Freddie Mac 2015 Annual Report Download - page 19

Management's Discussion and Analysis Consolidated Results of Operations | Comparison
Freddie Mac 2015 Form 10-K 17
performing loans that are held by consolidated trusts in which we own all of the trusts' outstanding
beneficial interests.
During 2015 and 2014, we reclassified $13.6 billion and $0.7 billion, respectively, in UPB of single-family
mortgage loans from held-for-investment to held-for-sale. The initial reclassifications of these loans
affected several line items on our consolidated results of operations, as shown in the table below.
Year Ended December 31,
(in millions) 2015 2014
Benefit for credit losses $ 2,314 $147
Other income (loss) - lower-of-cost-or-fair-value adjustment (2,193) (195)
Other (expense) income - property taxes and insurance associated with these loans (1,178) (62)
Effect on income before income tax (expense) benefit $ (1,057) $ (110)
Interest-Rate Risk Management Activities
We fund our business activities primarily through the issuance of unsecured short- and long-term debt.
The type of debt we issue is based on a variety of factors including market conditions and our liquidity
requirements.
We use derivatives to economically hedge interest-rate sensitivity mismatches between our assets and
liabilities. For example, depending on our strategic objectives and the duration of our mortgage-related
assets, we may fund our business using longer-term debt or using a mix of derivatives and shorter- and
medium-term debt. Through our use of derivatives, we manage our exposure to interest-rate risk on an
economic basis to a low level as measured by our models. For more information about our interest-rate
risk management and the sensitivity of reported earnings to our interest-rate risk management activities,
see “Risk Management - Interest Rate Risk and Other Market Risk.”
We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and
manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on
long-term debt, and it provides greater flexibility and opportunity to match the duration of our assets and
liabilities in the future as we reduce the mortgage-related investments portfolio in accordance with the
requirements of the Purchase Agreement and FHFA.
While our interest-rate risk management activities reduce our economic exposure to interest-rate risk to a
low level, as measured by our models, the accounting treatment for our assets and liabilities, including
derivatives, creates volatility in our earnings when interest rates fluctuate. Some assets and liabilities are
measured at amortized cost and some are measured at fair value, while all derivatives are measured at
fair value. These measurement differences create volatility in our earnings that generally is not indicative
of the underlying economics of our business.
The table below presents the effect of derivatives used in our interest-rate risk management activities on
our comprehensive income, after considering the accrual of periodic cash settlements (which is the
economic equivalent of interest expense), and the extent to which the effect of interest rate changes on
our derivatives was offset by their effect on other financial instruments. The estimated net effect on
comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that
are not measured at fair value.