Mike May's Speech to the MBA Commercial Real Estate Finance Conference on February 4, 2008

Prepared Remarks for Mike May
Senior Vice President of Multifamily Sourcing

Freddie Mac
MBA Commercial Real Estate Finance Conference
February 4, 2008

Thanks for coming to our session today. I know you have other sessions competing for your time. And I appreciate that you've decided to be with us. We have lots of news to share with you.

The good news is that the volatility of 2007 is over. Let's have a big applause on that one. The bad news is that 2008 is likely to be equally challenging. What started out as a re-pricing of risk – one that was overdue – instead grew into a full-blown credit crunch, with devastation every where.

And this credit crunch continues today.

The financial markets have not stopped their decline. Spreads are as wide as the Gulf of Mexico. Conduits have been sent to the sideline. And the over-structuring of CDOs and SIVs are gone. To which I say, “good riddance.” Clearly, damage has been done to the market. And there is talk that it could get even worse.

But we cannot let these fears obscure the core fundamentals of this market.

We see apartment conditions coming off their highs, when vacancy rates were very low and rental growth very strong. In the year ahead, analysts expect vacancy rates to tick up from the mid-5 percent range. And they expect rental growth to slow from the mid-4s to around the rate of inflation. A shadow supply of condos will affect some areas as well.

But that aside, the basic strength of this market is sound. The speculative behavior that was driven by poor credit discipline has now evaporated. And what are we all left with? A market that is simply good, just not great. A good market can be more sustainable over the long run. But you would not know that from the mass exodus of investors and liquidity from the market.

That is why there are GSEs like Freddie Mac.

In times like these, we are a source of stability in an unstable market. Rather than cut and run, we are here for the long run. And never was that more evident than in 2007. Last year, Freddie set a new record for business volume: almost $45 billion in mortgages and CMBS, split right down the middle. A 50-percent increase from the year before, and up two-thirds from 2005.

Most of our volume came in the fourth quarter, after the credit crunch hit the broader market. For the first three quarters, we averaged about $3 billion in mortgage purchases. In the fourth, that figure jumped to almost $13 billion.

And that was just one of the amazing things we did last year.

Through our liquidity, we helped to keep the multifamily markets open for business. As other investors fled the market, our pipeline filled to capacity. The GSEs became the sole, consistent provider of funds in the market. And in this role, our volume surge strained a couple things: our capacity to process all this volume; and our ability to maintain the quick, quality service we always strive to provide.

This pressure resulted in slower turn-around times, creating anxiety for both you and your borrowers. I appreciate the patience you showed before we could take action. We put more resources to work, expanded our capacity, and slowly but surely improved turnaround times. As a result, today we are able to maintain these high volumes, and do so with a better experience for you.

Not only did we increase our traditional flow business, we also executed several unique transactions, including the largest and most complicated deals in our history. For example, in December, we closed two of our largest deals ever: a $1.8 billion deal that financed properties across the nation; and a $2.8 billion deal that refinanced an entire portfolio of tax-exempt bonds.

Along with an effective supplemental program, both of these deals allowed us to advance the affordable housing part of our corporate mission. And while I am on affordable housing, we not only met our goals for multifamily, we over-delivered to help the company with its broader goals. With our Targeted Affordable lenders, we moved closer to making delegated underwriting more the rule than the exception.

But that is not all we did.

To help borrowers reposition their properties in a changing market, we introduced new Acquisition, Rehab and Upgrade products. We have already funded more than $700 million with these new, flexible terms.

We also enhanced the Early Rate Lock offering. Lowering the standard good-faith deposit. Reducing the amount of information we require. And launching the first phase of an electronic system for data delivery – another way to get you quotes faster.

We were able to do all this – keep markets open, support affordable housing, create more value for customers – all while keeping our credit losses low and portfolio quality high.

Now, not everything was all rosy.

There were a few areas where we fell short. Our reorganization impacted our performance by creating frustration and confusion. Our small-loan efforts fell victim to our need to support a volume surge. And does anyone here think that processing a loan with us is always easy and simple? I didn't think so. So we still have work to do.

Still, this was a year like no other. We started out struggling for relevance in a market gone wild. And we ended the year in a completely different environment, with big gains in customers, volume and mission.

Like other mortgage-related companies, Freddie Mac took some financial hits. But these conditions did not stop us from supporting the multifamily market. Our situation reminds me of that old Timex commercial: we took a licking, but kept on ticking. And because we did, we were there when you needed us most.

But all that was last year. And now it is time to turn the page to 2008.

What do we do from here? Do we take advantage of our gains and the exodus of many competitors? Or do we enhance our value proposition to customers? The answer, quite frankly, is a little of both.

Yes, we want to encourage a market return to sound underwriting and rational pricing. As we all know, these principles faded during the credit explosion of the housing boom. And so, you have seen us raise prices and tighten credit in recent months.

I realize that these are not popular things to do. But our moves reflect a big reality for many financial companies today: higher costs for capital and credit-related expenses. And Freddie Mac is not immune from these trends.

But 2008 cannot be about protecting our own interests, and doing little else. Instead, we also must create more value for our customers. After all, as a GSE, we must stay in the market in good times and bad. And I do not want to see a repeat of the last market cycle, when we lost relevance. I want to elevate our performance now so we can be a more durable player in any market cycle.

Therefore, in 2008 you can expect more from Freddie Mac:

• Expect more from us on products, with a new capital-markets execution at the top of the list.
• Expect more from us on affordable housing, with a series of more flexible executions in store.
• Expect more from us to streamline the process, with a new data delivery system that many of you are quickly adopting.
• And expect more from us in how we support you. From expanded capacity to process your loans, to simplified product information, to a more visible sales staff, we are deploying more resources to help you succeed.

Rather than me describe the detail of everything we are going to do, I am going to call on our senior management team after my remarks, and have them tell you more. They represent another area where you can expect more from us: a lot more engagement with the Freddie Mac team.

Now if we do our job right, when competitors return to the market, you will still choose Freddie. And you will choose us because we offer the best value in the short run and the most reliable relationship for the long run.

Before I call on my colleagues, let me underscore what we are trying to accomplish here.

We are trying to forge a business where we better support your needs today and in the next market cycle. One where we solidify our market position, build greater scale, and perform new and more complex transactions for you. Based on our performance last year – being there when other investors were not; the record volumes we processed; the newer types of deals we conducted – we have begun to deliver on this direction.

Much remains to be done, of course. And as we move forward, do me a favor: Keep us honest. If we are not delivering on what we say, then hold us accountable. Call us. E-mail us. Respond to our customer surveys. Make some noise. That way, we will know what is working, and what isn't.

Direct feedback. Appreciation for each other's business. And a common goal to be a long-term player in this industry. That is how both of us can not only operate in a turbulent marketplace, but thrive in it. And that is what we at Freddie Mac are determined to do with each of you.