Increasing market share and customer satisfaction is only part of our strategy to build shareholder value. A strong balance sheet and expert risk management are also essential. In 2005, we built on these enduring strengths.
Turning to our balance sheet, Freddie Mac’s regulatory core capital grew to over $35 billion — well above the capital requirements set by our safety and soundness regulator.
As a result of our strong capital position and confidence in our profitability, we increased our quarterly common stock dividend twice last year. In fact, since December 2003, we have raised this dividend by 81 percent.
Regarding our credit and interest-rate risk management record, it remains a hallmark of the industry. Our ready access to callable debt and specialized mortgage risk expertise are key competitive advantages. The company’s interest-rate and credit risks are near historic lows. Our delinquency rates remain low as well. Our key measures of interest-rate risk are disclosed monthly — transparent to all — demonstrating that we continue to manage risk prudently and consistently in a world of rapidly changing rate conditions.
In May we reported 2005 earnings in excess of $2 billion in GAAP net income. These results reflect a cyclical narrowing of spreads as well as costs associated with the settlement of litigation stemming from the events of 2003, charges related to Hurricane Katrina, and the cumulative impact of a number of accounting changes. Fair value, another very important measure of our performance, grew before capital transactions, but at a rate well below our long-term expectations and continuing guidance.
Creating value for shareholders depends in part on our ability to hold down expenses, and in 2005 we were successful in this area. But I want to be clear: we also have an absolute duty to make the necessary investments to ensure that Freddie Mac has world-class controls, reporting and accounting systems. Our goal is to reduce our expense ratio over time, so that as the company grows, expenses become a diminishing share of our overall business.
Freddie Mac’s statutory mission is a broad one: to provide stability, liquidity and affordability to the nation’s housing finance markets. Our response to the Gulf Coast hurricanes was just one example of our commitment to this mission.
Though the U.S. Secretary of Housing and Urban Development makes the final determination, we reported that we met the toughest set of affordable housing goals in the company’s history. Our affordable performance was strong — with well over half the units financed by our mortgage purchases being affordable to low- and moderate-income families. In addition, Single Family’s purchase of mortgages from underserved areas increased, and our goal-rich Multifamily business set a new record for annual volume.
The next generation of homeowners will need trillions of dollars in mortgage capital, and minorities and immigrants will be the source of most household growth. To meet these growing needs, Freddie Mac has a central role to play. That’s why we are focused on our mission. And why, more than ever, what’s good for our mission is good for our business.
Freddie Mac is better positioned to compete than it has been in years. We achieved good growth in line with the overall market, increased our penetration of the secondary conforming market that we serve and maintained a very strong balance sheet. We also streamlined our business operations; reinforced corporate governance, ethics and compliance; and added real strength and depth to our management team. These and other developments — including trends in the market — give me confidence in Freddie Mac’s long-term business prospects.
Clearly, much more needs to be done. Our most urgent task is to do everything it takes to ensure that our internal controls and accounting systems are of the same high caliber as our financial risk management and reporting. There is no higher priority for Freddie Mac’s senior management than completing this work and becoming timely in our financial reporting. This company must become the standard of excellence not only for managing mortgage risk, but for the accounting and internal controls associated with it.
Over the past year, Congress has worked to overhaul regulatory oversight of the housing GSEs, and we have supported this effort in a constructive way. Last fall, acting on a broad bipartisan basis, the U.S. House of Representatives passed tough legislation to enhance GSE oversight. This tough bill goes well beyond current banking law in a number of areas. Going forward, we will continue to support federal legislation that strengthens regulatory oversight and allows us to fulfill our mission.
As part of the ongoing policy discussion, we made good progress last year in publicly articulating the value and vital role of the GSEs. That includes how we insulate households from interest-rate risk and transfer it out to the capital markets; how we provide stability, liquidity and affordability in good times and bad; and how we harness market means —and private capital — to achieve a public mission.
As Freddie Mac stockholders, you share a vital role in making home possible for millions of families. So when I pledge to you that I will finish the job of making a strong franchise run better than ever, that is not a diversion from my mission responsibilities. It is an expression of those responsibilities.
And it is a promise I intend to keep.
Sincerely,
Richard F. Syron
Chairman and Chief Executive Officer