2016 Dodd-Frank Act Stress Test 

Severely Adverse Scenario Results

August 8, 2016
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Executive Summary

 Freddie Mac is required to conduct annual stress tests to assess capital adequacy under the Federal Housing Finance Agency (FHFA) 

rule implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) stress testing requirements. 

» FHFA’s stress test specifications include a Severely Adverse scenario, which reflects a 25% decline in house prices and a severe global 

market shock.

 The 2016 Dodd-Frank Act Stress Test (DFAST) is Freddie Mac’s third year of public disclosure of the Severely Adverse scenario 

results.

 Freddie Mac has been operating under conservatorship since September 6, 2008 under the direction of the FHFA, as Conservator.

 Freddie Mac entered into a Preferred Stock Purchase Agreement (PSPA) with the U.S. Department of the Treasury (Treasury) 

pursuant to which Treasury purchased Senior Preferred Stock of Freddie Mac and agreed to make certain funding available to Freddie 

Mac as needed to prevent Freddie Mac from having a negative net worth. 

» Freddie Mac has drawn $71.3 billion under the PSPA and currently has $140.5 billion of remaining funding available to it. 

» The PSPA provides for a quarterly dividend equal to Freddie Mac’s net worth in excess of an amount of capital that is $1.2 billion in 2016, and 

declines to zero in 2018. Because of the sweep dividend requirement, Freddie Mac cannot accumulate or retain capital in excess of the 

declining amount of capital permitted by the PSPA. 

 As prescribed by FHFA, Freddie Mac is disclosing the results of the stress test in the Severely Adverse scenario in two different 

versions – one that does not reflect having to reestablish the valuation reserve on our deferred tax assets (DTA) and one that reflects 

having to reestablish the DTA valuation reserve.

 Stress test results as of December 31, 2015 under the Severely Adverse scenario show substantial funding available under the PSPA 

after exhausting the $1.2 billion of capital allowed by the PSPA. 

» The Severely Adverse scenario (without re-establishing a valuation allowance on our DTA) indicates $26 billion of additional draws, leaving 

$114 billion of remaining PSPA funding.

» The Severely Adverse scenario (with re-establishing a valuation allowance on our DTA) indicates $53 billion of additional draws, leaving $88 

billion of remaining PSPA funding.

Stress test results are not expected outcomes. They are modeled projections based on hypothetical 

economic conditions prescribed by FHFA. Actual outcomes may be very different. 
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Stress Test Overview

Background

 Dodd-Frank requires certain financial companies with more than $10 billion in assets that are regulated by a primary federal 

financial regulatory agency to perform annual stress tests to assess capital adequacy 

 For the GSEs, the FHFA prescribed stress test assesses capital adequacy through the sufficiency of the remaining funding 

commitment under the PSPA(1)

 FHFA provided the key scenario assumptions for the 2016 Dodd-Frank annual stress test in March 2016. The nine quarter 

planning horizon includes 1Q16 to 1Q18, beginning with the 12/31/2015 balance sheet information

 The 2016 stress tests results were submitted to FHFA and the Federal Reserve (sent by FHFA) on May 20, 2016

 Overall stress test results were reviewed by Freddie Mac’s Board of Directors, CEO, CERO, and other key stakeholders

Key Economic Variables for the Severely Adverse Scenario as prescribed by FHFA

Macroeconomic Variables:

− Residential House Prices (9-Quarter Decline)

− Commercial Real Estate (9-Quarter Decline)

− Real Gross Domestic Product (peak-to-trough)

− Unemployment Rate (Peak)

Interest-Rate Variables

− 30-yr Mortgage Rate (Ending)

− 10-yr Treasury Rate (Ending)

− Short-term Rate (Ending)

Global Market Shock

− Instantaneous Price Shocks on Non-agency Securities

− Instantaneous Interest Rate, Option-Adjusted-Spread (OAS) Shocks, 

and Default of Largest Counterparty

-25%

-30%

-6.2%

10%

4.1%

1.2%

-0.5%

RMBS: up to -92%; CMBS: up to -20%

10-Yr Rates: -200 bps; MBS OAS: +170bps

(1) Including $1.2 billion permitted capital reserve at January 1, 2016. 
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Remaining

PSPA Funding

Commitment

(12/31/2015)

Capital at

12/31/2015

Pre-Provision

Net Revenue

(PPNR)

Provision for

Credit Losses

Mark-to-market

Losses

Global Market

Shock

Income Tax

Benefit and

Other

Comprehensive

Income

Dividends to

Treasury

Remaining

PSPA Funding

Commitment

(3/31/2018)

($Billions)

$1.2

$15.8

($20.1)

($24.2)

$114.1

$140.5

($8.6)

$9.9 ($0.3)

(1) (3) (5)

Severely Adverse Results – Without 

Re-establishing Valuation Allowance On DTA

 Severely Adverse scenario, without re-establishing valuation allowance on DTA, results in $114 billion 

of remaining funding under the PSPA ($26 billion of additional draws).

Note: Numbers may not foot due to rounding

(1) Equity was $2.9 billion as of 12/31/2015; reflects capital after $1.7 billion of dividends paid to Treasury in 1Q16.

(2) Includes estimated operational risk losses of ($2.6) billion.

(3) Includes fair value gains (losses) on derivatives and trading securities, and other gains (losses) on investment securities.

(4) Includes $7.9 billion of benefits for federal income taxes and $2.0 billion of other comprehensive income.

(5) Capital reserve decreases by $0.6 billion every year from $1.2 billion at January 1, 2016 to $0 at January 1, 2018.

(2)

(4)
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Remaining

PSPA Funding

Commitment

(12/31/2015)

Capital at

12/31/2015

Pre-Provision

Net Revenue

(PPNR)

Provision for

Credit Losses

Mark-to-Market

Losses

Global Market

Shock

 Other

Comprehensive

Income and DTA

Valuation

Allowance

Dividends to

Treasury

Remaining

PSPA Funding

Commitment

(3/31/2018)

($Billions)

$1.2

$15.8

($20.1)

($24.2)

$87.7

$140.5

($8.6)

($16.2)

($0.6)

(1) (3) (5)

Severely Adverse Results – With Re-establishing 

Valuation Allowance On DTA

 Severely Adverse scenario, with re-establishing valuation allowance on DTA, results in $88 billion of 

remaining funding under the PSPA ($53 billion of additional draws).

Note: Numbers may not foot due to rounding

(1) Equity was $2.9 billion as of 12/31/2015; reflects capital after $1.7 billion of dividends paid to Treasury in 1Q16.

(2) Includes estimated operational risk losses of ($2.6) billion.

(3) Includes fair value gains (losses) on derivatives and trading securities, and other gains (losses) on investment securities.

(4) Includes ($18.2) billion of DTA valuation allowance and $2.0 billion of other comprehensive income.

(5) Capital reserve decreases by $0.6 billion every year from $1.2 billion at January 1, 2016 to $0 at January 1, 2018.

(2)

(4)
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Severely Adverse Scenario Results

Cumulative Projected Financial Metrics 

(1Q2016 – 1Q2018)

($Billions) Results without re-establishing 

valuation allowance on DTA

Impact of re-establishing 

valuation allowance on DTA

Results with re-establishing 

valuation allowance on DTA

1. Pre-provision net revenue (PPNR) (1) $15.8 $15.8

2. (Provision) benefit for credit losses (24.2) (24.2)

3. Mark-to-Market gains (losses) (2) (8.6) (8.6)

4. Global market shock on trading securities and counterparty (3) (5.5) (5.5)

5. Net income (loss) before taxes (22.5) (22.5)

6. (Provision) benefit for taxes 7.9 (26.1) (18.2)

7. Other comprehensive income (loss) (4) (12.7) (12.7)

8. Total comprehensive income (loss) ($27.3) (26.1) ($53.4)

9. Dividends to Treasury (0.3) (0.3) (0.6)

10. PSPA funding commitment as of December 31, 2015 $140.5 $140.5

11. Treasury draws required 26.4 26.4 52.8 

12. Remaining PSPA funding commitment $114.1 (26.4) $87.7 

13. Credit losses (5) (10.3) (10.3)

14. Credit losses (% of average portfolio balance) 0.59% 0.59%

(1) Includes net interest income, security impairments, operational risk losses, foreclosed property income (expense) and other non-interest income (expense).

(2) Includes fair value gains (losses) on derivatives and trading securities, and other gains (losses) on investment securities.

(3) Includes global market shock impacts on trading securities, HFS loans and counterparty default losses.

(4) Includes the global market shock impact on available-for-sale (AFS) securities.

(5) Credit losses are defined as charge-offs, net plus foreclosed property expenses.

 Without re-establishing valuation allowance on DTA: Comprehensive loss of $27 billion over nine quarters results in $26 billion of additional draws, leaving $114 

billion of remaining funding under PSPA. 

 With re-establishing valuation allowance on DTA: Comprehensive loss of $53 billion over nine quarters results in $53 billion of additional draws, leaving $88 billion 

of remaining funding under PSPA. 

Note: Numbers may not foot due to rounding
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Appendix:

Stress Test Assumptions 

and Methodologies
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Stress Test Components

Pre-Provision Net 

Revenue (PPNR)

Net interest income, security impairments, estimated operational risk losses, foreclosed 

property income (expense), and other non-interest income (expense)

Loan Loss Provision

Credit loss provision expenses related to estimated single-family (SF) credit losses, 

troubled debt restructurings (TDRs), potential losses from recovering less than 100% of the 

company’s exposure to mortgage insurer (MI) counterparties, and multifamily (MF) credit 

provisions 

Mark-to-Market

Gains (Losses)

Mark-to-market gains (losses) related to changes in fair value of derivatives and trading 

securities, and other gains (losses) on investment securities.

Global Market Shock

(net of tax)

Instantaneous global shocks of interest rates, volatility, agency MBS OAS, and non-agency 

MBS prices applied to trading and AFS securities, and the estimated impact of a default of 

the company’s largest capital markets counterparty. Includes tax effect on AFS securities 

that the company intends to hold to recovery
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Description

 Reflects projections of net interest income, security impairments, estimated 

operational risk losses, foreclosed property income (expense), and other non-interest income (expense) over the ninequarter planning horizon. 

 Material risks covered include interest-rate risk, credit risk for non-agency MBS, and operational risk.

Methodologies 

 Projects cash flows using FHFA-provided interest rate paths and internal assumptions including business volume, 

retained portfolio size, funding mix, and spreads. 

 Estimates other-than-temporary impairments of non-agency MBS, incorporating FHFA’s house-price and interest-rate 

assumptions. 

 Estimated operational risk losses informed by the company’s historical operational loss experience and relevant 

external data consistent with supervisory expectations. 

Pre-Provision Net Revenue (PPNR)

Severely Adverse

PPNR: $16B (pre-tax)

(1Q16 – 1Q18)
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Description

 Reflects credit loss provision expenses related to estimated SF credit losses, TDRs, 

potential losses from recovering less than 100% of the company’s exposure to MI counterparties, and MF credit 

provisions.

 Captures mortgage credit risk, which is the largest component of Freddie Mac’s stress test losses.

Methodologies 

 Estimates SF provision expenses using Freddie Mac’s internal models, enhanced credit loss forecasting methodology 

and key house-price and interest-rate inputs provided by FHFA. 

 Incorporates estimated impacts of other relevant FHFA-provided macroeconomic variables, such as unemployment 

rate and GDP decline. 

 SF loss projections also reflect haircuts to MI payment obligations and the assumption that current loan modification 

programs will continue. 

 Estimates MF loan loss provision using regression of material macroeconomic variables provided by FHFA

(unemployment, 3-month Treasury yield, commercial real estate price index) versus Freddie Mac’s historical loan loss 

reserves.

Loan Loss Provision (LLP)

Severely Adverse

SF LLP: ($24)B (pre-tax)

(1Q16 – 1Q18)
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Mark-to-Market Gains (Losses) (MTM)

Description

 Reflects mark-to-market gains (losses) from changes in fair value of derivatives, 

and trading securities, and other gains (losses) on investment securities due to changes in interest rates. 

 Material risk covered includes interest-rate risk.

Methodologies 

 Applies FHFA-specified interest rate paths to estimate changes in fair value of derivatives and trading securities, and 

other gains (losses) on investment securities.

Global Market Shock (GMS)

Description

 The GMS is an instantaneous loss on Freddie Mac’s trading and AFS securities in

the first quarter that is not recovered during the nine-quarter planning horizon. This shock is treated as an add-on to 

the macroeconomic and financial market environment specified in the stress test.

 Includes impact of a default of the company’s largest capital markets counterparty. 

Methodologies

 Applies FHFA-specified shocks for interest rates, volatility, agency MBS OAS, and non-agency price shocks to the 

company’s MBS holdings. 

 Includes tax effect on AFS securities that the company has both the intent and ability to hold to recovery.

 Estimated impact of default of largest counterparty in the stress test. Assumes instantaneous default in the first quarter 

of the planning horizon with zero recovery. 

Other Components

(1) Portion related to trading and counterparty defaults is pre-tax.

Severely Adverse

MTM: ($9)B (pre-tax)

(1Q16 – 1Q18)

Severely Adverse

GMS: ($20)B (post-tax)1

(1Q16 – 1Q18)
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Description of Key Drivers

Mortgage

Credit Risk 

 Mortgage credit risk is the risk that a borrower fails to make timely payments on a mortgage owned or guaranteed by Freddie Mac.

 SF credit risk varies significantly by book year. Since 2008, Freddie Mac has enhanced its credit and underwriting policies and

purchased fewer loans with higher risk characteristics, which has contributed to improvements in the credit quality of the SF

guarantee business. Freddie Mac has also entered into risk transfer transactions on SF loans to reduce credit risk on these loans.

 MF credit risk is substantially reduced as a result of the K-deal securitization program, where Freddie Mac guarantees only the 

most senior tranches of K-deals, resulting in a significant portion of credit risk being transferred to the investors in subordinated 

tranches. 

Interest-Rate 

and Other 

Market Risk

 Interest-rate risk is the risk that changes in interest rates could result in a loss of value or future earnings. Freddie Mac is exposed 

to interest-rate risk primarily in its retained portfolio. 

 The retained portfolio also exposes the firm to spread risk, where changes in the spread between retained portfolio assets and 

related funding and derivatives could result in a loss. 

Counterparty

Credit Risk

 Counterparty risk is the risk that a counterparty will fail to meet its contractual obligations to Freddie Mac. The company’s

counterparty credit exposures include, but are not limited to, single-family seller/servicers that sell mortgage loans to the company 

and service the loans, MIs, and counterparties to derivative and repurchase agreement transactions. 

Operational

Risk

 Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, systems, human factors, 

or external events. Operational risk is inherent in the company’s business activities and can manifest itself in various ways, 

including accounting or operational errors, business interruptions, fraud and technology failures.
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Key Assumptions, Limitations and Weaknesses

House-price path 

change

 Higher house price declines in states that are a large percentage of Freddie Mac’s portfolio could lead to larger losses, even 

while keeping the same national house price decline

Macro factor 

variables

 DFAST Severely Adverse scenario is different from historical stress events. Impact of variables on losses cannot be fully 

substantiated with historical analysis

Interest-rate path  Negative rate environment: there is no historical data on negative rates to corroborate stress test results

Model limitations  Our credit loss forecast and certain other models have limitations that may significantly impact results 

Conservatorship  The company has been in a prolonged conservatorship with government support. The future state of the company in the 

medium-to-long term is unclear