Freddie Mac 2014 Annual Report Download - page 71

66 Freddie Mac
expect these fees to continue to increase in the future as we add new business and increase the UPB of loans subject to these
fees.
Other Expense (Income)
Other expense (income) was $238 million, $(109) million, and $465 million in 2014, 2013, and 2012, respectively. The
income in 2013, compared to expense in 2014 and 2012, was primarily due to a settlement with Lehman Brothers Holdings Inc.
to resolve our claims related to Lehman’s bankruptcy, which reduced other expenses for 2013. Other expense for 2012 included
expenses to establish legal reserves related to pending litigation. Other expense (income) also includes HAMP servicer
incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses. FHFA has
directed us to allocate funds to two housing funds managed by HUD and Treasury, beginning in 2015, as discussed in
"BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Affordable Housing Allocations."
Amounts related to this allocation will be recorded in non-interest expense beginning in 2015, but we do not expect them to be
material.
Income Tax (Expense) Benefit
We reported an income tax (expense) benefit of $(3.3) billion, $23.3 billion, and $1.5 billion for 2014, 2013, and 2012,
respectively. The income tax benefit in 2013 primarily resulted from the release of the valuation allowance in the third quarter
of 2013. See “NOTE 12: INCOME TAXES” for additional information.
Comprehensive Income
Our comprehensive income was $9.4 billion, $51.6 billion, and $16.0 billion for 2014, 2013, and 2012, respectively,
consisting of: (a) $7.7 billion, $48.7 billion, and $11.0 billion of net income, respectively; and (b) $1.7 billion, $2.9 billion, and
$5.1 billion of other comprehensive income, respectively. Other comprehensive income during 2014 primarily related to fair
value gains on our available-for-sale securities resulting from the impact of spread tightening on our non-agency mortgage-
related securities and the movement of these securities with unrealized losses towards maturity, coupled with the impact of a
decline in longer-term interest rates. Other comprehensive income during 2013 was primarily due to fair value gains resulting
from the impact of spread tightening on our non-agency mortgage-related securities and the movement of these securities with
unrealized losses towards maturity.
Other comprehensive income in all periods also reflects the reversals of: (a) unrealized losses due to the recognition of
other-than-temporary impairments in earnings; and (b) unrealized gains and losses related to available-for-sale securities sold
during the respective period. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity” for additional
information regarding total other comprehensive income.
Segment Earnings
We have three reportable segments, which are based on the type of business activities each performs — Single-family
Guarantee, Investments, and Multifamily. Certain activities that are not part of a reportable segment are included in the All
Other category.
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-
family Guarantee segment, we purchase and guarantee single-family mortgage loans originated by our seller/servicers in the
primary mortgage market and we manage our seriously delinquent loans. In most instances, we use the mortgage securitization
process to package the 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 credit-related
expenses, administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
The Investments segment reflects results from three primary activities: (a) managing the company’s mortgage-related
investments portfolio, excluding Multifamily segment investments and single-family seriously delinquent loans; (b) managing
the treasury function for the entire company, including funding and liquidity; and (c) managing interest-rate risk for the entire
company. In our Investments segment, we invest principally in mortgage-related securities and single-family performing
mortgage loans. Segment Earnings for this segment consist primarily of the returns on these investments, less the related
funding, hedging, and administrative expenses.
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee
activities in multifamily mortgage loans and securities. Our primary business model is to purchase multifamily mortgage loans
for aggregation and then securitization through issuance of multifamily K Certificates. To a lesser extent, we provide
guarantees of the payment of principal and interest on tax-exempt multifamily pass-through certificates backed by multifamily
housing revenue bonds. In addition, we guarantee the payment of principal and interest on tax-exempt multifamily housing
revenue bonds secured by low- and moderate-income multifamily mortgage loans. Historically, we were primarily a buy-and-
hold investor in multifamily assets (both loans held for investment and investment securities). While these legacy assets
continue to be significant, we have not focused on this investment strategy since 2009. Segment Earnings for this segment
consist primarily of returns on assets related to multifamily investment activities and management and guarantee fee income,
less credit-related expenses, administrative expenses, and allocated funding costs.
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