Freddie Mac Reports 2004 Financial Results

March 31, 2005

Fair Value of Net Assets Grows; Company Maintains Strong Capital Surplus

McLean, VA – Freddie Mac (NYSE:FRE) today reported quarterly and full-year financial results for the year ended December 31, 2004.

The company reported net income of $2.8 billion in 2004, compared to $4.8 billion in 2003. Fair value of net assets attributable to common stockholders, net of tax effect, grew by $3.8 billion – to $26.7 billion – a 17 percent increase from year-end 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. Freddie Mac's regulatory minimum capital surplus is estimated at $10.8 billion at year-end 2004, with an estimated $3.5 billion in excess of the 30-percent target surplus set by the Office of Federal Housing Enterprise Oversight (OFHEO), the company's federal safety and soundness regulator.

"Throughout 2004, and continuing today, we are making significant progress in accomplishing our top priorities: serving our mission; increasing market share; streamlining operations and seizing business opportunities; and returning to timely financial reporting," said Richard F. Syron, Freddie Mac chairman and chief executive officer. "We accomplished a great deal in 2004, and I am particularly pleased that we met our commitment to the market to publish our 2004 financial results on our announced timeline."

In 2004, Freddie Mac financed homes for more than 3.7 million families, and we have reported attaining all of our regulatory affordable housing goals for 2004. Our market share recovered to historic levels, as we forged new relationships with mortgage lenders and other key business partners.

"We are instilling in Freddie Mac a true sense of urgency to do more in 2005 to strengthen our business and serve our mission," Syron said. "While today we are operating in a challenging, lower-growth environment, we believe that Freddie Mac will continue to produce value for both our investors and America's families."

"While 2004 held some significant challenges for our company, we begin 2005 with growing momentum," said Eugene M. McQuade, Freddie Mac president and chief operating officer. "We maintained a strong balance sheet and increased our capital surplus position. We grew the fair value of net assets. We positioned ourselves to do more business with our lending customers. Our interest-rate and credit risk results remained impressive. And we took steps toward our goal of getting a better handle on our administrative expenses. We are well positioned to deliver long-term value to the market and our stockholders."


Net income was $2.8 billion for 2004, down from $4.8 billion for 2003. Diluted earnings per common share were $3.78 for 2004, down from diluted earnings per common share of $6.68 for 2003. The change in net income for 2004 was primarily due to a decrease of $4.5 billion related to our derivative instruments not in qualifying hedge accounting relationships. However, these derivatives continued to be an effective component of our risk management activities.

Net interest income was $9.1 billion in 2004, compared to $9.5 billion in 2003. Net interest yield on a fully tax equivalent basis decreased to 124 basis points in 2004 from 130 basis points in 2003. Management and guarantee income, which is a component of "Non-interest income (loss)" on the consolidated statements of income, was $1.4 billion in 2004, compared to $1.7 billion in 2003. The total management and guarantee income rate recognized in 2004 was 17.5 basis points, down compared to the 23.3 basis points recognized in 2003, primarily due to decreases in amortization of deferred fees. Non-interest income (loss), excluding management and guarantee income, totaled ($4.4) billion in 2004, compared to ($1.9) billion in 2003. The increased loss was primarily due to the aforementioned losses on derivative instruments not in qualifying hedge accounting relationships.

Non-interest expense totaled $2.4 billion in 2004, compared to $2.2 billion in 2003. Administrative expenses, which are a component of non-interest expense, totaled $1.6 billion in 2004, compared to $1.2 billion in 2003. This increase was primarily due to costs related to our financial reporting remediation activities. Our objective in 2005 is to keep administrative expenses relatively flat compared to 2004.

For 2005, we expect to report net interest income materially lower than that reported for 2004, primarily due to compression in net interest margins on our existing portfolio and lower nominal margins on floating-rate mortgage-related security purchases. However, we expect this decrease to be significantly offset by decreased losses in non-interest income (loss), assuming current forward rates are realized.

For additional details on our earnings and performance for 2004, see our Supplemental Disclosure Package [PDF 468K ], available on the Investor Relations page of our Web site at


At December 31, 2004, the fair value of net assets (net of tax effect) was $30.8 billion, a $3.5 billion, or 13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets attributable to preferred stockholders) was $26.7 billion, a $3.8 billion, or 17 percent, increase from December 31, 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. The fair value of net assets attributable to common stockholders, before common dividends and capital transactions, increased by $4.6 billion, or 20 percent, from December 31, 2003, a return that exceeds our long-term expectations.

The primary contributors to the increase in fair value of net assets in 2004 were core spread income from the Retained portfolio (defined as the estimated income resulting from the spread between mortgage-related investments and debt, calculated on an option-adjusted basis), fee-based income (including guarantee fees and credit fees related to our PCs and Structured Securities) and a gain in the fair value of our guarantees related to our outstanding PCs and Structured Securities. The fair value increase also included gains resulting from tighter mortgage-to-debt option-adjusted spreads. In 2004 we made improvements to our fair value estimation methodologies, including refinements that better capture available market data relevant to determining the fair value of our debt. The implementation of these improvements resulted in net increases in the fair value of total net assets of approximately $0.6 billion (after-tax).


In 2004, our interest-rate risk remained low. For full-year 2004, Portfolio Market Value Sensitivity and duration gap averaged two percent and zero months, respectively. Our total credit losses rose slightly in 2004 but were still quite low, totaling approximately 1.1 basis points, compared to approximately 0.8 basis points for 2003. Although we expect credit losses in 2005 to increase from their recent levels, we expect credit losses to remain low relative to historic levels.


We have submitted to OFHEO amended minimum capital reports for 2004, including estimates of our capital surpluses. Based on these estimates, we believe that Freddie Mac was in compliance with its regulatory capital requirements throughout the year. The estimated minimum capital surplus at December 31, 2004, as reported to OFHEO in our amended minimum capital reports, was approximately $10.8 billion. Our estimated surplus in excess of the 30 percent target surplus at December 31, 2004 was approximately $3.5 billion. We currently expect to be able to maintain a surplus over both our minimum regulatory capital requirement and the 30 percent target surplus across a wide range of market conditions.


GSE Regulatory Oversight Legislation

Freddie Mac faces an uncertain regulatory environment in light of legislative reforms currently being discussed. Freddie Mac strongly supports enactment of regulatory oversight legislation that ensures our regulator has authority to conduct effective oversight. We believe appropriate regulatory oversight legislation would strengthen market confidence and promote the company's mission. We will continue to work with the Congress, the Administration and other interested parties toward enacting such legislation.

We cannot predict the contents, timing or prospects for enactment of any legislation. As discussed under "GSE Regulatory Oversight Legislation" in the Supplemental Disclosure Package, it is possible that resolution of the legislative issues under consideration could adversely affect our financial condition and results of our operations in future years. Potential legislative or regulatory outcomes could also cause us to lose the ability to fulfill the goals and responsibilities of our housing mission while providing adequate returns to our stockholders.

Source: Freddie Mac

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