2020 Dodd-Frank Act Stress T

Severely Adverse Scenario ReAugust 13, 2021
CONFIDENTIAL 

Executive Summary

 Freddie Mac’s statutory mission is to provide liquidity, stability and affordabi

housing market. Consistent with its charter, the company’s business is focusthe U.S. residential mortgage market

 The company has been operating under conservatorship since September 6

direction of the Federal Housing Finance Agency (FHFA), as Conservator. Fability to access funds from Treasury under the Senior Preferred Stock Purc(PSPA) is critical to keeping the company solvent

 Freddie Mac is required to conduct annual stress tests to assess capital ade

FHFA’s rule implementing the Dodd-Frank Wall Street Reform and Consum(Dodd-Frank) stress testing requirements. The 2020 Dodd-Frank Act Stress represents the seventh year that Freddie Mac is performing the stress test

 FHFA’s stress test specifications include two required scenarios (Baseline s

Severely Adverse scenario with and without a valuation allowance against oAssets), each reflecting projections over a nine-quarter horizon (1Q20 - 1Q2Adverse scenario includes a 28% decline in house prices, 35% drop in commestate prices and a severe global market shock with our largest counterparty 

 Results are not expected outcomes. They are modeled projections based on 

economic conditions. Actual outcomes may be very different
CONFIDENTIAL 

Stress Test Overview

Background

 Dodd-Frank, as amended, requires certain financial companies with more than $250 billion in assets that 

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 

commitment under the PSPA(1)

 FHFA provided the key scenario assumptions for the 2020 Dodd-Frank annual stress test in March 2020

planning horizon includes 1Q20 to 1Q22, beginning with the 12/31/2019 balance sheet information

 The 2020 stress test results were submitted to FHFA and the Federal Reserve (sent by FHFA) on May 2 Overall stress test results were reviewed by Freddie Mac’s senior management and other key stakeholde

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

Macroeconomic Variables 2020 DFAST 2019  Residential House Prices (9-Quarter Decline) -28% -26 Commercial Real Estate (9-Quarter Decline) -35% -35 Real Gross Domestic Product (peak-to-trough) -8.3% -7.8 Unemployment Rate (Peak) 10% 10

Interest-Rate Variables

 30-yr Mortgage Rate (Peak) 4.4% 4.5 10-yr Treasury Rate (Ending) 1.6% 1.5 Short-term Rate (Ending) 0.10% 0.1

Global Market Shock

 Instantaneous Price Shocks on Non-agency securities RMBS: up to -62%; RM

(1) $140 billion as of December 31, 2019
CONFIDENTIAL 

Severely Adverse Scenario Results

Stress test results are not expected outcomes. They are modeled projections based on hypothetical economic coFHFA. Actual outcomes may be very different. The severely adverse scenario results do not reflect any COVID-1

 Impact of establishing 

valuation allowance on 

deferred tax assets 

 Billions of dollars Percent of average 

assets6 Billions 

1 Pre-provision net revenue1 0.82% 

17.3 

 (Provision) benefit for credit losses 2 

(19.4)

3 Mark-to-market gains (losses)2 

(1.3)

 Global market shock impact on trading securities 4 

(4.0)

and counterparty

 Net income before taxes 5 -0.35% 

(7.5) 

 (Provision) benefit for taxes 6 (7.5) 1.6 

7 Other comprehensive income (loss)3 

(1.2)

 Total comprehensive income (loss) 8 -0.34% (7.5) (7.1) 

 

9 Credit losses4 

(6.1)

10 Credit losses (% of average portfolio balance)5 0.27% 

1 Includes net interest income, security impairments, operational risk losses, foreclosed property income (expense), and other non-interest income/expenses2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities3 Includes global market shock impact on available-for-sale securities4 Credit losses are defined as charge-offs, net plus foreclosed property expenses5 Average portfolio balance over the nine-quarter planning horizon6 Average total assets over the nine-quarter planning horizon

 Results without

establishing valuation allowance on 

deferred tax assets 

estab

Cumulative Projected Financial Metrics

(Q1 2020 - Q1 2022)
CONFIDENTIAL 

Appendix:

Stress Test Assumptions 

and Methodologies
CONFIDENTIAL 

Stress Test Components

Pre-Provision Net Revenue 

(PPNR)

Business revenues (e.g., net interest income and guarantee fees), 

credit risk transfer transactions, and operating expenses (e.g., admexpenses, operational risk losses, foreclosed property expense)

Loan Loss Provision Provision related to SF business, reflecting estimated credit losses 

troubled debt restructurings (TDRs), and credit provision related to 

Mark-to-Market Gains 

(Losses)

Mark-to-market gains (losses) related to changes in fair value of de

loans, and trading securities, and other gains (losses) on investmenincluded in global market shock

Global Market Shock

(net of tax)

Instantaneous global shocks of OAS (option adjusted spread) and nprices applied to certain loans and trading and Available-For-Sale (Aas the estimated impact of a default of the company’s largest count

benefit on AFS securities that the company intends to hold to recov
CONFIDENTIAL 

Description

 PPNR reflects business revenues and expenses Includes projections of net interest income, non-interest income, cost and benefits of credit ris

foreclosed property expenses, operational risk losses (the risk of loss resulting from inadequaprocesses, people and systems or from external events) and other non-interest expense for thbusiness and new business during the nine-quarter horizon

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

relates to credit risk transfer recoveries and foreclosed property expense, and operational risk

Methodologies 

 Uses internal business assumptions for business volume, retained portfolio size, guarantee fe

transactions (credit risk transfer recovery benefit is primarily based on provision expense), despreads to LIBOR for assets and debt

 Projects cash flows using a third-party model, incorporating internal business assumptions an

scenario interest-rate paths

 Estimates forward prices on trading and AFS securities using a third-party model for non-agen

model for agency MBS

 Operational risk severely adverse stress loss is calculated with Basel II Basic Indicator Approa

factor to average annual gross income over a three-year period, excluding any years with neg

Pre-Provision Net Revenue (PPNR)
CONFIDENTIAL 

Description

 SF provision for credit losses reflects estimated credit losses, including costs from payment reductions 

due to reimbursement of servicer advances of property taxes and insurance. Credit loss amounts reflecrecoveries adjusted for the prescribed counterparty haircuts

 Captures SF mortgage credit risk, which is the largest component of Freddie Mac’s stress test losses MF Loan Loss Provision represents the credit provision recognized over the nine-quarter planning horiz

business

Methodologies 

 With CECL adoption, provision for credit losses reflects lifetime estimates for the portfolio, rather than i

on facts and circumstances as of each balance sheet date with no forecast of future economic changes

 Single-Family:

 Leveraged Moody's CCAR HPA scenarios at the MSA level, which aggregates to FHFA-provid

translated MSA-level house-price projections are then used in Freddie Mac’s internal models a

 Estimated scenario credit loss and reserves using internal credit loss forecasting model and ke

rate inputs from FHFA

 Loans are assumed to perform in a similar way as in the most recent economic cycle that cove

crisis and recovery, controlling for loan characteristics

 Loss projections reflect haircuts provided by FHFA to mortgage insurance payment obligations Credit risk transfer benefit for the consolidated SF portfolio is recognized as a separate asset u

PPNR along with the credit risk transfer costs and foreclosed property expense

 Multifamily:

 MF Loan Loss Provision employs a third-party model using a single path statistical model built 

Default (PD) / Loss Given Default (LGD) framework that calculates lifetime undiscounted net ccharacteristics of the forecasted portfolio balances and activities, and (2) market macroeconomFHFA and supplemented with Moody’s CCAR scenarios

 MF loan level credit losses are aggregated in accordance with securitization structures to reflec

subordination. The MF Loan Loss Reserve balance is reduced by credit protection received via 

Provision for Credit Losses
CONFIDENTIAL 

Other Components

Mark-to-Market Gains (Losses) (MTM)Global Market Shock (GMS)

Description

 Reflects mark-to-market gains (losses) from changes in fair value of derivatives and MF held-for sal

(losses) on investment securities not included in global market shock due to changes in interest rate

 Material risk covered includes interest rate risk We consider hedge accounting in our results

Methodologies  Applies FHFA-specified interest rate shocks to estimated changes in fair value of derivatives, loans 

Description

 The GMS is an instantaneous shock on Freddie Mac’s assets and debt valued at fair value in the f

recovered during the nine-quarter forecast horizon. This shock is treated as an add-on that is exogmacroeconomic and financial market environment specified in the stress test scenario

 The GMS captures market risks related to changes in OAS, as well as price shocks to non-agency  Also includes the estimated impact of a default of the company’s largest counterparty

Methodologies 

 Applies FHFA-specified shocks of OAS to Freddie Mac’s agency loans and security holdings Applies FHFA-specified price shocks to Freddie Mac’s non-agency MBS holdings, aggregated by p

and issuance year

 Includes tax benefit on AFS securities that the company has both the intent and ability to hold to re

company’s accounting policy, experience of the 2008 financial crisis, and projections of sufficient Psupports the company’s ability to hold AFS securities to recovery
CONFIDENTIAL 

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

purchased fewer loans with higher risk characteristics, which has contributed to improvements in the creguarantee business. The borrower’s equity in the property (expressed as the loan-to-value ratio) is a key 

losses. Actual house price growth reduces potential future losses

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

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

Market Risk 

Including 

Interest Rate 

and Spread 

Risk

 Market risk is the economic risk associated with adverse changes in interest rates, volatility, and spreads Freddie Mac’s GAAP financials are exposed to interest rate risk. The company employs hedge accountin

risk

 The retained portfolio is exposed to spread risk, related to adverse changes in the spread between secur

sectors

Counterparty

Credit Risk

 Counterparty credit risk is the risk that an institutional counterparty is unable to meet its contractual oblig

company’s counterparty credit exposures include, but are not limited to, counterparties to derivative and transactions and mortgage insurers (MIs)

Operational

Risk

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

external events. Operational risk is inherent in the company’s business activities and can manifest itself iaccounting or operational errors, business interruptions, fraud and technology failures