Freddie Mac 2015 Annual Report Download - page 18

Management's Discussion and Analysis Consolidated Results of Operations | Comparison
Freddie Mac 2015 Form 10-K 16
$0.6 billion increase in income from non-agency mortgage-related securities settlements, as
the majority of such settlements occurred in 2014;
$1.6 billion increase in the fair value of these multifamily mortgage loans, due to the
tightening of K Certificate benchmark spreads observed in the market; and
$0.2 billion increase in write-downs due to lower-of-cost-or-fair-value adjustments for
mortgage loans transferred from held-for-investment to held-for-sale.
• Administrative expense increased in 2015 and 2014 primarily because of costs associated with the
FHFA-mandated termination of our pension plans. This increase was partially offset by lower
professional services expense driven by lower expenses associated with FHFA-led lawsuits regarding
our investments in certain non-agency mortgage-related securities.
• REO operations expense increased in 2015 and 2014 compared to the respective prior year. REO
property expenses declined in 2015 and 2014, consistent with a decline in REO inventory in each
year. However, the REO property expenses were offset to a lesser extent by gains on the disposition
of REO properties and recoveries from mortgage insurance, compared to the respective prior year.
• Temporary Payroll Tax Cut Continuation Act of 2011 expense continued to increase as a result of
the increase in the population of loans subject to this expense. As of December 31, 2015, $1.1 trillion
of loans (or 63% of the single-family credit guarantee portfolio) were subject to these fees. We expect
the amount of these fees will continue to increase in the future as we add new business and the
population of loans subject to these fees increases.
• Other expense increased during 2015 compared to 2014, primarily driven by property taxes and
insurance costs associated with loans reclassified from held-for-investment to held-for-sale. These
costs are considered part of the loan loss reserves while the loans are classified as held-for-
investment. See "Effect of Loan Reclassifications" for more information. In addition, beginning
January 1, 2015, FHFA directed us to allocate funds that will be distributed to certain housing funds
pursuant to the GSE Act. During 2015, we completed $393.8 billion of new business purchases
subject to this allocation and accrued $165 million of related expense. We expect to pay these
amounts in February 2016. Other expense increased during 2014 compared to 2013, due to a
settlement with Lehman Brothers Holdings Inc. to resolve our claims related to Lehman’s bankruptcy
which reduced other expenses in 2013.
• Income tax expense decreased in 2015 due to a decrease in pre-tax income. Income tax expense
in 2014 reflects our return to a normal income tax recognition environment after the release of the
valuation allowance against our net deferred tax asset in 2013.
• Other comprehensive income was a loss in 2015 compared to income in 2014, primarily due to less
spread tightening for our non-agency mortgage-related securities and less impairment
reclassifications from AOCI into earnings. These factors were partially offset by a lower amount of
accretion being recognized during 2015 compared to 2014. Other comprehensive income
decreased during 2014 compared to 2013, primarily due to less spread tightening for our non-agency
mortgage-related securities, partially offset by a flattening of the yield curve during 2014.
The three items discussed below affected multiple line items on our consolidated results of operations.
Effect of Loan Reclassifications
In 2014, management, with the approval of FHFA, decided to pursue sales of certain seriously delinquent
single-family mortgage loans. During 2015, we expanded this program to include sales of certain