Freddie Mac Reports 2006 Financial Results

Net income for 2006 increases to $2.2 billion

Company announces plan to repurchase $1 billion in common stock

    MCLEAN, Va., March 23 /PRNewswire-FirstCall/ --
 
     2006 Highlights
     -- Net income increases to $2.2 billion and fair value increases by $2.5
        billion.
     -- Diluted earnings per common share up $0.09, to $2.84.
     -- Guarantee volumes show strong growth, up 10.6%, despite challenging
        year for housing and mortgage finance.
     -- Company returned $3.3 billion to common stockholders, the most in
        Freddie Mac history.
     -- Continuing to build shareholder value and manage capital prudently,
        company announces plan to repurchase additional $1 billion in common
        stock and issue $1 billion in preferred stock.
     -- 2006 Annual Report issued today.
     Freddie Mac ( FRE) today reported net income of $2.2 billion for
 2006, up 4 percent compared to $2.1 billion in 2005. The company also
 reported an increase in the fair value of net assets attributable to common
 stockholders, before capital transactions, of approximately $2.5 billion
 for 2006, compared to an increase of $1.0 billion in 2005. Freddie Mac's
 regulatory core capital is estimated at $36.2 billion at December 31, 2006,
 with an estimated $2.6 billion in excess of the 30-percent mandatory target
 capital surplus set by the Office of Federal Housing Enterprise Oversight
 (OFHEO).
     During 2006, the company increased its common dividend payout by 22
 percent to $1.3 billion or $2.00 per share on an annualized basis and
 returned $2.0 billion of capital to common stockholders in a
 preferred-for-common restructuring. All told, the company returned some
 $3.3 billion to common stockholders last year, the most in Freddie Mac
 history.
     Also, the company announced today that it plans to repurchase up to an
 additional $1 billion in common stock in conjunction with the issuance of
 up to $1 billion in preferred stock from time to time depending on market
 conditions.
     "Freddie Mac grew its business, strengthened its franchise and improved
 long-term value for its shareholders, despite a challenging year for
 housing and mortgage finance," said Richard F. Syron, chairman and chief
 executive officer. "In 2006, both net income and fair value return before
 capital transactions exceeded $2 billion, as we grew our guarantee
 business. We also maintained our low credit and interest-rate risk
 profiles, leaving us well positioned to deal with a broad range of interest
 rate conditions, and with the value of our shareholders' equity well
 protected.
     "Freddie Mac also continued to fulfill its important public mission,
 marking a major milestone in its history by making a decent, affordable
 home possible for the 50 millionth time," Syron said. "All of us at Freddie
 Mac are proud to have been a part of that achievement and are focused
 unwaveringly on serving our next 50 million families."
     "Our plan to repurchase an additional $1 billion in common stock and
 our significant return of capital to common stockholders in 2006
 demonstrate Freddie Mac's progress in improving our capital structure,"
 said Buddy Piszel, chief financial officer. "We've also made progress in
 our remediation efforts, as demonstrated by today's release of our 2006
 annual report. We continue to make good strides towards returning to
 quarterly reporting later this year."
     2006 RESULTS
 
     Net Income
     ($ in billions, except per share amounts)
                                                2006        2005      Change
     Net Income                                 $2.2        $2.1      $0.1
     Diluted earnings per common share          $2.84       $2.75     $0.09
     Return on common equity                     8.6%        7.7%      0.9%
     Diluted weighted average common
      shares outstanding                       682.7 mm    693.5 mm  (10.8) mm
     The $0.09 increase in diluted earnings per common share for 2006
 reflects the net effects of the increase in net income and the reduction in
 the diluted weighted average number of common shares outstanding, arising
 from the repurchase of approximately 32.7 million common shares during
 2006, partially offset by an increase in preferred dividends associated
 with the company's issuance of $1.5 billion in new preferred stock. Pre-tax
 income declined by $0.5 billion to $2.1 billion in 2006 from $2.6 billion
 in 2005.
     ($ in billions)                               2006        2005      Change
     Total Revenues                                $5.2        $5.6      $(0.4)
       Net interest income                          4.2         5.4       (1.2)
       Other non-interest income (loss)            (0.7)       (1.3)       0.6
       Management and Guarantee income              1.7         1.5        0.2
     Net interest income declined by $1.2 billion. During 2006, the unpaid
 principal balance (UPB) of the company's retained portfolio declined
 slightly to approximately $704 billion, as relatively tight
 mortgage-to-debt option- adjusted spreads (OAS) generally limited
 attractive investment opportunities and the company began managing the
 portfolio under a voluntary growth limit announced in August 2006.
     While the retained portfolio declined slightly year-over-year, the
 average balance of interest-earning assets increased, as did average
 yields. Notwithstanding this improvement, net interest income declined as
 the company replaced, at higher contractual interest rates, approximately
 $129 billion in long-term debt, which either matured or was repurchased
 during 2006. The company's average funding levels remained significantly
 below the London Interbank Offered Rate (LIBOR), with spreads relative to
 LIBOR improving during the year by 2 to 5 basis points along the
 interest-rate curve for its Reference Notes(R) securities.
     Other non-interest income (loss) includes another component of the
 company's investment returns, interest received or paid on interest-rate
 swaps. During 2006, the company recognized $92 million of interest income,
 versus $337 million of interest expense during 2005, an improvement of $429
 million. This change primarily resulted from the impact of rising
 short-term interest rates, partially offsetting the above-mentioned
 reduction in net interest income.
     Management and guarantee income on PCs held by third parties increased
 to $1.7 billion in 2006 from $1.5 billion in 2005, as the contractual
 guarantee fee rate in basis points declined modestly and the average
 balance of outstanding PCs held by third parties increased by roughly 15
 percent to $1,045 billion from $909 billion.
     During 2006, the company's total credit guarantee portfolio increased
 by 10.6 percent to approximately $1.5 trillion. The company estimates that
 its share of government-sponsored enterprise (GSE) mortgage securitizations
 for 2006 was approximately 43 percent, compared to about 45 percent in 2005
 and about 41 percent in 2004. All-in, Freddie Mac's 2006 activities
 provided mortgage funds for approximately 3.3 million families.
     ($ in billions)                              2006       2005     Change
     Total Expenses                               $3.0       $3.0      $-
       Administrative expenses                     1.6        1.5      0.1
       Other non-interest expense                  1.1        1.2     (0.1)
       Credit-related expenses                     0.3        0.3        -
     Total expenses were largely unchanged year-over-year at $3.0 billion.
 Administrative expenses increased slightly to $1.6 billion in 2006 from
 $1.5 billion in 2005 primarily due to higher professional services costs
 related to improving technology and internal control over financial
 reporting. The company benefited during 2006, as administrative expenses
 declined as a percent of the average total mortgage portfolio to 9.3 basis
 points from 9.7 basis points in 2005.
     Credit-related expenses were down slightly to $275 million from $291
 million in 2005. In 2005, the company recorded an additional provision for
 credit losses due to Hurricane Katrina of $128 million. During 2006, the
 company reduced that provision by $82 million.
     In 2006, Freddie Mac experienced a slight credit deterioration in its
 portfolio of loans not impacted by the hurricane as more loans transitioned
 through delinquency to foreclosure and the expected severity of losses on a
 per-property basis increased. As a result, the company recorded in 2006 a
 $297 million provision for credit losses as well as real estate owned
 expense of $60 million.
     ($ in billions)                            2006         2005    Change
     Tax Benefit (Expense)                      $0.1        ($0.4)    $0.5
     During 2006, Freddie Mac recorded a tax benefit of $0.1 billion,
 compared to a tax expense of $0.4 billion in 2005, due to a reduction in
 the company's tax reserves as a result of a favorable U.S. Tax Court
 decision and a separate Internal Revenue Service settlement, a decline in
 pre-tax income and a favorable tax impact from certain low-income housing
 activities.
     Capital Management
     Estimated regulatory core capital was $36.2 billion at December 31,
 2006, with an estimated regulatory minimum capital surplus of $10.3
 billion, and an estimated $2.6 billion in excess of the 30-percent
 mandatory target capital surplus set by OFHEO. During 2006, the company
 completed the repurchase of approximately $2.0 billion of outstanding
 shares of common stock (approximately 32.7 million shares) at an average
 price of $61.06 per share and issued non-cumulative, perpetual preferred
 stock in the amount of $1.5 billion.
     During the first quarter of 2007, the company issued $1.1 billion of
 non- cumulative, perpetual preferred stock and redeemed $0.6 billion of
 higher-cost non-cumulative, perpetual preferred stock. These transactions
 effectively reduced the company's cost of capital. The company announced
 today its plan to repurchase up to $1 billion of common stock in
 conjunction with the issuance of preferred stock from time to time
 depending on market conditions.
     Fair Value Results
     During 2006, the fair value of net assets attributable to common
 stockholders, before capital transactions, increased by $2.5 billion,
 resulting in a return on the average fair value of net assets attributable
 to common stockholders of approximately 9.5 percent, compared to a $1.0
 billion increase, or 3.7 percent return, in 2005. Payment of common
 dividends and the repurchase of common shares reduced total fair value by
 $3.3 billion. Taken together, these items resulted in fair value of net
 assets attributable to common stockholders as of December 31, 2006 of $26.0
 billion, compared to $26.8 billion as of December 31, 2005.
     Attribution of changes in fair value relies on models, assumptions, and
 other measurement techniques that evolve over time. The following
 attribution is management'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 contributed to the increase in fair value by an
 estimated $1.3 billion in 2006. This estimate includes reductions in fair
 value of approximately $0.9 billion attributable to mortgage-to-debt OAS
 widening. In 2006, other market conditions and asset-liability management
 returns did not meaningfully add to core spread on the retained portfolio,
 which remained generally consistent with 2005 levels.
     In 2005, investment activities increased fair value by an estimated
 $0.5 billion. This estimate includes reductions in fair value of
 approximately $2.7 billion attributable to mortgage-to-debt OAS widening.
 In 2005, asset- liability management returns and other market conditions
 added significantly to core spread results.
     Guarantee activities increased fair value by an estimated $1.9 billion
 in 2006, including a $0.3 billion increase attributable to reduced
 estimates of the impact of Hurricane Katrina. During 2005, guarantee
 activities increased fair value by an estimated $1.1 billion, which
 included a reduction in fair value of approximately $1.2 billion related to
 the change in valuation methodology on the company's guarantee asset and
 guarantee obligation and a $0.4 billion decrease attributable to 2005
 estimates of the impact of Hurricane Katrina.
     During 2006, the company recognized a more significant mark-to-market
 decline in its existing book of business due to the effect of a
 deteriorating market view of credit and increased market risk premiums
 related to the company's guarantee obligation. In addition, the company
 estimates that the fair value of new business booked in 2006 was lower than
 the fair value of new business booked in 2005.
     Fourth Quarter 2006 Results
     As a result of the interest-rate movements in the last quarter, Freddie
 Mac reported a net loss of $480 million in the fourth quarter of 2006, as
 realized losses and mark-to-market impacts on the company's credit
 guarantee portfolio, derivatives and administrative expenses more than
 offset net interest income and management and guarantee income.
     Freddie Mac also reported a decrease in the fair value of net assets
 attributable to common stockholders, before capital transactions, in the
 fourth quarter of 2006 of approximately $0.2 billion as the impact of OAS
 widening, the effect of credit deterioration on the guarantee obligation
 and administrative expenses more than offset the positive contributions
 from the company's investment and guarantee activities.
     Interest-Rate Risk Management
     Managing the company's interest-rate risk is essential to maintaining a
 strong and durable capital base and continuous access to debt and equity
 markets. Consistent with its longstanding record, the company's
 interest-rate risk remained low. During 2006, the company reported that
 portfolio market value sensitivity (PMVS) and duration gap averaged one
 percent and zero months, respectively, unchanged from the prior year.
     Credit Risk Management
     The company's mortgage credit risk, as measured by the current loan-to-
 value ratio (LTV) of its credit guarantee portfolio and other credit
 characteristics, remained low. The company estimates that the credit
 guarantee portfolio had a LTV of 57 percent as of December 31, 2006,
 compared with 56 percent for 2005, and the portfolio remains geographically
 well diversified. Long-term, fixed-rate mortgages constituted 82 percent of
 the credit guarantee portfolio, despite an increase in the purchase of
 variable- rate products, including non-traditional mortgage products,
 during 2006.
     At December 31, 2006, the company's $704 billion retained portfolio
 included $238 billion of non-agency mortgage-related securities, 96 percent
 of which were rated AAA or equivalent. Included in this amount were $124
 billion of non-agency mortgage-related securities backed by subprime loans,
 of which more than 99.9 percent were AAA rated.
     Mission, Affordable Housing Goals and Legislation
     In 2006, Freddie Mac's affordable housing performance overall was its
 strongest ever. Nearly 56 percent of the homes financed by the company were
 affordable to low- or moderate-income families. Freddie Mac served 300,000
 first-time homebuyers and in another strong year for the multifamily
 business, the company financed almost half a million affordable apartment
 homes. In mid-March, the company submitted its goal performance to the
 Secretary of HUD and reported that it met its three affordable housing
 goals for 2006.
     With respect to the home purchase subgoals, the company reported that
 it met the low- and moderate-income subgoal and the underserved areas
 subgoal, but that the result for the special-affordable subgoal was 16.93
 percent as compared with the subgoal of 17.0 percent. HUD will evaluate the
 company's performance with respect to 2006 and make a final determination
 as to the company's achievement of its affordable housing goals.
     Freddie Mac views the purchase of mortgage loans benefiting low- and
 moderate-income families and neighborhoods as a principal part of its
 mission and business, and is committed to fulfilling the needs of these
 borrowers and markets. As previously disclosed, meeting these increasingly
 difficult affordable housing goals and subgoals is challenging and there
 can be no assurances that the company will do so.
     Freddie Mac faces a highly uncertain regulatory environment in light of
 GSE oversight legislation currently under consideration in Congress. A bill
 was recently introduced in the U.S. House of Representatives that includes
 provisions that could have a material adverse effect on the company's
 business and financial results. Freddie Mac believes appropriate GSE
 oversight legislation would strengthen market confidence and promote the
 company's mission, but cannot predict the prospects for the enactment,
 timing or content of any final legislation.
     Internal Controls
     The company is continuing to make progress on the 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
 quarterly financial reporting. The comprehensive plan includes mitigation
 and remediation of identified material weaknesses and significant
 deficiencies; strengthening of the financial close process; implementing
 critical systems initiatives; and completion of a review of the company's
 system of internal controls related to the processing and recording of the
 company's financial transactions.
     Additional Information
     For more information, see the Consolidated Financial Statements
 accompanying this release, the company's Information Statement Supplement,
 including Core Tables, dated March 23, 2007, and slide presentation which
 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, 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
 atshareholder@freddiemac.com, (571) 382-4732 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 company disclosures.
     Announcement of Conference Call and Webcast
     Management will host a conference call discussing today's announcement
 at 8:30 a.m. Eastern Time today. Domestic investors should call
 1-800-230-1085 and international investors can access the call at
 612-234-9960. 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 12:00 p.m. Eastern Time on March
 23, 2007 until midnight on April 6, 2007. To access this recording in the
 United States, call 1-800-475- 6701 and use access code 867017. Outside of
 the United States, call 320-365- 3844 and use access code 867017.
     This press release contains forward-looking statements pertaining to
 management's current expectations as to the company's future business
 plans, remediation initiatives, and 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 and estimates,
 and various factors could cause actual results to differ materially from
 these expectations. These assumptions and factors are discussed in the
 company's Information Statement dated March 23, 2007, which is available on
 the Investor Relations page of the company's Web site at
 www.FreddieMac.com/investors.
     Freddie Mac is a stockholder-owned company established by Congress in
 1970 to support homeownership and rental housing. Freddie Mac fulfills its
 mission by purchasing residential mortgages and mortgage-related
 securities, which it finances primarily by issuing mortgage-related
 securities and debt instruments in the capital markets. Over the years,
 Freddie Mac has made home possible for one in six homebuyers and more than
 four million renters in America.
 
 

SOURCE Freddie Mac