Dodd-Frank 

Stress Test Results

April 30, 2014
 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. 

 Under Dodd-Frank, Freddie Mac is required to disclose publicly the results of its stress test in the Severely Adverse scenario. This 

document is Freddie Mac's required disclosure.

 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 funding remaining available to it. 

» The PSPA provides for a quarterly dividend equal to all Freddie Mac’s net worth in excess of an amount of capital that starts at $3 billion and 

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

small and declining amount of capital permitted by the PSPA. 

» In the event of a quarterly loss in excess of its capital, Freddie Mac would need to draw funds under the PSPA in order to avoid having a 

negative net worth. 

 Freddie Mac is disclosing the results of the stress test in the Severely Adverse scenario in two different versions – one that reflects 

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

DTA valuation reserve. If the Severely Adverse scenario were actually to occur, Freddie Mac considers it more likely than not that the 

DTA valuation reserve would need to be reestablished. 

 Stress test results as of 9/30/2013 under the Severely Adverse scenario show substantial funding available under the PSPA after 

exhausting the $3 billion of capital allowed by the PSPA. 

» The Severely Adverse scenario (without re-establishing a valuation allowance on our DTA) indicates $50 billion of additional draws, leaving 

$91 billion of remaining PSPA funding.

» The Severely Adverse scenario (with re-establishing a valuation allowance on our DTA) indicates $93 billion of additional draws, leaving $48 

billion of remaining PSPA funding.

Executive Summary

1

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. 
Stress Test Overview

2

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 

 FHFA issued a final rule in September 2013 to implement the Dodd-Frank annual stress tests and provided 

scenarios in November 2013

 Stress tests results as of 9/30/2013 were submitted to FHFA and the Federal Reserve on February 5, 2014

FHFA Dodd-Frank Stress Test

 Three required scenarios: Baseline, Adverse, Severely Adverse

 Nine-quarter planning horizon: 4Q13 – 4Q15 (begins with 9/30/2013 balance sheet)

 Key assumptions provided by FHFA

 Assesses capital adequacy (sufficiency of remaining funding commitment under PSPA) (1)

Overall stress test results reviewed by Board of Directors, CEO, CFO, CERO, and other key stakeholders

(1) Including $3 billion permitted capital as of September 30, 2013. 
$90.6

$140.5 

$3 

$16 

$(57) $(2) 

$(28) 

$19 

Remaining PSPA

Funding Commitment

(9/30/13)

Capital

at 9/30/2013

Pre-Provision

Net Revenue

(PPNR)

Loan Loss

Provision

Mark-to-Market

Gains (Losses)

Global Market

Shock (net of tax)

(Provision) Benefit

for Taxes

Remaining PSPA

Funding Commitment

(12/31/15)

($s in Billions)

Severely Adverse Results – Without Re-establishing 

Valuation Allowance On DTA

 Severely Adverse scenario, without re-establishing a valuation allowance on DTA, results in $91 billion of 

remaining funding under PSPA ($50 billion of additional draws).

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(1) Equity was $33.4 billion as of 9/30/2013; reflects capital after $30.4 billion of dividends paid to Treasury in 4Q13.

(2) Includes estimated operational risk losses.

(3) Includes $3 billion change in AOCI not related to global market shock and estimated impact of counterparty default scenario.

(4) Includes 35% tax rate on pre-tax net loss plus release of valuation allowance on DTA allocated to 4Q13.

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. 

(2)

(1) (3) (4)

Numbers may not foot due to rounding
$47.7

$140.5 

$3 

$16 

$(57) $(2) 

$(28) 

$(24) 

Remaining PSPA

Funding Commitment

(9/30/13)

Capital

at 9/30/2013

Pre-Provision

Net Revenue

(PPNR)

Loan Loss

Provision

Mark-to-Market

Gains (Losses)

Global Market

Shock (net of tax)

DTA

Valuation Allowance

Remaining PSPA

Funding Commitment

(12/31/15)

($s in Billions)

Severely Adverse Results – With Re-establishing 

Valuation Allowance On DTA

4

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. 

 Severely Adverse scenario, with re-establishing a valuation allowance on DTA, results in $48 billion of 

remaining funding under PSPA ($93 billion of additional draws).

(1) Equity was $33.4 billion as of 9/30/2013; reflects capital after $30.4 billion of dividends paid to Treasury in 4Q13.

(2) Includes estimated operational risk losses.

(3) Includes $3 billion change in AOCI not related to global market shock and estimated impact of counterparty default scenario.

(2)

(1) (3)

Numbers may not foot due to rounding
Severely Adverse Scenario Results

5

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. 

 Without re-establishing valuation allowance on DTA: Comprehensive loss of $53 billion over nine quarters results in $50 billion of 

additional draws, leaving $91 billion of remaining funding under PSPA. 

 With re-establishing valuation allowance on DTA: Comprehensive loss of $96 billion over nine quarters results in $93 billion of 

additional draws, leaving $48 billion of remaining funding under PSPA. 

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

(2) Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities, excluding impact of global market shock.

(3) $42.8 billion impact includes $18.9 billion benefit for taxes (35% tax rate on pre-tax net loss plus release of valuation allowance on DTA allocated to 4Q13) and $23.9 billion of re-establishing valuation 

allowance on DTA.

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

(5) Credit losses include net charge-offs plus foreclosed property expenses. 

($s in billions)

1 Pre-provision net revenue (PPNR) (1) $ 16.0 - $ 16.0

2 (Provision) benefit for credit losses (57.4) - (57.4)

3 Mark-to-market gains (losses) (2) (2.2) - (2.2)

4 Global Market Shock impact on trading securities and counterparty (3.0) - (3.0)

5 Net income (loss) before taxes (46.6) - (46.6)

6 (Provision) benefit for taxes (3) 18.9 (42.8) (23.9)

7 Other Comprehensive Income (loss) (4) (25.2) - (25.2)

8 Total Comprehensive Income (Loss) (52.9) (42.8) (95.8)

9 PSPA funding commitment as of September 30, 2013 140.5 - 140.5

10 Treasury draws required 49.9 42.8 92.8

11 Remaining PSPA funding commitment 90.6 (42.8) 47.7

12 Credit losses ($s) (5) 36.5 - 36.5

13 Credit losses (% of average portfolio balance) 2.0% - 2.0%

Cumulative Projected Financial Metrics

(Q42013 - Q42015)

Results without 

re-establishing 

valuation 

allowance on 

deferred tax assets

Impact of 

re-establishing 

valuation 

allowance on 

deferred tax assets

Results with 

re-establishing 

valuation 

allowance on 

deferred tax assets

Numbers may not foot due to rounding
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Appendix:

Stress Test Assumptions and Methodologies
Severely Adverse Key Assumptions Provided by FHFA

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Residential House Prices (9-Quarter Decline) -25%

Commercial Real Estate Prices (9-Quarter Decline) -35%

Real Gross Domestic Product (9-Quarter Decline) -3%

Unemployment Rate (Peak) 11%

30-yr Mortgage Rate (Peak) 4.4%

10-yr Treasury Rate (Peak) 1.6%

Instantaneous price shocks on non-agency securities -20% to -90%

Instantaneous interest-rate, volatility, option-adjusted-spread 

(OAS) shocks, and default of largest derivative / reverse repurchase 

counterparty

10 Yr. Rates + 225 bps

Volatility + 25 bps

MBS OAS + 40 bps

Macroeconomic Variables

Interest-Rate Variables

Global Market Shock
Stress Test Components

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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 available-for-sale (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
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, guarantee fees, 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. 

 Pre-Provision Net Revenue (PPNR)

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Severely Adverse

PPNR: $16B (pre-tax)

(4Q13 – 4Q15)
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, 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 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)

10

Severely Adverse

LLP: $(57)B (pre-tax)

(4Q13 – 4Q15)
Mark-to-Market Gains (Losses) (MTM)

Description

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

and trading 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.

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 capital markets counterparty based on derivative/repo collateral shortfall in the 

stress test. Assumes instantaneous default in the first quarter of the planning horizon with zero recovery. 

 Other Components

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Severely Adverse

MTM: $(2)B (pre-tax)

(4Q13 – 4Q15)

Severely Adverse

GMS: $(28)B (post-tax)(1)

(4Q13 – 4Q15)

(1) Portion related to trading and counterparty defaults is pre-tax.
Description of Key Risks

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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.

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 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 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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Limitations 

 Management judgment is required in various assumptions and methodologies (e.g., new 

business volumes, guarantee fees, portfolio composition, funding spreads, credit loss 

estimates). Actual stress scenario risks could materialize in unforeseen ways and 

potentially alter estimates of earnings, losses and U.S. Treasury draws. 

 The company uses models to determine relationships between macroeconomic variables 

and business results. Historical relationships between macroeconomic variables and 

business results during a stress environment may not accurately forecast future outcomes. 

 In certain cases, projections are generated at the aggregate level and may not fully reflect 

loan-level sensitivities. 

 The company relies on third-party models to execute certain stress test projections. We 

may have limited insights into the inner workings of those models, which increases the risk 

of inconsistency across models.

 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.