Key Accomplishments

Building Shareholder Value

I’ll begin by summarizing Freddie Mac’s improved business and financial performance. Our net income grew last year to approximately $2.2 billion, up roughly 4 percent from 2005. Return on common equity was 8.6 percent, up from 7.7 percent for 2005. Fair value, another very important measure of our performance, grew before capital transactions by approximately $2.5 billion last year, compared to a $1.0 billion increase in 2005. Fair value return on equity was approximately 9.5 percent, rebounding from 3.7 percent the previous year.

This improved performance was based on several factors. For starters, we achieved strong growth of 10.6 percent in our credit guarantee portfolio — slightly outpacing the overall market. By earning high marks for customer satisfaction and purchasing a broader range of loans, we were able to buy not only a larger volume but also a more representative mix of mortgages in 2006. This performance reflected the company’s enhanced responsiveness and the efforts of our sales force. We ended the year with a total of $1.5 trillion in mortgage securities issued — up from less than $1 trillion in 2001.

Another key to Freddie Mac’s success in 2006 was our disciplined management of interest-rate risk. One of the many reasons was our extensive use of callable debt — which we use more than most mortgage investors and believe gives us a real comparative advantage in managing risk. As a result, we came through a challenging year well positioned to deal with a broad range of interest-rate conditions, and with the value of our shareholders’ equity well protected from interest rate swings.

On the credit risk side, Freddie Mac’s exposures remained well controlled and our total single-family 90-day delinquencies actually declined during the year. At year’s end, only 6 percent of our total mortgage portfolio was in nontraditional mortgages and the portfolio’s average loan-to-value ratio was 57 percent. Experience and recent market developments tell us to be careful, however, and we are keeping a watchful eye on our 2006 book of business. While we are in better position than many, we have set aside increased loan loss reserves, as our credit portfolio remains vulnerable to significant declines in house prices.

Low funding costs were another building block of our success in 2006, with improvements across the yield curve. As an example, our funding cost advantage relative to LIBOR for our 10-year Reference Notes® securities increased in 2005 and 2006 by almost 20 basis points. We’ve said before that when spreads are tight, we may lose some return on the asset side, but we can often make up ground on the debt side. That is exactly what we did last year, by capitalizing on our improved funding costs.

Capital management remains a priority for us. Freddie Mac increased our common dividend again in 2006 to $2.00 per share annually, bringing the total increase in our dividend to 92 percent since the end of 2003. Moreover, we returned $2 billion to our common shareholders in a preferred-for-common restructuring. All told, we returned some $3.3 billion to common shareholders last year — the most in Freddie Mac history.

Going forward, Freddie Mac remains strongly capitalized. With a strong balance sheet, our estimated regulatory core capital grew in 2006 to over $36 billion. As we complete our financial reporting and internal controls remediation, I hope we will be in a better position to return some of the capital in excess of our statutory minimum that we have accumulated over the past several years. And I’m pleased to report that, consistent with discussions with our regulator, our board has approved an additional $1 billion in common repurchases and preferred offerings this year.