10-K: Freddie Mac's 2023 10-K Filing: Details on Securities, Conservatorship, and Financial Performance

Freddie Mac's 2023 10-K filing provides a detailed overview of the company's securities, its ongoing conservatorship, and its financial performance, including a net income of $10.5 billion.

Summary

• Freddie Mac operates under conservatorship with the Federal Housing Finance Agency (FHFA) as its conservator.
• The company has 21 classes of securities registered under Section 12 of the Securities Exchange Act of 1934, including common stock and 20 series of preferred stock.
• A Senior Preferred Stock Purchase Agreement with the U.S. Department of the Treasury (Treasury) has a significant impact on the rights of common and preferred stockholders.
• During conservatorship, the holders of common stock have no voting rights, which are succeeded to by FHFA.
• Dividends on common stock are not mandatory and are subject to restrictions under the conservatorship, the Purchase Agreement, the GSE Act, and the company's charter.
• The company's common stock is traded exclusively in the OTCQB Marketplace under the ticker symbol FMCC.
• The company's preferred stock is also traded exclusively in the OTCQB Marketplace.
• The company transitioned from LIBOR to spread-adjusted CME Term SOFR for certain preferred stock classes on July 1, 2023.
• The company's net income was $10.5 billion in 2023, a 13% increase year-over-year.
• Net revenues were $21.2 billion, down slightly year-over-year.
• The company provided $348 billion in liquidity to the mortgage market in 2023, enabling the financing of 1.4 million home purchases, refinancings, and rental units.
• The mortgage portfolio increased 2% year-over-year to $3.5 trillion at December 31, 2023.
• The company had credit enhancement coverage of 61% on its Single-Family mortgage portfolio and 94% on its Multifamily mortgage portfolio as of December 31, 2023.
• The company's net worth was $47.7 billion as of December 31, 2023, up from $37.0 billion as of December 31, 2022.

Sentiment

Score: 7

Explanation: The document presents a generally positive financial picture with increased net income and net worth, but the ongoing conservatorship and related restrictions temper the overall sentiment.

Positives

• The company's net income increased by 13% year-over-year to $10.5 billion in 2023.
• The company's net worth increased to $47.7 billion as of December 31, 2023.
• The company provided $348 billion in liquidity to the mortgage market in 2023.
• The company has a high level of credit enhancement coverage on both its Single-Family and Multifamily mortgage portfolios.

Negatives

• The company's net revenues decreased slightly year-over-year.
• The company's common stock and preferred stock are traded exclusively in the OTCQB Marketplace, which may have lower liquidity than a major exchange.
• The company is operating under conservatorship, which limits its business activities and strategic direction.
• The company's ability to pay dividends on common stock is restricted.

Risks

• The conservatorship and related matters significantly affect the company's management, business activities, financial condition, and results of operations.
• The company's future is uncertain, and the conservatorship has no specified termination date.
• The Purchase Agreement with Treasury significantly limits the company's business activities, including its ability to pay dividends, transfer certain assets, raise capital, and exit conservatorship.
• The company's payment of dividends is subject to restrictions under the conservatorship, the Purchase Agreement, the GSE Act, and the company's charter.
• The company's common stock and preferred stock are traded exclusively in the OTCQB Marketplace, which may have lower liquidity than a major exchange.
• The company's ability to compete with other market participants is limited by the conservatorship and related matters.
• The company's financial results and business volumes could be negatively affected by adverse changes in the housing market or economic conditions, including volatility and stress within the banking sector.

Future Outlook

The company expects its common stock and preferred stock to continue to trade in the OTCQB Marketplace so long as market makers demonstrate an interest in trading the stock.

Management Comments

• The Conservator has prohibited us from paying any dividends on our Common Stock.
• FHFA has instructed our Board of Directors that it should consult with and obtain the approval of FHFA before taking actions involving dividends.
• The Conservator has prohibited us from paying any dividends on our Preferred Stock.
• FHFA has instructed our Board of Directors that it should consult with and obtain the approval of FHFA before taking actions involving dividends.

Industry Context

This announcement is relevant to the broader housing finance industry, particularly given Freddie Mac's role as a GSE and its ongoing conservatorship. The transition from LIBOR to SOFR is also a significant industry-wide event.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards, but it does note that the company's voluntary turnover rate is below financial industry benchmarks.
• The document notes that the company's capital levels are significantly below the levels that would be required under the ERCF.
• The document notes that the company's credit enhancement coverage of 61% on its Single-Family mortgage portfolio and 94% on its Multifamily mortgage portfolio are significant.

Management Changes

Legal Proceedings

• The company is involved in a variety of legal proceedings arising from time to time in the ordinary course of business and in connection with the conservatorship and Purchase Agreement.
• The company is frequently involved in litigation involving mortgage foreclosures.
• The company is sometimes sued in connection with the origination or servicing of loans.
• The company is subject to a number of lawsuits challenging certain government actions related to the conservatorship and the Purchase Agreement.
• The company is subject to a class action lawsuit filed by private individual and institutional investors against FHFA, Fannie Mae, and Freddie Mac, alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties, and violation of Delaware and Virginia corporate law.
• The company is subject to an individual plaintiffs lawsuit by certain institutional investors against FHFA, Fannie Mae, and Freddie Mac, alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties, and violation of Delaware and Virginia corporate law.
• The company is subject to a derivative lawsuit, purportedly on behalf of Freddie Mac as a nominal defendant, alleging that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation.

Related Party Transactions

• The company is deemed a related party to the U.S. government due to the issuance of the warrant to Treasury.
• The company is deemed a related party with Fannie Mae as both companies have the same relationships with FHFA and Treasury.
• The company is deemed a related party with CSS as it is jointly owned by Freddie Mac and Fannie Mae.

Stakeholder Impact

• The conservatorship and related matters significantly affect the rights, preferences, and privileges of the holders of common stock and preferred stock.
• The Purchase Agreement with Treasury significantly limits the company's business activities, including its ability to pay dividends, transfer certain assets, raise capital, and exit conservatorship.
• The company's ability to attract and retain well-qualified and diverse employees is affected by the conservatorship, uncertainty of the company's future, and limitations on executive and employee compensation.
• The company's ability to access the capital markets and other sources of funding, as well as its cost of funds, may be affected by its credit ratings and those of the U.S. government.
• The company's business and results of operations may be directly and adversely affected by future legislative, regulatory, or judicial actions.

Next Steps

• The company expects its common stock and preferred stock to continue to trade in the OTCQB Marketplace so long as market makers demonstrate an interest in trading the stock.
• The company will continue to manage its debt issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase Agreement.
• The company will continue to work with its customers, investors, and servicers to implement the transition of historical LIBOR-based ARM products to SOFR-based ARM products.

Key Dates

Keywords

Freddie Mac, conservatorship, mortgage, securities, preferred stock, common stock, FHFA, Treasury, liquidity, credit risk, OTC, OTCQB, net income, housing market, mortgage portfolio, credit enhancement, Senior Preferred Stock Purchase Agreement, dividends, capital, LIBOR, SOFR