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Freddie Mac Releases Second Quarter 2007 Financial Results; Net Income of $764 Million, Fair Value Increase of $800 Million

For Immediate Release
August 30, 2007
Contact: corprel@freddiemac.com
or (703) 903-3933

Second Quarter Highlights

  • Net income of $764 million, or $1.02 per diluted common share.
  • Fair value, before capital transactions, increased by approximately $800 million.
  • Increase in management and guarantee income reflects continued guarantee portfolio growth.
  • Provision for credit losses of $320 million reflects weakening in the housing market.
  • Company progresses in remediation efforts and issues second quarter 2007 financial reports ahead of previously announced target.

McLean, VA – Freddie Mac (NYSE:FRE) today reported second quarter net income of $764 million, or $1.02 per diluted common share, compared to net income of $1.4 billion, or $1.93 per diluted common share, for the same period in 2006. The company also reported an increase in fair value of net assets attributable to common stockholders, before capital transactions, of approximately $800 million for the second quarter, compared to an increase of $1.4 billion for the same period a year ago. Compared to the first quarter of 2007, the company reported increases in both net income and growth in fair value primarily due to gains on mark-to-market items.

"Freddie Mac was created to provide liquidity, stability and affordability to the mortgage market in good times and bad," said Richard F. Syron, chairman and chief executive officer. "Rarely has that role been as important as it has been during this period of volatility in the U.S. housing and residential mortgage markets. Furthermore, we have been able to serve the market while maintaining a disciplined approach to risk."

"Our business volumes for the quarter were strong, with continued growth in our credit guarantee portfolio and improved commitments for our retained portfolio. And we are seeing a shift in the market back to more traditional products, including larger volumes of fixed-rate mortgages," Syron continued. "On the credit front we are seeing weakening, but we are well positioned relative to the overall marketplace to weather the ongoing disruptions in the mortgage markets and emerge as an even stronger player. Most important, we are working with our regulator, our customers and others to do our part in developing a market oriented response that will help provide stability, liquidity and affordability to the national housing and mortgage markets."

"In June, when Freddie Mac resumed quarterly financial reporting, we committed to continue to reduce the time it takes us to close our books and report our financial results," said Buddy Piszel, chief financial officer. "We have accelerated our second quarter release by two weeks compared to the first quarter and expect to release our third quarter results before Thanksgiving."

Freddie Mac's regulatory core capital was estimated at $36.3 billion at June 30, 2007, which represented an estimated $1.8 billion in excess of the 30 percent mandatory target capital surplus set by the Office of Federal Housing Enterprise Oversight (OFHEO).

Fair value of net assets attributable to common stockholders was $25.1 billion at June 30, 2007, compared to $25.4 billion as of March 31, 2007.

Three Months Ended
($ in millions, except per share amounts)
June 30, 2007
March 31, 2007
June 30, 2006
Net Income (Loss)
$764
$(211)
$1,397
Diluted earnings (loss) per common share
$1.02
$(0.46)
$1.93
Diluted weighted average common shares outstanding
655.8 mm
661.4 mm
693.0 mm

 

Lower net income, year-over-year, was primarily due to a higher provision for credit losses and mark-to-market losses on credit-related items. Within total revenues, net interest income was essentially flat when compared with the first quarter of 2007 and management and guarantee income continued to grow from prior period levels.

Three Months Ended
($ in millions)
June 30, 2007
March 31, 2007
June 30, 2006
Total Revenues
$2,255
$424
$2,151
Net interest income
973
978
1,172
Management and guarantee income
474
460
389
Other non-interest income (loss)
808
(1,014)
590

 

Net interest income was $973 million for the second quarter of 2007, compared to $1.2 billion for the second quarter of 2006. Year-over-year, net interest income declined, reflecting continued higher replacement costs associated with the company's maturing long-term debt.

During the second quarter of 2007, the unpaid principal balance of the company's retained portfolio decreased at an annualized rate of one percent to approximately $712 billion, as liquidations increased and relatively tight mortgage-to-debt option-adjusted spreads (OAS) early in the quarter limited net growth in settled positions. Late in the second quarter, wider mortgage-to-debt OAS presented more attractive investment opportunities, resulting in an increase in net purchase commitments during the month of June. Freddie Mac continues to manage the retained portfolio within its voluntary temporary growth limit.

Management and guarantee income on mortgage participation certificates (PCs) and Structured Securities increased to $474 million in the second quarter of 2007, compared to $389 million in the second quarter of 2006. The year-over-year increase is primarily due to growth in the average balance of outstanding PCs and Structured Securities and a moderately higher total guarantee fee rate.

The company's total credit guarantee portfolio increased at an annualized rate of 15 percent in the second quarter of 2007 to approximately $1.6 trillion at June 30, 2007. This compares to forecasted annual growth in total U.S. residential mortgage debt outstanding of approximately six percent in 2007.

During the second quarter of 2007, the company recorded mark-to-market gains totaling $822 million on items included in other non-interest income (loss), compared to mark-to-market gains of $504 million in the second quarter of 2006. The mark-to-market gains during the second quarter of 2007 primarily reflect the impact of increasing long-term interest rates on the value of the company's credit guarantee activities, partially offset by security impairments largely related to the anticipated sale of certain seasoned collateral securities.

Three Months Ended
($ in millions)
June 30, 2007
March 31, 2007
June 30, 2006
Total Expenses
$1,378
$1,074
$714
Administrative expenses
442
403
405
Credit-related expenses
336
193
63
Other non-interest expense
    Losses on certain credit guarantees
    Losses on loans purchased
    Other

 


187
205
208

 


144
170
164

 


52
21
173

 

Administrative expenses totaled $442 million for the second quarter of 2007, compared to $405 million for the second quarter of 2006. Administrative expenses increased to support the company's financial reporting, infrastructure and controls-related activities. Year-over-year administrative expenses, expressed as a percentage of the average total mortgage portfolio, declined to 9.2 basis points for the second quarter of 2007 from 9.3 basis points for the second quarter of 2006.

Credit-related expenses, consisting of provision for credit losses and real estate owned (REO) operations expense, were $336 million for the second quarter of 2007, compared to $63 million for the second quarter of 2006. The year-over-year increase primarily resulted from the recognition of a $320 million provision for credit losses during the second quarter of 2007. This increase largely reflects credit deterioration on 2006 and 2007 loan originations that have exhibited higher transition rates from delinquency to foreclosure and higher loan loss severities resulting from slower home price appreciation and higher unpaid principal balances.

For the second quarter of 2007, other non-interest expense included losses on certain credit guarantees of $187 million, compared to losses of $52 million in the second quarter of 2006, primarily related to higher fair values of credit costs recognized on certain guarantees associated with new business activity. Also included in other non-interest expense were losses on loans purchased of $205 million, compared to losses of $21 million in the second quarter of 2006, largely due to an increase in the volume of non-performing loan purchases and a decline in the fair value prices of non-performing loans purchased out of PC pools during the quarter.

Capital Management

Estimated regulatory core capital was $36.3 billion at June 30, 2007, which represented an estimated $9.8 billion in excess of the regulatory minimum capital requirement, and an estimated $1.8 billion in excess of the 30 percent mandatory target capital surplus set by OFHEO. In accordance with the previously announced authorization to repurchase up to $1 billion of common stock in conjunction with the issuance of up to $1 billion of non-cumulative perpetual preferred stock, the company repurchased $750 million of common stock (approximately 11.9 million shares) at an average purchase price of $63.23 per share and issued $500 million of non-cumulative, perpetual preferred stock during the three months ended June 30, 2007.

During the third quarter of 2007, the company completed its repurchase plan, buying $250 million of common stock (approximately 4.2 million shares) at an average purchase price of $58.74 per share and issuing another $500 million of non-cumulative, perpetual preferred stock.

Fair Value Results

Three Months Ended
($ in billions, after-tax)
June 30, 2007
March 31, 2007
June 30, 2006
Fair Value Change (before capital transactions)
$0.8
$(0.3)
$1.4

 

During the second quarter of 2007, the fair value of net assets attributable to common stockholders, before capital transactions, increased by approximately $800 million, compared to an increase of $1.4 billion in the second quarter of 2006.

Attribution of changes in fair value relies on models, assumptions, and other measurement techniques that evolve over time. The following attribution is the company's current estimate of the items presented (on a pre-tax basis) and excludes the effect of returns on capital and administrative expenses.

Investment activities in the company's retained portfolio decreased fair value by approximately $800 million during the second quarter of 2007. This estimate includes reductions in fair value of approximately $1.4 billion attributable to net mortgage-to-debt OAS widening. Market conditions in the second quarter of 2007 did not present opportunities for asset and liability management to generate returns above the core spread earned on the retained portfolio.

In the second quarter of 2006, investment activities increased fair value by approximately $1.0 billion. This estimate includes increases in fair value attributable to net mortgage-to-debt OAS tightening of approximately $100 million. During the second quarter of 2006, market conditions and asset and liability management activities contributed to investment returns above the core spread earned on the retained portfolio.

Credit guarantee activities increased fair value by an estimated $1.8 billion during the second quarter of 2007. This increase includes the receipt of cash primarily related to management, guarantee and other up-front fees. It also includes a fair value increase related to the single-family guarantee asset of approximately $1.7 billion, primarily attributable to an increase in interest rates during the quarter. These increases were partially offset by an increase in the fair value of the single-family guarantee obligation of approximately $600 million.

In the second quarter of 2006, credit guarantee activities increased fair value by an estimated $1.2 billion.  This estimate includes a fair value increase related to the single-family guarantee asset of approximately $500 million with the remainder primarily due to the receipt of cash related to management, guarantee and other up-front fees.

Interest-Rate Risk Management

Consistent with its longstanding record, the company's interest-rate risk remained low. During the second quarter of 2007, the company reported that portfolio market value sensitivity (PMVS-L) and duration gap averaged one percent and zero months, respectively, unchanged compared to the second quarter of 2006.

Internal Controls

Remediation of the material weaknesses and significant deficiencies in Freddie Mac's financial reporting process continues to be a top corporate priority in 2007. The company is continuing to make significant progress on a series of initiatives to improve its financial reporting infrastructure and remediate material weaknesses and other deficiencies in its internal controls. These activities are part of Freddie Mac's comprehensive plan for returning to timely quarterly financial reporting. Efforts made to date have resulted in a strengthened control environment.

Additional Information

For more information, see the Consolidated Financial Statements and Core Tables accompanying this release, the company's Information Statement Supplements, dated August 30, 2007, and the slide presentation that will be available on the Investor Relations page of the company's Web site at 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 March 23, 2007 and related Information Statement Supplements, available on the Investor Relations page of the company's Web site at 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 10:00 a.m. Eastern Time today. Domestic investors should call 1-800-230-1074 and international investors can access the call at 612-234-9959. 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 3:00 p.m. Eastern Time on August 30, 2007 until midnight on September 13, 2007. To access this recording in the United States, call 1-800-475-6701 and use access code 883319. Outside of the United States, call 320-365-3844 and use access code 883319.

This press release contains forward-looking statements pertaining to management's current expectations as to the company's future business plans, market share, remediation initiatives, financial reporting timeline, results of operations and/or financial condition on a GAAP or fair value basis. Management's expectations for the company's future necessarily involve a number of assumptions, judgments and estimates, and various factors 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 March 23, 2007, and related Information Statement Supplements, which are available on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors.

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