt securities may become less liquid as a result of our having reached the Purchase Agreement limits on the size of our mortgage-related investments portfolio and the amount of our unsecured debt, or future reductions in those limits. This could lead to a decrease in demand for our debt securities and an increase in our funding costs. Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business. Our credit ratings are important to our liquidity. We currently receive ratings for our unsecured debt from three nationally recognized statistical rating organizations (S&P, Moody's, and Fitch). These ratings are primarily based on the support we receive from Treasury and therefore are affected by changes in the credit ratings of the U.S. government. Any downgrade in the credit ratings of the U.S. government would be expected to be accompanied by a downgrade in our credit ratings. In addition to a downgrade in the credit ratings of or outlook on the U.S. government, several other events could adversely affect our debt credit ratings, including actions by governmental entities, changes in government support for us, future GAAP losses, and additional draws under the Purchase Agreement. Any such downgrades could lead to major disruptions in the mortgage and financial markets and to our business due to lower liquidity, higher borrowing costs, lower asset values, and higher credit losses, and could cause us to experience net losses and net worth deficits. For more information, see MD&A - Liquidity and Capital Resources. Operational Risks A failure in our operational systems or infrastructure, or those of third parties, could impair our ability to provide market liquidity, disrupt our business, damage our reputation, and cause financial losses. Operational risk is elevated due to the volume, complexity, and pace of change across the company. We face significant levels of operational risk due to a variety of factors, including the size and complexity of our business operations, the amount of change to our core systems required to keep pace with market demands, regulatory requirements, and business initiatives, and the ever-changing cybersecurity landscape. Shortcomings or failures in our internal processes, people, or systems, or those of third parties with which we interact, could lead to impairment of our liquidity, disruption of our business (e.g., issuing mortgage and/or debt securities), incorrect payments to investors in our securities, errors in our financial statements, liability to customers or investors, further legislative or regulatory intervention, reputational damage, and financial and economic loss. Our business is highly dependent on our ability to process a large number of transactions on a daily basis and manage and analyze significant amounts of information, much of which is provided by third parties. This information may be incorrect, or we may fail to properly manage or analyze it. The transactions we process are complex and are subject to various legal, accounting, tax, and regulatory standards, which can change rapidly in response to external events, such as the implementation of government-mandated programs and changes in market conditions. Our financial, accounting, data processing, or other operating systems and facilities may contain design flaws or may fail to operate properly, adversely affecting our ability to process these transactions, including our ability to FREDDIE MAC | 2021 Form 10-K 138
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compile and process legally required information. We have certain systems that require manual support and intervention, which may lead to heightened risk of system failures. The inability of our systems to accommodate an increasing volume of transactions or new types of transactions or products could constrain our ability to pursue new business initiatives or improve existing business activities. Our technological connections with our customers, counterparties, service providers, and other financial institutions continue to increase, which increases our risk exposure with respect to an operational failure of their infrastructure systems. We have developed, and expect to continue to develop, software tools for use by our customers in the customers' loan production and other processes. These tools may fail to operate properly, which could disrupt our or our customers' business and adversely affect our relationships with our customers. We continue to increase our use of a third-party cloud infrastructure platform for both customer-facing applications and internal-use applications. If we do not implement changes to this platform in a well-managed, secure, and effective manner, we may experience unplanned service disruptions or unplanned costs which may harm our business and operating results. In addition, our cloud infrastructure providers, or other service providers, could experience system breakdowns or failures, outages, downtime, cyberattacks and other security incidents, adverse changes to financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect on our business and reputation. Thus, our plans to increase the amount of our infrastructure that we outsource to the cloud or to other third parties may increase our risk exposure. We face increased operational risk due to the magnitude and complexity of the new initiatives we are undertaking. Some of these initiatives require significant changes to our operational systems. In some cases, the changes must be implemented within a short period of time. Our legacy systems may create increased operational risk for these new initiatives. We also face significant risks related to CSS and the operation and continued development of the CSP. We rely on CSS and the CSP (which is owned and operated by CSS) for the operation of many of our Single-Family securitization activities. Our business activities would be adversely affected and the market for Freddie Mac securities would be disrupted if the CSP were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us. As the CSP has an operational dependency on Fannie Mae to administer Freddie Mac-issued commingled securities, an operational failure at Fannie Mae could also adversely impact the ability of CSS to perform its obligations to Freddie Mac. In the event of a CSS operational failure, we may be unable to issue certain new single-family mortgage-related securities, and investors in mortgage-related securities hosted on the CSS platform may experience payment delays. Any measures we could take to mitigate these risks might not be sufficient to prevent our business from being harmed. We update our internal systems and processes on a regular basis, including to improve existing processes and respond to market and regulatory developments. We could be adversely affected if CSS and/or the CSP are unable to make any necessary corresponding changes to their systems and processes in a timely manner. CSS could adopt or prioritize strategies that could adversely affect its ability to perform its obligations to us. For example, as a result of amendments to the CSS LLC agreement required by FHFA, during conservatorship, the CSS Board Chair must be designated by FHFA, and all CSS Board decisions require the affirmative vote of the Board Chair. Our employees could act improperly for their own or third-party gain and cause unexpected losses or reputational damage. While we have processes and systems in place designed to prevent and detect fraud, these processes may not be successful. Most of our key business activities are conducted in the Washington D.C. metropolitan area and represent a concentrated risk of people, technology, and facilities. As a result, an infrastructure disruption in or around our offices or affecting the power grid, such as from a terrorist event, active shooter, or natural disaster, could significantly adversely affect our ability to conduct normal business operations. Any measures we take to mitigate this risk may not be sufficient to respond to the full range of events that may occur or allow us to resume normal business operations in a timely manner. Potential cybersecurity threats are changing rapidly and advancing in sophistication. We may not be able to protect our systems and networks, or the confidentiality of our confidential or other information (including personal information), from cyberattacks and other unauthorized access, disclosure, and disruption. Our operations rely on the secure, accurate, and timely receipt, storage, transmission, and other processing of confidential and other information (including personal information) in our systems and networks and with counterparties, vendors, service providers, and financial institutions. Cybersecurity risks for companies like ours have significantly increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, and other external parties, including foreign state-sponsored actors. There have been several highly publicized cases involving financial services companies, consumer-based companies, and other organizations reporting the unauthorized disclosure, dissemination, theft, or destruction of client, customer, or other confidential information (including personal information), corporate information, intellectual property, cash, or other valuable assets. There have also been several highly publicized cases where hackers have requested "ransom" payments in exchange for not disclosing customer information (including personal information) or for not making the targets' computer systems unavailable. In addition, there have been cases where hackers have misled company personnel into making unauthorized transfers of funds to the hackers' accounts. FREDDIE MAC | 2021 Form 10-K 139
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Risk Factors
Like many companies and government entities, from time to time we have been, and expect to continue to be, the target of attempted cyberattacks and other security incidents. Such incidents may include malware, ransomware, denial-of-service attacks, social engineering, unauthorized access, human error, theft or misconduct, fraud, and phishing, as part of an effort to disrupt operations, potentially test cybersecurity capabilities, or obtain confidential, proprietary, or other information (including personal information). We could also be adversely affected by cyberattacks or other security incidents that target the infrastructure of the internet, as such incidents could cause widespread unavailability of websites and degrade website performance. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature and increasing frequency, levels of persistence, sophistication, and intensity of these threats, our role in the financial services industry, the outsourcing of some of our business operations, and the current global economic and political environment. The ongoing COVID-19 pandemic also increases the risk that we may experience cybersecurity incidents as a result of our employees, vendors, service providers, and other third parties with which we interact working remotely on less secure systems and environments. Because we are interconnected with and dependent on third-party vendors, exchanges, clearinghouses, fiscal and paying agents, and other financial institutions, we could be adversely affected if any of them is subject to a successful cyberattack or other security incident. Third parties with which we do business may also be sources of cybersecurity or other technology risks. We routinely transmit and receive confidential, proprietary, and other information (including personal information) by electronic means. This information could be subject to interception, misuse, or mishandling. Our exposure to these risks could increase as a result of our migration of core systems and applications to a third-party cloud environment. While we generally perform cybersecurity diligence on our key vendors, because we do not control third parties with whom we do business and our ability to monitor their cybersecurity posture is limited, we cannot ensure that the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws and regulations or contractual obligations, we may be held responsible for data breaches resulting from cyberattacks or other security incidents attributed to third parties with whom we do business in relation to the information we share with them. Although we devote significant resources to protecting our critical assets and provide employee awareness training about phishing, malware, and other cybersecurity risks, these measures may not provide effective security. Our computer systems, software, end point devices, and networks may be vulnerable to cyberattacks and other security incidents, supply chain disruptions, or other attempts to harm them or misuse or steal information (including personal information). We routinely identify cybersecurity threats as well as vulnerabilities in our systems and work to address them, but these efforts may be insufficient. Outside parties may attempt to induce employees, customers, counterparties, vendors, service providers, financial institutions, or other users of our systems or networks to disclose confidential, proprietary, or other information (including personal information) in order to gain access to our systems and networks and the information they contain. Unauthorized access or disclosure, or breaches of our security, also may result from human error. We may not be able to anticipate, prevent, detect, recognize, or react to threats to our systems, networks, and assets, or implement effective preventative measures against cyberattacks or other security incidents, especially because the techniques used change frequently or are not recognized until launched. A cyberattack or other security incident could occur and persist for an extended period of time without detection. We expect that any investigation of such an incident would take time, during which we would not necessarily know the extent of the harm or how best to remediate it. Although to date we have not experienced any such incident resulting in significant impact to the company, our cybersecurity risk management program may not prevent such an incident from having a significant impact in the future. We have obtained insurance coverage relating to cybersecurity risks, but this insurance may not be sufficient to provide adequate loss coverage (including if the insurer denies future claims) and may not continue to be available to us on economically reasonable terms, or at all. Further, we cannot ensure that any limitations of liability provisions in our agreements with vendors, customers, and other third parties with which we do business would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim in connection with a cyberattack or other security incident. The occurrence of one or more cyberattacks or other security incidents could result in thefts of important assets (such as cash or source code) or the unauthorized disclosure, misuse, or corruption of confidential, proprietary, and other information (including personal and other information about our borrowers, our customers, or our counterparties) or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. This could result in significant losses or reputational damage, adversely affect our relationships with our customers and counterparties, negatively affect our competitive position, or otherwise harm our business. We could also face regulatory and other legal action, including for any failure to provide timely disclosure concerning, or appropriately to limit trading in our securities, following an incident. We might be required to expend significant additional resources to modify our internal controls and other protective measures or to investigate and remediate vulnerabilities or other exposures, and we might be subject to litigation and financial losses that are not fully insured. In addition, customers, counterparties, vendors, service providers, financial intermediaries, and governmental organizations may not be adequately protecting the information that we share with them. As a result, a cyberattack or other security incident on their systems and networks, or a breach of their cybersecurity measures, may result in harm to our business and business relationships. FREDDIE MAC | 2021 Form 10-K 140
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Risk Factors
We rely on third parties, or their vendors and other business partners, for certain important functions. Any failures by those third parties to deliver products or services, or to manage risks effectively, could disrupt our business operations, or expose us to other operational risks. Our use of third parties, including vendors, service providers, sellers, and servicers, exposes us to the risk of failures in their risk and control environments. We outsource certain key functions to these external parties, including some that are critical to financial reporting, our mortgage-related investment activity, loan underwriting, loan servicing, UMBS issuance and administration (i.e., CSS), and data processing. We may enter into other key outsourcing relationships in the future and continue to expand our existing reliance on public cloud services. Additionally, we may be fully reliant on a third party to complete certain business operations (e.g., financial market utilities that provide the infrastructure for transferring, clearing, and settling payments, securities, and other financial transactions). If one or more of these key external parties were not able to perform their functions for a period of time, perform them at an acceptable service level or handle increased volumes, or if one or more of them experiences a disruption in its own business or technology from any cause, our business operations could be constrained, disrupted, or otherwise negatively affected. Our use of third parties also exposes us to other harm, such as in the event of a cyberattack or other security incident impacting our data (including personal information), fraud, or damage to our reputation if one or more of these third parties fails to maintain adequate risk and control environments. Our ability to monitor the activities or performance of certain third parties may be limited based on restricted access to and availability of risk management information for the third party, which may make it difficult for us to assess and manage the risks associated with these relationships. 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. We use models to project significant factors in our businesses, including, but not limited to, interest rates and house prices under a variety of scenarios. We also use models to project borrower prepayment and default behavior and loss severity over long periods of time. Models are inherently imperfect predictors of actual results. There is inherent uncertainty associated with model projections of economic variables and the downstream projections of prepayment and default behavior dependent on these variables. Uncertainty and risks related to models may arise from a number of sources, including the following: n We could fail to design, implement, operate, adjust, or use our models as intended. We may fail to code a model correctly, we could use incorrect or insufficient data inputs or fail to fully understand the data inputs, or model implementation software could malfunction. We may not have performed user acceptance testing appropriately or correctly, including allowing sufficient testing time and resources and using the right subject matter experts before deploying the model. The complexity and interconnectivity of our models create additional risk regarding the accuracy of model output. We may not be able to deploy or update models in a timely manner. n When market conditions change in unforeseen ways, our model projections may not accurately reflect these conditions, or we may not fully understand the model outputs. For example, models may not fully reflect the effect of certain government policy changes or new industry trends. In such cases, it is often necessary to make assumptions and judgments to accommodate the effect of scenarios that are not sufficiently well represented in the historical data. While we may adjust our models in response to new events, considerable residual uncertainty remains. In particular, the COVID-19 pandemic has increased the degree of uncertainty concerning key inputs into our financial cash flows, such as projections of interest rates, house prices, credit defaults, negative yields, and prepayments, and we expect our models to face significant challenges in accurately forecasting these inputs. n We also use selected third-party models. While the use of such models may reduce our risk where no internal model is available, it exposes us to additional risk, as third parties typically do not provide us with proprietary information regarding their models. We have little control over the processes by which these models are adjusted or changed. As a result, we may be unable to fully evaluate the risks associated with the use of such models. Our use of models could affect decisions concerning the purchase, sale, securitization, and credit risk transfer of loans; the purchase and sale of securities; funding; the setting of guarantee fee prices; and the management of interest-rate, market, and credit risk. Our use of models also affects our quality-control sampling strategies for loans in our Single-Family mortgage portfolio and potential settlements with our counterparties. We also use models in our financial reporting process, including when measuring our allowance for credit losses and applying hedge accounting. See MD&A - Risk Management - Market Risk and Critical Accounting Estimates for more information on our use of models. Legal and Compliance Risks Legislative or regulatory changes or actions could adversely affect our business activities and financial results. We face risk of non-compliance with our legal and regulatory obligations. We operate in a highly regulated industry and are subject to heightened supervision from FHFA, as our Conservator. Our compliance systems and programs may not be adequate to confirm that we are in compliance with all legal, regulatory, and other requirements. We could incur fines or other negative consequences for violations of such requirements. For example, FREDDIE MAC | 2021 Form 10-K 141
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Risk Factors
FHFA has raised concerns that we need to strengthen our compliance practices by further developing our compliance framework with respect to identifying, assessing, monitoring, testing, and reporting compliance risk. Although we are taking steps to strengthen our compliance program and address FHFA's concerns, our efforts may not be successful. Until we satisfactorily remediate FHFA's concerns, we may be subject to continued regulatory criticism. We also rely upon third parties and their respective compliance risk management programs, and the failure or limits of any such third-party compliance programs may expose us to legal and compliance risk. Our business may be directly adversely affected by future legislative, regulatory, or judicial actions at the federal, state, and local levels. Such actions could affect us in a number of ways, including by imposing significant additional legal, compliance, and other costs on us, limiting our business activities, and diverting management attention or other resources. Such actions, and any required changes to our business or operations or those of third parties upon whom we rely in response thereto, could result in reduced profitability and increased compliance risk, particularly because of the identified weaknesses in our compliance program noted above. If we were not to comply with our legal and regulatory obligations, this could result in enforcement actions, investigations, fines, monetary and other penalties, and harm to our reputation. For example, we are, or may in the future become, subject to a variety of complex and evolving laws, regulations, rules, and standards in the United States (at the federal, state and local level), as well as contractual obligations, regarding privacy and cybersecurity. Privacy and cybersecurity are currently areas of considerable legislative and regulatory attention, with new or modified laws, regulations, rules, and standards being frequently adopted and potentially subject to divergent interpretation or application from state to state in a manner that may create inconsistent or conflicting requirements for businesses. The uncertainty and compliance risk created by these legislative and regulatory developments are compounded by the rapid pace of technology development in disciplines that may impact the use or security of data and, in particular the use or security of personal information, such as artificial intelligence and advancements in the field of data science. Privacy and cybersecurity laws and regulations often impose strict requirements regarding the collection, storage, handling, use, disclosure, transfer, security, and other processing of personal information, which may have adverse consequences on our business, including incurring significant compliance costs, requiring changes to our business or operations, and imposing severe penalties for non-compliance. Further, any failure or perceived failure to comply with our public privacy policies and other public statements about privacy and cybersecurity could potentially subject us to regulatory investigations, enforcement or legal actions, and harm to our reputation and, if such public policies or statements are found to be deceptive, unfair, or misrepresentative of our actual practices, we may be subject to fines, monetary or other penalties, and other damage to our business and results. We expect the Administration will continue to implement a regulatory reform agenda that is significantly different from that of the previous one. This reform agenda could include a heightened focus on affordability, equity, sustainability, and climate. It is uncertain whether, and to what extent, potential action by Congress or the Administration will affect our regulatory compliance. We may make certain changes to our business in an attempt to meet our housing goals, duty to serve, and equitable housing finance requirements, which may adversely affect our profitability. We may make adjustments to our loan sourcing and purchase strategies in an effort to meet our housing goals and subgoals, including modifying some of our underwriting standards and expanding the use of targeted initiatives to reach underserved populations. For example, we may purchase loans that offer lower expected returns on our investment and potentially increase our exposure to credit losses. We may also make changes to our business in response to our duty to serve underserved markets or equitable housing finance requirements that could adversely affect our profitability. If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were feasible, we may become subject to a housing plan that could require us to take additional steps that could potentially adversely affect our profitability. The benchmark levels for our single-family and multifamily affordable housing goals for 2022 increased significantly compared to those for 2021. While we may achieve these housing goals by meeting or exceeding either the FHFA benchmark level or the market level, these increases to the benchmark levels may require additional changes to our business, and we may not meet these housing goals. In addition, because we did not meet one of our housing goals for 2020 and FHFA determined that achievement of that goal was feasible, FHFA required us to submit a housing plan that indicates how we plan to meet the missed goal during 2022 to 2024. We submitted our housing plan to FHFA in February 2022. If we fail to comply with this housing plan, when approved, FHFA could take additional action against us. FREDDIE MAC | 2021 Form 10-K 142
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