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Freddie Mac Reports 2005 Financial Results Company Reports Market Share Growth and Continued Solid Risk Management Performance

June 1, 2006

McLean, VA – Freddie Mac (NYSE:FRE) reported GAAP net income of $2.1 billion for 2005.

The decline in net income from $2.9 billion for 2004 was due primarily to approximately $600 million of costs associated with the recent agreement to settle the securities class action and shareholder derivative litigation, charges related to Hurricane Katrina and the net impact of certain accounting changes. Freddie Mac's regulatory core capital is estimated to have grown to $36.0 billion at December 31, 2005, with an estimated $3.5 billion in excess of the 30-percent target surplus. The company's interest-rate and credit risks remain near historic lows.

"Freddie Mac made continued progress throughout 2005, delivering long-term value to the nation's homeowners and to our stockholders as we've strived to fulfill our mission and solidify business execution," said Chairman and CEO Richard F. Syron. "We provided more support for low- and moderate-income homebuyers, increased our market share, streamlined our business operations and added key talent to our senior management team. With the release today of our 2005 results, we are positioned to initiate the capital management activities we announced last year."

In 2005, Freddie Mac financed homes for more than four million families. In addition, while the final determination will be made by the Secretary of HUD, we reported that we met all of our regulatory affordable housing goals for 2005. We estimate our share of government-sponsored enterprise mortgage securitizations was 45 percent in 2005, compared to 41 percent in 2004, as we improved service quality and products and forged new and stronger relationships with mortgage lenders and other key business partners.

"2005 was a year of continued investment in the business capabilities, infrastructure and management team here at Freddie Mac," said Eugene M. McQuade, president and chief operating officer. "These investments position our company to achieve our long-term growth and return objectives, and to deliver long-term value to the market and our stockholders. As we execute on our 2006 priorities, we have a strong capital position, growing business momentum and a determination to resolve remaining financial infrastructure challenges. Dick and I feel very good about the long-term prospects of this franchise."

2005 RESULTS

GAAP Financial Results

Net income was $2.1 billion for 2005, down from $2.9 billion for 2004. Diluted earnings per common share were $2.75 for 2005, down from $3.94 for 2004. GAAP return on common equity was 7.72 percent for 2005, down from 10.16 percent for 2004. Consistent with management's previous guidance, year-over-year total revenue was lower in 2005 as a result of lower net interest income from narrowing spreads on fixed-rate assets and a greater proportion of floating-rate assets purchased in 2005.

2005 net income also was adversely affected by approximately $600 million as a result of the following:

  • The agreement to settle securities class action and shareholder derivative litigation of approximately $220 million,
  • Charges related to Hurricane Katrina of approximately $133 million, and
  • The cumulative impact of a change in accounting principle and significant changes in estimate adopted in 2005 totaling approximately $265 million.

Net income was $226 million, $340 million, $880 million and $684 million for the first, second, third and fourth quarters of 2005, respectively, compared to $1,312 million, $2,754 million, ($1,506) million and $377 million for the comparable quarters of 2004. Our quarterly results reflect the impact of accounting corrections and changes (e.g., the new valuation methodology for guarantee assets and obligations) and subsequent events (e.g., the recent litigation settlement) occurring after our initial release of first and second quarter information in August 2005. Going forward, as interest rates change, our period-to-period results are likely to continue to exhibit earnings volatility primarily as a result of the asymmetric mark-to-market accounting treatment of certain assets and liabilities on our balance sheet that is reflected in our income statement.

Regulatory core capital was $36.0 billion at December 31, 2005, with a regulatory minimum capital surplus estimated at $11.0 billion, and an estimated $3.5 billion in excess of the 30-percent target surplus set by the Office of Federal Housing Enterprise Oversight (OFHEO), as reported in our amended capital report filed with OFHEO in conjunction with the issuance of this earnings release.

Fair Value Results 

During 2005, the fair value of net assets attributable to common stockholders, before capital transactions, increased by $0.9 billion, which represents a return on the average fair value of net assets attributable to common stockholders of approximately 3.3 percent. The fair value of net assets attributable to common stockholders as of December 31, 2005 was $26.7 billion, a $0.1 billion decrease from December 31, 2004.

The primary drivers of our fair value results during 2005 were income from the retained portfolio (defined as the net revenue resulting from the option-adjusted spread (OAS) between mortgage-related investments and debt) and fee-based income (including guarantee fees and credit fees related to our guaranteed mortgage-related securities), substantially offset by a decrease from wider mortgage-to-debt OAS, which we estimate reduced fair value by approximately $1.4 billion (after-tax). We believe disclosing the estimated impact of changes in OAS on the fair value of net assets is helpful to understanding our current-period fair value results in the context of management's long-term fair value return expectations. A more complete discussion of how we derived our estimates of OAS impacts and the limitations that apply to their use are included in the Information Statement Supplement dated as of today and available on our Web site.

Our fair value results also were affected by the cumulative net effect of valuation methodology changes implemented as of the first quarter 2005, which we estimate reduced fair value by approximately $0.5 billion (after-tax). This includes the net effect of changes in our improved methodology for valuing guarantee assets and obligations, which we estimate reduced fair value by approximately $0.8 billion (after-tax). As part of our process for producing 2005 financial reports, we improved our fair value estimation methodologies, including implementing a new market-based methodology that uses more direct capital markets information for determining the estimated fair values of our guarantee assets and guarantee obligations. A more complete discussion of the methodology changes is included in the Information Statement Supplement dated as of today and available on our Web site.

In addition, our fair value results were affected by the agreement to settle securities class action and shareholder derivative litigation, the effect of which reduced fair value by approximately $0.2 billion (after-tax), and the effect of charges related to Hurricane Katrina, which we estimate reduced fair value by approximately $0.2 billion (after-tax).

Looking beyond 2005, management continues to believe the company will achieve long-term returns on the average fair value of net assets attributable to common stockholders, before capital transactions, in the low- to mid-teens, although period-to-period returns may fluctuate substantially due to market conditions.

Source: Freddie Mac



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