Freddie Mac 2014 Annual Report Download - page 81

76 Freddie Mac
were designated for securitization, and we continue to pursue strategies to transfer credit risk for loans that are not designated
for securitization. We sold $21.3 billion in UPB of multifamily loans in 2014 primarily through K Certificate transactions,
compared to $28.3 billion in 2013.
We met our 2014 Conservatorship Scorecard goal of maintaining the dollar volume of new multifamily business activity
at or below the 2013 cap of $25.9 billion in UPB. For purposes of determining our performance under the goal, we exclude
business activity associated with certain targeted loan types (i.e., affordable housing loans, loans for smaller multifamily
properties, and loans for manufactured housing rental communities). The 2015 Conservatorship Scorecard set a goal for us to
maintain new multifamily business activity (excluding the targeted loan types) at or below $30.0 billion in UPB.
The UPB of the total multifamily portfolio increased to $169.3 billion as of December 31, 2014 from $166.8 billion as of
December 31, 2013, primarily due to an increase in our guarantee portfolio, partially offset by liquidations of our legacy
portfolio. The percentage of our total multifamily mortgage portfolio protected by subordination increased from 48% at
December 31, 2013 to 56% at December 31, 2014. The average subordination level at issuance of our multifamily
securitizations for 2014 and 2013 was 14.1% and 15.7%, respectively. This subordination is primarily provided by the
unguaranteed securities sold to third parties in K Certificate transactions, which absorb first losses.
Segment Earnings net interest income was $0.9 billion in 2014 compared to $1.2 billion in 2013 and $1.3 billion in 2012.
The declines in both 2014 and 2013 were primarily due to lower average balances of the multifamily unsecuritized loan and
investment securities portfolios.
Segment Earnings non-interest income was $1.7 billion in 2014 compared to $2.4 billion in both 2013 and 2012. Lower
gains on derivatives used to economically hedge our CMBS in 2014 were substantially offset by favorable changes in market
value of the assets they hedged. Segment Earnings other non-interest income was higher in 2013 than both 2014 and 2012,
primarily due to significant sales of investment securities (primarily CMBS) in 2013. We sold $2.6 billion in UPB of
investment securities in 2014 compared to $13.6 billion in UPB during 2013. Segment Earnings non-interest income remained
relatively unchanged in 2013 compared to 2012, as higher gains on sales of available-for-sale securities were offset by lower
gains on mortgage loans.
Derivative gains (losses) for the Multifamily segment are offset by fair value changes of the corresponding assets that the
derivatives economically hedge. The fair value changes of these hedged assets are included in gains (losses) on mortgage loans,
other non-interest income and total other comprehensive income. As a result, there is no net impact on total comprehensive
income for the Multifamily segment from interest rate-related derivatives.
Segment Earnings management and guarantee income increased to $254 million in 2014, compared to $206 million in
2013, and $151 million in 2012. The increase in both 2014 and 2013, compared to the preceding year, was primarily due to the
higher average balance of the multifamily guarantee portfolio, which was primarily due to ongoing issuances of K Certificates.
Our guarantees of K Certificates have lower fees than our other multifamily guarantee activities as a result of our limited credit
risk exposure due to the use of subordination.
Segment Earnings benefit for credit losses was $55 million, $218 million, and $123 million in 2014, 2013, and 2012,
respectively. The recognition of a benefit for credit losses in these periods was primarily due to continued improvement in the
expected performance of the underlying loans.
As a result of our prudent underwriting standards and practices, and the continued solid multifamily market
fundamentals, we believe that the credit quality of the multifamily mortgage portfolio remains strong. Multifamily credit losses
(gains) as a percentage of the combined average balance of our multifamily loan and guarantee portfolios were (0.5) basis
points, 0.9 basis points, and 2.8 basis points in 2014, 2013, and 2012, respectively, and our delinquency rate of 0.04% as of
December 31, 2014 continues to be among the industry's lowest. See “RISK MANAGEMENT — Credit Risk Overview —
Multifamily Mortgage Credit Risk Profile” for further information about the credit performance, including delinquency rates, of
our multifamily mortgage portfolio.
CONSOLIDATED BALANCE SHEETS ANALYSIS
You should read this discussion of our consolidated balance sheets in conjunction with our consolidated financial
statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for
information concerning certain significant accounting policies and estimates applied in determining our reported financial
position.
Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell
Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets
discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and
liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help
manage recurring cash flows and meet our other cash management needs. Securities purchased under agreements to resell
principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency
securities.
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