Richard F. Syron's Speech at the Freddie Mac Annual Stockholders' Meeting on June 8, 2007
Prepared Remarks for Richard F. Syron
Chairman & Chief Executive Officer, Freddie Mac
Freddie Mac Annual Stockholders' Meeting
McLean, Virginia
June 8, 2007
I'm pleased to welcome you to our annual shareholder meeting. I'm especially pleased we are able to hold this meeting three months earlier than last year, and as the only shareholder meeting of the year.
And I'm most delighted of all that we will also return to quarterly reporting next week. I want to thank our employees for all their hard work in making this possible. It's been an almost backbreaking task and our shareholders appreciate this important sign of progress.
2006 ushered in a very challenging period in the U.S. housing and mortgage markets. Freddie Mac is not immune to these same challenges, from intense competition to credit quality to housing affordability. Yet even though housing weakened last year, Freddie Mac still gained strength. Your company ended the year in a good position to weather the current housing downturn – and it remains a solid long-term investment, thanks to our high asset quality, low risk exposures, improving operations and enhanced capital structure.
That's a very high-level overview. Now I want to focus on four topics in more detail.
- First, last year's key developments in our business;
- Second, how we met our vital housing mission;
- Third, our remediation of internal controls and accounting; and
- Fourth, our capital management.
That's a lot to cover and we also want to leave time for your questions. But first, I want to discuss a couple of matters regarding our board and senior management, starting with the departure of our board's last original member, Ron Poe.
Ron has had a truly impressive tenure here. He joined our board on February 6, 1990. Since then, he has attended 413 board meetings – that's 98 percent attendance – including 74 meetings in 2003 alone. When Ron started with us, Freddie Mac had a market capitalization of some $4 billion; today it is almost $45 billion. We had roughly $35 billion in assets when he started; today, it's over $800 billion.
We can't attribute ALL of that growth to Ron … but the fact is, he has served Freddie Mac superbly. His commitment to housing – and his knowledge of its key principles and players – are second to none. Ron will be missed by all of us, and he leaves with our profound thanks.
Fortunately, we anticipate that when the preliminary vote is announced in a few minutes, Ron's seat will be filled by another housing giant: Nic Retsinas, who many of you know as director of the Joint Center for Housing Studies at Harvard. Nic has impressive experience in academia, in government and in Washington policy circles – and he is highly respected in all of them. Our ability to go from strength to strength on the board like this is a good sign for Freddie's future. I would put our board up against that of any other company.
I don't want to go any further in this meeting without discussing Gene McQuade. Gene has been a terrific part of our senior team – a great partner and a good friend. Thanks in no small part to his efforts, Freddie Mac today is in a stronger position with our customers; we are a better operating company; and we are closer to the finish line on our financial reporting and internal controls. We're sorry Gene decided to return to his home, family and banking roots in the Northeast, but we respect his decision. Above all, we're delighted Gene is now standing for reelection to our board – where his wealth of experience will provide guidance and insight.
As for Gene's replacement, let me just say the board takes the entire matter of succession very seriously and has begun the search process. We expect to have more to tell you on this subject later this year.
I also want to acknowledge Joe Smialowski, who has advised me of his desire to retire from Freddie Mac at the end of this year, now that we have moved closer to achieving our goals for strengthening our systems and controls. Joe has accomplished a lot for us as head of our integrated Operations & Technology Division, and we thank him for all his significant contributions.
Now let me turn to Freddie Mac's business and financial performance – in what became an increasingly tough year for the housing and mortgage markets.
Our net income last year grew to approximately $2.2 billion, up roughly 4 percent from 2005. Fair value grew by approximately $2.5 billion.
This improved performance was based on several factors. We achieved strong growth in our credit guarantee portfolio – slightly outpacing the overall market. This growth reflected the company's enhanced responsiveness and the efforts of our sales force.
Another key to Freddie Mac's success in 2006 was our disciplined management of interest-rate risk. 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.
Credit risk management is another comparative advantage for Freddie Mac. Through this March, our total single-family 90-day delinquencies stayed very low, although we expect this to increase some in coming months. Like everyone, we are keeping a very watchful eye on our 2006 book of business. But thanks to our low delinquency rates, diversified regional exposure, and our average loan-to-value ratio of 58 percent, we are better positioned than most market competitors to withstand the expected period of heightened credit risk.
On the mission side, Freddie Mac served our charter well in 2006 – providing liquidity, affordability and a key source of stability to a weakening housing market. Our affordable performance last year was among our strongest ever. Almost 56 percent of the nearly 3.3 million homes we financed were affordable to low- or moderate-income families – an all-time high. And we can all be proud of the fact that Freddie Mac financed its 50 millionth home.
Freddie Mac took steps last year to help ease the growing strains on housing affordability. For example, we supported our lenders by introducing an innovative 40-year fixed-rate loan product, and we expanded our workforce housing initiative to include military families.
We also have remained active in rebuilding the Gulf Coast region after Hurricane Katrina. That includes completing our commitment to buy $1 billion in mortgage revenue bonds from state and local housing finance agencies in the Gulf.
I want to say a word about our efforts in the subprime market – where difficulties built quietly but didn't really emerge in a major way until this year.
In February, Freddie Mac became the first major secondary market participant to announce that we will no longer buy subprime mortgages that pose an unacceptable risk of excessive payment shock and possible foreclosure.
In April, we followed up by announcing we will purchase up to $20 billion in fixed-rate and hybrid ARM products that are being developed to limit payment shock and provide lenders with more and safer choices to offer subprime borrowers.
The steps we're taking on subprime will clearly serve our congressional charter and public mission. We are confident they will serve our business objectives, as well.
Our efforts on subprime extend a tradition of Freddie Mac leadership to foster sustainable homeownership. Last year, we instituted workout policies that can significantly reduce the odds of foreclosure; educated consumers on how to avoid predatory practices; and maintained our pioneering policies that led the industry to reject abusive loans that limit consumers' rights.
The third issue is financial reporting and internal controls – and it’s one where we were heartened by the progress we made, but obviously not totally satisfied. We have implemented a sound, comprehensive plan to make the needed improvements and we have made considerable progress in the past year.
One sign of this progress was our annual report: it took roughly 80 days to release our 2006 financials. And as I noted at the outset, we will resume quarterly reporting when we release our first quarter 2007 earnings next week, on the morning of June 14.
So our progress tells us we are turning the corner in this area. And we will not ease up our efforts to strengthen our internal controls until that vital job is done, as well.
This brings me to a topic that's always important to you, as well it should be: capital management. Last year, Freddie Mac increased our common dividend again to $2.00 per share annually – bringing the total increase in our dividend since the end of 2003 to 92 percent. We also 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 – a company record.
This year, we have made significant progress on a new commitment to repurchase $1 billion more in common shares in conjunction with the issuance of preferred stock. We'll have further details on this in our upcoming earnings call. And as we continue to remediate our accounting and internal controls, we will make every effort to extend this trend of returning capital to our shareholders.
After all, we are acutely conscious this is your money. And it's your private capital that allows the GSEs to fulfill our public mission.
So being accountable to our shareholders is not a diversion from Freddie Mac's mission. It reinforces our mission. And it is why we are here today.
Thank you again for investing in Freddie Mac. We appreciate your being here.
And now, Fred, if you could please report the results of the vote. After which I will take questions.
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