Morningstar DBRS Confirms Federal Home Loan Mortgage Corporation's (Freddie Mac) Long-Term Credit Ratings of AAA With a Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed both the Long-Term Issuer Rating and Long-Term Senior Debt credit rating of Federal Home Loan Mortgage Corporation (Freddie Mac or the Company) at AAA. The trend on all credit ratings is Stable. The Company's current position under conservatorship and the strong implicit support from the U.S. federal government results in Freddie Mac's final credit ratings being equalized with the Long-Term Local Currency - Issuer Rating of the United States of America (the U.S.), as well as the confirmation of the SA1 Support Assessment.

KEY CREDIT RATING CONSIDERATIONS
Despite the lack of an explicit guarantee from the U.S. government, the Long-Term Issuer Rating of Freddie Mac continues to be equalized with the sovereign rating of the U.S., reflecting the very strong and ongoing systemic support in place from the U.S. government. While there has been increased speculation around the potential privatization of the Government-Sponsored Enterprises (GSEs), we view any changes to the current status quo as unlikely for the length of the credit rating outlook period given the complexities and potential far-reaching consequences of such an action, especially considering current macroeconomic uncertainties. The privatization of the GSEs also remains unlikely in the short to medium term, in our view, as the pursuit of any well thought out solution will require ample implementation time given the need to minimize the possibility of any negative repercussions and/or degree of transitional disruptions to the world's largest housing market.

Freddie Mac is essential to the functioning of the U.S. housing finance market given the scale of its operations and the critical function it serves. The Company's irreplicable market position, access to funding commitments from the U.S. Treasury, and conservatorship status under the FHFA are also important considerations. We view Freddie Mac as of high systemic importance given its role in supporting the very large U.S. housing finance ecosystem, which would likely experience higher levels of volatility in the absence of this support, resulting in more severe/disruptive systemic shocks across the broader U.S. economy in times of stress. We also consider the Company's strong market position (the two housing GSEs effectively operate as a duopoly), scale economies (driven by its large established platform), and our view that there are currently no other entities that could readily perform this specific role outside of the two housing GSEs.

Freddie Mac's position across the global debt capital markets is also an important consideration in the assessment of the Company's essentiality. The debt of the Company is widely held throughout the global financial system, likely incentivizing the U.S. government to help avoid any defaults given the likely repercussions. Indeed, as of March 19, 2025, the U.S. Federal Reserve Bank held $2.2 trillion (33% of the Fed's total balance sheet and second only to U.S. Treasuries of $4.2 trillion) of agency debt and agency MBS.

We also consider Freddie Mac's high degree of access to financial support given its existing funding commitment from the U.S. Treasury, which provides the Company with a source of funds should its GAAP net worth turn negative. Although the drawable limit remains ($140.2 billion as of YE 2024), continued support from the U.S. government is assumed to be timely should the need arise. Freddie Mac also has strong government oversight given its conservatorship status under the FHFA. The FHFA reconstituted the Board after becoming conservator, directing the Board to owe its fiduciary obligations solely to the FHFA (and not to the Company or shareholders). Currently, the Director of the FHFA (William J. Pulte) serves as Chairman of the Board. Separately, Freddie Mac's current and future business activities also remain limited in scope given any new product offerings continue to require FHFA approval prior to implementation.

The Stable trend primarily reflects that of the U.S. sovereign credit rating. Given the complexities of privatization, size of capital required to meet regulatory capital standards and the current U.S. housing market that is facing substantial headwinds, we foresee Freddie Mac remaining in conservatorship for the length of the credit rating outlook period.

CREDIT RATING DRIVERS
Given the current credit ratings of Freddie Mac are at the highest level in Morningstar DBRS' long-term rating scale, there is no potential for a credit ratings upgrade. Conversely, the credit ratings would be downgraded should Morningstar DBRS lower the Long-Term Local Currency -- Issuer Rating of the United States. The credit ratings of Freddie Mac would also be downgraded should we view the support from the U.S. Treasury to be diminished, or the expectation of support to be less timely.

CREDIT RATING RATIONALE
Franchise Strength
Freddie Mac was chartered in 1970 by an act of Congress, and the Company's federal charter and status as a GSE continues to be key to its franchise. The Company was established to create a liquid and stable secondary market for U.S. residential and multi-family mortgages. Freddie Mac does not originate or service mortgage loans but rather aggregates these loans via purchases from financial institutions (banks and non-banks) thereby providing liquidity, stability, and affordability to the U.S. housing market. Freddie Mac subsequently packages these purchased loans into mortgage-related securities and guarantees the principal and interest payments of these securities thereby eliminating credit risk to third-party investors. As of December 31, 2024, Freddie Mac guaranteed $3.1 trillion of single-family residential mortgages, or approximately 22% of all U.S. residential mortgage debt outstanding, reflecting a significant share of the market and the scale of its operations. Freddie Mac operates across two business segments (single-family and multifamily), with single-family accounting for most of its net revenues (83% in 2024). The Company also requires FHFA approval prior to any new product offerings, resulting in limitations on its current and future business activities.

Earnings Power
Freddie Mac's earnings power is significant but can also be volatile given its linkage to the cyclical U.S. housing market and exposure to movements in interest rates. Freddie Mac's revenues are predominately sourced from the guarantee fees received for managing the credit risk on loans underlying the Company's agency MBS. Indeed, guarantee net interest income accounted for 67% of 2024 total net revenues. Revenues are also predominately from the single-family segment, which accounted for 83% of 2024 revenues. The Company reported 2024 net income of $11.9 billion (up 14% YoY), driven primarily by higher net revenues that was partially offset by a credit reserve build for the single-family segment. Higher net revenues of $23.9 billion (up 13% YoY) was driven by both higher net interest income (given continued mortgage growth and lower funding costs) and noninterest income (primarily driven by an increase in net investment gains). The credit reserve build in single-family was attributable to new acquisitions, which resulted in the Company's 2024 provision for credit losses of $476 million compared to a benefit of $872 million in 2023.

Risk Profile
Freddie Mac has a comprehensive enterprise risk management system that is designed to monitor and mitigate the Company's exposure to credit risk, market risk and operational risk. The Company is exposed to both national and regional housing downturns given its sizeable share of the U.S. housing market. Nonetheless, the Company's single-family guarantee book remains geographically diversified, and credit quality has remained strong. Although the YE 2024 seriously delinquency rate (SDQ) increased slightly to 59bps (up 4bps YoY, primarily due to the impact of recent hurricanes), levels remain near historical lows. The Company's multifamily guarantee book also remains well-diversified, though the delinquency rate did increase slightly to 40bps at YE 2024 (up 12bps YoY), largely driven by an increase in delinquent floating rate loans.

The Company continues to transfer a portion of its single-family credit risk to third parties through mortgage insurance and credit risk transfer transactions as well as utilize credit enhancements (both front-end and back-end) across its multi-family credit exposures. While these risks are managed appropriately, we expect credit losses in the residential mortgage portfolio to increase in 2025 given the expectations for a slowing economy and continued pressure on households given the higher for longer interest rate environment. Freddie Mac has sound operational risk oversight and has maintained a good track record of identifying and managing these risks. Cybersecurity risk has significantly increased in recent years and the Company has, from time to time, been the target of attempted cyber-attacks. However, there have been no reported breaches to date.

Funding and Liquidity
Freddie Mac continues to maintain a broad and deep funding base comprised of a wide range of securities tailored to meet the needs of virtually every type of investor across the globe. The Company had $3.3 trillion of debt outstanding as of December 31, 2024, with a balance sheet that remains high encumbered given 94% of the debt was comprised of securitization debt. Nonetheless, the Company's funding is well-aligned with its asset base given the agency MBS amortizes with the underlying residential mortgages. The remaining funding is issued as unsecured corporate debt, the majority of which is fixed rate with maturities that are laddered appropriately.

Freddie Mac maintains a solid liquidity position underpinned by a well-designed liquidity management framework and contingent liquidity plan. However, in a severely stressed operating environment, the Company is unlikely to meet its sizeable liquidity requirements without support from the U.S. Treasury. At December 31, 2024, Freddie Mac had $158.5 billion of liquid assets, including $134.4 billion in its Liquidity and Contingency Operating Portfolio, and an additional $24.1 billion of mortgage loans and mortgage-related securities that could be pledged or sold for liquidity purposes.

Capitalization
Freddie Mac's capitalization has been gradually improving, with the Company reporting a GAAP positive net worth of $59.6 billion as of YE 2024 (compared to $9.1 billion at YE 2019). Nonetheless, capital levels continue to be materially below regulatory requirements. While the Company is subject to the enterprise regulatory capital framework (ERCF) set by the FHFA, its capital requirements have been waived during conservatorship. The ERCF excludes the stated value of the senior preferred stock ($72.6 billion) as well as a portion of deferred tax assets, resulting in Freddie Mac being significantly undercapitalized. Indeed, at YE 2024, the shortfall to adjusted capital requirements totaled $164 billion, with the Company continuing to report negative regulatory capital ratios given deficits across each tier of capital.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the United States of America are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of United States of America are discussed separately at https://dbrs.morningstar.com/issuers/12866, However, there were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:
Global Methodology for Rating Government-Related Entities (April 15, 2024)
https://dbrs.morningstar.com/research/431178.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. U.S. Federal Reserve, Federal Housing Finance Agency and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

This is the first credit rating action since the Initial Rating Date.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Eric Chan, Vice President,
Rating Committee Chair: David Laterza, Associate Managing Director,
Initial Rating Date: April 11, 2024

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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