The company's charter established a board comprising 18 members - thirteen elected by shareholders and five appointed by the President of the United States. Freddie Mac is a Government-Sponsored Enterprise GSE , that is, a business entity that has a distinct relationship with the government. GSEs usually enjoy special perks and privileges that other businesses do not receive. Freddie Mac, for example, is exempt from state and local taxes.
Neither is it subject to standard disclosure rules imposed on other financial institutions. It is rated by credit rating agencies such as Moody's. GSEs such as Freddie Mac are among the world's largest securities issuers. Freddie Mac is one of the biggest buyers of home mortgages in the U. S and is a publicly traded company. It buys mortgages from mortgage lenders, such as commercial banks and other financial institutions, repackages them as mortgage-backed and debt securities, which are then purchased by investors.
Mortgage-backed securities are more liquid than individual mortgages. Institutions like Freddie Mac make their profits from the difference between the cost of its debts and the return on its mortgage holdings. Their role is to serve as a secondary market conduit between mortgage lenders and investors. Mortgage lenders use the proceeds from selling loans to Freddie Mac to fund new mortgages. In this way, Freddie Mac replenishes and increases the supply of funds available for homebuyers and apartment owners from mortgage lenders.
About fifty percent of all new single-family home mortgages today are sold to secondary market conduits. A December report by the Federal Reserve Board finds that Freddie like Fannie benefits from its government connection far more than homeowners do. Rather than boosting homeownership, the federal subsidies help the company's shareholders because it increases the company's earnings.
The implicit guarantee of its credit line from the federal government allows it to borrow at interest rates by about half a percentage point lower than comparable borrowers.
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By comparison, the average mortgage rate is reduced by less than a tenth of a percentage point. Bonuses for Top executives for , the year the company inflated its profits, were based on corporate performance. The Federal Reserve study also says that the complex accounting methods used by the company are hard to understand. Such questionable methods are a risk for taxpayers who would be expected to bail out the firm with its billions of dollars in loans and debts if it had financial problems.
A company spokesman called the study "an interesting but fundamentally flawed academic exercise," while a senior vice president said that the findings were "highly theoretical and bear no resemblance to the reality experienced in the housing industry and capital markets every day. The Federal Housing Enterprises Financial Safety and Soundness Act of created Freddie Mac's regulatory oversight structure related to two functions - its housing mission and its overall viability "safety and soundness".
Its housing mission is overseen by the U. As part of its housing mission, Freddie Mac is required to make 50 percent of its loans for affordable housing - 30 percent for underserved rural or urban areas and 20 percent for low-income families. But for years HUD has allowed it to invest primarily in the more profitable business of middle class home mortgages and shortchange its stated affordable housing goals. HUD is expected to complete a draft of regulations that would expand the organization's affordable housing goals later this month. Following its accounting and disclosure problems, the OFHEO has come under fire for failing to monitor Freddie adequately.
Assistant Treasury Secretary Wayne Abernathy has called it a "crippled agency. The Administration has proposed creating a new regulatory body under the Treasury Department. But Democratic senators charge that the company's accounting problems are being used to curtail its mission and take away HUD's oversight. Such fears don't seem unfounded. In a recent speech, Gregory Mankiw, chairman of the President's Council of Economic Advisors reportedly said, "All indications are that if the housing GSEs were to lose some of their implicit subsidy, private financial institutions would eagerly step in.
Conservative think tanks like the American Enterprise Institute have been promoting full privatization as the solution for Freddie Mac's problems. As one AEI fellow has said, "The only effective way to protect the economy and the taxpayers is to separate the GSEs from the government - to privatize them fully by cutting their government links and their special privileges. As a fully privatized entity its only goal would be to meet its obligations to its shareholder.
The conservatives say that if affordable housing is a desirable goal it should be pursued by a government agency. The majority of these losses are associated with loans originated in through Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond our current expectations. Seriously delinquent 1. Non-performing loans in millions 2. Single-family loan loss reserve in millions 3.
Seriously delinquent loan additions 1. Loan modifications 4. Foreclosure starts ratio 5. REO acquisitions 6. REO disposition severity ratio: 7. The number of new serious delinquencies i. Our servicers generally resumed foreclosures and we fully resumed marketing and sales of REO properties during the first quarter of , which led to a high REO disposition volume during the quarter.
Our REO inventory measured in properties declined in each of the last two quarters. The UPB of our non-performing loans also declined in the first quarter of This was the first decline in non-performing loans since the first half of However, the credit losses from our single-family credit guarantee portfolio were higher in the first quarter of than the first quarter of , due in part to:. These groups continue to be large contributors to our credit losses. Some of our loss mitigation activities create fluctuations in our delinquency statistics.
For example, single-family loans that we report as seriously delinquent before they enter the HAMP trial period continue to be reported as seriously delinquent for purposes of our delinquency reporting until the modifications become effective and the loans are removed from delinquent status by our servicers. Conservatorship and Government Support for our Business. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition and results of operations. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business.
Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. As a result, we expect to make additional draws in future periods, even if our operating performance generates net income or comprehensive income.
Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.
Neither the U. Consolidated Financial Results. Key highlights of our financial results include:. Mortgage Market and Economic Conditions. The housing market recovery experienced continued challenges during the first quarter of due primarily to weak housing demand. The U. Unemployment was 8. Bureau of Labor Statistics. Single-Family Housing Market. We believe the level of home sales in the U. Within the industry, existing home sales are important for assessing the rate at which the mortgage market might absorb the inventory of listed, but unsold, homes in the U.
We believe new home sales can be an indicator of certain economic trends, such as the potential for growth in total U. Sales of existing homes in the first quarter of averaged 5. New home sales in the first quarter of averaged 0. We estimate that home prices declined 2.
This estimate is based on our own index of mortgage loans in our single-family credit guarantee portfolio. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own. Multifamily Housing Market.
Multifamily market fundamentals continued to improve on a national level during the first quarter of , though certain states and metropolitan areas continue to exhibit weaker than average fundamentals. This improvement continues a trend of several consecutive quarters of favorable movements in key indicators such as vacancy rates and effective rents. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows.
Improving fundamentals and perceived optimism about demand for multifamily housing have helped improve property values in most markets. However, rising interest rates may cause property owners to increase the returns they expect on their multifamily property investments. In turn, this could reduce multifamily property values, which could make it more difficult to refinance multifamily properties when the balloon payment becomes due.
As a result, a number of our. During the first quarter of , we fully resumed marketing and sales of REO properties. While the larger servicers have generally resumed foreclosure proceedings, the rate at which they are completing foreclosures is slower than prior to the suspensions. These issues have caused delays in the foreclosure process in many states and temporarily slowed the pace of our REO acquisitions. We expect the pace of our REO acquisitions to increase in the remainder of , in part due to the resumption of foreclosure activity by servicers.
We generally refer to these issues as the concerns about foreclosure documentation practices. These institutions service the majority of the single-family mortgages we own or guarantee. We will not be able to assess the impact of these actions on our business until the servicers submit their comprehensive action plans. Mortgage Market and Business Outlook. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections.
Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U. The economy is expected to generate new jobs and rising incomes, contributing to a gradual recovery in housing activity and declines in delinquency rates.
However, several developments may adversely affect the prospects for a housing recovery. We also expect rates on fixed-rate mortgages to be slightly higher in the second half of , as stronger GDP growth and further labor market improvements generate higher demand for credit and consumer spending. Lastly, many large financial institutions experienced temporary delays in the foreclosure process late in , and we believe the resumption of foreclosures will result in increased distressed sales of REO properties in We expect our credit losses will likely increase in the near term and, for , remain significantly above historical levels.
This is in part due to the substantial number of mortgage loans in our single-family credit guarantee portfolio on which borrowers owe more than their home is currently worth, as well as the substantial backlog of seriously delinquent loans. For the near term, we also expect:. We expect that the continuation of challenging economic conditions, including elevated unemployment in certain states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, may negatively impact our mortgage portfolio performance and may lead to additional non-performing assets.
Improvements in loan performance historically lag improvements in broader economic and market trends during market recoveries. As a result, we may continue to experience elevated credit losses in the remainder of and delinquency rates may increase despite improving fundamentals. In addition, as more market participants re-emerged in the multifamily market during the first quarter of , increased competition from other institutional investors may negatively impact our future purchase volumes as well as the pricing and credit quality of newly originated loans for the remainder of Long-Term Financial Sustainability.
We expect to request additional draws under the Purchase Agreement in future periods. Over time, our dividend obligation to Treasury will increasingly drive future draws. Although we may experience period-to-period variability in earnings and comprehensive income, it is unlikely that we will regularly generate net income or comprehensive income in excess of our annual dividends payable to Treasury over the long term.
In addition, we are required under the Purchase Agreement to pay a quarterly commitment fee to Treasury, which could contribute to future draws if the fee is not waived in the future. Treasury waived the fee for the first and second quarters of , but it has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.
The amount of the quarterly commitment fee has not yet been established and could be substantial. As a result of these factors, there is uncertainty as to our long-term financial sustainability. There continues to be significant uncertainty in the current mortgage market environment, and continued high levels of unemployment, weakness in home prices, adverse changes in interest rates, mortgage security prices, spreads and other factors could lead to additional draws. There is also significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist.
While we are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term, there are likely to be significant changes beyond the near-term that we expect to be decided by the Obama Administration and Congress.
Our future structure and role will be determined by the Obama Administration and Congress. We have no ability to predict the outcome of these deliberations. Limits on Mortgage-Related Investments Portfolio. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC pools. Legislative and Regulatory Developments. The report recommends winding down Freddie Mac and Fannie Mae, and states that the Obama Administration will work with FHFA to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions.
The report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers and the housing market. The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further states that the Obama Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and Fannie Mae to honor their obligations.
These recommendations, if implemented, would have a material impact on our business volumes, market share, results of operations and financial condition. We cannot predict the extent to which these recommendations will be implemented or when any actions to implement them may be taken. However, we are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Statements of Income and Comprehensive Income Data. Total comprehensive income loss attributable to Freddie Mac. Weighted average common shares outstanding in thousands : 2.
Mortgage loans held-for-investment, at amortized cost by consolidated trusts net of allowance for loan losses. Debt securities of consolidated trusts held by third parties. Portfolio Balances 3. Total mortgage portfolio 5. Non-performing assets 6. Ratios 7. Return on average assets 8 Non-performing assets ratio 9.
Equity to assets ratio 10 The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Net interest income loss after provision for credit losses. Gains losses on extinguishment of debt securities of consolidated trusts. Gains losses on debt recorded at fair value. Total other-than-temporary impairment of available-for-sale securities. Portion of other-than-temporary impairment recognized in AOCI. Net impairment of available-for-sale securities recognized in earnings.
Other gains losses on investment securities recognized in earnings. Other comprehensive income loss , net of taxes and reclassification adjustments:. Changes in unrealized gains losses related to available-for-sale securities. Changes in unrealized gains losses related to cash flow hedge relationships.
Total other comprehensive income loss , net of taxes and reclassification adjustments. Less: Comprehensive income loss attributable to noncontrolling interest. Net Interest Income. Federal funds sold and securities purchased under agreements to resell. Mortgage-related securities 3. Non-mortgage-related securities 3. Mortgage loans held by consolidated trusts 4. Unsecuritized mortgage loans 4. Debt securities of consolidated trusts including PCs held by Freddie Mac.
Total debt securities of consolidated trusts held by third parties. Long-term debt 5. Income expense related to derivatives 6. These factors were partially offset by the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity. Provision for Credit Losses. While the quarterly amount of our provision for credit losses declined for the last several consecutive quarters, our quarterly amount of charge-offs, net of recoveries remained elevated. We believe the level of our charge-offs will continue to remain high in due to the large number of single-family non-performing loans that will likely be resolved during the year.
Although still at historically high levels, the UPB of our single-family non-performing loans declined slightly during the first quarter of In the first quarter of , we also continued to experience high volumes of loan modifications involving concessions to borrowers, which are considered TDRs.
Impairment analysis for TDRs requires giving recognition in the provision for credit losses to the excess of our recorded investment in the loan over the present value of the expected future cash flows. We expect the percentage of modifications that qualify as TDRs in will remain high, since the majority of our modifications are anticipated to include a significant reduction in the contractual interest rate, which represents a concession to the borrower.
The total number of seriously delinquent loans declined during the first quarter of , but has remained high due to the continued weakness in home prices, persistently high unemployment, extended foreclosure timelines and foreclosure suspensions in many states, and challenges faced by servicers processing large volumes of problem loans. We believe this will help us to better realize the benefits of our loss mitigation plans, though it is too early to determine if this will be successful. The decrease in the reserves was driven by positive market trends in vacancy rates and effective rents reflected over the past several consecutive quarters, as well as stabilizing or improved property values and improved borrower credit profiles.
However, some states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, continue to exhibit weaker than average fundamentals. Non-Interest Income Loss. When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trust.
We recognize a gain loss on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value. The gains in the first quarter of were due to the repurchases of our debt securities at a discount resulting from an increase in interest rates during the period. Gains Losses on Retirement of Other Debt. We recognized gains on debt retirements in the first quarter of primarily due to the repurchase of other debt securities at a discount. We also recognized fewer losses on debt calls and puts in the first quarter of compared to the first quarter of due to a decreased level of debt call activity in the first quarter of Gains losses on debt recorded at fair value primarily relates to changes in the fair value of our foreign-currency denominated debt.
We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains losses in our consolidated statements of income and comprehensive income.
Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.
While derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported net income loss , because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income. Option-based derivatives 1. Other derivatives 2. Accrual of periodic settlements 3. Investment Securities-Related Activities. Impairments of Available-For-Sale Securities. Other gains losses on investment securities recognized in earnings primarily consists of gains losses on trading securities.
Other Income. Table 8 summarizes the significant components of other income. Gains losses on mortgage loans recorded at fair value. Other income declined during the first quarter of , compared to the first quarter of , primarily due to lower recoveries on loans impaired upon purchase, a decline in all other income during the first quarter of , and the shift to net losses on mortgage loans recorded at fair value in the first quarter of Our recoveries on loans impaired upon purchase declined in the first quarter of , compared to the first quarter of , due to a lower volume of foreclosure transfers associated with loans impaired upon purchase.
Consequently, our recoveries on loans impaired upon purchase will generally decline over time. All other income was higher in the first quarter of primarily due to reduced expectations of losses from certain legal claims that were previously recognized.
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Administrative expenses 1 :. Administrative Expenses. Administrative expenses decreased in the first quarter of compared to the first quarter of , due in part to our ongoing focus on cost reduction measures, particularly with regard to salaries and employee benefits and professional services costs. Administrative expenses declined during and we expect these expenses will continue to decline for the full year of when compared to REO Operations Expense.
The table below presents the components of our REO operations expense for the first quarters of and , and REO inventory and disposition information. REO property expenses 1. Disposition gains losses, net 2 3. Change in holding period allowance, dispositions. Change in holding period allowance, inventory 4. Recoveries 5. This increase was primarily due to higher property expenses associated with larger REO inventories and higher disposition losses.
Net disposition losses increased in the first quarter of , compared to the first quarter of , as we completed a higher volume of property dispositions in and home prices declined on a national basis. The pace of our REO acquisitions was slowed by delays in the foreclosure process arising from concerns about foreclosure documentation practices, particularly in states that require a judicial foreclosure process.
We expect the pace of our REO acquisitions to increase in the remainder of in part due to the resumption of foreclosure activity by servicers. Other Expenses. Other expenses primarily consist of losses on loans purchased and other miscellaneous expenses. Losses on delinquent and modified loans purchased from mortgage pools within our non-consolidated securitization trusts occur when the acquisition basis of the purchased loan exceeds the estimated fair value of the loan on the date of purchase. Income Tax Benefit. Total Comprehensive Income Loss. Segment Earnings.
Certain activities that are not part of a reportable segment are included in the All Other category. The Investments segment reflects results from our investment, funding and hedging activities.
In our Investments segment, we invest principally in mortgage-related securities and single-family performing mortgage loans funded by other debt issuances and hedged using derivatives. Segment Earnings for this segment consist primarily of the returns on these investments, less the related funding, hedging, and administrative expenses.
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In most instances, we use the mortgage securitization process to package the purchased mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of management and guarantee fee revenues, including amortization of upfront fees, less the related credit costs i.
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The Multifamily segment reflects results from our investment and guarantee activities in multifamily mortgage loans and securities. We purchase multifamily mortgage loans primarily for purposes of aggregation and then securitization. Segment Earnings for this segment primarily includes management and guarantee fee income and the interest earned on assets related to multifamily investment activities, net of allocated funding costs. The Multifamily segment reflects the impact of changes in fair value. We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator.
Likewise, the sum of total comprehensive income loss for each segment and the All Other category equals GAAP total comprehensive income loss attributable to Freddie Mac. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. In presenting Segment Earnings, we make significant reclassifications to certain financial statement line items in order to reflect a measure of net interest income on investments, and a measure of management and guarantee income on guarantees, that is in line with our internal measures of performance.
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income loss as determined in accordance with GAAP.
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Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole. Single-family unsecuritized mortgage loans 2. Non-Freddie Mac agency mortgage-related securities.
Single-family unsecuritized mortgage loans 4. Single-family Freddie Mac mortgage-related securities held by us. Single-family Freddie Mac mortgage-related securities held by third parties. Single-family other guarantee commitments 5. Multifamily Freddie Mac mortgage-related securities held by us. Multifamily Freddie Mac mortgage-related securities held by third parties. Multifamily other guarantee commitments 5.
Less: Freddie Mac single-family and multifamily securities 6. Net impairment of available-for-sale securities. Segment adjustments 2. Segment Earnings loss before income tax benefit. Segment Earnings loss , net of taxes, including noncontrolling interest. Total other comprehensive income, net of taxes. Average balances of interest-earning assets: 3 4 5.
Mortgage-related securities 6. Non-mortgage-related investments 7.
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Total average balances of interest-earning assets. The UPB of the Investments segment mortgage investments portfolio declined by 3. The decline in UPB of agency securities is due mainly to liquidations, including prepayments and select sales. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities.
The primary driver was lower funding costs, primarily due to the replacement of debt at lower rates. These lower funding costs were partially offset by the reduction in the average balance of higher-yielding mortgage-related assets, due to continued liquidations. While derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported Segment Earnings, because, while fair value changes in derivatives affect Segment Earnings, fair value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings.
The objectives set forth for us under our charter and conservatorship, restrictions set forth in the Purchase Agreement and restrictions imposed by FHFA have negatively impacted, and will continue to negatively impact, our Investments segment results. This will likely cause a corresponding reduction in our net interest income from these assets and therefore negatively affect our Investments segment results. FHFA also stated its expectation that any net additions to our mortgage-related investments portfolio would be related to purchasing seriously delinquent mortgages out of PC pools.
We are also 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. Single-Family Guarantee. Table 13 presents the Segment Earnings of our Single-family Guarantee segment. Segment Earnings loss before income tax benefit expense. Total other comprehensive income loss , net of taxes. Average balance of single-family credit guarantee portfolio.
Management and Guarantee Fee Rate in bps, annualized :. Segment Earnings management and guarantee income. REO inventory, at end of period number of properties. Single-family credit losses, in bps annualized 6. Single-family mortgage debt outstanding total U. Financial Results. Segment Earnings loss improved in the first quarter of , compared to the first quarter of , primarily due to a decline in provision for credit losses, partially offset by an increase in REO operations expense.
Segment Earnings management and guarantee income consists of contractual amounts due to us related to our management and guarantee fees as well as amortization of delivery fees. Segment Earnings management and guarantee income increased slightly in the first quarter of compared to the first quarter of , primarily due to an increase in the amortization of delivery fees. Increased amortization of delivery fees reflects the impact of higher delivery fees associated with loans purchased after combined with continued high prepayment rates on guaranteed mortgages in the first quarter of as mortgage rates remained low and refinancing activity remained high.
Segment Earnings provision for credit losses decreased in the first quarter of , compared to the first quarter of , primarily due to a decline in the number of delinquent loan inflows, and a decline in the rate at which delinquent loans ultimately transition to a loss event. Year of origination 5 :. Income tax benefit and other non-interest income and expense , net 6. We currently believe our management and guarantee fee rates for guarantee issuances after , when coupled with the higher credit quality of the mortgages within our new guarantee issuances, will provide management and guarantee fee income, over the long term, that exceeds our anticipated credit-related and administrative expenses associated with the underlying loans.
However, our management and guarantee fee rates associated with guarantee issuances in through have not been adequate to provide related income to cover the credit and administrative expenses associated with such loans. We also believe that the management and guarantee fees associated with originations after will not be sufficient to offset the future expenses associated with our to guarantee issuances.
Consequently, we expect to continue reporting net losses for the Single-family Guarantee segment at least through Key Metrics. The slight decline in this portfolio was primarily attributable to liquidations of Freddie Mac mortgage-related securities, which are due to high levels of refinancing, and our repurchases of delinquent loans from PC pools during the first quarter of The annualized liquidation rate on our securitized single-family credit guarantees was Due to increasing interest rates and improving economic conditions we believe that, overall and as a percentage of our.
The serious delinquency rate on our single-family credit guarantee portfolio decreased slightly to 3. These new vintages reflect a combination of changes in underwriting practices and a higher composition of fixed-rate and refinanced mortgage products, and represent an increasingly large proportion of our single-family credit guarantee portfolio.
The proportion of the portfolio represented by older vintages, which have a higher composition of loans with higher-risk characteristics, continues to decline principally due to liquidations resulting from repayments, payoffs, and refinancing activity as well as those resulting from foreclosure events and foreclosure alternatives.
Although the volume of new serious delinquencies declined in each of the last five quarters, our serious delinquency rate remains high, reflecting continued stress in the housing and labor markets. Segment Earnings, net of taxes, including noncontrolling interest. Average balance of Multifamily loan portfolio. Average balance of Multifamily guarantee portfolio. Average balance of Multifamily investment securities portfolio. Average Management and guarantee fee rate, in bps annualized 2.
Delinquency rate 3. Credit losses, in bps annualized 4. We currently expect to generate positive Segment Earnings in the Multifamily segment in Segment Earnings non-interest income for the Multifamily segment was unchanged in the first quarter of compared to the first quarter of Within Segment Earnings non-interest income, we experienced higher security impairments on CMBS that were offset primarily by fair value gains on mortgage loans during the first quarter of , compared to the first quarter of Gains on sales of multifamily loans in the multifamily segment are presented net of changes in fair value due to changes in interest rates.
Multifamily market fundamentals, including vacancy rates and effective rents, continued to improve nationally and in most states and metropolitan areas during the first quarter of These improving fundamentals continued to help stabilize property values in a number of markets. While multifamily market fundamentals reflect positive trends for much of the nation, certain states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, continue to exhibit weaker than average fundamentals and elevated unemployment and may negatively impact our mortgage portfolio performance and may lead to additional non-performing assets.
The decrease in our loan loss reserve in the first quarter of was driven by positive trends in vacancy rates and effective rents reflected over the past several consecutive quarters, as well as stabilizing or improved property values and improved borrower credit profiles.
For loans where we identified deteriorating collateral performance characteristics, such as estimated current LTV ratio and DSCRs, we evaluate each individual loan, using estimates of property value, to determine if a specific loan loss reserve is needed. The delinquency rate for loans in the multifamily mortgage portfolio was 0.
Multifamily credit losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios decreased from 8. Although our charge-offs were low for the first quarter of , we expect that our charge-offs will increase in the remainder of Increased competition in certain markets has exerted and may continue to exert downward pressure on pricing and credit for new activity in the remainder of , and could negatively impact our future purchase volumes.
Our primary multifamily business strategy in is to purchase loans and subsequently securitize them under our CME securitization program, which supports liquidity for the multifamily market and affordability for multifamily rental housing. The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes.
We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities. The short-term assets related to our consolidated VIEs are comprised primarily of restricted cash and cash equivalents and investments in securities purchased under agreements to resell.
The aggregate increase in these assets is largely related to an increase in forecasted debt redemptions. Available-for-sale mortgage-related securities:. Freddie Mac 1. Obligations of states and political subdivisions. Total available-for-sale mortgage-related securities. Total investments in available-for-sale securities. Total trading non-mortgage-related securities. Non-Mortgage-Related Securities. Our investments in non-mortgage-related securities provide an additional source of liquidity for us. Mortgage-Related Securities. We are primarily a buy-and-hold investor in mortgage-related securities, which consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions.
We also invest in our own mortgage-related securities. However, single-family PCs and certain Other Guarantee Transactions we purchase are not accounted for as investments in securities because we recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. Freddie Mac mortgage-related securities: 2. Total Freddie Mac mortgage-related securities. Agency securities: 3. Single-family: 4. Obligations of states and political subdivisions 5.
Total non-agency mortgage-related securities 6. Premiums, discounts, deferred fees, impairments of UPB and other basis adjustments. Net unrealized losses on mortgage-related securities, pre-tax. Total carrying value of mortgage-related securities. The purchase activity includes single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated. Purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
Non-Freddie Mac mortgage-related securities purchased for resecuritization:. Non-agency mortgage-related securities purchased for Other Guarantee Transactions 2. Total Non-Freddie Mac mortgage-related securities purchased for resecuritization. Non-Freddie Mac mortgage-related securities purchased as investments in securities:.
Total non-Freddie Mac mortgage-related securities purchased as investments in securities. Total non-Freddie Mac mortgage-related securities purchased.
Freddie Mac mortgage-related securities purchased:. Total Freddie Mac mortgage-related securities purchased. We did not purchase any non-agency mortgage-related securities during the first quarters of or , other than purchases for resecuritization as Other Guarantee Transactions. This improvement in unrealized losses was primarily due to an increase in fair value on non-agency mortgage-related securities, as spreads tightened on CMBS, coupled with fair value gains related to the movement of non-agency mortgage-related securities with unrealized losses towards maturity.
Additionally, net unrealized losses recorded in AOCI decreased due to the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities. All available-for-sale securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. As discussed below, we have exposure to subprime, option ARM, interest-only, and Alt-A and other loans as part of our investments in mortgage-related securities as follows:.
Freddie Mac releases temporary guidance for government shutdown
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. Since the. Alt-A 2. Gross unrealized losses, pre-tax: 3. Collateral delinquency rate: 4. Cumulative collateral loss: 5. Average credit enhancement: 6. Net impairment of available-for-sale securities recognized in earnings:.
Principal repayments and cash shortfalls: 2. All of this amount has been reflected in our net impairment of available-for-sale securities recognized in earnings in this and prior periods. The increase in our estimate of the present value of expected future credit losses resulted primarily from our expectation of slower prepayments, and to a lesser extent from deteriorating delinquency data on the underlying loans, decreases in actual and forward home prices, and higher forward interest rates.
Many of the trusts that issued non-agency mortgage-related securities we hold were structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency mortgage-related securities we hold will be significantly less than the fair value declines experienced on these securities.
The investments in non-agency mortgage-related securities we hold backed by subprime first lien, option ARM, and Alt-A loans were structured to include credit enhancements, particularly through subordination and other structural enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related securities. These credit enhancements are the primary reasons we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in aggregate.
It is difficult to estimate the point at which structural credit enhancements will be exhausted. Included in these net. The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined since In addition, subprime, option ARM, and Alt-A and other loans backing the securities we hold have significantly greater concentrations in the states that are undergoing the greatest economic stress, such as California and Florida. Loans in these states undergoing economic stress are more likely to become seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our investments in non-agency mortgage-related securities. Our assessments concerning other-than-temporary impairment require significant judgment and the use of models, and are subject to potentially significant change due to changes in the performance of the individual securities and in mortgage market conditions. Depending on the structure of the individual mortgage-related security and our estimate of collateral losses relative to the amount of credit support available for the tranches we own, a change in collateral loss estimates can have a disproportionate impact on the loss estimate for the security.
Additionally, servicer performance, loan modification programs and backlogs, bankruptcy reform and other forms of government intervention in the housing market can significantly affect the performance of these securities, including the timing of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities. Foreclosure processing suspensions can also affect our losses. For example, while defaulted loans remain in the trusts prior to completion of the foreclosure process, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments, rather than absorbing default losses.
This may reduce the amount of funds available for the tranches we own. Given the extent of the housing and economic downturn, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities with high assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls.
Below investment grade 2. Total investments in mortgage-related securities. Mortgage Loans. As guarantor, we have the right to purchase mortgages that back our PCs from the underlying loan pools when they are significantly past due or when we determine that loss of the property is likely or default by the borrower is imminent due to borrower incapacity, death or other extraordinary circumstances that make future payments unlikely or impossible. This right to repurchase mortgages is known as our repurchase option, and we also exercise this option when we modify a mortgage.
Our multifamily loan activity in the first quarters of and primarily consisted of purchases of loans intended for securitization and sales through Other Guarantee Transactions as part of our CME securitization program. We expect to continue to purchase and subsequently securitize multifamily loans in under our CME securitization program, which supports liquidity for the multifamily market and affordability for multifamily rental housing, as our primary multifamily business strategy in Mortgage loan purchases and guarantee issuances:.
Adjustable-rate 2. Interest-only 3. Total single-family 4. Total mortgage loan purchases and other guarantee commitment activity 5. Percentage of mortgage purchases and other guarantee commitment activity with credit enhancements 6. Derivative Assets and Liabilities, Net. The composition of our derivative portfolio changes from period to period as a result of derivative purchases, terminations, or assignments prior to contractual maturity and expiration of the derivatives at their contractual maturity.
The increase in the net fair value of our total derivative portfolio was primarily due to increasing longer-term swap interest rates. A negative fair value for a derivative type is the estimated amount, prior to netting by counterparty, that we would owe if the derivatives of that type were terminated. Weighted average fixed rate 4. Forward-starting swaps 5. Other option-based derivatives 6. Commitments 7. Commitments 2. Other derivatives: 3. Fair value of new contracts entered into during the period 4.
Contracts realized or otherwise settled during the period. REO, Net. As a result of borrower default on mortgage loans that we own, or for which we have issued our financial guarantee, we acquire properties which are recorded as REO assets on our consolidated balance sheets. The pace of our REO acquisitions temporarily slowed beginning in the fourth quarter of due to delays in the foreclosure process, including delays related to concerns about deficiencies in foreclosure documentation practices.
These delays in foreclosures continued in the first quarter of , particularly in states that require a judicial foreclosure process. While foreclosure proceedings generally resumed during the first quarter of , the rate of foreclosure completion is slower than prior to the suspensions. We expect our REO inventory to grow in the remainder of Deferred Tax Assets, Net. In connection with our entry into conservatorship, we determined that it was more likely than not that a portion of our net deferred tax assets would not be realized due to our inability to generate sufficient taxable income and, therefore, we recorded a valuation allowance.
After evaluating all available evidence, including our losses, the events and developments related to our conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we reached a similar conclusion in all subsequent quarters, including in the first quarter of We believe the deferred tax asset related to these unrealized losses is more likely than not to be realized because of our assertion that we have the intent and ability to hold our available-for-sale securities until any temporary unrealized losses are recovered. IRS Examinations.
The IRS completed its examinations of tax years to We filed a petition with the U. The principal matter of controversy involves questions of timing and potential penalties regarding our tax accounting method for certain hedging transactions.