Freddie Mac Releases First Quarter 2008 Financial Results

MCLEAN, Va., May 14 /PRNewswire-FirstCall/ -- Freddie Mac today reported a net loss of $151 million, or $0.66 per diluted common share, for the quarter ended March 31, 2008, compared to a net loss of $133 million, or $0.35 per diluted common share, for the quarter ended March 31, 2007. The company reported a net loss of $2.5 billion, or $3.97 per diluted common share, for the fourth quarter of 2007.

"Market and credit conditions remained challenging during the first quarter of 2008," said Richard F. Syron, chairman and chief executive officer. "This stress is particularly evident in our increased credit-related expenses. However, Freddie Mac on the whole had a better first quarter than what we experienced in the third and fourth quarters of last year, which were significantly impacted by credit and interest rate related marks. We showed strong momentum in market share, business volumes, margins and total revenue.

"In this trying time for our housing market, and the economy as a whole, I am especially pleased that our company continues to serve its mission by being a consistent, reliable provider of affordability, liquidity and stability to the nation's housing financing system," Syron continued. "Among many other things, we're serving this vital role by using the new authority provided by Congress to support the jumbo mortgage market, making a meaningful and positive impact on spreads in the MBS market and exploring constructive and creative ways to work out loan modifications for distressed homeowners.

"In the near future, we plan to raise $5.5 billion in new core capital," Syron added. "We are already deploying our available capital to make the most of the excellent opportunities we see in the current market, which will serve our mission at a time when most sources of liquidity for the struggling housing sector have dried up. This additional, fresh capital will enable us to do even more to serve our mission and build long-term, durable shareholder value."

"Throughout the first quarter, Freddie Mac struck a careful balance of managing risk and seizing business opportunities," said Buddy Piszel, chief financial officer. "We continued to make prudent provision for credit losses, monitor our credit book closely and maintain our disciplined approach to managing interest-rate and other risks. Our credit guarantee business saw strong, high quality growth -- and as the quarter ended, we also were able to significantly ramp up our mortgage purchase commitments for the retained portfolio.

"It's important to note that we began the year with a larger capital cushion compared to a year earlier, and during the quarter we put that capital to work, providing critically needed liquidity to the market and delivering attractive returns on equity for our business," Piszel said. "Our plan is to raise new capital that will not only enable us to continue to serve our mission and meet the housing market's needs in this time of stress, but also to deploy that capital in a way that enhances business flexibility and strengthens our capital position.

"We also made progress on a number of other important fronts, including beginning our registration process with the Securities and Exchange Commission and completing our remediation of all the previously identified material weaknesses in our controls environment," Piszel added. "While our expectation is for continued weakness in the housing and economic environment to negatively impact our overall performance through the remainder of this year, we have put Freddie Mac on a better foundation to manage through the current cycle and emerge a successful, long-term competitor."

GAAP Results Three Months Ended March 31, December 31, March 31, ($ in millions) 2008 2007 2007 Net interest income $798 $774 $771 Management and guarantee income 789 698 628 Other non-interest loss (58) (2,093) (705) Total revenues 1,529 (621) 694 Administrative expenses (397) (401) (403) Credit-related expenses (1,448) (912) (262) Other non-interest expense (258) (2,144) (559) Total expenses (2,103) (3,457) (1,224) Loss before taxes (574) (4,078) (530) Income tax benefit 423 1,626 397 Net loss $(151) $(2,452) $(133) Estimated regulatory core capital (at period end) $38,320 $37,867 $35,503

Net loss for the first quarter of 2008 was $151 million, compared to a net loss of $2.5 billion in the fourth quarter of 2007. Improved results reflect reduced losses related to a change in the guarantee obligation valuation methodology implemented under SFAS No. 157, "Fair Value Measurements" (SFAS 157), which better aligns revenue recognition with the economic release from risk under the guarantee. As a result, effective January 1, 2008, the company no longer records estimates of deferred gains or immediate losses recognized upon issuances of single-family Mortgage Participation Certificates (PCs) and Structured Securities in guarantor swap transactions through losses on certain credit guarantees, a component of non-interest expense. In the fourth quarter of 2007, the company incurred $1.3 billion in losses on certain credit guarantees.

Improved results also reflect lower interest-rate related mark-to-market losses as a result of the company's adoption of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" (SFAS 159). Effective January 1, 2008, the company elected the fair value option for certain available-for-sale mortgage-related securities and its foreign-currency denominated debt. Upon adoption of SFAS 159, the company recognized a $1.0 billion after-tax increase to its beginning retained earnings at January 1, 2008. See the Appendix for more detail on the adoption of SFAS 157 and SFAS 159.

In addition, during the first quarter, the company recorded strong revenue growth in the guarantee business mostly due to growth in the average balance of issued PCs and Structured Securities, which was offset by higher credit- related expenses as higher loan loss severities and serious delinquency rates resulted in increases in provision for credit losses and real estate owned (REO) operations expense.

The key components affecting the company's net loss for the first quarter of 2008 as compared to the fourth quarter of 2007 were:

Net interest income for the first quarter was $798 million, up $24 million, or 3 percent, from $774 million in the fourth quarter. This increase was primarily driven by wider spreads on fixed-rate assets and debt funding at lower levels, largely offset by the adverse effect of spread compression associated with 1-month rate resets on floating-rate assets as rates declined and an increase in amortization expense.

Management and guarantee income on PCs and Structured Securities for the first quarter was $789 million, up $91 million, or 13 percent, from $698 million in the fourth quarter. This increase reflects growth in the average balance of issued PCs and Structured Securities, as well as a higher total guarantee fee rate, which increased to 18.2 basis points for the first quarter from 16.6 basis points in the fourth quarter. This higher rate was driven by an increase in up-front cash payments and the impact of higher average fees associated with guarantees issued in 2007.

Other non-interest loss for the first quarter was $58 million, compared to a loss of $2.1 billion in the fourth quarter. Improved results reflect lower interest-rate related mark-to-market losses as a result of higher gains on investment activities as the company recognized market valuation gains on trading securities recorded at fair value due to the implementation of SFAS 159 and reduced losses recognized on the company's derivatives portfolio. See the Appendix for more detail on the adoption of SFAS 159 and implementation of hedge accounting.

The company also benefited from higher income on the guarantee obligation due to accelerated, or catch-up, amortization of deferred fees resulting from house price depreciation. The company recognized $589 million of catch-up amortization income on its guarantee obligation, primarily as a result of accelerated losses on individual pools of mortgage loans issued during 2006 and 2007, as well as significant increases in prepayment speeds for mortgage loan pools issued prior to 2005. These cumulative catch-up adjustments result in a pattern of revenue recognition that is consistent with the company's economic release from risk and the timing of the recognition of losses on pools of mortgage loans it guarantees.

In addition, the company recognized $226 million in the first quarter associated with the recapture of previously recorded losses on purchased loans due to either borrower payoffs or an excess of the property values upon foreclosure over the carrying basis of the loan. Gains on debt retirement increased to $305 million for the first quarter, as compared to $158 million in the fourth quarter, due to the significant decline in interest rates resulting in an increase in the company's call activity.

Credit-related expenses, consisting of provision for credit losses and REO operations expense, were $1.4 billion for the first quarter, compared to $912 million for the fourth quarter. The provision for credit losses for both quarters increased due to credit deterioration in the company's single-family credit guarantee portfolio, primarily due to 2006 and 2007 loan originations, as delinquency rates increased, more loans transitioned from delinquency to foreclosure and the estimated severity of losses on a per-property basis increased. The credit deterioration has been largely driven by a decline in home prices and other declines in regional economic conditions. REO operations expense increased as a result of an increase in market-based write downs of REO property, due to the decline in home prices, coupled with higher volumes in REO inventory.

The company expects credit-related expenses to remain high as the U.S. housing market remains under pressure.

Total credit losses, consisting of net charge-offs plus REO operations expense, were $528 million for the first quarter, compared to $236 million for the fourth quarter. Realized credit losses were an annualized 11.6 basis points and 5.4 basis points of the average total mortgage portfolio for the first quarter of 2008 and fourth quarter of 2007, respectively. The company has increased its expectation of total credit losses to approximately 16 basis points, compared to its previous expectation of 12 basis points, of the average total mortgage portfolio for the full-year 2008.

Other non-interest expense for the first quarter was $258 million, compared to $2.1 billion for the fourth quarter. The decline in other non-interest expense was primarily due to a $1.3 billion reduction in losses on certain credit guarantees in connection with the company's adoption of SFAS 157. Effective January 1, 2008, the fair value of the company's newly-issued guarantee obligations was estimated as an amount equal to the fair value of compensation received in the related securitization transaction. As a result, the company no longer records estimates of deferred gains or immediate losses recognized upon issuances of single-family PCs and Structured Securities in guarantor swap transactions through losses on certain credit guarantees, a component of non-interest expense. See the Appendix for more detail on the adoption of SFAS 157.

Also contributing to the decline in other non-interest expense was the reduction in losses on loans purchased out of PC pools due to the December 2007 implementation of certain operational changes for purchasing delinquent loans from PC pools, which reduced the volume of the company's delinquent loan purchases. Losses on loans purchased were $51 million for the first quarter, compared to $736 million for the fourth quarter.

Administrative expenses, expressed as a percentage of the average total mortgage portfolio, declined to 7.5 basis points for the first quarter from 7.8 basis points for the fourth quarter.

Core Capital

Estimated regulatory core capital was $38.3 billion at March 31, 2008, which represented an estimated $11.4 billion in excess of the company's statutory minimum capital requirement, and an estimated $6.0 billion in excess of the 20 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO). During the first quarter of 2008, the company added approximately $0.5 billion to core capital due primarily to the $1.0 billion impact of adopting SFAS 159, partially offset by dividend payments of $0.4 billion and the net loss of $0.2 billion for the quarter.

The company expects to raise $5.5 billion of new core capital in the near future through one or more offerings, of which $2.75 billion may consist of common stock and $2.75 billion may consist of non-convertible preferred securities. The timing, amount and mix of securities to be offered will depend on a variety of factors, including near-term prevailing market conditions and the company's SEC registration process, and is subject to approval by Freddie Mac's Board of Directors.

OFHEO has informed the company that, upon completion of these offerings, the mandatory target capital surplus will be reduced from 20 percent to 15 percent. OFHEO has also informed the company that it intends a further reduction of the mandatory target capital surplus from 15 percent to 10 percent upon completion of its SEC registration process, the company's completion of the remaining Consent Order requirement (i.e., the separation of the positions of Chairman and Chief Executive Officer), the company's continued commitment to maintain capital well above OFHEO's regulatory requirement and no material adverse changes to ongoing regulatory compliance. The company reduced the dividend on its common stock in December 2007, and does not currently anticipate further decreases in dividend payments.

Segment Earnings

With the release of the company's 2007 Annual Report, Freddie Mac publicly introduced a new method of managing and evaluating the financial performance of its business, resulting in three reportable segments, the results of which are reported using a Segment Earnings approach (formerly referred to as Adjusted operating income), as discussed below. The company previously reported its results as a single segment using GAAP-basis income. Segment Earnings is a non-GAAP financial measure and should not be used as a substitute for GAAP. See the Appendix for a reconciliation of Segment Earnings to net income (loss) in accordance with GAAP and other information about how the company uses Segment Earnings and its limitations as a measure of financial performance for the company.

The company's reportable segments are set forth below. Certain activities that are not part of a segment are included in the All Other category.

-- Investments, which encompasses its investment activity in mortgage-related securities and single-family mortgage loans, and its activities related to the company's cash and non-mortgage-related securities investment portfolio. -- Single-family Guarantee, which encompasses its credit guarantee activity for single-family mortgages. -- Multifamily, which encompasses both its investment activity and its credit guarantee activity related to multifamily mortgages and its investments in low-income housing tax credit (LIHTC) partnerships. Consolidated Segment Earnings

On a consolidated Segment Earnings basis, the company recorded a loss of $251 million for the first quarter of 2008, compared with income of $421 million for the fourth quarter of 2007. This decline was primarily due to lower earnings in the company's Investments and Single-family Guarantee segments.

Investments Three Months Ended Segment Earnings - Investments March 31, December 31, March 31, ($ in millions) 2008 2007 2007 Net interest income $299 $825 $902 Non-interest income (loss) 15 (10) 24 Non-interest expense: Administrative expenses (131) (129) (128) Other non-interest expense (9) (9) (7) Income tax expense (61) (237) (277) Total Segment Earnings $113 $440 $514

Segment Earnings for the company's Investments segment were $113 million for the first quarter of 2008, compared to $440 million for the fourth quarter of 2007.

The decline of $526 million in net interest income on a Segment Earnings basis was primarily driven by spread compression on floating-rate assets, which resulted from downward rate resets as interest rates declined in the first quarter. Reduced Investment segment net interest income also reflects

higher costs associated with increased interest expense on derivatives and recognition of deferred hedging costs.

Single-family Guarantee Three Months Ended Segment Earnings - Single-family March 31, December 31, March 31, Guarantee ($ in millions) 2008 2007 2007 Net interest income $77 $175 $168 Non-interest income: Management and guarantee income 895 770 677 Other non-interest income 104 40 22 Non-interest expense: Administrative expenses (204) (195) (199) Provision for credit losses (1,349) (839) (289) REO operations expense (208) (125) (14) Other non-interest expense (19) (20) (21) Income tax (expense) benefit 246 68 (120) Total Segment Earnings $(458) $(126) $224

Segment Earnings for the company's Single-family Guarantee segment declined to a loss of $458 million for the first quarter of 2008, compared to a loss of $126 million for the fourth quarter of 2007.

The decline primarily reflects a $593 million increase in credit-related expenses, consisting of provision for credit losses and REO operations expense, due to higher volumes of non-performing loans and foreclosures, higher severity of losses on a per-property basis and a decline in home prices and other regional economic conditions.

The decline in Segment Earnings was partially offset by a $125 million increase in management and guarantee income due to growth in the weighted average balance of guaranteed assets and a moderately higher total guarantee fee rate related to the increased amortization of deferred fees.

Multifamily Three Months Ended Segment Earnings - Multifamily March 31, December 31, March 31, ($ in millions) 2008 2007 2007 Net interest income $75 $121 $123 Non-interest income: Management and guarantee income 17 15 14 Other non-interest income 8 8 4 Non-interest expense: Administrative expenses (49) (47) (45) Provision for credit losses (9) (18) (3) LIHTC partnerships (117) (115) (108) Other non-interest expense (4) (5) (4) LIHTC partnership tax benefits 149 132 138 Income tax benefit 28 15 6 Total Segment Earnings $98 $106 $125

Segment Earnings for the company's Multifamily segment were $98 million for the first quarter of 2008, compared to $106 million in the fourth quarter of 2007.

The decline of $46 million in net interest income on a Segment Earnings basis was primarily due to lower prepayment fee income associated with flat or declining property values and the difficult credit market, making refinancing less appealing to borrowers.

All Other

All Other, which includes corporate-level expenses not allocated to any of the company's reportable segments, was a loss of $4 million for the first quarter of 2008, compared to income of $1 million in the fourth quarter of 2007.

Portfolio Activity and Balances

Year-to-date through April 30, 2008, the company estimates that the unpaid principal balance of the company's retained portfolio increased at an annualized rate of about 7 percent to approximately $738 billion.

During the month of April 2008, the company estimates that the amount of retained portfolio mortgage purchase and sales agreements entered into totaled approximately $43 billion.

The company estimates that its total credit guarantee portfolio increased at an annualized rate of about 10 percent to approximately $1.8 trillion year-to-date through April 30, 2008.

At March 31, 2008, Freddie Mac estimates that its single-family serious delinquency (i.e., 90 plus days late) rate for non-credit enhanced, credit enhanced and all loans was approximately 0.54 percent, 1.81 percent and 0.77 percent, respectively.

Fair Value of Net Assets

The company's attribution of changes in fair value relies on models, assumptions and other measurement techniques that evolve over time.

At March 31, 2008, the fair value of net assets was ($5.2) billion as compared to $12.6 billion at December 31, 2007, reflecting a net after-tax reduction of $17.8 billion. This change in fair value of net assets includes the payment of preferred and common stock dividends during the first quarter of 2008.

The change in fair value of net assets includes a pre-tax reduction in fair value of $28.8 billion as a result of net mortgage-to-debt OAS widening, partially offset by a pre-tax increase in fair value related to core spread income in the first quarter of 2008. In addition, the company estimates that the change in fair value of its credit guarantee activities resulted in a pre-tax reduction of $3.0 billion.

Interest-Rate Risk Management

During the first quarter of 2008, Freddie Mac's interest-rate risk remained low with portfolio market value sensitivity (PMVS-L) averaging $403 million and duration gap averaging zero months, compared to $361 million and zero months, respectively, for the fourth quarter of 2007.

Internal Controls

As of March 31, 2008, the company has remediated all of the previously identified material weaknesses and two of its previously identified significant deficiencies. Freddie Mac has continued to execute its plan to remediate the remaining significant deficiencies in internal control over financial reporting and improve its financial reporting processes and infrastructure. See the Appendix for more detail on the company's remediation of its material weaknesses and significant deficiencies.

Additional Information

For more information, see the Appendix accompanying this release, the company's Information Statement Supplement, including the Consolidated Financial Statements and Core Tables, dated May 14, 2008, as well as a slide presentation that will be available on the Investor Relations page of the company's Web site at http://www.freddiemac.com/investors .

Additional information about Freddie Mac and its business is also set forth in the company's Information Statement and Annual Report dated February 28, 2008 and related Information Statement Supplements, which are available on the Investor Relations page of the company's Web site at http://www.freddiemac.com/investors . Printed copies of these documents may be obtained free of charge upon request from the company's Investor Relations department by writing or calling the company at shareholder@freddiemac.com, (703) 903-3883 or (800) 373-3343. Freddie Mac encourages all investors and

interested members of the public to review these materials for a more complete understanding of the company's financial results and related disclosures.

Announcement of Conference Call and Webcast

Management will host a conference call discussing today's announcement at 10 a.m. Eastern Time today. Domestic investors should call 1-800-230-1074 and international investors can access the call at 612-288-0329. The conference call will be webcast live on the company's Web site. A telephone recording of this conference call will be available continuously beginning at approximately 3 p.m. Eastern Time on May 14, 2008 until midnight on May 28, 2008. To access this recording in the United States, call 1-800-475-6701 and use access code 919633. Outside of the United States, call 320-365-3844 and use access code 919633.

This press release contains forward-looking statements pertaining to management's current expectations as to the company's future business plans, capital management, remediation initiatives, returns on investments, results of operations and/or financial condition on a GAAP, Segment Earnings, or fair value basis. Management's expectations for the company's future necessarily involve a number of assumptions, judgments and estimates, and various factors, including changes in market conditions, liquidity, mortgage-to-debt OAS, credit outlook, and the impacts of newly enacted legislation or regulations, could cause actual results to differ materially from these expectations. These assumptions, judgments, estimates and factors are discussed in the company's Information Statement and Annual Report dated February 28, 2008 and related Information Statement Supplements, which are available on the Investor Relations page of the company's Web site at http://www.freddiemac.com/investors.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible more than 50 million times, ensuring financing for one in six homebuyers and more than four million renters.