Rebuilding confidence.
Leading responsibly.
2004 ANNUAL REPORT
A message from
the Chairman
1
TO OUR STOCKHOLDERS:
I am pleased to write you this second annual letter as Chairman and CEO of Freddie Mac —
the first covering developments under the company’s new leadership team.
What began as a triage year became a year of mounting progress. By the end of 2004, our
steps forward had begun to build real momentum. While we still have many challenges, I feel
good about where we are and where we’re going.
Our progress has come in three phases. First, we acted to repair the company’s accounting,
reputation and key relationships. Second, we laid a strong organizational foundation for the
future. This has meant putting in place a tested and
talented senior management team and reorganizing
the company to be more agile, control costs and
move toward operating excellence. Third, we are
taking specific steps to build on this foundation,
fulfill our vital public mission and produce lasting
value for our shareholders.
Freddie Mac’s employees are highly able, loyal and
committed to our mission. The key is providing the
right kind of leadership and sense of urgency.
PUTTING OUR HOUSE IN ORDER
While much remains to be done, Freddie Mac made
significant strides last year in putting our house in
order. We met all our financial reporting targets. We
continued to modernize and strengthen our internal
controls. In March of this year, we met our important
commitment to report 2004 results. And we are on
track to become fully current early next year.
We have also taken steps to strengthen corporate
governance. For example, we have conducted the
orderly transition of more than half of our elected
board. In an era when many companies have had
a hard time with board recruiting, the high quality of our board is a heartening sign of strong
leadership and oversight for Freddie Mac.
FULFILLING OUR MISSION
Freddie Mac’s mission is to provide liquidity, stability and affordability to the housing market. On
the first two, we have done a good job. Mortgage money has been widely available under a wide
range of market conditions, and the GSEs have played a vital role in keeping the economy
strong. On affordability, however, I have been “Johnny One-Note” about Freddie Mac’s need to
do more. This is an area where we face substantial legislative and regulatory challenges. And the
company has responded.
2
Freddie Mac made significant strides in recommitting ourselves to our affordable housing
mission in 2004. We financed homes for more than 3.7 million families last year — more than half
of whom were of low or moderate income. We reported to HUD that we met all of our affordable
housing goals for 2004, which effectively increased by 14 percent. We also made progress on
other measures such as our purchase of loans for minority families and first-time homebuyers.
We laid the groundwork for the successful rollout early this year of our new Home Possible SM
suite of affordable mortgages. Broadly available through our automated underwriting service,
this initiative will bring new scale and influence to affordable housing finance. It also contains
special terms to address the urgent problem of workforce housing. All told, we expect Home
Possible to help hundreds of thousands of people — including first-time homebuyers and
immigrant families — buy a home over the next few years.
As you can see, Freddie Mac is more focused today on our affordable housing mission. Our
lender customers have recognized this change publicly. And this awareness has not only fed
our mission progress, but our business progress as well.
BUILDING SHAREHOLDER VALUE
Last year we produced GAAP net income of approximately $2.9 billion — increasing our capital
surplus and maintaining a strong balance sheet. Our strong capital position allowed us this
March to raise our common stock dividend by 17 percent. We are very conscious this is your
capital we are working with.
Risk management continues to be a distinguishing strength of Freddie Mac. Across a range of
rigorous measures — from standards of credit risk to interest-rate risk to risk-based capital —
the company remains very safe and sound. Indeed, we consistently pass tests of safety and
soundness that very few financial institutions could satisfy. For example, we measure the sen-
sitivity of our portfolio to sudden interest-rate movements every business day. We publicly
report this PMVS, as it’s called, every month. And our published monthly duration gap results
show that we have kept our assets and liabilities very well matched through a wide variety of
market conditions.
Although Freddie Mac is operating today in a challenging, lower-growth environment, I am
confident we can continue to produce long-term value for our investors. One big reason is our
greatly improved focus on the customer, under the strong leadership of President and COO
Gene McQuade. In 2003, the company lost customers, partly because of our worsening
security price performance, resulting in the loss of market share. In 2004, we turned that
around — winning customers, improving the price of our mortgage-backed securities, and
setting the stage for further gains in market share. Another plus was our introduction of more
new products last year than in the previous four years combined. By year’s end, our GSE
market share had rebounded toward historic levels — climbing six percentage points from its
2003 low. And we expect to build on our gains this year.
The substantial improvement in our mortgage security prices was a major factor in our success
last year. This turnaround didn’t happen by accident. EVP for Investments Patti Cook leads a
consolidated division whose holistic approach links the sourcing side of our business with the
investment side. We also developed an important new product that was introduced successfully
earlier this year. The Freddie Mac Reference REMIC SM will provide simplicity, predictability,
transparency and liquidity.
We are streamlining the company in further ways to achieve operational efficiencies. Most notably,
we have created a unified operations and technology division, under EVP Joe Smialowski.
3
This brings together all of our back office and IT operations that previously were scattered
throughout the different business areas.
We are taking a very hard look at costs — striving to be a least-cost producer wherever this
fits our strategy. One goal this year is to arrest the growth in our General and Administrative
expenses. To do so, we have already cut some 1,300 consultants from the company’s payroll
through the early months of this year. We are hopeful our G&A costs have peaked and we see
further progress in the years ahead.
Some of our recent spending has been a classic case of making investments today to save money
tomorrow. For example, the new systems we are building will allow us to rely more on automated
internal controls over financial reporting, replacing many costly manual controls and reducing audit
costs. As our CFO Marty Baumann can attest, our large investments in this area will pay off not just
in better and more efficient accounting systems, but in a better-run company.
STRENGTHENING HOW WE ARE REGULATED
Since coming to Freddie Mac, I have made it clear we support sound legislation that will
strengthen GSE regulation and market confidence. Achieving this outcome has been my
highest priority. It’s unfortunate that a bill didn’t pass last year and we are working hard to
achieve one this year.
The genius of the GSE business model established by Congress is that it employs private capital
to achieve a vital public mission. In the political environment of the past year, the full meaning of
this point has often been obscured. So it is one I have made clearly and vigorously as part of the
legislative process. For the truth is, Freddie Mac’s investors provide capital that is indispensable
to fulfilling our mission with minimum risk — and maximum benefit — to the public.
That’s why my being a vigilant steward of your capital is not a diversion from my public mission
responsibilities. It advances those responsibilities.
CONCLUSION
Thanks to the foundation we laid and the steps we took in 2004, Freddie Mac is turning the
corner. This is a company working from traditional strengths and adding new ones: a strong
balance sheet and capital position; low and rigorously managed levels of risk; improved market
share and funding costs; and a stronger competitive position with customers. We’re doing
more on our affordable mission. And the year brought us that much closer to resolving our two
big remaining issues: GSE legislation and our financial reporting.
Going forward, we’ve got the right leadership for our most critical challenges, the right focus
on winning over customers, and the right plan to achieve operational excellence.
Thank you for investing in Freddie Mac. Your confidence in us has helped millions of America’s
families achieve homeownership. Our responsibility is to justify that confidence. And we are
fully committed to doing so.
Sincerely,
Richard F. Syron
Chairman and Chief Executive Officer
4
PRESIDENT AND CHIEF OPERATING OFFICER
As a former commercial banker, I marvel at
what a great market Freddie Mac serves —
and at the strength of this franchise. We’ve
got a strong business model, increasing cus-
tomer focus, much improved funding costs
and a dynamic, growing housing market.
Dick Syron acted decisively to bring in new
top executives who quickly gelled into a
cohesive team. This helps make even our
hard decisions a bit easier. Today there’s a
new sense of commitment and teamwork
not only in our senior management, but
throughout the company. Freddie Mac’s people are responding to the challenge.
You can sense the momentum. We’re working to delight our customers and make the
company simpler and easier to deal with. We’re becoming nimbler — developing products,
seizing opportunities. And we’re executing better, with streamlined organizations, tighter
internal controls, smarter use of IT.
Yes, our market share and several other dashboard dials have been moving the right way.
But beyond the numbers, experience has given me a feel for what operating excellence feels
like. And Freddie Mac is getting closer every day.
Eugene M. McQuade
5
Martin F. Baumann
When I joined Freddie Mac in April 2003, my immediate task was to create a plan to return
the company to timely financial reporting and create a first-class financial reporting structure.
It’s been a long road, but today we are well on the way to fulfilling these goals.
We’ve met a series of financial reporting commitments on our announced timetable, and
we’re progressing along the final steps of our plan to resume timely financial reporting
and become an SEC registrant. Across the company, our senior management team has
made it a priority to enable investors to better assess our business performance. We
remain on track to do these things.
The investments and efforts we’ve made to improve our accounting and financial controls
are yielding tangible results. They will make us not only a better reporting company, but a bet-
ter-run company as well. By creating a culture of accountability and teamwork, we are
streamlining and improving our operations. And
that is helping Freddie Mac remain focused on
the business of our mission.
EXECUTIVE VICE PRESIDENT — FINANCE
AND CHIEF FINANCIAL OFFICER
6
Patricia L. Cook
Freddie Mac’s mission is to provide liquidity, stability and affordability to the housing
market — all while maintaining the company’s safety and soundness. We ensure a
steady supply of low-cost funds to mortgage lenders by continuously securitizing home
mortgages and providing a competitive investment bid. We use our retained portfolio,
our debt issuance and securitization capabilities to tap the power of the global markets
to finance housing in America.
Today, we’re exploring new approaches to meet the challenges of our mission, such as
increased mortgage funding for minority and immigrant households, and creative new
investment options designed to meet investors’ changing needs. Doing so means we
have to challenge ourselves constantly to innovate and create new ways to satisfy our
mission objectives while also achieving our financial return objectives. It’s not an either/or
proposition. Rather, it’s a holistic approach to capital market and investment activities —
and one that serves both our mission and
our investors.
Prudently deploying capital while manag-
ing risk to provide low-cost mortgage
funding — that’s a mission we’re proud to
serve every day.
EXECUTIVE VICE PRESIDENT — INVESTMENTS
7
EXECUTIVE VICE PRESIDENT — OPERATIONS AND TECHNOLOGY
Operational excellence and a commitment to
creating a performance-based culture drive me
every day at Freddie Mac.
We’re delivering new technology-based initia-
tives and executing on strategies to return the
company to timely financial reporting, make it
easier for our customers to do business with us,
and help fulfill the company’s mission.
The operational challenges ahead for Freddie
Mac are demanding, varied and exciting. They
range from applying technology to meet our
business needs to ensuring we’re agile enough to seize opportunities and meet the ever-
changing needs of an emerging and diverse generation of homebuyers.
Today, we’re implementing new efficiencies in our operations and use of technology to reduce
the costs of doing business, strengthen our competitive position in the marketplace and
deliver on our commitment to our mission and shareholders.
By focusing on operational excellence — the ability to define a problem, determine a solution
and execute for success — Freddie Mac can do more than ever to make home possible for
millions of families.
Joseph A. Smialowski
8
EXECUTIVE VICE PRESIDENT — COMMUNITY RELATIONS
AND CHAIRMAN OF THE FREDDIE MAC FOUNDATION
Being a trusted friend to the community is
a Freddie Mac hallmark. Through our
extensive philanthropic program, anchored
by the Freddie Mac Foundation, we make
stronger communities possible for children
and families. We do this by investing good-
will, expertise, leadership, volunteer power
and money — nearly $32 million in 2004.
This commitment has led us to partner with
organizations to increase affordable housing
for families and to develop our signature
program — Freddie Mac’s Hoops for the
Homeless — to raise awareness and money to combat family homelessness. Our foun-
dation works every day to prevent child abuse and neglect, find homes for foster children
and develop our young people. Our employees also give generously of their time, talent
and treasure.
Freddie Mac’s community and our nation can continue to count on us as a neighbor
and friend to make streets into neighborhoods and help strengthen America’s families.
Ralph F. Boyd, Jr.
INFORMATION STATEMENT
AND
ANNUAL REPORT TO STOCKHOLDERS
For the Ñscal year ended December 31, 2004
Freddie Mac is a stockholder-owned, government-sponsored enterprise, or GSE, established by Congress
to provide a continuous Öow of funds for residential mortgages. We perform this function primarily by buying
and guaranteeing residential mortgage loans and mortgage-related securities, which we Ñnance by issuing
mortgage-related securities, debt securities and equity securities. Our securities are not required to be
registered under the Securities Act of 1933 or the Securities Exchange Act of 1934 and we are not currently
required to Ñle periodic reports with the Securities and Exchange Commission under the Exchange Act.
However, we are committed to the voluntary registration of our common stock under the Exchange Act,
which we expect to complete after we return to timely Ñnancial reporting. We alone are responsible for making
payments on our securities. Neither the U.S. nor any agency or instrumentality of the U.S. other than Freddie
Mac is obligated to fund our mortgage purchase or Ñnancing activities or to guarantee our securities or other
obligations.
The publication of this Information Statement and Annual Report, or Information Statement, has been
delayed as a result of the ongoing controls remediation and systems re-engineering and development necessary
to return to timely Ñnancial reporting following the previous revision and restatement of our Ñnancial results
for 2002, 2001 and 2000. For more details, see ""EXPLANATORY NOTE.''
This Information Statement contains important Ñnancial and other information about Freddie Mac. This
Information Statement will be supplemented periodically. All available supplements should be read together
with this Information Statement. We also provide information about the securities we issue in the OÅering
Circular for each securities program and any supplement for each particular oÅering. You can obtain copies of
the Information Statement, OÅering Circulars, all available supplements, Ñnancial reports and other similar
information by visiting our Internet website (www.FreddieMac.com) or by writing or calling us at:
Freddie Mac
Investor Relations Department
Mailstop D4O
1551 Park Run Drive
McLean, Virginia 22102-3110
Telephone: 571-382-4732 or 1-800-FREDDIE (800-373-3343)
shareholder@freddiemac.com
Our principal oÇces are located at 8200 Jones Branch Drive, McLean, Virginia 22102
(telephone: 703-903-2000).
THIS INFORMATION STATEMENT IS DATED JUNE 14, 2005
TABLE OF CONTENTS
BOARD OF DIRECTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXPLANATORY NOTE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BUSINESSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MARKET PRICE FOR THE COMPANY'S COMMON EQUITY, RELATED STOCK-
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ÏÏÏÏÏÏÏÏÏ
FORWARD-LOOKING STATEMENTSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXECUTIVE SUMMARY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AVERAGE CONSOLIDATED BALANCE SHEETS AND RATE/VOLUME
ANALYSISÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED FAIR VALUE BALANCE SHEETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VOLUME STATISTICS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LIQUIDITY AND CAPITAL RESOURCES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OFF-BALANCE SHEET ARRANGEMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RISK MANAGEMENT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk Oversight ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
QUARTERLY SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SUBSEQUENT ACCOUNTING REVISIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ADDITIONAL INFORMATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VOLUNTARY COMMITMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ÏÏÏÏÏÏÏÏ
DIRECTORS AND EXECUTIVE OFFICERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS, OFFICERS
AND EMPLOYEES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PRINCIPAL ACCOUNTANT FEES AND SERVICES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INDEX OF ACRONYMSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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Freddie Mac
BOARD OF DIRECTORS (as of June 1, 2005)*
John B. McCoy**
Retired Chairman and Chief Executive OÇcer
Bank One Corporation
A Ñnancial services company
Columbus, Ohio
Eugene M. McQuade
President and Chief Operating OÇcer
Freddie Mac
McLean, Virginia
Shaun F. O'Malley (Lead Director)
Chairman Emeritus
Price Waterhouse LLP
An accounting and consulting Ñrm
Philadelphia, Pennsylvania
Ronald F. Poe
President
Ronald F. Poe & Associates
A private real estate investment Ñrm
White Plains, New York
Stephen A. Ross
Professor
Massachusetts Institute of Technology
Cambridge, Massachusetts
William J. Turner
Manager
Signature Capital, Inc.
A venture capital investment Ñrm
Portland, Maine
Richard F. Syron
Chairman and Chief Executive OÇcer
Freddie Mac
McLean, Virginia
Barbara T. Alexander
Independent Consultant
Monarch Beach, California
GeoÅrey T. Boisi
Chairman and Senior Partner
Roundtable Investment Partners LLC
A private investment management Ñrm
New York, New York
Michelle Engler
Trustee
JNL Investor Series Trust and JNL Series Trust
and Member of Board of Managers
JNL Variable Funds
Each an investment company
Lansing, Michigan
Richard Karl Goeltz
Retired Vice Chairman and Chief Financial OÇcer
American Express Company
A Ñnancial services company
New York, New York
Thomas S. Johnson
Retired Chairman and Chief Executive OÇcer
GreenPoint Financial Corp.
A Ñnancial services company
New York, New York
William M. Lewis, Jr.
Managing Director and Co-Chairman
of Investment Banking
Lazard Ltd
An investment banking company
New York, New York
* Freddie Mac's enabling legislation establishes the membership of the Board of Directors at 18 directors: 13 directors elected by the
stockholders and 5 directors appointed by the President of the United States. Prior to our March 31, 2004 Annual Meeting, the OÇce
of Counsel to the President informed us that the President did not intend to reappoint any of his then-current presidential appointees.
Consequently, each of their terms as presidential appointees ended on the date of that annual meeting. No new appointees have been
named by the President as of June 1, 2005.
** As previously announced, Mr. McCoy will not stand for re-election at our stockholders' meeting to be held on July 15, 2005.
1
Freddie Mac
EXPLANATORY NOTE
This Information Statement contains forward-looking statements regarding our current expectations and
objectives for Ñnancial reporting, future business plans, results of operations, Ñnancial condition and trends and
other matters that could aÅect our business. Forward-looking statements do not relate to historical matters
and involve known and unknown risks, uncertainties and other factors, including those listed in the section
titled ""FORWARD-LOOKING STATEMENTS.'' Such statements are made as of the date of this
Information Statement and we undertake no obligation to publicly update any forward-looking statement to
reÖect events or circumstances after the date of this Information Statement, or to reÖect the occurrence of
unanticipated events.
The publication of this Information Statement has been delayed as a result of the ongoing controls
remediation and systems re-engineering and development necessary to return to timely Ñnancial reporting.
Although we are working to address the operational weaknesses that are contributing to our current inability to
release Ñnancial results on a timely basis, uncertainty regarding the expected success, scope and timing of
these activities remains. See ""MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, or MD&A Ì RISK MANAGEMENT Ì Opera-
tional Risks Ì Sources of Operational Risks.''
Our current objective is to provide Ñnancial results for Ñrst and second quarter 2005 by August 31, 2005
and for third quarter 2005 by mid-November 2005. In addition, our current objective is to provide Ñnancial
results for fourth quarter and full-year 2005, including the timely Ñling of a minimum capital report with our
regulator, the OÇce of Federal Housing Enterprise Oversight, or OFHEO, that complies with U.S. generally
accepted accounting principles, or GAAP, at the end of January 2006. In 2004 and continuing into 2005, we
have focused on our controls and systems remediation eÅorts to address the material weaknesses and other
deÑciencies in our internal controls over Ñnancial reporting. We expect to continue to make signiÑcant
progress in developing and building a fully capable systems infrastructure. This infrastructure will facilitate our
return to timely Ñnancial reporting, enabling us to fulÑll our commitment to register our common stock with
the Securities and Exchange Commission, or SEC, under the Exchange Act. We anticipate Ñling our Form 10
registration statement with the SEC in the second quarter of 2006 and becoming an SEC reporting company
as soon as possible thereafter.
Although we have made signiÑcant progress during 2004 and the Ñrst Ñve months of 2005, signiÑcant
systems revisions are still required for us to return to timely Ñnancial reporting as a result of our adoption of
revised and new accounting policies in recent years. We face continuing challenges because of the prior
deÑciencies in our accounting infrastructure and the operational complexities caused by the volume of revised
and new accounting policies that we have adopted.
Systems improvements to date have enabled us to move to a one-step Ñnancial close process in 2005, a
signiÑcant improvement over the two-step process used for the production of 2003 and 2004 results that
involved the ""remeasurement'' of preliminary Ñnancial Ñgures. We continue, however, to rely extensively on
substantial validation and analytical review procedures to verify that the Ñnancial results produced by our
recently implemented systems comply with GAAP.
This Information Statement and the certiÑcations by our Chief Executive OÇcer and Chief Financial
OÇcer, which are based on the certiÑcations required of SEC registrants as to the accuracy and completeness
of the information and the fair presentation of the consolidated Ñnancial statements and other Ñnancial
information in periodic reports, do not address our internal controls over Ñnancial reporting or our disclosure
controls and procedures because a comprehensive evaluation of the eÅectiveness of these controls and
procedures was not performed as of December 31, 2004. See ""MD&A Ì RISK MANAGEMENT Ì
Operational Risks Ì Sources of Operational Risks'' for additional information regarding our internal control
weaknesses and remediation eÅorts.
2
Freddie Mac
Overview
BUSINESS
Freddie Mac is a stockholder-owned Ñnancial services company chartered by Congress on July 24, 1970
under the Federal Home Loan Mortgage Corporation Act, as amended, which we refer to as the Freddie Mac
Act or our charter. At December 31, 2004, we had total assets of $795.3 billion, total liabilities and minority
interests of $763.9 billion, and total stockholders' equity of $31.4 billion. At May 13, 2005, we had 5,064 full-
time and 153 part-time employees. Our principal oÇces are located in McLean, Virginia. We have additional
oÇces in Washington, D.C.; Reston, Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; New York,
New York; and Woodland Hills, California.
We fulÑll the requirements of our charter by purchasing residential mortgage loans and mortgage-related
securities from mortgage lenders and securities dealers and by providing our credit guarantee of payment of
principal and interest for residential mortgages originated by mortgage lenders. Through our credit guarantee
activities, we securitize mortgage loans by issuing undivided interests in pools of purchased mortgages, which
are called Mortgage Participation CertiÑcates, or PCs, to third-party investors. We also resecuritize mortgage-
related securities that are issued by us or the Government National Mortgage Association, or Ginnie Mae, as
well as non-agency entities. Securities issued through our resecuritization activities are referred to as
Structured Securities. For further information concerning our mortgage purchase and securities issuance
activity and the composition of our Retained portfolio, see ""MD&A Ì OUR RETAINED AND TOTAL
MORTGAGE PORTFOLIOS'' and ""MD&A Ì VOLUME STATISTICS.''
For more than three decades, we have been one of the largest participants in the U.S. residential
mortgage market. The residential mortgage market consists of a primary mortgage market that links
homebuyers and lenders and a secondary mortgage market that links lenders and investors. We purchase
mortgage loans that Ñnance homes in every geographic region of the U.S., including U.S. territories (Puerto
Rico, Guam, U.S. Virgin Islands). By providing liquidity and eÇciency in the secondary mortgage market, we
reduce the cost of homeownership and rental housing and improve the quality of life by making the American
dream of access to a decent and aÅordable home possible.
In the primary market, residential mortgage lenders originate or provide mortgages to homebuyers. These
lenders include mortgage banking companies, commercial banks, savings banks, savings and loan associations,
credit unions and state and local housing Ñnance agencies. Lenders may choose to replenish their supply of
lending capital by selling the mortgage loans they originate into the secondary mortgage market.
We compete in the secondary mortgage market with the Federal National Mortgage Association, or
Fannie Mae, and other Ñnancial institutions that retain or securitize mortgages, such as banks, dealers and
thrift institutions, and the Federal Home Loan Banks. We compete, primarily on the basis of price, products,
structure and service, by buying and selling mortgages in the form of whole loans (i.e., mortgage loans that
have not been securitized) and mortgage-related securities. We also compete for low-cost debt funding with
Fannie Mae, the Federal Home Loan Banks and other institutions that hold mortgage portfolios. Competition
from these entities can vary with economic, Ñnancial market and regulatory environments.
We compete in the large and growing mortgage debt market. Total U.S. residential mortgage debt was
$8.7 trillion as of December 31, 2004, according to reports from the Federal Reserve System. In relation to
this market, our Total mortgage portfolio was $1.5 trillion as of December 31, 2004. See further discussion of
our mortgage portfolio holdings in ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFO-
LIOS.'' Total residential mortgage debt outstanding in the U.S. grew at an annual rate of 13 percent in both
2003 and 2004. We expect economic and demographic trends will continue to increase the total amount of
mortgage debt outstanding, though at a slower rate than in the past few years. The share of the mortgage debt
market attributed to Fannie Mae and us, however, has declined recently due to the increasing proportion of
adjustable rate mortgages, or ARMs, and other non-traditional mortgage products originated. Banks have
tended to retain these mortgages rather than sell them to the GSEs. In addition, there has been strong demand
for mortgages in general by other investors, particularly banks.
3
Freddie Mac
Availability of Documents
Our Information Statements, Supplements and other Ñnancial disclosure documents are available free of
charge on our website at www.FreddieMac.com. (We are providing this Internet address solely for the
information of interested persons. We do not intend this Internet address to be an active link and are not using
references to this Internet address here or elsewhere in this Information Statement to incorporate additional
information into this Information Statement.) Our corporate governance guidelines, codes of conduct for
employees and members of the Board of Directors (and any amendments or waivers that would be required to
be disclosed), and the charters of the Board's Ñve standing committees (i.e., the Audit, Compensation and
Human Resources, Finance and Capital Deployment, Governance and Nominating, and Mission and
Sourcing Committees) are also available on our website. Printed copies of these documents may be obtained
upon request.
Information About Business Segments
We have determined that we had one business segment for the periods presented in this Information
Statement.
Our Charter and Mission
Our charter serves as the foundation of our business, forms the framework for our business activities,
shapes the products we bring to market and drives the services we provide to the nation's housing and
mortgage industry. Our mission is to provide liquidity, stability and aÅordability in the residential mortgage
markets. We accomplish this by securitizing mortgages and by purchasing mortgages and mortgage-related
securities to hold in our own portfolio.
SpeciÑcally, our statutory purposes are:
‚ to provide stability in the secondary market for residential mortgages;
‚ to respond appropriately to the private capital market;
‚ to provide ongoing assistance to the secondary market for residential mortgages (including mortgages
on housing for low- and moderate-income families involving a reasonable economic return that may be
less than the return received on other activities) by increasing the liquidity of mortgage investments
and improving the distribution of investment capital available for residential mortgage Ñnancing; and
‚ to promote access to mortgage credit throughout the U.S. (including central cities, rural areas and
other underserved areas) by increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for residential mortgage Ñnancing.
Our charter also provides us with special attributes such as:
‚ exemption from Securities Act and Exchange Act securities registration requirements (although we
are subject to the antifraud provisions of those laws and are committed to the voluntary registration of
our common stock with the SEC under the Exchange Act);
‚ favorable treatment of our securities under various legal investment laws and other regulations;
‚ access to the Federal Reserve Banks' book-entry system, which provides book-entry issuance, transfer,
payment and settlement for our mortgage-related and debt securities;
‚ discretionary authority of the Secretary of the Treasury to purchase obligations we issue up to a
maximum of $2.25 billion principal balance outstanding at any one time; and
‚ exemption from state and local taxes, except tax on real property that we own.
4
Freddie Mac
Loans Eligible for Purchase under Our Charter
Conforming Loan Limits
Our charter places a dollar amount cap on the size of the original principal balance of each single-family
mortgage loan we purchase, referred to as the conforming loan limit. The conforming loan limit is established
annually pursuant to a procedure prescribed by OFHEO. Table 1 presents a summary of the conforming loan
limits for 2005, 2004 and 2003.
Table 1 Ì Conforming Loan Limits(1)(2)
EÅective as of January 1,
2004
2003
2005
First-lien conventional, single-family mortgage loan limits:
One-family residence(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Two-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Three-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Four-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$359,650
$460,400
$556,500
$691,600
$333,700
$427,150
$516,300
$641,650
$322,700
$413,100
$499,300
$620,500
(1) The dollar limits shown are those eÅective January 1st through December 31st of each calendar year.
(2) The applicable conforming loan limits are 50 percent higher for mortgages secured by properties in Alaska, Guam, Hawaii and the
U.S. Virgin Islands.
(3) The conforming loan limit for second-lien mortgages on one-family residences is 50 percent of the limit for Ñrst-lien mortgages on
such residences. When both Ñrst- and second-lien mortgages are purchased, the total amount purchased may not exceed the
applicable conforming Ñrst-lien limit.
Loan-to-Value Ratios and Credit Enhancements
Conventional mortgages are mortgages that are not guaranteed or insured by any agency or instrumental-
ity of the U.S. government. Our charter prohibits us from purchasing Ñrst-lien conventional, single-family
mortgages if the unpaid principal balance at the time of purchase exceeds 80 percent of the value of the
property securing the mortgage, unless we have one or more of the following credit protections:
‚ mortgage insurance from an approved mortgage insurer that covers at least the portion of the mortgage
balance that exceeds 80 percent of the property's value;
‚ a seller's agreement to repurchase or replace (for periods and under conditions as we may determine)
any mortgage in default; or
‚ retention by the seller of at least a ten percent participation interest in the mortgages.
The loan-to-value ratio, or LTV, restriction does not apply to multifamily mortgages or to mortgages
insured by the Federal Housing Administration, or FHA, or the Rural Housing Service, or RHS, or partially
guaranteed by the Department of Veterans AÅairs, or VA.
Loan Quality
Under our charter we must limit our mortgage purchase and resecuritization activities, so far as
practicable, to mortgages that are of a quality, type and class that generally meet the purchase standards of
private institutional mortgage investors. This means the mortgage loans we purchase must be readily
marketable to institutional mortgage investors.
We design our mortgage loan underwriting guidelines to assess the creditworthiness of the borrower and
the borrower's capacity to fulÑll the obligations of the mortgage. We continuously review these guidelines to
ensure their eÅectiveness in order to address the changing needs of the marketplace so that more borrowers
can access mortgage Ñnancing. In some circumstances, we grant waivers or variances from our guidelines.
We also seek to distribute our guidelines through the most eÇcient means possible, including using Loan
Prospector», our automated underwriting service. While the ultimate responsibility for a lending decision rests
with the lender, Loan Prospector» provides our lender customers with a quick assessment of a loan's eligibility
for our purchase.
5
Freddie Mac
Business Activities
We connect Main Street Ì the residential mortgage market Ì to Wall Street Ì dealers and investors Ì
through our mortgage purchase, credit guarantee and portfolio investment activities.
Our customers are predominantly lenders in the primary mortgage market. Our activity in the secondary
mortgage market supports a continuous Öow of funds to the primary market, which leads to consumer beneÑts
in the form of a steady Öow of low-cost mortgage funding. This Öow of funds helps moderate cyclical swings in
the housing market, redistributes the Öow of mortgage funds regionally throughout the U.S. and provides for
the availability of mortgage funds at all times. In addition, the supply of cash made available to lenders
through this process lowers mortgage rates, making homeownership aÅordable for more families and
individuals.
Single-Family Mortgages. Lending institutions extend mortgage loans directly to their customers who
wish to purchase or reÑnance a home. Often, lenders look to us to purchase those mortgage loans from them,
replenishing the supply of money for lending. We purchase single-family mortgage loans, which are secured by
one- to four-family properties, mainly from mortgage bankers, dealers, insurance companies and federally
insured Ñnancial institutions.
The types of single-family mortgage loans we purchase typically include 30-year, 20-year, 15-year and
10-year Ñxed-rate mortgages, initial interest-only mortgages, ARMs and balloon/reset mortgages. The
substantial majority of the mortgage loans we purchase are conventional mortgages. However, we purchase
some mortgages that are fully insured by the FHA or the RHS, and some mortgages that are partially
guaranteed by the VA. Single-family mortgage loans generally are subject to our internal credit policies and
credit, appraisal, underwriting and other purchase policies and guidelines as set forth in our Single-Family
Seller/Servicer Guide.
A signiÑcant portion of our single-family mortgage purchase volume is generated from several large
mortgage lenders. During 2004, Wells Fargo Home Mortgage, Inc., Chase Home Finance LLC, ABN Amro
Mortgage Group, Inc. and National City Mortgage Co. accounted for approximately 63 percent of our
mortgage purchase volume. Wells Fargo was the largest source and accounted for approximately 33 percent of
our mortgage purchase volume during 2004, while Chase Home Finance LLC, our second largest source,
accounted for approximately 14 percent of our mortgage purchase volume.
As the mortgage industry has been consolidating, we and our competitors have been seeking business
from a decreasing number of key lenders. We are exposed to the risk that we will lose signiÑcant business
volume and will be unable to replace this business if one or more of our key lenders chooses to reduce
signiÑcantly the volume of mortgages it delivers to us or ceases to exist because of a merger or an acquisition.
The loss of business from any one of our key lenders could adversely aÅect our market share, our revenues, the
use of our technology by participants in the mortgage market and the performance of our mortgage-related
securities. We are actively working to diversify our customer base and thus reduce the potential impact of
losing a key customer. We believe that we would be able to recover from a signiÑcant decrease in, or loss of,
business volume from one or more of our largest customers through such means as strengthening our
relationships with other major lenders and servicers or modifying our business strategies.
Multifamily Mortgages. We purchase multifamily mortgages, which are secured by structures with Ñve
or more units designed principally for residential use, from approved mortgage lenders. These lenders include
federally insured Ñnancial institutions, mortgage bankers, investment bankers and insurance companies. These
mortgages have terms generally ranging from Ñve to thirty years. Our multifamily mortgage products, services
and initiatives are designed primarily to Ñnance rental housing aÅordable to low- and moderate-income
families.
We have established multifamily mortgage credit, appraisal and underwriting guidelines as set forth in
our internal credit policies and our Multifamily Seller/Servicer Guide. We may modify these guidelines or
grant waivers for some multifamily mortgages, including mortgages on properties that have favorable debt
coverage or loan-to-value ratios (a) that we consider to have superior management, (b) that are located where
the demand for rental housing is strong, (c) that serve our aÅordable housing mission, or (d) for which we are
seeking to match competitive bids by other lenders.
6
Freddie Mac
Credit Guarantee Activities
The following discussion summarizes our credit guarantee activities.
Guarantees of PCs. One of the means by which we fund purchases of mortgage loans is through the use
of securitization-based Ñnancing. We issue PCs that represent undivided interests in the mortgage loans we
purchase and which, in some cases, we sell to investors for cash. However, most of our credit guarantee
activity occurs through mortgage swap transactions in which a mortgage lender or other seller delivers
mortgages to us in exchange for our PCs. Our customers may choose to hold these PCs in their portfolios or
sell them to other investors. We guarantee the payment of principal and interest on all PCs. Our guarantee
increases the marketability of our PCs, providing additional liquidity to the marketplace.
Guarantees Issued Through Resecuritization. Our credit guarantee activities also involve the resecuri-
tization of mortgage-related securities. In the resecuritization process, we issue securities representing
undivided interests in PCs and certain other types of mortgage-related securities. In general, we issue the
following two types of Structured Securities:
‚ Single-Class Structured Securities. We issue single-class Structured Securities backed by PCs and
by non-Freddie Mac mortgage-related securities, including Ginnie Mae CertiÑcates.
‚ Multi-Class Structured Securities. We issue multi-class Structured Securities that divide the cash
Öows of the underlying PCs, Ginnie Mae CertiÑcates and other mortgage-related securities into two or
more classes that meet the investment criteria and portfolio needs of diÅerent types of investors. Our
principal multi-class Structured Securities activity is the issuance and sale of securities that qualify for
tax treatment as Real Estate Mortgage Investment Conduits, or REMICs. Structured Securities
backed by non-agency mortgage-related securities are also referred to as multi-class Structured
Securities for purposes of this report.
The non-agency mortgage-related securities may be backed by mortgages originated using underwriting
standards that diÅer from our normal criteria; however, most of these securities are signiÑcantly credit-
enhanced at issuance. By issuing Structured Securities backed by these securities, we seek to provide liquidity
to alternative segments of the mortgage market. See ""MD&A Ì RISK MANAGEMENT Ì Credit
Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Portfolio DiversiÑcation''
for more information concerning the additional credit risk related to these transactions.
We commonly transfer Structured Securities to third parties in exchange for either cash or the collateral
underlying the Structured Securities (e.g., mortgage-related securities that third-party securities dealers
deliver to us).
Guarantees on Non-Freddie Mac-Issued Securities or Loan Portfolios. We also provide guarantees of the
payment of principal and interest on tax-exempt multifamily housing revenue bonds that support pass-through
certiÑcates issued by third parties. These housing revenue bonds are collateralized by mortgage loans on low-
and moderate-income multifamily housing projects. In addition, we guarantee the payment of principal and
interest related to low- and moderate-income multifamily mortgage loans that are originated and held by state
and municipal housing Ñnance agencies to support tax-exempt multifamily housing revenue bonds. For more
information see ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' Ì ""Ta-
ble 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based on Unpaid
Principal Balances.''
The To-Be-Announced Market
In connection with our credit guarantee activities, we issue PCs that represent pools of mortgages with
similar characteristics Ì such as PCs relating to a pool of 30-year, fully amortizing Ñxed-rate mortgages with
mortgage coupons within a speciÑed range. Because these PCs are generally homogeneous and are issued in
high volume, they are highly liquid and trade on a ""generic'' basis, also referred to as trading in the To-Be-
Announced, or TBA, market. A TBA trade represents a contract for the purchase or sale of PCs to be
delivered at a future date; however, the speciÑc PCs that will be delivered to fulÑll the trade obligation, and
7
Freddie Mac
thus the speciÑc characteristics of the mortgages underlying those PCs, are not known (i.e., not ""announced'')
at the time of the trade, but only subsequently when the trade is to be settled.
While the majority of TBA trades are performed manually, with purchases and sales occurring through
direct contact between or among the parties to the trade, dealers often trade as anonymous participants
through an inter-dealer broker or electronic trading system.
Purchases and sales of TBA-eligible PCs occur daily. Prices are generally quoted and accepted based only
upon the name of the issuer (e.g., Freddie Mac), the type of PC (e.g., 30-year Ñxed rate), the coupon of the
PC, the quantity and the settlement month. Each type of TBA trade has a single designated settlement date in
each month, and 48 hours before the settlement date the parties identify the speciÑc PCs to be delivered to
fulÑll the TBA trade obligation. During 2004 and 2003, we issued approximately $272.2 billion and $564.3
billion, respectively, of PCs that were eligible to be delivered to settle TBA trades, representing approximately
76 percent and 80 percent, respectively, of our total PC issuances.
Lenders use the TBA market to hedge the risk of changes in the fair value of mortgage loans caused by
Öuctuations in mortgage interest rates that occur after the lender ""locks'' a mortgage interest rate with a
borrower, but before the mortgage loan is originated. When a lender locks in a rate for a borrower, the lender
may sell PCs in the TBA market for delivery at a future date. After the lender originates the mortgages, it
delivers the mortgages to us in a swap transaction and receives PCs in return. Those PCs can then be used to
settle the TBA trade, or the lender can settle the trade with any of our other existing PCs that meet the
generic terms of the trade.
We use the TBA market to manage cash purchase transactions. When a lender commits to deliver
mortgages to us in exchange for cash at a speciÑed price, we may sell PCs in the TBA market for delivery at a
future date. By using the TBA market, we can manage the risk of Öuctuations in interest rates by locking in
the price at which we will sell the PCs that will ultimately be formed from the mortgages we purchase from
lenders in cash transactions.
The use of the TBA market increases the liquidity of mortgage investments and improves the distribution
of investment capital available for residential mortgage Ñnancing, thereby helping us to accomplish our
statutory mission.
Portfolio Investment Activities
We purchase mortgage loans and mortgage-related securities (including PCs and Structured Securities
we previously issued to third parties) and hold them in our Retained portfolio for investment purposes. We
Ñnance these purchases by issuing short-, medium- and long-term debt and subordinated debt and equity
securities. Our purchases of mortgage loans and mortgage-related securities replenish the sources of capital
available for mortgage lending to consumers.
Our Retained portfolio is managed through a disciplined strategy of long-term capital deployment. We
apply our mortgage market expertise to support our asset selection while managing our credit and interest-rate
risk. We invest in agency securities, non-agency mortgage-related securities and whole mortgage loans.
Agency securities are mortgage-related securities issued by GSEs or governmental agencies.
We manage interest-rate risk and reduce the funding cost of the debt we issue by:
‚ issuing a mixture of debt of various maturities, either callable (that is, redeemable at our option at one
or more times before its scheduled maturity) or non-callable;
‚ using a variety of derivatives; and
‚ restructuring mortgage-related securities cash Öows and retaining a portion of these restructured cash
Öows in the form of Structured Securities.
See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more
information.
8
Freddie Mac
Mortgage Security Performance and Other Market Support Activities
We support the liquidity and depth of the market for PCs through various activities, including:
‚ educating dealers and investors about the merits of trading and investing in PCs;
‚ purchasing and selling PCs and other mortgage-related securities through the Retained portfolio; and
‚ introducing new mortgage-related securities products and initiatives.
We may increase, reduce or discontinue these or other related activities at any time, which could aÅect
the liquidity and depth of the market for PCs. We support the execution of our credit guarantee business by
adjusting our guarantee fee. For example, if the price performance of, and demand for, our PCs is not
comparable to Fannie Mae securities on future mortgage deliveries by sellers, we may use market-adjusted
pricing where we provide guarantee fee price adjustments to partially oÅset weaknesses in prevailing security
prices and increase the competitiveness of our credit guarantee business. The use of such market-adjusted
pricing could have a material adverse eÅect on the proÑtability of our new credit guarantee business over its
life.
Our strategies to support PC price performance include the purchase and sale by our Retained portfolio
of TBA PCs and other agency securities, including Fannie Mae securities. While some purchases of PCs may
result in an expected return on equity substantially below our normal thresholds, this strategy is not currently
expected to have a material eÅect on the overall performance of our Retained portfolio. Depending upon
market conditions, including the relative prices and relative supply of and demand for PCs and comparable
Fannie Mae securities, there may be substantial variability in any period in the total amount of securities we
purchase or sell for our Retained portfolio in accordance with this strategy.
In the fourth quarter of 2004, as part of our eÅort to realign our business around our mission and core
business, we ceased our PC market making and support activities accomplished through our Securities Sales
& Trading Group business unit and our external Money Manager program. For more information, see
""CONSOLIDATED RESULTS OF OPERATION Ì Net Interest Income'' and ""NOTE 5: RETAINED
PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to our consolidated Ñnancial
statements.
Predatory Lending
We have instituted anti-predatory lending policies designed to prevent the purchase or assignment of
mortgage loans with unacceptable terms or conditions or resulting from unacceptable practices. In accordance
with these policies, the following mortgages are not eligible for purchase:
‚ mortgages originated with single-premium credit insurance;
‚ mortgages with terms that exceed either the annual percentage rate or the points and fees threshold
under the Home Ownership and Equity Protection Act of 1994;
‚ subprime mortgages with prepayment penalty terms that exceed three years; or
‚ prime mortgages, and subprime mortgages originated on or after August 1, 2004, that required the
borrower to submit to arbitration.
In addition, we require the third parties who service the loans we hold in our Retained portfolio and the
loans underlying our PCs and Structured Securities to report all borrower credit information, including
monthly mortgage payments, to all credit bureau and reporting agencies. Several states have enacted laws
aimed at predatory lending practices, generally with regard to loans exceeding thresholds based on annual
percentage rates or Ñnancing costs. For some states, the high-cost home loan thresholds are deÑned by statutes
that trigger state law liabilities for subsequent purchasers or assignees of such loans that may be more
signiÑcant than liabilities imposed upon such purchasers or assignees under the Home Ownership and Equity
Protection Act. Currently, we do not purchase such ""high-cost home loans'' in the states of Arkansas,
Georgia, Illinois, Indiana, Kentucky, Maine, Massachusetts, Nevada, New Jersey, New Mexico, New York
and Oklahoma. We continue to assess newly enacted and proposed state laws to determine our policies with
respect to the purchase of loans aÅected by those laws.
9
Freddie Mac
Regulatory and Governmental Matters
HUD
The U.S. Department of Housing and Urban Development, or HUD, has general regulatory power over
us. HUD's oversight to date has focused on housing goals, fair lending and new program approval.
Housing Goals
The GSEs are subject to aÅordable housing goals set by HUD. The goals are targeted to low- and
moderate-income families, very low-income families and low-income families living in low-income areas, and
families living in HUD-deÑned underserved areas. The HUD goals, which are set as a percent of total
purchases, have risen steadily since they became permanent in 1995.
If the Secretary of HUD were to Ñnd that we failed, or that there was a substantial probability that we
would fail, to meet any housing goal and that achievement of the housing goal was or is feasible, the Secretary
could require us to submit a housing plan. The housing plan would describe the actions we will take to achieve
the goal in the future. HUD also has the authority to issue a cease and desist order and to assess civil money
penalties against us in the event that we fail to submit a required housing plan or fail to make a good faith
eÅort to comply with a plan approved by HUD.
We have reported to HUD that we achieved each of the aÅordable housing goals in 2004 and 2003. Our
purchases, as reported to HUD, are set forth in Table 2 below.
Table 2 Ì Prior Period Housing Goals and Results(1)
Year Ended December 31,
2003
2004
Goal
Result
Goal
Result
Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily special aÅordable volume target (dollars in billions) ÏÏÏÏÏ
50%
31
20
$2.11
54%
34
24
$9.83
50%
31
20
$2.11
51%
33
20
$8.00
(1) An individual mortgage may qualify for more than one of the goals. Each of the goal percentages and each of our percentage results is
determined independently and cannot be aggregated to determine a percentage of total purchases that qualiÑes for these goals.
On May 4, 2004 and August 3, 2004, we received letters from HUD requesting information pertaining to
certain transactions entered into in calendar years 2001, 2002 and 2003. As part of the information request,
HUD asked us to describe how each identiÑed transaction complied with HUD's rules for counting units
Ñnanced toward the housing goals in these years. We fully complied with these requests for information.
Following its review, HUD determined that we failed to meet our underserved areas goal of 31 percent for
2002 by 1,222 units (or approximately 0.03 percent). Because this shortfall occurred in 2002 and we exceeded
the underserved areas goal in 2003 by approximately 95,000 units (or 1.7 percent), HUD did not require us to
submit a housing plan as a result of missing the 2002 underserved areas goal. We are engaged in ongoing
discussions with HUD regarding certain interpretive issues relating to the treatment of our mortgage
purchases under the housing goals. If these discussions result in additional guidance from HUD that requires
us to modify our reporting of housing goal results, we will make any necessary adjustments at the appropriate
time.
EÅective January 1, 2005, HUD established new and increasing aÅordable housing goal levels for the
GSEs for the years 2005 through 2008, as summarized in ""Table 3 Ì Current and Future Housing Goals for
2005, 2006, 2007 and 2008'' below. In addition, HUD established three new home purchase subgoals for
mortgages that Ñnance purchases of single-family, owner-occupied properties located in metropolitan areas
(reÑnanced mortgages are excluded). Finally, the existing dollar-based target for multifamily mortgage
purchases increased to $3.92 billion, based on HUD's established formula setting the goal as the average of the
previous three years' volume. In total, beginning in 2005 and continuing through 2008, we are required to
achieve six diÅerent and increasing HUD goals and subgoals and a higher multifamily dollar-based target, as
summarized in Table 3 below.
10
Freddie Mac
Table 3 Ì Current and Future Housing Goals(1) for 2005, 2006, 2007 and 2008
Current and Future Housing Goals for 2005, 2006, 2007 and 2008
Housing Goals Levels
Low and moderate- income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily special aÅordable volume target (dollars in
2005 Goal
2006 Goal
2007 Goal
2008 Goal
52%
37
22
53%
38
23
55%
38
25
56%
39
27
billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3.92
$3.92
$3.92
$3.92
Home Purchase Subgoals
2005 Goal
2006 Goal
2007 Goal
2008 Goal
Low and moderate- income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45%
32
17
46%
33
17
47%
33
18
47%
34
18
(1) An individual mortgage may qualify for more than one of the goals. Each of the goal percentages is determined independently and
cannot be aggregated to determine a percentage of total purchases that qualiÑes for these goals.
We believe that meeting these goals and subgoals will be challenging and there can be no assurance that
we will meet all of them in 2005 or beyond. We are making signiÑcant eÅorts to meet the new goals and
subgoals through adjustments to our mortgage sourcing and purchase strategies, including changes to our
underwriting guidelines and expanded and targeted initiatives to reach underserved populations.
Our strategies to meet the new goals and subgoals may result in the purchase of loans that oÅer lower
expected returns on our investment and are likely to increase our exposure to potential credit losses. Increasing
the concentration of our purchases of goal-eligible loans also may require us to forego other purchase
opportunities that we would expect to be more proÑtable. If our current eÅorts to meet the new goals and
subgoals prove to be insuÇcient, we may need to take additional steps that could lead to a signiÑcant reduction
of service to portions of the conventional conforming mortgage market, and also a reduction in our
proÑtability.
We view the purchase of mortgage loans beneÑting low- and moderate-income families and neighbor-
hoods as a principal part of our mission and business, and remain committed to fulÑlling the needs of these
borrowers and markets.
Fair Lending
Our mortgage purchase activities are subject to federal anti-discrimination laws. In addition, the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992, or the GSE Act, requires the Secretary of
HUD to adopt regulations prohibiting discriminatory practices in our mortgage purchase activities and
periodically to review and comment on our underwriting and appraisal guidelines for consistency with the Fair
Housing Act and the fair housing provisions of the GSE Act. The GSE Act also requires the Secretary of
HUD to direct that we:
‚ submit data to HUD to assist it in investigating whether a mortgage lender with which we do
business has failed to comply with the Fair Housing Act or the Equal Credit Opportunity Act; and
‚ undertake remedial actions, including suspension, probation, reprimand or settlement, against
lenders that are found to have engaged in discriminatory lending practices in violation of the Fair
Housing Act or Equal Credit Opportunity Act pursuant to a Ñnal adjudication and after
opportunity for an administrative hearing.
11
Freddie Mac
New Program Approval
Under the GSE Act, we must obtain the approval of the Secretary of HUD for any new program for the
purchasing, servicing, selling, lending on the security of or otherwise dealing in conventional mortgages that:
‚ is signiÑcantly diÅerent from programs that were previously approved under the GSE Act or that
were approved or engaged in before the date the GSE Act was enacted; or
‚ represents an expansion, of the dollar volume or number of mortgages or securities involved, of
programs above limits expressly contained in any prior approval.
HUD has issued regulations implementing the new program approval authority granted under the GSE
Act. The Secretary of HUD is required to approve any new program unless the Secretary determines that the
new program is not authorized under the Freddie Mac Act or that the program is not in the public interest.
OFHEO
Regulation of our Ñnancial safety and soundness is vested in OFHEO. Organizationally, OFHEO is
located within HUD; however, it operates independently of the Secretary of HUD in most respects. Among
other regulations relating to safety and soundness, OFHEO implements, monitors, and enforces capital
standards that apply to us. In addition, OFHEO conducts comprehensive examinations of our operations.
OFHEO's regulatory capital requirements include a ratio-based minimum capital requirement and a risk-
based capital requirement designed to ensure that we maintain suÇcient capital to survive a sustained severe
downturn in the economic environment. OFHEO is required to classify our capital adequacy at least quarterly.
OFHEO has never classiÑed us as other than ""adequately capitalized,'' the highest possible classiÑcation.
If we were classiÑed as less than adequately capitalized, our ability to pay dividends on common or
preferred stock could be restricted. Also, without prior written approval from OFHEO, we may not make any
dividend payment on common or preferred stock if, after paying such dividend, we would fail to meet our
minimum capital or risk-based capital requirements. For additional information about our regulatory capital
requirements, see ""NOTE 10: REGULATORY CAPITAL'' to the consolidated Ñnancial statements.
On January 29, 2004, OFHEO announced the creation of a framework for monitoring our capital due to
the temporarily higher operational risks arising from our current inability to produce timely Ñnancial
statements in accordance with GAAP. The framework includes a target capital surplus of 30 percent of our
minimum capital requirement, subject to certain conditions and variations; weekly monitoring; and prior
approval of certain capital transactions, to verify that appropriate levels of capital are maintained. While
OFHEO's framework includes weekly monitoring and imposes restrictions on share repurchases and other
capital activities, we do not expect it to adversely aÅect our ability to grow in most scenarios. For additional
information about the OFHEO target capital surplus framework, see ""NOTE 10: REGULATORY CAPI-
TAL'' to the consolidated Ñnancial statements.
Treasury
Under the Freddie Mac Act, the Secretary of the Treasury has approval authority over all of our
issuances of notes, debentures and substantially identical types of unsecured debt obligations (including the
interest rates and maturities on these securities), as well as new types of mortgage-related securities issued
subsequent to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
The Secretary of the Treasury has historically performed this debt securities approval function by coordinating
GSE debt oÅerings with Treasury funding activities.
SEC
While we are exempt from the Securities Act and Exchange Act securities registration requirements, we
are dedicated to fulÑlling our commitment to register our common stock under the Exchange Act. Once this
process is complete, we will be subject to the Ñnancial reporting requirements applicable to registrants under
the Exchange Act, including Ñling with the SEC annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K. We anticipate Ñling our Exchange Act registration statement
with the SEC in the second quarter of 2006 and becoming an SEC reporting company as soon as possible
thereafter.
12
Freddie Mac
In addition, OFHEO has issued a supplemental disclosure regulation that will obligate us to submit proxy
statements and insider transaction reports to the SEC in accordance with rules promulgated under the
Exchange Act. Our securities continue to be exempt from the securities oÅering registration requirements of
the Securities Act and certain other provisions of the federal securities laws.
GSE Regulatory Oversight Legislation
We face an uncertain regulatory environment in light of legislative reforms currently being discussed. We
strongly support enactment of regulatory oversight legislation that ensures our regulator has authority to
conduct eÅective oversight. We believe appropriate regulatory oversight legislation would strengthen market
conÑdence and promote our mission. In our view, a strong regulator that values housing, capital requirements
tied to risk, and legislative provisions that maintain our GSE status are among the key elements of appropriate
GSE regulatory oversight legislation. We will continue to work with the Congress, the Administration and
other interested parties toward enacting such legislation.
Both the Senate and the House of Representatives have indicated that they will consider GSE regulatory
oversight legislation during the current session of Congress. Separate bills concerning regulatory oversight are
under consideration in the Senate and the House of Representatives, and others are likely to be introduced,
that address key elements of the GSE's business and regulation including regulatory structure, capital
standards, receivership, scope of GSE activities, aÅordable housing goals, portfolio growth and expanded
regulatory oversight over GSE oÇcers and directors.
We currently generate a signiÑcant portion of our net income through our portfolio investment activities.
Legislative provisions now under consideration would give our regulator substantial authority to regulate the
amount and composition of our portfolio investments and would enable the regulator to require substantial
reductions in those investments. Additional provisions under consideration would increase the regulator's
authority to require us to maintain higher capital levels and to approve new programs and business activities,
and would modify our aÅordable housing goals and require that a speciÑed percentage of our proÑts be placed
in a fund to support aÅordable housing.
It is also possible that the enactment of legislative provisions that go beyond the key elements identiÑed
above could further erode or eliminate the special abilities and responsibilities set forth in our charter that
make it possible for us to pursue our mission eÅectively. The enactment into law of the various legislative
provisions under consideration, depending on their Ñnal terms and on how they were applied by our regulator
within the scope of its authority, could have a material adverse eÅect on Freddie Mac's future earnings, stock
price and shareholder returns, ability to fulÑll its mission, and ability to recruit and retain qualiÑed oÇcers and
directors.
While we continue to work toward enactment of appropriate GSE regulatory oversight legislation, we
cannot predict the prospects for the enactment, timing or content of any legislation or its impact on our
Ñnancial prospects.
Other Regulatory Matters
Our business activities may be aÅected by a variety of legislative and regulatory actions related to the
activities of banks, savings institutions, insurance companies, securities dealers and other regulated entities
that comprise a signiÑcant part of our customer base. Among the legislative and regulatory provisions
applicable to these entities are capital requirements for federally insured depository institutions and regulated
bank holding companies. For example, the Basel Committee on Banking Supervision, composed of representa-
tives of certain central banks and bank supervisors, has developed a new set of risk-based capital standards for
banking organizations. The U.S. banking regulators have stated their intent to propose new capital standards
for certain banking organizations that would incorporate the new risk-based capital standards into existing
requirements. If Ñnal rules adopted by the U.S. banking regulators revise the capital treatment of mortgage
assets, decisions by U.S. banking organizations about whether to hold or sell such assets could be aÅected.
However, the contents and timing of any Ñnal rules remain uncertain, as does the manner in which U.S.
banking organizations may respond to them.
Legislative or regulatory provisions that create or remove incentives for these entities either to sell
mortgage loans to us or to purchase our securities, could have a material eÅect on our business results.
13
Freddie Mac
PROPERTIES
We own a 75 percent interest in a limited partnership that owns our principal oÇces, consisting of four
oÇce buildings in McLean, Virginia that comprise approximately 1.2 million square feet. We occupy the
headquarters complex under a long-term lease from the partnership. We also lease other oÇce space in
McLean, Virginia; Washington, D.C.; Reston, Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas;
New York, New York; and Woodland Hills, California.
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings arising from time to time in the ordinary
course of business including, among other things, contractual disputes, personal injury claims, employment-
related litigation and other legal proceedings incidental to our business.
Furthermore, we are frequently involved, directly or indirectly, in litigation involving mortgage foreclo-
sures. We also are involved in proceedings arising from our termination of a seller/servicer's eligibility to sell
mortgages to, and service mortgages for, us. In these cases, the former seller/servicer sometimes seeks
damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes
sued in connection with the origination or servicing of mortgages. These suits generally involve claims alleging
wrongful actions of seller/servicers. Our contracts with our seller/servicers generally provide for them to
indemnify us against liability arising from their wrongful actions.
We are also subject to various legal proceedings, including regulatory investigations and administrative
and civil litigation, arising from the restatement. These proceedings include class action and stockholder
derivative lawsuits, administrative enforcement proceedings commenced by OFHEO, and investigations by
the SEC, Department of Labor, the U.S. Attorney's oÇce and the FEC. Recently, we have been named in
multiple lawsuits alleging violations of federal and state antitrust laws and state consumer protection laws in
connection with the setting of our guarantee fees.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate
prediction. For additional information on these proceedings, see ""NOTE 13: LEGAL CONTINGENCIES''
and ""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements.
14
Freddie Mac
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were presented for stockholder vote at the November 4, 2004 Annual Meeting of
Stockholders: (a) election of 13 members to our Board of Directors, each for a term ending on the date of the
next annual meeting of our stockholders; (b) ratiÑcation of the appointment of PricewaterhouseCoopers LLP
as our independent auditors for 2004; (c) approval of the 2004 Stock Compensation Plan; and (d) approval of
the Amended and Restated Employee Stock Purchase Plan. Of the 689,544,489 shares of common stock
outstanding on the record date for the meeting, 602,265,372 shares were present in person or by proxy at the
meeting. As shown in Table 4 below, the following persons were elected to our Board of Directors at the
meeting by the respective votes indicated:
Table 4 Ì Submission of Matters to a Vote of Security Holders
Votes For
Votes Withheld
Barbara T. AlexanderÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GeoÅrey T. Boisi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Michelle Engler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Richard Karl Goeltz ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thomas S. Johnson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
William M. Lewis, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
John B. McCoy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eugene M. McQuade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shaun F. O'MalleyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ronald F. PoeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stephen A. RossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
William J. TurnerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
588,912,902
589,092,865
556,672,196
588,955,520
569,820,155
589,119,835
566,411,920
585,483,822
570,164,908
566,582,087
571,402,848
578,824,360
569,823,326
13,352,470
13,172,507
45,593,176
13,309,852
32,445,217
13,145,537
35,853,452
16,781,550
32,100,464
35,683,285
30,862,524
23,441,012
32,442,046
The appointment of PricewaterhouseCoopers LLP was ratiÑed at the meeting by the following votes:
Votes Against
Abstentions
Votes for
597,300,503
1,572,056
3,392,813
The 2004 Stock Compensation Plan was approved at the meeting by the following votes:
Votes for
444,307,818
Votes Against
47,005,047
Abstentions
4,459,507
The Amended and Restated Employee Stock Purchase Plan was approved at the meeting by the
following votes:
Votes for
466,370,480
Votes Against
25,541,493
Abstentions
3,860,399
No matters were submitted to stockholders from November 5, 2004 through the date of this Information
Statement.
15
Freddie Mac
MARKET PRICE FOR THE COMPANY'S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock, par value $0.21 per share, is listed on the New York Stock Exchange, or NYSE, and
the PaciÑc Stock Exchange under the symbol FRE. From time to time, our common stock may be admitted to
unlisted trading status on other national securities exchanges. Put and call options on our common stock are
traded on U.S. options exchanges. As of December 31, 2004, there were 690,606,185 shares outstanding of our
common stock.
Table 5 sets forth the high and low sale prices of our common stock for the periods indicated.
Table 5 Ì Quarterly Common Stock Information
2005 Quarter Ended
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 Quarter Ended
December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 Quarter Ended
December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1) The principal market is the NYSE, and prices are based on the Composite Tape.
Sale Prices(1)
High
Low
$73.91
$59.74
$74.20
69.50
64.62
65.15
$59.75
56.04
61.40
64.78
$64.15
61.73
56.45
57.60
$52.65
47.35
46.48
49.53
As of May 23, 2005, the closing price for our common stock was $64.52 per share. As part of a stock
repurchase plan approved by our Board of Directors, we are authorized to repurchase our common stock in an
amount up to Ñve percent of our shares outstanding as of September 5, 1997, which was approximately
34 million shares. At December 31, 2004, approximately 13 million common shares remained available for
repurchase under this plan. We did not repurchase any common stock during 2004 or the Ñrst Ñve months of
2005, and we do not expect to engage in share repurchases until after we are timely in our Ñnancial reporting.
See ""BUSINESS Ì Regulatory and Governmental Matters Ì OFHEO'' for more information.
Dividends
Table 6 sets forth the cash dividend per common share that we have declared for the periods indicated.
Table 6 Ì Dividends Per Common Share
Regular Cash
Dividend Per Share
2005 Quarter Ended
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 Quarter Ended
December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 Quarter Ended
December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.35
$0.30
0.30
0.30
0.30
$0.26
0.26
0.26
0.26
We have historically paid dividends to our stockholders in each quarter. Our Board of Directors intends to
continue declaring dividends quarterly, but further dividends will depend upon our capital position, earnings
and growth prospects and other factors our Board of Directors considers relevant to our payment of dividends
and the declaration of speciÑc dividends. See ""NOTE 10: REGULATORY CAPITAL'' to the consolidated
16
Freddie Mac
Ñnancial statements for additional information regarding dividend payments and ""NOTE 9: STOCKHOLD-
ERS' EQUITY'' to the consolidated Ñnancial statements for additional information regarding our preferred
stock dividend payments.
Holders
As of May 13, 2005, we had approximately 2,500 common stockholders of record.
Securities Authorized for Issuance under Equity Compensation Plans
Table 7 provides information about our common stock that may be issued upon the exercise of options,
warrants and rights under our existing equity compensation plans as of December 31, 2004. Our stockholders
have approved the Amended and Restated Employee Stock Purchase Plan, the 2004 Stock Compensation
Plan and the 1995 Directors' Stock Compensation Plan, as amended and restated in 1998.
Table 7 Ì Securities Authorized for Issuance under Equity Compensation Plans
(a)
Number of securities
that may be issued
upon exercise
of outstanding
options, warrants
and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reÖected in
column (a))
9,312,985(1)
$43.73(2)
17,720,244(3)
Plan Category
Equity compensation plans approved by
stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity compensation plans not approved by
stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
None
N/A
None
(1) Includes 1,624,628 restricted stock units, or RSUs, issued under the 1995 Directors' Stock Compensation Plan and the 1995 and
2004 Stock Compensation Plans and options to purchase 60,416 shares under the Amended and Restated Employee Stock Purchase
Plan.
(2) For the purpose of calculating this amount, the restricted stock units are assigned an exercise price of zero.
(3) Consists of 12,910,468 shares, 3,237,149 shares and 1,572,627 shares available for issuance under the 2004 Stock Compensation
Plan, the Amended and Restated Employee Stock Purchase Plan, and the 1995 Directors' Stock Compensation Plan, as amended
and restated in 1998, respectively.
NYSE Corporate Governance Listing Standards
On November 30, 2004, our Chief Executive OÇcer submitted to the NYSE the certiÑcation required by
Section 303A.12(a) of the NYSE Listed Company Manual regarding our compliance with the NYSE's
corporate governance listing standards.
FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, securities analysts,
the news media and others as part of our normal operations. Some of these communications include ""forward-
looking statements'' pertaining to our current expectations about our objectives for Ñnancial reporting, future
business plans, results of operations, Ñnancial condition and trends. Forward-looking statements are typically
accompanied by, and identiÑed with, terms such as ""estimates,'' ""continue,'' ""ongoing,'' ""anticipates,''
""believes,'' ""expects,'' ""intends,'' ""plans,'' ""endeavors,'' ""future,'' ""seeks,'' ""potential,'' ""objectives,'' ""goal,''
""will,'' ""may,'' ""might,'' ""should,'' ""could,'' ""would,'' ""likely'' and similar phrases. This Information
Statement includes forward-looking statements. These statements are not historical facts, but rather represent
our expectations based on current information, plans, estimates and projections. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. You
should be careful about relying on any forward-looking statements. You should also consider all risks,
uncertainties and other factors described in this Information Statement in considering any forward-looking
statements. Factors that could cause actual results to diÅer materially from the expectations expressed in these
and other forward-looking statements by management include, among others:
‚ Changes in applicable legislative or regulatory requirements, including our Congressional charter,
aÅordable housing goals, or regulatory capital requirements (including the temporary 30 percent target
capital surplus imposed on us by OFHEO in January 2004), the exercise or assertion of regulatory or
17
Freddie Mac
administrative authority beyond current practice, or the enactment of proposed legislation (in whole or
in part) discussed in ""BUSINESS Ì Regulatory and Governmental Matters Ì GSE Regulatory
Oversight Legislation;''
‚ Actions by governmental entities, securities rating agencies or others that could adversely aÅect the
supply or cost of equity capital or debt Ñnancing available to us;
‚ Our ability to eÅectively and timely implement the remediation plan undertaken as a result of the
restatement of our consolidated Ñnancial statements and the consent order entered into with OFHEO,
including particular initiatives relating to technical infrastructure and controls over Ñnancial reporting;
‚ Our ability to identify, manage, mitigate and/or remedy internal control weaknesses and deÑciencies
and other risks;
‚ Developments in, outcomes of, impacts of, and costs, expenses, settlements and judgments related to
regulatory investigations and civil litigation in which we are involved;
‚ Political conditions and related actions by the U.S. or abroad, which may adversely aÅect our
businesses and economic conditions as a whole;
‚ Changes in our strategies for and results of credit loss mitigation, interest-rate and other market risk
management activities and investment activities;
‚ Our ability to implement changes, developments and/or impacts of new, pending or existing
accounting standards, including the timely development of supporting systems;
‚ Changes in pricing or valuation methodologies, models, assumptions and/or estimates;
‚ The degree to which our business and Ñnancial forecasting methods accurately predict actual results
and our ability to implement business processing improvements;
‚ Volatility of reported results due to changes in fair value of certain instruments or assets;
‚ Changes in, and volatility of, the general economy, including interest rates, housing prices and
employment rates;
‚ The availability of debt Ñnancing and equity capital in suÇcient quantity and at attractive rates to
support continued growth in our retained portfolio, to reÑnance maturing debt and to meet regulatory
capital requirements;
‚ The availability of derivative Ñnancial instruments (such as options and interest-rate and currency
swaps) from acceptable counterparties of the types and in the quantities needed for investment funding
and risk management purposes;
‚ The rate of growth in total outstanding U.S. residential mortgage debt and the size of the U.S.
residential mortgage market;
‚ The possibility of further concentration of mortgage loan sourcing in a smaller number of originators;
‚ Preferences of originators in selling into the secondary market. See ""BUSINESS Ì Regulatory and
Governmental Matters Ì Other Regulatory Matters'' for additional information;
‚ Borrower preferences for Ñxed-rate mortgages or ARMs;
‚ Investor preferences for mortgage loans and mortgage-related and debt securities versus other
investments;
‚ Competition and liquidity in the market for mortgage-related and debt securities;
‚ Changes in foreign exchange rates;
‚ SigniÑcant business disruptions resulting from acts of war or terrorism;
‚ The occurrence of a major natural or other disaster in geographic areas in which portions of our total
mortgage portfolio are concentrated; and
‚ Our ability to eÅectively manage these and other risks.
We undertake no obligation to update these forward-looking statements to reÖect events or circumstances
after the date of this Information Statement, or to reÖect the occurrence of unanticipated events.
18
Freddie Mac
SELECTED FINANCIAL DATA(1)
Income Statement Data
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of change in accounting
principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of change in accounting principles, net
of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per common share before cumulative eÅect of
change in accounting principles, net of taxes
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per common share after cumulative eÅect of
change in accounting principles, net of taxes
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average common shares outstanding (in
thousands)
2004
At or for the Year Ended December 31,
2002
2003
(dollars in millions, except share-related amounts)
2001
2000
$
9,137
(3,039)
$
9,498
(244)
$
9,525
7,154
$
7,448
(1,591)
$ 3,758
2,656
2,937
Ì
2,937
3.96
3.94
3.96
3.94
1.20
$
$
$
$
4,816
Ì
4,816
6.69
6.68
6.69
6.68
1.04
10,090
Ì
10,090
14.22
14.17
14.22
14.17
0.88
$
$
$
$
$
$
$
$
3,115
43
3,158
3,666
Ì
$ 3,666
4.19
4.17
4.25
4.23
0.80
$
$
$
5.04
5.01
5.04
5.01
0.68
$
$
$
$
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
689,282
691,521
687,094
688,675
692,727
695,116
692,603
695,973
692,097
695,307
Balance Sheet Data
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt securities, net due within one year ÏÏÏÏÏÏÏÏÏÏ
Senior debt securities, net due after one year ÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Miscellaneous liabilities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Portfolio Balances(4)
Retained portfolio (unpaid principal balances)(5) ÏÏÏÏÏÏÏÏ
Total PCs issued and Structured Securities (unpaid
principal balances)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage portfolio (unpaid principal balances)ÏÏÏÏÏ
Ratios
Return on average assets(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on common equity(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on total equity(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend payout ratio on common stock(10)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity to assets ratio(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 795,284
282,303
443,772
5,622
30,662
1,509
31,416
$ 803,449
295,262
438,738
5,613
30,420
1,929
31,487
$ 752,249
244,429
415,662
5,605
52,914
2,309
31,330
$ 641,100
264,227
311,013
3,128
40,489
2,619
19,624
$462,803
183,374
244,732
144
14,252
2,944
17,357
$ 652,936
$ 645,466
$ 567,272
$ 497,639
$392,298
1,208,968
1,505,206
1,162,068
1,414,399
1,090,624
1,316,609
961,511
1,150,723
838,323
975,612
0.4%
10.2
9.3
30.7
3.9
0.6%
17.2
15.3
15.6
4.0
1.4%
47.2
39.6
6.2
3.7
0.6%
20.2
17.1
18.9
3.4
0.9%
39.0
30.2
13.6
2.9
(1) EÅective January 1, 2003, we adopted the provisions of the Financial Accounting Standards Board, or FASB, Interpretation No. 45, ""Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' or FIN 45, and FASB StaÅ Position 45-2, ""Whether FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' or
Provides Support for Subsequently Accounting for a Guarantor's Liability at Fair Value,'' or FIN 45-2. We also adopted the provisions of Statement of Financial
Accounting Standards, or SFAS, No. 133, ""Accounting for Derivative Instruments and Hedging Activities,'' or SFAS 133, and the provisions of Emerging Issues
Task Force No. 99-20, ""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in Securitized Financial Assets,'' or
EITF 99-20 as of January 1, 2001 and April 1, 2001, respectively. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our
consolidated Ñnancial statements for more information.
(2) Non-interest income (loss) was increased by $11 million and $9 million for 2001 and 2000, respectively, to conform to the 2004 presentation.
(3) Includes Due to Participation CertiÑcate investors, Accrued interest payable, Guarantee obligation for Participation CertiÑcates, Derivative liabilities, at fair value,
Reserve for guarantee losses on Participation CertiÑcates and Other liabilities.
(4) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(5) The Retained portfolio presented in our consolidated balance sheets diÅers from the Retained portfolio on this table because the consolidated balance sheets
caption includes valuation adjustments (e.g., fair value adjustments for securities classiÑed as available-for-sale and trading and the Reserve for losses on mortgage
loans held-for-investment) and deferred balances (e.g., premiums and discounts). See ""Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances
to the Consolidated Balance Sheets'' in ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' for more information.
(6) Represents PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities and other credit guarantees of mortgage loans held by third
parties. The balances are based on the underlying collateral, which ultimately aÅects the principal amount of PCs, Structured Securities and other credit guarantees
of mortgage loans held by third parties.
(7) Ratio computed as Net income divided by the simple average of beginning and ending Total assets.
(8) Ratio computed as Net income available to common stockholders divided by the simple average of beginning and ending Stockholders' equity, net of Preferred
stock (at redemption value).
(9) Ratio computed as Net income divided by the simple average of beginning and ending Stockholders' equity.
(10) Ratio computed as Common stock dividends declared divided by Net income available to common stockholders.
(11) Ratio computed as the simple average of beginning and ending Stockholders' equity divided by the simple average of beginning and ending Total assets.
19
Freddie Mac
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion that follows includes forward-looking statements describing results and trends for business
performance metrics during the Ñrst part of 2005, as well as our outlook for certain metrics for the full year
ending December 31, 2005. Actual results will depend on a number of factors such as changes in interest rates
and other market conditions and may diÅer from the outlook discussed below. See ""FORWARD-LOOKING
STATEMENTS'' for a list of such factors.
EXECUTIVE SUMMARY
Overview
We generate revenue from two primary sources: management and guarantee income from our credit
guarantee activities and net interest income from our portfolio investment activities.
Management and guarantee income represents the fee we charge mortgage originators or servicers to
guarantee the payment of principal and interest. This fee is compensation for:
‚ Guaranteeing the payment of principal and interest to security holders; and
‚ Costs incurred in administering payments on these securities.
Net interest income is primarily the diÅerence between interest income earned on mortgages and
mortgage-related assets and interest expense owed on debt. To manage the interest-rate and other market risks
associated with funding portfolio investments and to reduce Ñnancing costs, we enter into interest-rate swaps,
options and other derivatives. Although we believe the derivative transactions we execute are eÅective in
managing interest-rate risk from an economic perspective, they may signiÑcantly aÅect, and increase the
volatility of, our reported earnings. This is particularly the case where the derivative is not accounted for in a
hedge accounting relationship, because the fair value gains and losses on such transactions are recorded on our
consolidated statements of income in Non-interest income (loss) without the oÅsetting change in the value of
the economically hedged risk being recognized in earnings.
In addition to management and guarantee income and net interest income, we generate revenue from fee-
based activities. For instance, we earn fees associated with servicing and technology-related programs,
including Loan Prospector» (our automated underwriting system).
Summary of Our 2004 Financial Results
GAAP Results
Our Net income was $2.9 billion for 2004, a decrease of 39 percent from $4.8 billion for 2003. Diluted
earnings per common share were $3.94 for 2004, a decrease of 41 percent from Diluted earnings per common
share of $6.68 for 2003. The decrease in net income for 2004 was primarily due to losses in Derivative gains
(losses), a component of Non-interest income (loss), related to derivative instruments not in qualifying hedge
accounting relationships. However, these derivatives continued to be an eÅective component of our risk
management activities. Changes in the level and volatility of interest rates have resulted in signiÑcant period-
to-period volatility in our reported net income. It is important to note that while our reported net income under
GAAP was volatile, our interest-rate risk remained low as demonstrated by the low levels of our portfolio
market value sensitivity, or PMVS, and duration gap throughout 2004, which are discussed more fully in
""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Measurement of Interest-Rate
Risk.''
Net interest income was $9.1 billion in 2004, compared to $9.5 billion in 2003. Net interest yield
decreased to 124 basis points in 2004 from 130 basis points in 2003 on a fully taxable-equivalent basis. The
decline in 2004 net interest yield was attributable to lower yields on assets acquired in 2004 and runoÅ of
higher-yielding assets, partially oÅset by a decrease in average debt funding yields, lower derivative-related
expenses associated with derivatives in qualifying hedge accounting relationships and lower interest expense
20
Freddie Mac
related to amounts due to holders of PCs and Structured Securities. Net derivative-related interest expense
declined primarily because we moved a signiÑcant amount of pay-Ñxed swaps to no-hedge designation
eÅective at the beginning of the second quarter of 2004 and the related interest expense on these contracts was
recognized as a component of Non-interest income (loss) in periods following the move to no-hedge
designation.
For 2005, we expect to report Net interest income materially lower than that reported for 2004, primarily
due to compression in net interest margins on our existing portfolio and lower nominal margins on Öoating-rate
mortgage-related security purchases. However, we expect this decrease to be signiÑcantly oÅset by decreased
losses in Non-interest income (loss), assuming current forward rates are realized.
Management and guarantee income, which is a component of Non-interest income (loss) on the
consolidated statements of income, was $1.4 billion in 2004, compared to $1.7 billion in 2003. The total
management and guarantee income rate recognized in 2004 was 17.5 basis points, compared to 23.3 basis
points in 2003. Management and guarantee income consists of the guarantee fee on outstanding PCs and
Structured Securities and certain pre-2003 fees that seller/servicers paid to us at the time of securitization
that are amortized into Management and guarantee income over the estimated life of the PC. The decrease in
the total Management and guarantee income rate in 2004 was driven by a decrease in the amortization of the
pre-2003 deferred fees and a decrease in the average contractual guarantee fee rate on outstanding PCs,
partially oÅset by higher levels of outstanding PCs.
Non-interest income (loss), excluding Management and guarantee income, totaled ($4.4) billion in
2004, compared to ($1.9) billion in 2003. The increase in the loss compared to 2003 was primarily due to net
losses on derivative instruments not in qualifying hedge accounting relationships in 2004 of ($4.5) billion,
compared to a net gain of $39 million in 2003. The loss in 2004 was partly attributable to a decline in swap
rates during 2004, which resulted in losses on our pay-Ñxed swap portfolio. In addition, there were net losses
on our call and put swaptions as the fair value of these positions was aÅected by changes in swap rates and the
decline in implied volatilities of interest rates during the year. However, these derivatives continued to be an
eÅective component of our risk management activities. The net loss on our derivatives not in hedge accounting
relationships also included higher net losses related to the accrual of periodic settlements, primarily because
we moved a signiÑcant amount of pay-Ñxed swaps to no hedge designation eÅective at the beginning of the
second quarter of 2004. The accrual of periodic settlements on these pay-Ñxed swaps was recognized as a
component of Derivative gains (losses) in periods following the move to no hedge designation, rather than as a
component of Net interest income. Non-interest income (loss) also reÖected smaller net losses on investment
activity of ($348) million in 2004, compared to net losses of ($1.1) billion in 2003 and lower losses on debt
retirements of ($327) million in 2004, compared to losses of ($1.8) billion in 2003.
Non-interest expense totaled $2.4 billion in 2004, compared to $2.2 billion in 2003. Non-interest expense
includes Administrative expenses, which totaled $1.6 billion in 2004 compared to $1.2 billion in 2003. During
2004, we continued to incur signiÑcant Administrative expenses related to our on-going eÅorts to return to
timely Ñnancial reporting. Our objective in 2005 is to keep Administrative expenses relatively Öat compared to
2004. In addition, in 2005, we expect credit losses to increase from their recent levels, but to be low relative to
historic levels.
Total stockholders' equity decreased to $31.4 billion at December 31, 2004 from $31.5 billion at
December 31, 2003. The net decrease was attributable to a decrease in Accumulated other comprehensive
income (loss), net of taxes, or AOCI, partially oÅset by an increase in Retained earnings. See ""CONSOLI-
DATED BALANCE SHEETS ANALYSIS Ì Total Stockholders' Equity'' for more information.
Fair Value Balance Sheet Results
We believe fair value measures provide an important view of our business economics and risks because
fair value takes a consistent approach to the representation of all Ñnancial assets and liabilities, rather than an
approach that combines historical cost and fair value techniques, as is the case with our GAAP-basis
consolidated Ñnancial statements. The fair value balance sheet is an important component of our risk
management processes as we use daily estimates of the changes in fair value to calculate our PMVS and
duration gap measures.
21
Freddie Mac
At December 31, 2004, the fair value of net assets (net of tax eÅect) was $30.9 billion, a $3.6 billion, or
13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to
common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets
attributable to preferred stockholders) was $26.8 billion, a $3.9 billion, or 17 percent, increase from
December 31, 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. The fair value of net assets
attributable to common stockholders, before common dividends and capital transactions, increased by
$4.7 billion, or 21 percent, from December 31, 2003, a return that exceeds our long-term expectations.
Capital
We have submitted to OFHEO amended minimum capital reports for 2004, including estimates of our
capital surpluses. Based on these estimates, we believe that we were in compliance with OFHEO's regulatory
capital requirements throughout the year. The estimated minimum capital surplus at December 31, 2004, as
reported to OFHEO in our amended minimum capital reports, was approximately $10.9 billion. Our estimated
surplus in excess of the 30 percent target surplus at December 31, 2004 was approximately $3.6 billion. Our
surplus over the risk-based capital requirement was approximately $23.6 billion at December 31, 2004. We
currently expect to be able to maintain a surplus over our regulatory capital requirements across a wide range
of market conditions.
22
Freddie Mac
OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS
Our Total mortgage portfolio includes the unpaid principal balances of mortgages and mortgage-related
securities held in our Retained portfolio and the unpaid principal balances of PCs and Structured Securities
held by third parties; PCs and Structured Securities held by third parties are considered outstanding and are
not included on our consolidated balance sheets. Table 8 provides information about our Total mortgage
portfolio as of December 31, 2004 and 2003 based on unpaid principal balances. For purposes of Table 8, the
unpaid principal balances reÖect all PCs issued and only that portion of Structured Securities that is backed by
non-Freddie Mac mortgage-related securities as of December 31, 2004 and 2003. The unpaid principal
balances of Structured Securities that directly or indirectly relate to issued PCs are excluded because such
amounts are included in the amounts reported in Table 8 that relate to issued PCs.
Table 8 Ì Freddie Mac's Total Mortgage Portfolio Based on Unpaid Principal Balances(1)(2)
Outstanding PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio:
PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Freddie Mac mortgage-related securities:
Agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏ
Total non-Freddie Mac mortgage-related securities ÏÏ
Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PCs and Structured Securities in the Cash and
investments portfolio(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31,
2004
2003
Dollars in
Millions
% of
Total
Mortgage
Portfolio
Dollars in
Millions
% of
Total
Mortgage
Portfolio
$ 852,270
56%
$ 752,164
53%
356,698
59,715
175,163
234,878
591,576
61,360
652,936
24
4
12
16
40
4
44
393,135
77,289
114,772
192,061
585,196
60,270
645,466
28
6
8
14
42
4
46
Ì
$1,505,206
Ì
100%
16,769
$1,414,399
1
100%
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Due to timing diÅerences in our receipt of principal and interest payments from mortgage servicers and the subsequent pass-through
of payments to PC investors, the unpaid principal balances of the underlying mortgage loans do not always equal the unpaid principal
balance of issued PCs and Structured Securities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLI-
CIES Ì Due to Participation CertiÑcate Investors'' to the consolidated Ñnancial statements for more information.
(3) The Retained portfolio presented in this table diÅers from the Retained portfolio presented in our consolidated balance sheets
because the amounts presented in our consolidated balance sheets include valuation adjustments (e.g., fair value adjustments for
securities classiÑed as available-for-sale and trading and the Reserve for losses on mortgage loans held-for-investment) and deferred
balances (e.g., premiums and discounts). ""Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances to the
Consolidated Balance Sheets'' provides a reconciliation of the Retained portfolio amounts shown in this table to the amounts shown
under such caption in accordance with GAAP on our consolidated balance sheets.
(4) Represents PCs and Structured Securities we held in connection with PC market-making and support activities, which are reÖected
in Investments on our consolidated balance sheets. In the fourth quarter of 2004, we ceased our PC market-making and support
activities accomplished through our Securities Sales & Trading Group business unit and our external Money Manager program.
For a discussion of purchases into the Total mortgage portfolio, see ""VOLUME STATISTICS.''
23
Freddie Mac
Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances to the Consolidated Balance
Sheets
December 31,
2004
2003
(dollars in millions)
Mortgage loans in the Retained portfolio:
Unpaid principal balances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized premiums, discounts, deferred fees and other basis adjustments(1)
Less: Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans, net of reserve per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 61,360
74
(114)
61,320
$ 60,270
64
(174)
60,160
Mortgage-related securities in the Retained portfolio:(2)
Unpaid principal balances(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized premiums, discounts, deferred fees and other basis adjustments(5)
Net unrealized gains on mortgage-related securities, pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
591,576
3,965
6,762
845
603,148
$664,468
585,196
4,729
9,601
671
600,197
$660,357
(1) Other basis adjustments include lower-of-cost-or-market valuation adjustments for loans held-for-sale and basis adjustments related
to purchase commitment hedging activities. Basis adjustments are modiÑcations to the carrying value of these mortgage loans.
(2) Includes PCs, Structured Securities and non-Freddie Mac mortgage-related securities.
(3) Includes other-than-temporary credit-related impairments attributable to certain securities. Impairments to unpaid principal
balances are recorded in certain circumstances when the fair value declines below the amortized cost basis of a security.
(4) Consists of PCs and Structured Securities and Total non-Freddie Mac mortgage-related securities held in the Retained portfolio. See
""Table 8 Ì Freddie Mac's Total Mortgage Portfolio Based on Unpaid Principal Balances'' for more information.
(5) Other basis adjustments are related to (a) hedging activities for the purchase of securities, (b) certain impairments related to
interest-only securities and (c) the extinguishment of the net positive diÅerence between Guarantee assets, Guarantee obligations
and credit enhancement-related assets recognized at the inception of an executed Guarantor Swap that correspond to PCs and
Structured Securities that we purchase.
24
Freddie Mac
Table 10 provides further detail regarding both issued and outstanding PCs and Other Structured
Securities.
Table 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based on
Unpaid Principal Balances
December 31, 2004
PCs and Structured
Securities in
Retained Portfolio
PCs and Structured
Securities in Cash
and Investments
Portfolio(4)
PCs and Structured
Securities Outstanding
(held by
third parties)
Total PCs and
Structured Securities
Issued
(dollars in millions)
PCs and Structured Securities:
Single-class(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multi-class(2)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total PCs and Structured
Securities(6)(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$219,794
136,904
Ì
$356,698
$ Ì
Ì
Ì
$ Ì
$454,396
390,636
7,238
$ 674,190
527,540
7,238
$852,270
$1,208,968
December 31, 2003
PCs and Structured
Securities in
Retained Portfolio
PCs and Structured
Securities in Cash
and Investments
Portfolio(4)
PCs and Structured
Securities Outstanding
(held by
third parties)
Total PCs and
Structured Securities
Issued
(dollars in millions)
PCs and Structured Securities:
Single-class(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multi-class(2)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total PCs and Structured
Securities(6)(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$269,442
123,693
Ì
$393,135
$15,970
799
Ì
$16,769
$397,009
347,833
7,322
$ 682,421
472,325
7,322
$752,164
$1,162,068
(1) Includes PCs that do not back Structured Securities and single-class Structured Securities backed by PCs and Ginnie Mae
CertiÑcates.
(2) Includes that portion of multi-class Structured Securities that are backed by PCs and non-agency mortgage-related securities. Also
includes multi-class Structured Securities backed by Ginnie Mae CertiÑcates.
(3) Excludes $43,419 million and $42,692 million at December 31, 2004 and 2003, respectively, of total multi-class Structured Securities
where we have resecuritized other already issued Structured Securities.
(4) Represents PCs and Structured Securities held by us in connection with PC market-making and support activities, which are
reÖected in Investments on our consolidated balance sheets. We ceased our PC market making and support activities accomplished
through our Securities Sales & Trading Group business unit and our external Money Manager program during the fourth quarter
of 2004.
(5) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES'' to the consolidated Ñnancial statements, these amounts
include:
‚ $5,432 million and $5,044 million at December 31, 2004 and 2003, respectively, that pertain to our guarantee of the payment
of principal and interest on (a) multifamily mortgage loans that are originated and held by state and municipal housing
Ñnance agencies to support tax-exempt multifamily housing revenue bonds, (b) tax-exempt multifamily housing revenue
bonds that support pass-through certiÑcates issued by third parties, and (c) Freddie Mac pass-through certiÑcates which are
backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans; and
‚ $1,806 million and $2,278 million at December 31, 2004 and 2003, respectively, of single-family mortgage loans held by third
parties for which we provided a credit guarantee.
(6) PCs and Structured Securities exclude $723,429 million and $637,491 million at December 31, 2004 and 2003, respectively, of
Structured Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured
Securities, which do not increase our credit related exposure, consist of single-class Structured Securities backed by PCs, REMICs,
and principal-only strips. The notional balances of interest-only strips of $105,703 million and $91,192 million at December 31, 2004
and 2003, respectively, are excluded because this table is based on unpaid principal balances. Also excluded are modiÑable and
combinable REMIC tranches and Interest and Principal classes, which collectively totaled $1,097,336 million and $988,600 million
at December 31, 2004 and 2003, respectively, where the holder has the option to exchange the security tranches for other pre-deÑned
security tranches. See ""BUSINESS Ì Credit Guarantee Activities'' for more information on Structured Securities.
(7) Includes $3,015 million and $4,729 million of Structured Securities backed by Ginnie Mae CertiÑcates at December 31, 2004 and
2003, respectively.
25
Freddie Mac
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The notes to the consolidated Ñnancial statements contain a summary of our signiÑcant accounting
policies, including a discussion of recently issued accounting pronouncements. Certain of these policies, as
well as estimates we make, are critical to the presentation of our Ñnancial condition since they are particularly
sensitive to our judgment and are highly complex in nature. Some of these policies and estimates relate to
matters that are inherently uncertain. Actual results could diÅer from our estimates and it is possible that such
diÅerences could have a material impact on the consolidated Ñnancial statements. We have included here a
discussion of our accounting policies that we have identiÑed as being particularly critical to understanding our
consolidated Ñnancial statements. For additional information about these and other accounting policies, see
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial
statements. We have discussed each of these critical accounting policies and the signiÑcant related estimates
with the Audit Committee of the Board of Directors.
Fair Value Measurement
The measurement of fair value is fundamental to the presentation of our Ñnancial condition and results of
operations in our consolidated Ñnancial statements. Fair value is deÑned under GAAP as the amount at which
an instrument could be exchanged in a current transaction between willing parties, other than in a forced or
liquidation sale. We record many of our Ñnancial instruments at fair value in the consolidated balance sheets,
with changes in these fair values recognized as gains and losses in the consolidated statements of income or
deferred, net of tax, in AOCI. We also prepare fair value-based consolidated balance sheets, which present our
assets and liabilities at fair value (including instruments such as debt, which are presented at amortized cost in
the GAAP-basis consolidated Ñnancial statements). Our consolidated fair value balance sheets satisfy our
disclosure requirements under SFAS No. 107, ""Disclosures about Fair Values of Financial Instruments,'' or
SFAS 107, and are a tool to communicate our Ñnancial position and results on a fair value basis. See
""CONSOLIDATED FAIR VALUE BALANCE SHEETS'' and ""NOTE 16: FAIR VALUE DISCLO-
SURES'' to the consolidated Ñnancial statements for more information.
26
Freddie Mac
Table 11 summarizes our assets and liabilities that are recorded at fair value in the GAAP-basis
consolidated balance sheets at December 31, 2004 and 2003.
Table 11 Ì Assets and Liabilities Recorded at Fair Value
December 31,
2004
2003
(dollars in millions)
Retained portfolio(1)
Mortgage-related securities:
Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$590,461
11,842
845
$581,326
18,200
671
Investments
Mortgage-related securities:
Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
32,817
(5)
Non-mortgage-related securities:
Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets(2)
Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected debt securities, net
Securities sold, not yet purchased, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities
Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
29,830
Ì
15,257
4,516
Ì
226
31,228
1,314
16,180
3,686
733
357
(1) Mortgage loans classiÑed as held-for-sale are not included in this table because they are carried on the GAAP-basis consolidated
balance sheets at lower-of-cost-or-market value (i.e., not at fair value). The carrying value was $2.6 billion and $2.5 billion at
December 31, 2004 and 2003, respectively.
(2) Real estate owned is not included in this table because it is carried on the GAAP-basis consolidated balance sheets at lower-of-cost-
or-fair value (after deduction for estimated disposition costs). The carrying value was $741 million and $795 million at December 31,
2004 and 2003, respectively.
Fair value aÅects our earnings in a variety of ways. For certain Ñnancial instruments that are carried at
fair value (such as securities and PC residuals classiÑed as trading, derivatives with no hedge designation and
guarantee assets), changes in fair value are recognized in current period earnings. These changes are classiÑed
in several captions on our consolidated statements of income, including Gains (losses) on investment activity,
Derivative gains (losses) and Gains (losses) on guarantee assets for PCs, at fair value. For certain other
Ñnancial instruments that are carried at fair value (such as securities and PC residuals classiÑed as available-
for-sale and derivatives in cash Öow hedge relationships), changes in fair value are generally deferred, net of
tax, in AOCI, a component of Stockholders' equity. The deferred gains and losses in AOCI, initially measured
at fair value, are recognized in earnings over time through amortization, sale of securities from the available-
for-sale category or impairment recognition. In addition, impairments of mortgage loans classiÑed as held-for-
sale are recognized in earnings through lower-of-cost-or-market valuation adjustments. Finally, certain other
amounts (such as Guarantee obligations) are initially measured at fair value, but are not remeasured at fair
value on a periodic basis. These amounts aÅect earnings over time through the amortization of these amounts
into income and extinguishment when we purchase the related PCs and Structured Securities into the
Retained portfolio.
The estimation of fair values reÖects our judgments regarding appropriate valuation methods and
assumptions. The selection of a method to estimate fair value for each type of Ñnancial instrument depends on
both the reliability and availability of relevant market data. The amount of judgment involved in estimating
the fair value of a Ñnancial instrument is aÅected by a number of factors, such as the type of instrument, the
liquidity of the markets for the instrument and the contractual characteristics of the instrument.
27
Freddie Mac
Even for instruments with a high degree of price transparency, fair value estimation involves our
application of signiÑcant, ongoing judgment. These judgments include:
‚ evaluation of the expected reliability of the estimate;
‚ reliability, timeliness and cost of alternative valuation methodologies;
‚ selection of third-party market data sources;
‚ selection of proxy instruments, as necessary; and
‚ adjustments to market-derived data to reÖect diÅerences in instruments' contractual terms.
While our general practice is to use consistent valuation methodologies over time, we periodically
evaluate our methodologies and may change them to improve our fair value estimates, to accommodate
market developments or to compensate for changes in data availability or other operational constraints.
For Ñnancial instruments with active markets and readily available market prices, we estimate fair values
based on independent price quotations obtained from third parties, including pricing services, dealer marks or
direct market observations, where available. We seek to use third-party pricing where possible. Independent
price quotations obtained from third-party pricing services are valuations estimated by an independent service
provider using market information. Dealer marks are prices that are obtained from third-party dealers that
generally make markets in the relevant products. The quoted price is an indication of the price at which the
dealer would consider transacting in normal market conditions. Market observable prices are prices that are
retrieved from sources in which market trades are executed, such as electronic trading platforms.
Certain instruments are less actively traded and, therefore, are not always able to be reliably valued based
on prices obtained from third parties. If quoted prices or market data are not available, fair value is based on
internal valuation models using market data inputs or internally developed assumptions, where appropriate.
Model-based valuations with signiÑcant market inputs are fair values that are estimated using one or more
models such as: interest rate models, prepayment models, option-adjusted spread models and/or credit
models. These models use market inputs such as interest rate curves, market volatilities and pricing spreads,
which can be validated using external sources such as third party pricing services, dealer marks and market
observable transactions. Model-based valuations without market inputs are required for products with limited
price discovery and are estimated using one or more of the models indicated or are based on our judgment and
assumptions. The use of diÅerent pricing models and assumptions could produce materially diÅerent estimates
of fair values.
The fair values for approximately 98 percent of our mortgage-related securities are based on prices
obtained from third parties or are determined using models with signiÑcant market inputs. The fair values for
the remainder of our mortgage-related securities are obtained from internal models with few or no market
inputs. The fair values for our non-mortgage-related securities are based on prices obtained from third parties,
unless their interest rates frequently reset, in which case the carrying value is presumed to be a reasonable
approximation of fair value. As few of the derivative contracts we use are listed on exchanges, the majority of
our derivative positions are valued using internally developed models that use market parameters as their basis.
Approximately 75 percent of the gross fair value of our derivatives portfolio relates to interest-rate and cross-
currency swaps that do not have embedded options. These derivatives are valued using a discounted cash Öow
model that projects future cash Öows and discounts them at the spot rate related to each cash Öow. The
remaining 25 percent of our derivatives portfolio is valued based on prices obtained from third parties or is
determined using models with signiÑcant market inputs. The fair values for all of our debt securities are based
on prices obtained from third parties or are determined using models with signiÑcant market inputs.
Some of our Ñnancial instruments are not traded in active markets. Examples include guarantee assets,
guarantee obligations and PC residuals. The fair values of these instruments are determined using internally
developed models that facilitate simulation of multiple future scenarios that may occur. Our internal models
incorporate empirical data coupled with the results of benchmarking default and capital assumptions observed
in comparable non-conforming securities market trades adjusted, as appropriate, to reÖect diÅerences in
underlying collateral and other factors. Material assumptions include:
‚ our projections of interest rates and housing prices;
‚ our expectations of prepayments, defaults and loss severity rates;
28
Freddie Mac
‚ our estimates of market-implied option-adjusted spread data into our discount rates, including the
selection of benchmark interest-only securities and the application of a trailing average option-
adjusted spread assumption of up to 24 months;
‚ our projections of credit losses, inÖuenced by expectations about factors such as defaults and loss
severities; and
‚ our expectations about the estimated risk premium needed to address exposure to unexpected
increases in credit losses.
We continue to improve the controls over the valuation of Ñnancial instruments. Modeling techniques
used to estimate fair values are subject to review by an independent modeling group in our Enterprise Risk
Oversight group led by our Chief Enterprise Risk OÇcer, who reports directly to the Chief Executive OÇcer.
This group is responsible for the independent oversight and technical review of models, including evaluating
the appropriateness of models used in risk management activities and Ñnancial disclosure. We have also
established a senior management Valuation Committee, chaired by the Chief Financial OÇcer. The Valuation
Committee reviews fair value estimation methodologies, assumptions, controls and results to ensure an
eÅective process exists to provide reasonably accurate and reliable estimates for Ñnancial disclosures. To
support the Valuation Committee, we have also created a Financial Valuation Control group reporting to the
Chief Financial OÇcer with broad oversight of valuation processes. This group is responsible for performing
comprehensive price veriÑcation using an array of independently obtained information to evaluate the
reasonableness of fair value estimates and assumptions. This group is also responsible for reviewing and
approving all valuation assumptions and methods, benchmarking valuation processes against industry
practices, deÑning corporate valuation policies and standards and evaluating, on an ongoing basis, the
eÅectiveness of valuation processes and controls.
As described above, the estimation of fair value requires judgment and we may have reasonably chosen
diÅerent methodologies or assumptions in the current period. The use of diÅerent pricing methodologies and
assumptions could have produced materially diÅerent estimates of fair value in the periods currently
presented. However, we believe the fair values we estimated are reasonable based on internal reviews of
signiÑcant pricing models and methodologies as well as veriÑcation of Ñnancial instrument pricing with third-
party broker/dealers or pricing services. Furthermore, our estimates of fair value are likely to change in future
periods to reÖect changes in market factors such as interest rates and related volatility, credit performance,
expectations about prepayment behavior and other factors. Our estimates of fair value for individual
instruments may change by material amounts, depending on market developments. See ""RISK MANAGE-
MENT Ì Interest-Rate Risk and Other Market Risks'' for discussion of market risks and our interest-rate
sensitivity measures, PMVS and duration gap.
Issuances and Transfers of PCs and Structured Securities
As is further discussed in ""BUSINESS,'' we issue PCs and Structured Securities to third parties in
several diÅerent ways. In general, we account for such transfers as either sales, secured borrowings or Ñnancial
guarantee transactions.
We evaluate whether transfers of PCs or Structured Securities qualify as sales based upon the
requirements of SFAS No. 140, ""Accounting for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities'' and, prior to April 1, 2001, SFAS No. 125, ""Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,'' which we collectively refer to as SFAS 125/140. If we
determine that a transfer of PCs or Structured Securities does not qualify as a sale, we account for such
transfer as a secured borrowing or as a Ñnancial guarantee transaction pursuant to the provisions of FASB
Interpretation No. 45, ""Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others'' (""FIN 45''). In this regard, we will account for a transfer as a
sale to the extent that we conclude that (1) assets that underlie transferred PCs or Structured Securities are
legally beyond the reach of Freddie Mac and its creditors even in the event that Freddie Mac were to become
Ñnancially insolvent, (2) a third-party buyer can freely pledge or exchange the PCs or Structured Securities
that were transferred to it and (3) Freddie Mac did not maintain eÅective control over transferred PCs or
Structured Securities through either (a) an arrangement that both entitles and obligates Freddie Mac to
repurchase or redeem transferred PCs or Structured Securities before their maturity or (b) the ability to
29
Freddie Mac
unilaterally cause the holder of a transferred PC or Structured Security to return speciÑc assets (i.e., other
than through a clean up call).
If a transfer of PCs or Structured Securities qualiÑes as a sale, we recognize a gain or loss on the sale
immediately in earnings based upon the diÅerence in value between cash received, the recognized carrying
value of interests sold and the fair value of liabilities incurred upon sale. In this case, our obligation to
guarantee the payment of principal and interest on PCs and Structured Securities results in the recognition of
a guarantee asset and guarantee obligation on our consolidated balance sheets.
Many of the transfers of PCs and Structured Securities that are made to third parties do not qualify as
sales or secured borrowings, but are accounted for as Ñnancial guarantee transactions pursuant to the
provisions of FIN 45. For such transactions, we recognize at the inception of an executed guarantee a
guarantee obligation that is initially measured to be the greater of (a) fair value or (b) the contingent liability
amount required to be recognized at inception of the guarantee by SFAS No. 5, ""Accounting For
Contingencies,'' or SFAS 5. We also recognize the fair value of any consideration received on such
transactions. Positive diÅerences between the fair value of consideration expected and received, and guarantee
obligations incurred are deferred as a component of recognized guarantee obligations, while negative
diÅerences between such amounts are recognized immediately in earnings as a component of Other expense.
Table 12 summarizes securitization activity in 2004, 2003 and 2002 that relates to transfers of PCs or
Structured Securities that were accounted for as sales.
Table 12 Ì Securitization Activity Accounted for as Sales
Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏ
Gain on saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$152,662
356
$
2004
Year Ended December 31,
2003
(dollars in millions)
$347,874
711
$
$241,214
874
$
2002
With respect to all transfers of PCs and Structured Securities to third parties, the measurement of
recognized guarantee assets, guarantee obligations and credit enhancement-related assets involves our best
estimate with respect to key assumptions, including expected credit losses and the exposure to credit losses
that could be greater than expected credit losses, prepayment rates, forward yield curves and discount rates.
We believe that the assumptions we made in this regard are comparable to those used by other market
participants. The use of diÅerent pricing models and assumptions could produce materially diÅerent results.
See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED AS-
SETS'' to the consolidated Ñnancial statements for further discussion of methodologies and judgments we
used to determine the fair values of guarantee assets and obligations, as well as sensitivity analyses to show the
eÅects of hypothetical changes in key assumptions.
Derivative Instruments and Hedging Activities
The determination of whether a derivative qualiÑes for hedge accounting requires signiÑcant judgment
and has a signiÑcant impact on how such instruments are accounted for in our consolidated Ñnancial
statements. As described more fully in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Derivative
Gains (Losses),'' we discontinued substantially all of our cash Öow hedge accounting relationships eÅective as
of April 2, 2004, because they no longer met the hedge eÅectiveness requirements of SFAS 133, as amended
by SFAS No. 138, ""Accounting for Certain Derivative Instruments and Certain Hedging Activities'' and
SFAS No. 149 ""Amendment of Statement 133 on Derivative Instruments and Hedging Activities,'' which we
collectively refer to as SFAS 133. In addition, we voluntarily discontinued a signiÑcant portion of our fair
value hedging relationships eÅective November 1, 2004. Accordingly, the portion of our derivatives portfolio
that was designated in hedge accounting relationships was signiÑcantly reduced by the end of 2004.
Our Retained portfolio activities and our funding of these investments with a mix of short- and long-term
debt expose us to interest-rate risk and other market risks. In particular, a mortgage borrower's prepayment
option makes the timing and amount of mortgage prepayments very sensitive to changes in interest rates. The
30
Freddie Mac
borrower's option exposes us to a potential mismatch in cash inÖows from the mortgage assets we purchase for
investment as compared to cash outÖows required to make payments on our debt. We manage this interest-
rate risk through various investment and funding activities, as well as through the use of derivatives.
We recognize all derivatives, whether designated in hedging relationships or not, at fair value as either
assets or liabilities on our consolidated balance sheets. Derivatives that are expected to be highly eÅective in
reducing the risk associated with the exposure being hedged may be designated for accounting purposes as a
hedge of:
‚ The cash Öows of a variable-rate instrument or a forecasted transaction, or a ""cash Öow hedge;''
‚ The changes in fair value of a Ñxed-rate instrument, or a ""fair value hedge;'' or
‚ Foreign currency fair value or cash Öow, or a ""foreign currency hedge.''
We report the change in fair value of derivatives that are not in hedge accounting relationships in our
consolidated statements of income in the period in which the change in value occurs. We record the change in
fair value of derivatives that are in cash Öow hedge accounting relationships, to the extent these relationships
are eÅective, as a separate component of AOCI and reclassify this amount into earnings when the earnings
eÅect of the hedged risk is recorded. We record the change in fair value of derivatives in fair value hedge
accounting relationships each period in earnings along with the change in fair value of the hedged item.
The determination of whether a derivative qualiÑes for hedge accounting requires judgment about the
application of SFAS 133. SFAS 133 requires contemporaneous documentation of our hedge relationships,
including identiÑcation of the hedged item, the hedging instrument, the nature of the hedged risk and the
method used to assess the eÅectiveness of the hedge relationship. We use statistical analysis or comparison of
the critical terms of the hedging instrument to those of the hedged item to assess the eÅectiveness of hedges.
If our documentation and assessments are not adequate, the derivative does not qualify for hedge accounting.
Hedge accounting also requires us to measure hedge ineÅectiveness and recognize it currently in
earnings. For certain cash Öow hedging relationships, we have used the hypothetical derivative method, one of
three methods acceptable under GAAP. This method requires us to develop a hypothetical derivative whose
terms match those of the hedged item and compare estimated changes in its fair value to changes in the fair
value of the hedging derivative. Development of hypothetical derivatives requires us to make certain
assumptions and estimates. The use of diÅerent assumptions and estimates could result in a materially
diÅerent amount of recorded ineÅectiveness. We believe that our assumptions and estimates used to develop
hypothetical derivatives are reasonable.
Derivatives designated as cash Öow hedges generally hedge interest-rate risk related to forecasted
issuances of debt. For these hedging relationships to qualify for hedge accounting both at inception and over
the life of the derivative, we must estimate the probable future level of certain types of debt issuances. These
estimates are based on our expectation of future funding needs and the future mix of funding sources. Our
expectations about future funding are based upon projected growth and historical activity. If these estimates
had been lower, a smaller notional amount of derivatives would have been eligible for designation as cash Öow
hedges and potentially material amounts that were deferred and reported in AOCI would have been reported
in Derivative gains (losses) in the consolidated statements of income in the period they occurred. If estimated
future fundings do not occur, or are probable of not occurring, potentially material amounts that were deferred
and reported in AOCI would be immediately recognized in Derivative gains (losses) in the consolidated
statements of income. We believe that the forecasted issuances of debt previously hedged in cash Öow hedging
relationships are suÇciently likely to occur so that we may continue recording previously deferred amounts in
AOCI.
For a more detailed description of our use of derivatives and summaries of derivative positions, see
""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Use of Derivatives and Interest-
Rate Risk Management'' and ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements.
31
Freddie Mac
Credit Losses
We maintain a Reserve for losses on mortgage loans held-for-investment to provide for credit losses
incurred related to those mortgage loans. At December 31, 2004 and 2003, the Reserve for losses on
mortgages held-for-investment was $114 million and $174 million, respectively. The Reserve for losses on
mortgage loans held-for-investment is determined pursuant to the provisions of SFAS 5 and SFAS No. 114,
""Accounting by Creditors for Impairment of a Loan Ì an Amendment of FASB Statements No. 5 and 15,''
or SFAS 114. We also maintain a Reserve for guarantee losses on Participation CertiÑcates to provide for
losses incurred on mortgages underlying PCs or Structured Securities held by third parties. At December 31,
2004 and 2003, the Reserve for guarantee losses on Participation CertiÑcates was $150 million and $125
million, respectively. The Reserve for guarantee losses on Participation CertiÑcates is determined pursuant to
the provisions of SFAS 5 and SFAS 114. The Reserve for losses on mortgage loans held-for-investment and
the Reserve for guarantee losses on Participation CertiÑcates are collectively referred to as the loan loss
reserves. Increases in loan loss reserves that relate to both mortgage loans held as a component of our
Retained portfolio as well as PCs and Structured Securities held by third parties are reÖected in earnings as a
component of the (Provision) beneÑt for credit losses. Loan loss reserves decrease when charge-oÅs of such
balances (net of recoveries) occur or when we record realized losses, which reduces our (Provision) beneÑt
for credit losses.
Loan loss reserves are also increased upon the sale of PCs and Structured Securities for which we
incurred losses on the underlying mortgage loans while such securities were held by us. From an earnings
perspective, such incurred losses are recognized as a component of Gains (losses) on investment activity
through, where applicable, (a) the subsequent measurement of corresponding PC residuals that are classiÑed
as trading (and to which such PCs or Structured Securities relate), (b) the recognition of impairment-related
losses on such securities (i.e., to the extent that such securities do not have recognized PC residual balances
associated with them that are classiÑed as trading) or (c) as a component of gain (loss) on sale of such
securities. Upon the sale of such PCs or Structured Securities, incurred losses are classiÑed on the
consolidated balance sheets as Reserve for guarantee losses on Participation CertiÑcates. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Recently Adopted Accounting Stan-
dards and Accounting Changes Ì Accounting for Financial Guarantees'' to the consolidated Ñnancial
statements for a discussion of the impact of newly adopted accounting standards on the loan loss reserves in
2003. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 6:
LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more information about our process
for determining the loan loss reserves.
The process for determining the level of loan loss reserves is subject to numerous estimates and
assumptions that are uncertain and require judgment. We regularly evaluate the underlying estimates and
assumptions we use when determining the loan loss reserves and update these assumptions to reÖect our own
historical experience and our current view of overall economic conditions and other relevant factors. Changes
in one or more of these underlying estimates and assumptions could have a material impact on the loan loss
reserves and the provision for credit losses. Key estimates and assumptions that could have an impact on loan
loss reserves include:
‚ loss severity trends;
‚ default experience;
‚ expected proceeds from credit enhancements;
‚ evaluation of collateral; and
‚ identiÑcation of relevant macroeconomic factors and assessment of their applications.
Our use of speciÑc estimates and assumptions is based on all available information and our knowledge
and experience in the single-family and multifamily loan markets. We exercise a signiÑcant amount of
judgment in selecting these factors and, had we made diÅerent determinations in the selection of these factors,
a materially diÅerent level of loan loss reserves could have resulted. Additionally, it is possible that, given the
32
Freddie Mac
same information, others could have reached diÅerent, reasonable conclusions. However, we believe the level
of loan loss reserves is reasonable based on internal reviews of the factors and methodologies used.
Interest Income Recognition and Impairment Recognition on Investments in Securities
For most of our mortgage-related and non-mortgage-related investments, we recognize interest income
using the eÅective interest method in accordance with SFAS No. 91, ""Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,'' or SFAS 91.
Deferred items, including premiums, discounts and other basis adjustments such as changes in commitment-
period fair value, are amortized into interest income over the estimated lives of the securities using the
retrospective eÅective interest method. Under this method, we recalculate the constant eÅective yield based
on changes in estimated prepayments. Catch-up adjustments to the unamortized balance of premiums,
discounts and other deferred items that result from applying the updated eÅective yield as if it had been in
eÅect since acquisition are recognized through interest income.
For certain other investments in mortgage-related securities and non-mortgage-related securities classi-
Ñed as available-for-sale, interest income is recognized using the prospective eÅective interest method in
accordance with EITF 99-20. Under this method, changes in the eÅective yield are recognized as adjustments
to interest income in future periods. We speciÑcally apply such guidance to beneÑcial interests (including
undivided interests which are similar to beneÑcial interests) in securitized Ñnancial assets that:
‚ can contractually be prepaid or otherwise settled in such a way that we may not recover
substantially all of our recorded investment (such as interest-only stripped securities); or
‚ were not of high credit quality at the date that we acquired them.
We use actual prepayment experience and estimates of future prepayments to determine the constant
yield needed to apply the eÅective interest method of income recognition. In estimating future prepayments
and cash Öows, we aggregate securities by similar characteristics of their underlying collateral such as
origination date, coupon and product. For securities with structured cash Öow payments, such as Structured
Securities, we also consider the characteristics of other security classes within the same transaction structure
when estimating future prepayments and cash Öows.
Determination of the eÅective yield requires signiÑcant judgment in estimating expected prepayment
behavior, which is inherently uncertain. Estimates of future prepayments are derived from market sources and
our internal prepayment models. Our prepayment models contemplate a variety of assumptions about
borrower behavior in response to changes in interest rates and other macroeconomic factors. Judgment is
involved in making initial determinations about prepayment expectations and in changing those expectations
over time in response to changes in market conditions. The eÅects of future changes in market conditions may
be material. We believe that the above assumptions are comparable to those used by other market
participants. However, the use of diÅerent assumptions in our prepayment models could have resulted in
materially diÅerent income recognition results.
We recognize impairment losses on available-for-sale securities in our Retained portfolio and Cash and
investments portfolio when we have concluded that a decrease in the fair value of a security is other than
temporary. EITF 99-20 requires impairment recognition when there is both a decline in fair value below the
carrying amount and an adverse change in expected cash Öows. Determination of whether an adverse change
has occurred involves judgment about expected prepayments and credit events. For securities not accounted
for under EITF 99-20, we review securities for possible other-than-temporary impairment whenever the
security's fair value is less than its amortized cost. Impairment is evaluated considering a number of indicators
which include the severity of the decline in fair value, credit ratings and the length of time the investment has
been in an unrealized loss position. In addition to these indicators, we recognize impairment when qualitative
factors indicate that we may not recover the unrealized loss. When evaluating the impairment indicators and
qualitative factors, we consider our intent and ability to hold the investment until a point in time at which
recovery can be reasonably expected to occur. We apply signiÑcant judgment in determining whether
impairment loss recognition is appropriate. We believe our judgments are reasonable; however, diÅerent
recognition. See
in materially diÅerent
judgments could have
impairment
resulted
loss
33
Freddie Mac
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial
statements for more information on interest income and impairment recognition on securities.
Recently Issued Accounting Pronouncements
See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated
Ñnancial statements for more information concerning our accounting policies and recently issued accounting
pronouncements that we have not yet adopted and that will likely aÅect our consolidated Ñnancial statements.
34
Freddie Mac
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of our consolidated results of operations should be read in conjunction with the
2003 vs. 2002
Year Ended
December 31,
2002
notes to our consolidated Ñnancial statements.
Table 13 Ì Summary of Consolidated Results
2004 vs. 2003
Year Ended December 31,
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)
$ 9,137
2004
Change
2003
(in millions, except per share amounts)
$ 9,525
$ (361)
$ 9,498
Management and guarantee income ÏÏÏÏ
Gains (losses) on ""Guarantee asset for
Participation CertiÑcates, at fair
value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on ""Guarantee obligation for
Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏ
Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedge accounting gains (losses) ÏÏÏÏÏÏÏ
Gains (losses) on investment activity ÏÏÏ
Gains (losses) on debt retirementÏÏÏÏÏÏ
Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest income (loss) ÏÏÏÏÏ
Non-interest expense
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏ
Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other administrative expenses ÏÏÏÏÏÏÏÏÏ
Total administrative expenses ÏÏÏÏÏ
(Provision) beneÑt for credit losses ÏÏÏÏ
REO operations income (expense) ÏÏÏÏÏ
Housing tax credit partnerships ÏÏÏÏÏÏÏÏ
Minority interests in earnings of
consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest expense ÏÏÏÏÏÏÏÏ
Income before income tax expense ÏÏÏÏÏÏÏ
Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income available to common
1,382
1,653
(271)
1,527
(1,135)
(1,461)
326
(2,176)
732
(4,475)
743
(348)
(327)
159
230
(3,039)
(758)
(588)
(60)
(144)
(1,550)
(143)
3
(281)
(129)
(271)
(2,371)
3,727
(790)
2,937
(210)
925
39
644
(1,114)
(1,775)
352
493
(244)
(624)
(311)
(52)
(194)
(1,181)
5
(7)
(200)
(157)
(696)
(2,236)
7,018
(2,202)
4,816
(216)
(193)
(4,514)
99
766
1,448
(193)
(263)
(2,795)
(134)
(277)
(8)
50
(369)
(148)
10
(81)
28
425
(135)
(3,291)
1,412
(1,879)
6
592
5,302
187
1,799
(674)
276
321
7,154
(593)
(155)
(42)
(184)
(974)
(122)
(4)
(160)
(184)
(432)
(1,876)
14,803
(4,713)
10,090
(239)
Change
$
(27)
126
715
333
(5,263)
457
(2,913)
(1,101)
76
172
(7,398)
(31)
(156)
(10)
(10)
(207)
127
(3)
(40)
27
(264)
(360)
(7,785)
2,511
(5,274)
23
stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,727
Diluted earnings per common share ÏÏÏÏÏÏ
$
3.94
$ 4,600
$
6.68
$(1,873)
$ (2.74)
$ 9,851
$ 14.17
$(5,251)
$ (7.49)
35
Freddie Mac
Net Interest Income
Net interest income, or NII, our principal source of earnings, represents the diÅerence between Interest
income and Interest expense. Net interest income is aÅected by changes in the balance and contractual rates
associated with our interest-earning assets, interest-bearing liabilities and certain derivative contracts, as
adjusted for amortization of premiums, discounts, deferred hedging gains and losses and other basis
adjustments. We analyze Net interest income, and the related net interest yield, on a fully taxable-equivalent
basis to consistently reÖect income from taxable and tax-exempt investments based on a 35 percent marginal
tax rate.
Analysis of Annual Results
2004 versus 2003
Table 14 summarizes Net interest income and net interest yield for 2004 compared to 2003, and the
related analysis of the eÅect of changes in the rates and volumes of our interest-earning assets and interest-
bearing liabilities on the changes in Net interest income between 2004 and 2003.
Table 14 Ì Net Interest Income and Rate/Volume Analysis (2004 compared to 2003)
Year Ended December 31,
2004
2003
Amounts
Yield
Amounts
Yield
Change to
Amounts
Attributable to
Changes in(1)
Rate
Volume
(dollars in millions)
Interest income:
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total income on interest-earning assets ÏÏÏ
4,007
28,460
32,467
3,136
35,603
6.51% $
4.82
4.98
2.79
4.66
4,251
29,051
33,302
3,796
37,098
6.70% $ (244)
(591)
5.34
(835)
5.48
(660)
2.63
(1,495)
4.93
$ (123) $ (121)
2,330
(2,921)
2,209
(3,044)
(678)
1,531
(3,026)
18
Interest expense:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense on debt securities ÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏ
(2,908) (1.39)
(22,950) (4.32)
(25,858) (3.50)
(708) (5.71)
(2,785) (1.21)
(22,083) (4.62)
(24,868) (3.52)
(1,641) (6.26)
Total expense on interest-bearing
liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives(2) ÏÏÏÏ
Impact of net non-interest-bearing funding ÏÏÏÏ
Total funding of interest-earning assets ÏÏÏ
Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent
100
(26,566) (3.54)
0.01
Ì 0.07
(26,466) (3.46)
1.20
0.03
9,137
267
(26,509) (3.62)
(1,091) (0.15)
Ì 0.10
(27,600) (3.67)
1.27
0.03
9,498
227
(123)
(867)
(990)
933
(57)
1,191
Ì
1,134
(361)
40
(406)
1,472
1,066
133
1,199
1,191
Ì
2,390
(636)
38
283
(2,339)
(2,056)
800
(1,256)
Ì
Ì
(1,256)
275
2
basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
9,404
1.24% $
9,725
1.30% $ (321)
$ (598) $
277
(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.
(2) The changes in Income (expense) related to derivatives are fully attributed to rate as the derivatives have no associated principal
amounts recorded on the consolidated balance sheets.
(3) Yields may not sum due to rounding.
Net interest income on a fully taxable-equivalent basis decreased by $321 million to $9,404 million in
2004 from $9,725 million in 2003. During 2004, Interest income on Mortgage loans and Mortgage-related
securities declined by $835 million, or 3 percent. We earned lower Interest income on these investments
during 2004 compared to 2003 because we earned lower yields on newly acquired assets, primarily due to
purchases of lower-coupon non-agency mortgage-related securities (such as Öoating-rate securities that tend
to earn lower initial yields than Ñxed-rate securities), coupled with the continued liquidation of relatively
higher-coupon assets during 2004. The decline in our Retained portfolio yields during 2004 more than oÅset
the positive impact of 7 percent growth in the Retained portfolio's average unpaid principal balance. We also
earned lower interest income related to our Cash and investments portfolio during 2004 as compared to 2003.
36
Freddie Mac
The average balance of this portfolio declined by 22 percent during 2004 as we ceased the PC market-making
and support activities conducted through our Securities Sales & Trading Group business unit and our external
Money Manager program during the fourth quarter of 2004. The decline in the average balance of the Cash
and investments portfolio more than oÅset a 16 basis point increase in the yield we earned on this portfolio
during 2004 as compared to 2003, due to a change in the asset mix and increases in short-term interest rates
during 2004. During the Ñrst quarter of 2004, we implemented enhancements to certain assumptions and
calculations in the amortization process for deferred fees recorded as basis adjustments on assets in our
Retained portfolio. The eÅect on Net interest income of these enhancements, which were treated as changes
in estimates, was the recognition of $86 million of additional amortization expense during the Ñrst quarter of
2004.
During 2004, Total interest expense on debt securities increased by $990 million. Interest expense related
to long-term debt increased by $867 million, or 4 percent, during 2004 as the average balance increased by
approximately $53 billion, or 11 percent, oÅsetting the beneÑt from the maturity and repurchase of higher-rate
long-term debt and the issuance of new long-term debt at lower rates. Interest expense related to short-term
debt increased by $123 million, or 4 percent, in 2004 as average short-term interest rates were higher in 2004
than 2003, partially oÅset by a 10 percent decline in the average balance of short-term debt.
Income (expense) related to derivatives improved to income of $100 million during 2004 from expense of
($1,091) million in 2003 primarily as a result of the movement of certain pay-Ñxed swaps out of hedge
accounting relationships. As discussed below, in Derivative Gains (Losses) we determined that substantially
all pay-Ñxed interest-rate swaps and certain other derivatives that previously had been in cash Öow hedge
accounting relationships no longer met hedge accounting requirements in accordance with SFAS 133,
eÅective at the beginning of the second quarter of 2004. Consequently, we discontinued hedge accounting
treatment for these relationships, resulting in pay-Ñxed swaps with a notional balance of approximately
$108 billion being moved from the cash Öow hedge designation to no hedge designation. The movement of
these pay-Ñxed swaps to no hedge designation had a signiÑcant impact on Net interest income during 2004
because the related net interest expense is no longer reported as a component of Net interest income in periods
following the move, but as a component of Derivative gains (losses). We also voluntarily discontinued hedge
accounting treatment for the majority of our receive-Ñxed interest-rate swaps eÅective November 1, 2004,
resulting in receive-Ñxed interest-rate swaps with a notional balance of approximately $50 billion being moved
from the fair value hedge designation to no hedge designation.
Our Due to Participation CertiÑcate investors interest expense decreased by $933 million as liquidation
rates on outstanding PCs and Structured Securities declined to 29 percent in 2004 from 63 percent in 2003.
For a further discussion of how the prepayments of the collateral underlying outstanding PCs aÅect Net
interest income, see ""Analysis of Quarterly Results Ì Interest expense related to amounts Due to Participa-
tion CertiÑcate investors'' below.
As discussed above, in the fourth quarter of 2004, we decided to cease the PC market-making and support
activities accomplished through our Securities Sales & Trading Group business unit and our external Money
Manager program. By the end of 2004, we had divested the trading portfolio related to these activities in the
Cash and investments portfolio. See ""NOTE 5 Ì RETAINED PORTFOLIO AND CASH AND INVEST-
MENTS PORTFOLIO'' to the consolidated financial statements for further information. In conjunction with
these activities, our investments in mortgage-related securities were generally hedged by entering into forward
sales of mortgage-related securities. When determining the fair value of these positions, the held investment was
valued at the current market, or spot price, while the forward sale commitment was valued at the discounted
sales, or forward price. The spot-forward difference between the trading security and the forward sale
commitment resulted in a loss in Gains (losses) on investment activities that was offset by Net interest income
on the held position. This spot-forward difference was $976 million, $981 million and $938 million in 2004, 2003
and 2002, respectively.
Net interest yield on a fully taxable-equivalent basis decreased by 6 basis points to 124 basis points in
2004 from 130 basis points in 2003, as the decline in yields on interest-earning assets exceeded the beneÑt of
lower debt funding costs. The yield on interest-earning assets declined due to the Retained portfolio's
acquisition of relatively lower-yielding assets and the liquidation of higher-coupon securities, partially oÅset by
37
Freddie Mac
an improvement in the yield on the Cash and investments portfolio as short-term interest rates increased
during 2004. The yield on interest-bearing liabilities declined due to the maturity and repurchase of higher
cost long-term debt and the issuance of new long-term debt at lower rates, coupled with lower costs associated
with the amounts of interest expense Due to Participation CertiÑcate investors. This decline was partially
oÅset by higher short-term debt yields as average short-term rates were higher in 2004 as compared to 2003.
Income (expense) related to derivatives improved during 2004, as we moved a signiÑcant amount of our pay-
Ñxed swaps to no hedge designation and the related net interest expense was reported as Derivative gains
(losses) eÅective at the beginning of the second quarter of 2004 (as described above). The impact of this
movement was slightly oÅset by the movement of a signiÑcant amount of our receive-Ñxed swaps to no hedge
designation in the fourth quarter of 2004 and the recording of the related Net interest income in Derivative
gains (losses) in periods subsequent to the move.
2003 versus 2002
Table 15 summarizes Net interest income and net interest yield for 2003 as compared to 2002, and the
related analysis of the eÅect of changes in the rates and volumes of our interest-earning assets and interest-
bearing liabilities on the changes in Net interest income between 2003 and 2002.
Table 15 Ì Net Interest Income and Rate/Volume Analysis (2003 compared to 2002)
Year Ended December 31,
2003
2002
Amounts
Yield
Amounts
Yield
Change to
Amounts
Attributable to
Changes in(1)
Rate
Volume
(dollars in millions)
Interest income:
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total income on interest-earning assets ÏÏÏ
4,251
29,051
33,302
3,796
37,098
6.70% $
5.34
5.48
2.63
4.93
4,290
30,039
34,329
4,147
38,476
7.02% $
6.39
6.46
3.41
5.89
(39) $ (199)
(5,330)
(5,529)
(718)
(6,247)
(988)
(1,027)
(351)
(1,378)
$
160
4,342
4,502
367
4,869
Interest expense:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense on debt securities ÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏ
(2,785) (1.21)
(22,083) (4.62)
(24,868) (3.52)
(1,641) (6.26)
(4,303) (2.03)
(21,337) (5.24)
(25,640) (4.15)
(1,236) (6.82)
Total expense on interest-bearing
liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives(2) ÏÏÏÏ
Impact of net non-interest-bearing funding ÏÏÏÏ
Total funding of interest-earning assets ÏÏÏ
Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent
(26,509) (3.62)
(1,091) (0.15)
Ì 0.10
(27,600) (3.67)
1.27
0.03
9,498
227
(26,876) (4.23)
(2,075) (0.32)
Ì 0.13
(28,951) (4.43)
1.46
0.04
9,525
252
1,518
(746)
772
(405)
367
984
Ì
1,351
(27)
(25)
1,849
2,725
4,574
110
4,684
984
Ì
5,668
(579)
9
(331)
(3,471)
(3,802)
(515)
(4,317)
Ì
Ì
(4,317)
552
(34)
basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
9,725
1.30% $
9,777
1.50% $
(52) $ (570)
$
518
(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.
(2) The changes in Income (expense) related to derivatives are fully attributed to rate as the derivatives have no associated principal
amounts recorded on the consolidated balance sheets.
(3) Yields may not sum due to rounding.
Net interest income on a fully taxable-equivalent basis decreased by $52 million to $9,725 million in 2003
from $9,777 million in 2002. During 2003, interest income on mortgage-related securities declined by
$988 million, or 3 percent. The interest income generated by the 14 percent growth in the average unpaid
principal balance of the Retained portfolio was more than oÅset by the accelerated amortization of net
premiums on Retained portfolio securities, lower yields on assets acquired due to the low interest-rate
environment during 2003, and the continued liquidation of higher-yielding assets. Net interest income and net
interest yield were reduced as the yield on interest-earning assets declined at a faster rate than the cost of debt
funding during 2003. During the Ñrst quarter of 2003, we reÑned the assumptions and calculations for the
amortization of certain deferred fees recorded as basis adjustments on assets in our Retained portfolio. The
38
Freddie Mac
eÅect on Net interest income of reÑning these assumptions, which was treated as a change in estimate under
GAAP, was the recognition of $31 million of additional amortization income during the Ñrst quarter of 2003.
These reÑned assumptions also aÅected Management and guarantee fee income as discussed in ""Management
and Guarantee Income'' below. Interest income related to Cash and investments declined by $351 million, or
8 percent, during 2003 as the negative impact of declining interest rates during the Ñrst half of the year was
only partially oÅset by the 19 percent increase in the average balances of Cash and investments.
The decline in short-term interest rates during the Ñrst half of 2003 was the primary factor in the
$1,518 million, or 35 percent decline in interest expense related to short-term debt for 2003. This decline was
only partially oÅset by an 8 percent increase in the average balance of short-term debt during the year. Interest
expense related to long-term debt increased by $746 million, or 3 percent, during 2003 as the average balances
of long-term debt increased by 17 percent, oÅsetting the beneÑt of issuing new debt at lower rates. We
repurchased approximately $27.3 billion of long-term debt during 2003 and issued new debt at lower average
rates in most cases. The most signiÑcant debt repurchases in 2003 occurred in the second quarter when we
repurchased an aggregate of approximately $17.1 billion of U.S. dollar and Euro-denominated debt securities,
most of which followed the announcement of changes in our senior management. We executed these
particular repurchases to support the liquidity and price performance of these securities. Gains (losses) on
debt retirement are reported as a component of Non-interest income (loss).
Interest expense related to amounts Due to investors in PCs and Structured Securities increased by
$405 million to ($1,641) million in 2003 from ($1,236) million in 2002 as prepayments on the collateral
underlying PCs and Structured Securities accelerated during the Ñrst part of 2003 in response to declining
interest rates. The liquidation rate on outstanding PCs and Structured Securities increased to 63 percent in
2003 from 47 percent in 2002. For a further discussion of how the prepayments of the collateral underlying
PCs aÅect Net interest income, see ""Analysis of Quarterly Results Ì Interest expense related to amounts Due
to Participation CertiÑcate investors.''
Income (expense) related to derivatives, which includes the accrual of periodic cash settlements on
interest-rate swap transactions accounted for as hedges and amortization of net deferred losses on closed cash
Öow hedges, improved by $984 million with expenses decreasing to ($1,091) million in 2003 from ($2,075)
million in 2002. During 2002 and into 2003, we terminated pay-Ñxed swaps to help manage the funding
mismatch caused by the decrease in the expected lives of mortgage investments and increase in the balance of
long-term debt. In 2002, the portfolio of swaps designated in hedge accounting relationships was in a net pay-
Ñxed position, which resulted in increasing interest expense as market interest rates declined.
Net interest yield on a fully taxable-equivalent basis decreased by 20 basis points to 130 basis points in
2003 from 150 basis points in 2002. For 2003, net interest yield was lower as declines in yields on interest-
earning assets outpaced the beneÑt of lower funding costs. The yield on interest-earning assets declined as a
result of high liquidations in the Ñrst three quarters of 2003 and the acquisition of new assets in a lower rate
environment. The yield on debt securities issued declined as the result of our long-term debt retirements,
primarily in the second quarter of 2003, and subsequent reÑnance activity, primarily decreasing our short-term
funding costs.
39
Freddie Mac
Analysis of Quarterly Results
Table 16 summarizes quarterly Net interest income and net interest yield for 2004 and 2003.
Table 16 Ì Quarterly Net interest income (quarterly yields annualized)
Contractual amounts of net interest income ÏÏÏÏÏÏÏÏÏÏ
Deferred item amortization expense, net(1)
Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ
Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives
Amortization of deferred balances in AOCI, net(2) ÏÏ
Accrual of periodic settlements of derivatives(3)
Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrual of periodic settlements of derivatives ÏÏÏ
Total income (expense) related to derivativesÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent basis) ÏÏÏ
1Q 2004
$3,146
2Q 2004
$2,897
4Q 2004
3Q 2004
(dollars in millions)
$3,008
$2,695
Full year
2004
$11,746
(592)
(298)
(890)
(62)
(322)
(384)
(446)
(366)
(812)
(308)
(315)
(623)
(1,408)
(1,301)
(2,709)
(367)
(482)
(481)
(484)
(1,814)
(427)
527
138
(1)
237
(130)
2,126
63
$2,189
Ì
494
101
(1)
Ì
525
82
(1)
594
112
2,625
63
$2,688
606
125
2,321
67
$2,388
Ì
422
55
Ì
477
(7)
2,065
74
$2,139
(427)
1,968
376
(3)
1,914
100
9,137
267
$ 9,404
Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏ
1.15%
1.44%
1.24%
1.13%
1.24%
Contractual amounts of net interest income ÏÏÏÏÏÏÏÏÏÏ
Deferred item amortization expense, net(1)
Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ
Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives
Amortization of deferred balances in AOCI, net(2) ÏÏ
Accrual of periodic settlements of derivatives(3)(4) ÏÏÏ
Total income (expense) related to derivativesÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent basis) ÏÏÏ
1Q 2003
2Q 2003
$3,056
$3,088
3Q 2003
4Q 2003
(dollars in millions)
$3,493
$3,353
Full year
2003
$12,990
(238)
(257)
(495)
(446)
306
(140)
2,421
41
$2,462
(540)
(241)
(781)
(363)
241
(122)
2,185
64
$2,249
(280)
(216)
(496)
(341)
(74)
(415)
2,442
60
$2,502
(364)
(265)
(629)
(1,422)
(979)
(2,401)
(332)
(82)
(414)
2,450
62
$2,512
(1,482)
391
(1,091)
9,498
227
$ 9,725
Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏ
1.40%
1.26%
1.27%
1.26%
1.30%
(1) Amortization relates to premiums, discounts, deferred fees and other basis adjustments. Basis adjustments are modiÑcations to the
carrying value of our Ñnancial instruments.
(2) Represents changes in fair values of derivatives in cash Öow hedge relationships that were previously deferred in AOCI and have
been reclassiÑed to earnings as the associated hedged forecasted issuances of debt and forecasted mortgage purchase transactions
aÅect earnings.
(3) ReÖects the accrual of periodic cash settlements in accordance with the contractual terms of all derivatives in qualifying hedge
accounting relationships.
(4) Data for 2003 not available at the level of detail provided for 2004.
The various drivers of Net interest income and yields are described in detail below.
Investment asset mix. The purchase, sale and liquidation of assets within the Retained portfolio and the
Cash and investments portfolio, which we collectively refer to as our portfolios, has a signiÑcant impact
40
Freddie Mac
on our overall net interest yield. As the composition of the portfolios changes between higher or lower
yielding assets, the overall asset yield on these portfolios Öuctuates. Generally, during periods of relatively
low interest rates, as experienced in 2003 and 2004, the yield on portfolio assets will decline as higher-
yielding assets liquidate and new assets are acquired at lower rates. The composition of the Retained
portfolio and the Cash and investments portfolio is discussed later in the ""CONSOLIDATED
BALANCE SHEETS ANALYSIS.''
Amortization of premiums and discounts. When we purchase mortgage-related securities, the price we
pay for these assets generally does not equal the securities' unpaid principal balance. We pay more than
the unpaid principal balance (referred to as a premium) when the coupon on the security is greater than
the current market yield for that security. We pay less than the unpaid principal balance (referred to as a
discount) when the coupon on the security is less than the current market yield for that security.
Purchase premiums and discounts are amortized over the estimated life of the purchased assets as
adjustments to interest income based on the eÅective interest method in accordance with SFAS 91. This
method of amortization results in periodic adjustments to interest income, which are applied retrospec-
tively to the date of purchase of the underlying mortgage-related security, when the eÅective interest-rate
changes due to diÅerences between actual and previously estimated prepayments and changes in
estimated future prepayments.
As interest rates declined during the Ñrst half of 2003, we paid higher premiums to acquire
mortgage-related securities. This resulted in a shift in the Retained portfolio to an increasing premium
position in 2003. Mortgage interest rates Öuctuated throughout 2004; however, at year end, these rates
were comparable to rates at December 31, 2003. As a result, the Retained portfolio continued to be in a
net premium position at December 31, 2004. The net balance of unamortized premiums, discounts,
deferred fees and other basis adjustments related to all mortgage-related securities in the Retained
portfolio (both those classiÑed as available-for-sale and trading) equaled $3,965 million and $4,729 mil-
lion at December 31, 2004 and 2003, respectively.
Interest expense related to amounts Due to Participation CertiÑcate investors. As a result of the payment
remittance cycle associated with PCs and certain Structured Securities, interest expense related to
amounts Due to PC investors tends to increase during periods of rising prepayments and decrease during
periods of declining prepayments. We invest the proceeds from prepayments on mortgage loans
underlying PCs and Structured Securities in short-term investments until related payments are Due to
PC investors. The interest earned on these investments is reported as a component of interest income on
Cash and investments.
As described above, mortgage interest rates were relatively stable during 2004 in contrast to
declining mortgage interest rates during the Ñrst half of 2003. Consequently, the volume of liquidations
associated with outstanding PCs and Structured Securities peaked during 2003, causing interest expense
Due to Participation CertiÑcate investors to be at a higher level during 2003 compared to 2004 and 2002.
Liquidations associated with outstanding PCs and Structured Securities (excluding liquidations associ-
ated with PCs in our Cash and investment portfolio) totaled $224,283 million and $471,591 million
during 2004 and 2003, respectively.
Debt funding mix and derivatives activity. We communicate our anticipated issuances of both long-
term and short-term debt securities by publishing an annual Ñnancing calendar along with periodic
updates in the form of Quarterly Funding Announcements. We consider our commitments to issue debt
securities with certain maturity characteristics as well as the maturity characteristics of our existing debt
outstanding and other funding requirements when we evaluate our existing derivative portfolio. We adjust
the composition of that derivative portfolio to manage our interest-rate risk, including the relative
duration and convexity of our assets and liabilities.
As discussed in the analysis of Net interest income results for full year 2004, we moved a signiÑcant
amount of our pay-Ñxed swaps that were previously in hedge accounting relationships to no hedge
designation eÅective at the beginning of the second quarter of 2004, and we also moved a signiÑcant
amount of our receive-Ñxed swaps to no hedge designation in the fourth quarter of 2004. For periods
41
Freddie Mac
following these moves, the interest income or expense associated with these swaps is included in
Derivative gains (losses).
Due to declining interest rates in 2002 and the Ñrst half of 2003, the expected lives of assets held in
the Retained portfolio decreased, requiring us to reduce the duration of our long-term debt funding from
an asset/liability management perspective. As a result, we terminated certain pay-Ñxed swaps and
entered into receive-Ñxed swaps. Receive-Ñxed swaps eÅectively convert a Ñxed-rate debt payment into a
variable-rate payment. Conversely, a pay-Ñxed swap requires us to make a Ñxed interest payment in
exchange for a variable rate payment. In the third quarter of 2003, we entered into additional pay-Ñxed
swaps to extend the duration of our debt portfolio as interest rates increased. During 2004, our debt
securities became more heavily weighted toward long-term debt. The average balance of long-term debt
increased approximately 11 percent while the average balance of short-term debt decreased by
approximately 10 percent.
Amortization of hedging gains and losses. Historically, certain derivative contracts were in hedge
accounting relationships, which resulted in basis adjustments to hedged items. These basis adjustments
are accounted for and are similar to premiums and discounts, as described above. However, as of
December 31, 2004, the majority of our pay-Ñxed and receive-Ñxed swaps are no longer in hedge
accounting relationships, as discussed in the analysis of 2004 full-year Net interest income results above.
For more information, see ""Non-Interest Income (Loss) Ì Derivative Gains (Losses).''
Certain derivative contracts (primarily pay-Ñxed swaps) have been accounted for as cash Öow
hedges of the variability of interest payments on forecasted debt issuances, while other derivative
contracts (primarily receive-Ñxed swaps) have been accounted for as fair value hedges of existing debt. In
both cases, termination of the hedge accounting relationship, including the actions we took in 2004
related to pay-Ñxed and receive-Ñxed swaps, resulted in the associated deferred hedging gain or loss being
amortized into Net interest income over the life of the hedged item. Amortization related to terminated
cash Öow hedges is generally included in Income (expense) related to derivatives or, if the deferred gain
or loss is related to a closed cash Öow hedge linked to long-term debt, in Interest expense on long-term
debt. The amortization related to terminated fair value hedges is also included in Interest expense on
long-term debt.
The impact of these drivers on Net interest income, discussed above, during the quarterly periods of 2004
and 2003 is discussed below.
4Q04 vs. 3Q04
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
decreased $249 million and 11 basis points, respectively, during the fourth quarter of 2004 compared to the
third quarter of 2004. The decline in Net interest income was primarily due to an increase in our short-term
funding costs resulting from increases in short-term interest rates during the fourth quarter and the movement
of a signiÑcant amount of our receive-Ñxed swaps to no hedge designation in November 2004. The decline in
net interest yield was primarily related to the increase in our short-term funding costs.
3Q04 vs. 2Q04
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
decreased $300 million and 20 basis points, respectively, during the third quarter of 2004 compared to the
second quarter of 2004. The decline in Net interest income was primarily due to increased amortization
expense related to net premiums and other security-related basis adjustments as a result of a decline in long-
term market interest rates from the second quarter of 2004. Additionally, our short-term funding costs
increased as a result of increases in short-term interest rates during the third quarter. The decline in net
interest yield was due to lower yields on Retained portfolio assets and an increase in short-term funding costs.
2Q04 vs. 1Q04
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
increased $499 million and 29 basis points, respectively, during the second quarter of 2004 compared to the
Ñrst quarter of 2004. The increase in Net interest income resulted from lower amortization expense related to
42
Freddie Mac
net premiums and other security-related basis adjustments and the impact of moving a signiÑcant amount of
our pay-Ñxed swaps to no hedge designation, eÅective at the beginning of the second quarter. The reduction in
amortization expense related to net premiums and other security-related basis adjustments resulted from an
increase in long-term market interest rates from the Ñrst quarter of 2004. The increase in net interest yield was
driven by the reduction in amortization expense and the movement of the pay-Ñxed swaps as described above.
1Q04 vs. 4Q03
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
decreased $323 million and 11 basis points, respectively, during the Ñrst quarter of 2004 compared to the
fourth quarter of 2003. Net interest income declined as lower interest income on our interest-earning assets
and higher amortization expense related to net premiums and other security-related basis adjustments was
partially oÅset by higher interest income related to the accrual of periodic settlements on derivatives in hedge
accounting relationships. The decline in interest income on our interest-earning assets resulted primarily from
a $32 billion decline in the related average balance from the fourth quarter of 2003. The higher amortization
expense related to net premiums and other security-related basis adjustments was driven by a decline in
market interest rates from the fourth quarter of 2003. Net interest yield declined as a result of the higher
amortization expense related to net premiums and other security-related basis adjustments, partially oÅset by
the higher interest income related to the accrual of periodic settlements on derivatives in hedge accounting
relationships.
During the Ñrst quarter of 2004, we implemented enhancements to certain assumptions and calculations
in the amortization process for deferred fees recorded as basis adjustments on assets in our Retained portfolio.
The eÅect on Net interest income of these enhancements, which were treated as a change in estimate, was the
recognition of $86 million of additional amortization expense during the Ñrst quarter of 2004.
4Q03 vs. 3Q03
Net interest income, on a fully taxable-equivalent basis, increased by $10 million during the fourth
quarter of 2003 as compared to the third quarter of 2003. Net interest yield, on a fully taxable-equivalent basis,
decreased by 1 basis point for the same periods. The increase to Net interest income was due to increased
interest income recognized on the Retained portfolio as its average balance increased by 5 percent quarter-
over-quarter. This increase to net interest income was oÅset by increased long-term debt expense related to
the funding of the Retained portfolio growth. Net interest yield remained relatively Öat as improved funding
costs were oÅset by lower asset yields.
3Q03 vs. 2Q03
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
increased by $253 million and 1 basis point, respectively, during the third quarter of 2003 compared to the
second quarter of 2003. These increases were driven by lower amortization expense resulting from adjustments
to the amortization of the related deferred premiums in the Retained portfolio as mortgage rates and estimates
of weighted average mortgage lives increased. Net interest income also beneÑted from decreases in long-term
debt expense and net growth in the Retained portfolio. Interest expense on derivative contracts increased with
purchases of additional pay-Ñxed swaps, which were acquired in a rising rate environment and designated in
hedge accounting relationships. Net interest yield remained relatively Öat as the decline in our debt costs was
oÅset by the decline in asset yields and an increase in expense related to derivatives.
2Q03 vs. 1Q03
Net interest income and net interest yield, both of which are presented on an fully taxable-equivalent
basis, decreased by $213 million and 14 basis points, respectively, during the second quarter of 2003 compared
to the Ñrst quarter of 2003. These decreases were driven by increases in amortization expense related to
deferred premiums on mortgage investment purchases. As discussed above in ""Amortization of premiums and
discounts,'' the deferred amount related to the total Retained portfolio was in an increasing net premium
position and liquidations increased in the quarter. Also, increased liquidations on PCs outstanding generated
timing diÅerences between amounts due from servicers and amounts due to PC investors resulting in increased
interest expense. These negative eÅects were partially oÅset by lower long-term debt expense due to large debt
43
Freddie Mac
retirements completed in the second quarter. Net interest yield declined as amortization expenses and lower
asset yields outpaced lower funding costs.
1Q03 vs. 4Q02
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
increased by $9 million and decreased by 1 basis point, respectively, during the Ñrst quarter of 2003 compared
to the fourth quarter of 2002. The increase in net interest income related to a decrease in short-term debt
expense as a result of declining interest rates and higher interest income related to derivatives due to an
increase in volume of receive-Ñxed swaps. Partially oÅsetting these increases was higher amortization expense
related to net deferred premiums on mortgage investment purchases. In addition, lower yields were recognized
on the investment portfolio as short-term rates remained low. During the Ñrst quarter of 2003, we reÑned the
assumptions and calculations for the amortization of deferred fees recorded as discounts on assets in our
Retained portfolio. The eÅect on Net interest income of reÑning these assumptions, which was treated as a
change in estimate (and which also impacted Management and guarantee income), was the recognition of
$31 million of additional amortization income during the Ñrst quarter of 2003. Although yields on assets were
declining faster than debt costs, the margin reduction was oÅset by the rate impact of lower derivative
expenses.
Non-Interest Income (Loss)
Table 17 summarizes our Non-interest income (loss) for 2004, 2003 and 2002.
Table 17 Ì Non-Interest Income (Loss)
Non-interest income (loss)
Management and guarantee income ÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for
2004 vs. 2003
2003 vs. 2002
Year Ended
December 31,
2004
2003
Change
Year Ended
December 31,
2002
Change
(dollars in millions)
$ 1,382
$1,653
$ (271)
$ 1,527
$
126
Participation CertiÑcates, at fair value'' ÏÏÏÏÏ
(1,135)
(1,461)
326
(2,176)
715
Income on ""Guarantee obligation for
Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏ
Gains (losses) on debt retirementÏÏÏÏÏÏÏÏÏÏÏÏ
Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest income (loss) ÏÏÏÏÏÏÏÏÏ
925
732
39
(4,475)
644
743
(348)
(1,114)
(327) (1,775)
352
493
$ (244)
159
230
$(3,039)
(193)
(4,514)
99
766
1,448
(193)
(263)
$(2,795)
592
5,302
187
1,799
(674)
276
321
$ 7,154
333
(5,263)
457
(2,913)
(1,101)
76
172
$(7,398)
Management and Guarantee Income
Management and guarantee income primarily represents the contractual guarantee fees we receive on
mortgage-related securities issued and guaranteed by us that are held by third party investors. For securities we
hold, the associated components of guarantee income are included in Net interest income. Management and
guarantee income also includes amortization of pre-2003 deferred fees, including credit fees and buy-down
fees on PCs and Structured Securities that have not been previously sold under SFAS 125/140 or that have not
been previously subject to Ñnancial guarantee accounting under FIN 45.
44
Freddie Mac
Table 18 provides summary information about Management and guarantee income for 2004, 2003 and
2002. The total management and guarantee rate consists of the contractual management and guarantee fee
rate, as adjusted for amortization of certain pre-2003 deferred fees, including credit fees and buy-down fees.
Table 18 Ì Management and Guarantee Income
2004
Year Ended December 31,
2003
2002
Contractual management and guarantee fees ÏÏÏÏÏÏÏÏÏ
Amortization of deferred fees(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total management and guarantee incomeÏÏÏÏÏÏÏÏÏÏÏÏ
$1,303
79
$1,382
Amount
Rate
Rate
Amount
Amount
(dollars in millions, rate in basis points)
$1,335
192
$1,527
$1,229
424
$1,653
17.3
6.0
23.3
16.5
1.0
17.5
Rate
19.4
2.8
22.2
Unamortized balance of credit and buy-down fees
included in Other Liabilities, at period end ÏÏÏÏÏÏÏÏ
$ 215
$ 329
$ 804
(1) We reclassiÑed amounts from certain expenses related to uncollectible interest on PCs held by third parties from Management and
guarantee income to (Provision) beneÑt for credit losses to conform with the 2004 presentation. This resulted in a $15 million and an
$11 million increase in Management and guarantee income during 2003 and 2002, respectively.
(2) In accordance with SFAS 91, deferred items are amortized over the estimated lives of the underlying securities using the
retrospective eÅective interest method. This method of amortization results in periodic adjustments when the eÅective interest rate
changes due to diÅerences between actual and estimated prepayments and changes in estimated future prepayments. Catch-up
adjustments are made to the unamortized balances of the deferred items to reÖect the application of the updated eÅective yield as if
it had been in eÅect since acquisition.
Management and guarantee income decreased by $271 million, or 16 percent, to $1,382 million in 2004
from $1,653 million in 2003. This decrease in Total management and guarantee income was primarily driven
by an 81 percent decrease in amortization of pre-2003 deferred fees. Contributing to this decrease was the
eÅect of the change in our accounting treatment of certain fees beginning in 2003 and a model change
implemented in the Ñrst quarter of 2003, both of which are discussed in more detail below.
The management and guarantee rate related to the amortization of deferred fees decreased from 6.0 basis
points in 2003 to 1.0 basis point in 2004. The rate of amortization is determined based on the estimated lives of
the mortgage loans underlying our PCs using the eÅective interest method (as established by SFAS 91).
Periodic adjustments to deferred fees amortization are made to reÖect diÅerences between actual and
previously estimated mortgage prepayments and changes in estimated future prepayments. The primary
drivers of the decrease in amortization of deferred fees in 2004 were: (a) a reduction in the unamortized
balances being amortized through Management and guarantee income; (b) 2003 amortization methodology
changes; and (c) higher interest rates in 2004 resulting in longer estimated lives of the loans underlying
our PCs.
Management and guarantee income includes amortization of pre-2003 deferred fees, including credit fees
and buy-down fees on our PCs that have not previously been subject to guarantee accounting under FIN 45 or
have not previously been sold under SFAS 125/140. The existing unamortized balance of pre-2003 deferred
fees related to Outstanding PCs equaled approximately $215 million, $329 million and $804 million as of
December 31, 2004, 2003 and 2002, respectively, and will ultimately be reduced to zero over time. Beginning
in 2003, credit and buy-down fees on PCs issued through our Guarantor and MultiLender Programs have been
deferred as a component of our Guarantee obligation for Participation CertiÑcates, rather than recorded in
Other liabilities on our consolidated balance sheets as was the practice prior to 2003 before the adoption of
FIN 45. These fees are amortized into income as a component of Income on ""Guarantee obligation for
Participation CertiÑcates,'' as described more fully in ""Table 22 Ì Income on Guarantee Obligation for 2004
and 2003.'' For all periods presented, deferred balances related to credit and buy-down fees associated with PC
transactions that qualify as sales (i.e., non-Guarantor or non-MultiLender Program transactions) do not aÅect
Management and guarantee income nor Income on ""Guarantee obligation for Participation CertiÑcates.''
Instead, these deferred balances are included in the determination of the gain or loss on the sale of mortgage
loans, which we report as Gains (losses) on investment activity.
In the Ñrst quarter of 2003, we improved our methodology for estimating the expected weighted average
lives of mortgages with related deferred fees, including credit fees and buy-down fees. The improvements we
45
Freddie Mac
made included enhancements to the prepayment models we use to determine the expected weighted average
lives of mortgage loans underlying our PCs, which in turn are used to calculate the recognition of deferred fees
based on the eÅective interest method. These improvements to our models were treated as a change in
estimate in accordance with Accounting Principles Board Opinion No. 20, ""Accounting Changes,'' or
APB 20, and resulted in the recognition of $110 million (1.5 basis points) of additional amortization income in
Management and guarantee income in the Ñrst quarter of 2003.
The decrease in amortization of deferred fees in 2004 as compared with 2003 also resulted from higher
mortgage interest rates in 2004 compared to 2003 and the associated impact on prepayment speeds used in our
amortization models, which increased the expected weighted average lives of outstanding PCs and slowed the
pace of amortization.
The contractual management and guarantee fee rate recognized in 2004 decreased to 16.5 basis points
compared with 17.3 basis points in 2003. The portfolio turnover we experienced in 2004 reduced our
contractual guarantee fee rates because newly issued PCs tended to have lower contractual guarantee fee rates
than the previously outstanding PCs, that were liquidated during 2004. This rate decline was partly driven by
the impact of our market adjusted pricing feature on new business purchases, which is discussed in more detail
below. Also, the contractual guarantee fee rate for 2004 declined because a greater proportion of our overall
credit guarantee compensation was received in the form of upfront fees paid to us by seller/servicers.
Beginning in 2003, these upfront fees are amortized into income as a component of Income on ""Guarantee
obligation for Participation CertiÑcates'' or are included in the determination of the gain or loss on the sale of
mortgage loans.
We expanded the use of our market adjusted pricing feature in late 2003 to oÅset the then-prevailing
weakness in prices of our PCs outstanding. This pricing provision adjusts guarantee fees upward or downward
to compensate for the strength or weakness of our PC prices relative to competing securities. This pricing
feature had an increased impact on new business guarantee fees generated in late 2003 and throughout all of
2004. Toward the end of 2004, our PC prices strengthened compared to the second half of 2003. The Ñnancial
impact of prior and current market adjusted pricing is generally recognized over the life of the PC, unless the
security is transferred to a third party in a transaction that qualiÑes as a sale under SFAS 140. Thus, the
impact will continue to be recognized in Contractual management and guarantee fees even though the prices
of our PCs have improved and similar adjustments on new purchases have decreased.
Total Management and guarantee income increased in 2003 by $126 million, or 8 percent, to
$1,653 million from $1,527 million in 2002. This increase was driven by an increase in average outstanding
PCs and an increase in the average total management and guarantee rate recognized in 2003, including
amortization of deferred fees. The total management and guarantee rate in 2003 was 23.3 basis points
compared with 22.2 basis points in 2002. The increase was driven by accelerated amortization of deferred fees,
partially oÅset by lower contractual management and guarantee fee rates on new business. Increased
amortization of deferred fees resulted from the decline in mortgage interest rates during the Ñrst half of 2003
and the related increase in mortgage prepayments, as well as the Ñrst quarter 2003 model change.
46
Freddie Mac
Table 19 summarizes Management and guarantee income and rates for each quarter in 2004 and 2003.
Table 19 Ì Quarterly Management and Guarantee Income
1Q 2004
2Q 2004
3Q 2004
4Q 2004
Amount
Rate
Contractual management and guarantee fees ÏÏÏÏÏ
Amortization of deferred fees(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total management and guarantee incomeÏÏÏÏÏÏÏÏ
$320
64
$384
16.7
3.4
20.1
Rate
Amount
Rate
Amount
(dollars in millions, rate in basis points)
16.3
2.8
19.1
$322
(71)
$251
16.6
(3.7)
12.9
$324
56
$380
Amount
Rate
$337
30
$367
16.3
1.4
17.7
1Q 2003
2Q 2003
3Q 2003
4Q 2003
Amount
Rate
Amount
Rate
Amount
Rate
Amount
Rate
Contractual management and guarantee fees ÏÏÏÏÏ
Amortization of deferred fees(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total management and guarantee income(2)ÏÏÏÏÏÏ
$314
248
$562
17.3
13.7
31.0
(dollars in millions, rate in basis points)
17.3
(3.2)
14.1
$311
168
$479
17.4
9.5
26.9
$295
(55)
$240
$309
63
$372
17.1
3.5
20.6
(1) In accordance with SFAS 91, deferred items are amortized over the estimated lives of the underlying securities using the
retrospective eÅective interest method. This method of amortization results in periodic adjustments when the eÅective interest rate
changes due to diÅerences between actual and estimated prepayments and changes in estimated future prepayments. Catch-up
adjustments are made to the unamortized balances of the deferred items to reÖect the application of the updated eÅective yield as if
it had been in eÅect since acquisition.
(2) We reclassiÑed amounts from certain expenses related to uncollectible interest on PCs held by third parties from Management and
guarantee income to (Provision) beneÑt for credit losses to conform with the 2004 presentation. This resulted in increases of
$4 million, $3 million, $5 million and $3 million for 1Q 2003, 2Q 2003, 3Q 2003 and 4Q 2003, respectively, in Management and
guarantee income.
As described above, the total management and guarantee rate represents the contractual management
and guarantee fee rate as adjusted for amortization of pre-2003 deferred fees, including credit fees and buy-
down fees. The amortization component of Management and guarantee income representing the recognition of
deferred fees is based on the eÅective interest method required by SFAS 91, which requires estimating the
expected weighted average lives of mortgages with related deferred fees. The use of the eÅective interest
method requires periodic adjustments to the amortization of deferred fees. This can cause signiÑcant volatility
in quarterly income, as both a current period amortization and a cumulative catch-up adjustment are
recognized in a given period as the eÅective constant yield changes over time. This volatility is driven primarily
by variances between actual and anticipated prepayments, which aÅect the internal rate of return applied in
determining the eÅective constant yield.
4Q04 vs. 3Q04
Management and guarantee income decreased by $13 million, or 3 percent, to $367 million in the fourth
quarter of 2004 from $380 million in the third quarter of 2004. This decrease was primarily driven by a slight
increase in the 30-year mortgage rate during the fourth quarter and the associated impact on estimated
prepayment speeds used in our amortization models. This decrease was partially oÅset by an increase in
contractual management and guarantee fees, that was primarily driven by an increase in average outstanding
PCs.
3Q04 vs. 2Q04
Management and guarantee income increased by $129 million, or 51 percent, to $380 million in the third
quarter of 2004 from $251 million in the second quarter of 2004, primarily due to an increase in the
amortization of deferred fees. The change in amortization related income was driven by an approximate
53 basis point decline in the 30-year mortgage rate during the third quarter and the associated higher
estimated prepayment speeds used in our amortization models which accelerated recognition of deferred fees.
2Q04 vs. 1Q04
Management and guarantee income decreased by $133 million, or 35 percent, to $251 million in the
second quarter of 2004 from $384 million in the Ñrst quarter of 2004. This decline was driven by an
approximate 85 basis points increase in the 30-year mortgage rate during the quarter and associated slower
47
Freddie Mac
estimated prepayment speeds used in our amortization models. This estimated decline in prepayment speeds
caused slower amortization and resulted in net amortization expense for the second quarter of 2004.
1Q04 vs. 4Q03
Management and guarantee income increased by $12 million, or 3 percent, to $384 million in the Ñrst
quarter of 2004 from $372 million in the fourth quarter of 2003. This increase in guarantee income was
primarily driven by an increase in average outstanding PCs that more than oÅset the decline in the contractual
guarantee fee rates caused by generally lower rates on new guarantees and the liquidation of seasoned loans
with higher guarantee fee rates.
4Q03 vs. 3Q03
Management and guarantee income increased by $132 million, or 55 percent, to $372 million in the
fourth quarter of 2003 from $240 million in the third quarter of 2003. This increase was driven primarily by an
increase in the portion of Management and guarantee income representing the amortization of deferred fees.
The change in amortization recognition was driven by a return to income amortization after the downward
adjustment made to amortization in the third quarter, together with a decrease in the expected weighted
average lives of mortgages underlying our PCs. The change in the contractual guarantee fee portion of
Management and guarantee income reÖected an increase in average outstanding PCs.
3Q03 vs. 2Q03
Management and guarantee income decreased by $239 million, or 50 percent, to $240 million in the third
quarter of 2003 from $479 million in the second quarter of 2003. This decrease was driven primarily by
amortization expenses that were recorded due to an increase of approximately 70 basis points in the 30-year
mortgage rate during the quarter. The change in the contractual guarantee fee portion of Management and
guarantee income was relatively small and reÖected the decrease in average outstanding PCs.
2Q03 vs. 1Q03
Management and guarantee income decreased by $83 million, or 15 percent, to $479 million in the
second quarter of 2003 from $562 million in the Ñrst quarter of 2003. This decrease primarily reÖects the eÅect
of the $110 million model-related adjustment made in the Ñrst quarter of 2003 discussed above. The change in
the cash Öow portion of Management and guarantee income was relatively small, reÖective of the decrease in
average outstanding PCs.
Gains (Losses) on Guarantee Asset
Gains (losses) on Guarantee asset for Participation CertiÑcates, at fair value, represents the change in
fair value of the guarantee asset. Guarantee assets are recognized in connection with transfers of PCs and
Structured Securities that are accounted for as sales under SFAS 125/140. Additionally, beginning on
January 1, 2003, we began recognizing guarantee assets for PCs issued through our Guarantor Programs and
for certain Structured Securities that we issue to third parties in exchange for non-agency mortgage-backed
securities, as well as for that portion of PCs issued through MultiLender Program transactions that are not
accounted for as sales under SFAS 125/140. This change in accounting, which was triggered by our adoption
of FIN 45, resulted in a signiÑcant increase in guarantee assets that are recognized on our consolidated balance
sheets. Consequently, the size of our guarantee asset subject to this mark to fair value adjustment was larger in
2004 and 2003 compared with 2002.
The change in fair value of the guarantee asset reÖects:
‚ The portion of cash received that is considered a return of our recorded investment in the
guarantee asset; and
‚ Changes in the fair value of expected future cash inÖows.
Factors AÅecting the Fair Value of the Guarantee Asset. With the passage of time, actual expected cash
Öows are received and are no longer included in the valuation of the guarantee asset. Cash Öows received,
which are recorded as Management and guarantee income, represent a reduction of our investment in the
48
Freddie Mac
guarantee asset. As depicted in ""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for
Participation CertiÑcates, at Fair Value,'' cash Öows received on the guarantee asset are allocated between
interest income (imputed income on the asset based on the discount rate used in the calculation of the fair
value of the guarantee asset) and return of investment (the portion of actual cash Öows that represents a
reduction of the guarantee asset receivable). The realization of cash Öows results in a corresponding reduction
in the valuation of the guarantee asset.
The change in the fair value of future expected cash Öows is the second component of the change in the
guarantee asset value. The value of expected cash Öows is driven by changes in the expected interest rates and
related discount rates that aÅect the estimated life of the mortgages underlying the Outstanding PCs and
Structured Securities and other economic factors that inÖuence the amount and timing of the future cash
Öows. Changes in the estimated lives of the underlying mortgages aÅect the value of the guarantee asset
because our right to receive guarantee fees ceases when borrowers prepay the underlying mortgages.
The portion of the gains and losses on the guarantee asset attributable to these two factors is shown in
""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value,''
below. See ""Table 36 Ì Changes in Guarantee Asset for Participation CertiÑcates, at Fair Value'' in
""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Guarantee Asset for Participation CertiÑcates''
for additional information about the guarantee asset.
Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value
Total cash Öows received(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Portion of cash Öows received related to imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in fair value of future cash ÖowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair
2002
2004
Year Ended December 31,
2003
(dollars in millions)
$ (891)
244
(647)
(814)
$(1,086)
257
(829)
(306)
$ (820)
259
(561)
(1,615)
value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(1,135)
$(1,461)
$(2,176)
(1) Represents guarantee fees received on Outstanding PCs and Structured Securities issued under FAS 140 or FIN 45 for which there
is a guarantee asset established.
Losses on the guarantee asset decreased $326 million, or 22 percent, to ($1,135) million in 2004
compared to ($1,461) million in 2003 and decreased $715 million, or 33 percent, to ($1,461) million in 2003
compared to ($2,176) million in 2002. The decreased losses were primarily due to a smaller overall decline in
mortgage interest rates in 2004 compared to 2003, which tends to aÅect actual and expected prepayments.
This prepayment experience aÅects our estimation of future guarantee fee cash Öows and consequently, the
fair value of the guarantee asset. Return of investment for each year was consistent with the growth of the
outstanding PCs and Structured Securities, as shown in ""Table 8 Ì Freddie Mac's Total Mortgage Portfolio
Based on Unpaid Principal Balances''
in ""OUR RETAINED AND TOTAL MORTGAGE
PORTFOLIOS.''
49
Freddie Mac
""Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates,
at Fair Value'' summarizes the 2004 and 2003 quarterly and full year gains and losses on the guarantee asset.
Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at
Fair Value
Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for Participation
1Q 2004
$ (199)
(444)
4Q 2004
2Q 2004
3Q 2004
(dollars in millions)
$ (207)
(639)
$ (200)
771
$ (223)
6
Full Year
2004
$ (829)
(306)
CertiÑcates at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (643)
$ 571
$ (846)
$ (217)
$(1,135)
Guarantee asset for Participation CertiÑcates, at fair
value, at period end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,583
$4,724
$4,184
$4,516
$ 4,516
Return of investment in guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for Participation
1Q 2003
$ (153)
(415)
2Q 2003
3Q 2003
(dollars in millions)
$ (160)
418
$ (154)
(938)
4Q 2003
$ (180)
121
Full Year
2003
$ (647)
(814)
CertiÑcates, at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (568)
$(1,092)
$ 258
$ (59)
$(1,461)
Guarantee asset for Participation CertiÑcates, at fair
value, at period endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,424
$ 2,076
$3,030
$3,686
$ 3,686
For all periods presented, quarterly Öuctuations in gains (losses) on the guarantee asset were driven by
changes in interest rates that aÅected the expected lives of the mortgages underlying Outstanding PCs and
Structured Securities, our expectations of prepayments and corresponding discount rates and the return of
investment.
We experienced declines in the fair value of our guarantee asset during the Ñrst and third quarters of 2004
because the decline in 30-year mortgage interest rates increased our expectation of prepayments and reduced
the value of our guarantee asset. Conversely, increases in 30-year mortgage interest rates during the second
quarter of 2004 slowed the pace of expected prepayments and increased the fair value of the guarantee asset.
Interest rates for 30-year mortgages were relatively Öat during the fourth quarter of 2004. In the fourth
quarter, the fair value of our guarantee asset declined as we collected Management and guarantee income
related to our guarantee asset, as described above.
Through the Ñrst two quarters of 2003, our average single-family portfolio mortgage coupon rate was
signiÑcantly higher than prevailing 30-year mortgage rates, which increased our expectation of prepayments
and reduced the fair value of our guarantee asset. In the third quarter of 2003, mortgage interest rates
increased, which slowed the pace of liquidations and increased the fair value of the guarantee asset. The fourth
quarter of 2003 was primarily driven by the return of investment, as described above. Rates on 30-year
mortgages dropped slightly during the fourth quarter of 2003, which also contributed to the decline in the fair
value of the guarantee asset.
Income on Guarantee Obligation
With the adoption of FIN 45 on January 1, 2003, we changed the way we account for Income on
""Guarantee obligation for Participation CertiÑcates.'' Beginning in 2003, we began recording guarantee
obligations for PCs issued through our Guarantor Program and for certain Structured Securities that we issue
to third parties in exchange for non-agency mortgage-backed securities, as well as for that portion of PCs
issued through MultiLender Program transactions that are not accounted for as sales under SFAS 125/140.
Previously, we recorded a guarantee obligation only upon the transfer of PCs or Structured Securities that
qualiÑed for sale accounting pursuant to SFAS 125/140. (We continue to record guarantee obligations for
50
Freddie Mac
these sales.) Consequently, the size of our guarantee obligation subject to this accounting was larger in 2004
and 2003 as compared with 2002. Compensation for this obligation is received in the form of upfront fees
(credit and buy-down fees) and contractual guarantee fees received over time. Credit and buy-down fees
received prior to 2003 were included in Other liabilities on our consolidated balance sheets and amortized into
income as a component of Management and guarantee fee income. In 2003, we began amortizing these items
and the initial recorded value of our guarantee obligation into Income on ""Guarantee obligation for
Participation CertiÑcates'' based on actual payment experience on the underlying mortgage loans, which we
refer to as the Declining Unpaid Principal Balance Method. Prior to 2003, we marked our guarantee obligation
to fair value at the end of each period.
Table 22 summarizes the income for the years ended December 31, 2004 and 2003 on guarantee
obligation. In 2002, we accounted for the guarantee obligation at fair value. See ""Table 23 Ì Attribution of
Change Ì Guarantee Obligation for 2002'' for an attribution of the changes in fair value of the guarantee
obligation in 2002.
Table 22 Ì Income on Guarantee Obligation for 2004 and 2003
Year Ended
December 31, 2004
Year Ended
December 31, 2003
(dollars in millions)
Amortization income related to:
Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Initial fair value of contractual guarantee fees(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏ
Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liquidation rate for outstanding PCs and Structured Securities(2) ÏÏÏÏ
$ 128
604
$ 732
$4,065
$
57
868
$ 925
$2,904
29%
63%
(1) The initial fair value of contractual guarantee fees is the equivalent of our Guarantee asset for Participation CertiÑcates, at fair value.
(2) Related to outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and
investments portfolio).
Income on ""Guarantee obligation for Participation CertiÑcates'' totaled $732 million, $925 million and
$592 million in 2004, 2003 and 2002, respectively.
In 2004, our Guarantee obligation for Participation CertiÑcates on our consolidated balance sheets
increased, but our Income on ""Guarantee obligation for Participation CertiÑcates'' decreased from $925 mil-
lion to $732 million because liquidations slowed during 2004 compared to 2003. The full-year annualized
liquidation rate for our Outstanding PCs and Structured Securities was 29 percent in 2004 as compared to
63 percent in 2003, which resulted in lower amortization under the Declining Unpaid Principal Balance
Method in 2004 compared to 2003.
Amortization of credit fees and buy downs increased $71 million during 2004 due to increased balances
and a full year of amortization. See ""Table 24 Ì Quarterly and Annual Income on Guarantee Obligation for
2004 and 2003'' for more information. In 2003, an increase in the balance of guarantee obligation, combined
with a 63 percent annualized liquidation rate on outstanding PCs and Structured Securities, resulted in
$925 million of income recognized on the amortization of our guarantee obligation.
Prior to January 1, 2003, we marked our guarantee obligation to fair value through earnings and, after
that date, we began amortizing the initial balance of such guarantee obligations through Income on
""Guarantee obligation for Participation CertiÑcates'' based on the Declining Unpaid Principal Balance
Method. Accordingly, the 2002 Income on ""Guarantee obligation for Participation CertiÑcates'' must be
analyzed separately (see ""Table 23 Ì Attribution of Change Ì Guarantee Obligation for 2002'').
Table 23 summarizes the attribution of changes in the fair value of the guarantee obligation for 2002. The
guarantee obligation for 2002 was established at its initial fair value, which is determined by estimating the
amount and timing of cash Öows related to the guarantee obligation. Factors in determining the fair value of
the guarantee obligation include expectations about house price appreciation, interest rates, default rates, loan
prepayment rates and other economic factors that inÖuence expected credit losses and expected income
51
Freddie Mac
earned on mortgage principal and interest payments held in our cash and investments portfolio pending
remittance to PC investors. See ""Table 37 Ì Changes in Guarantee Obligation for Participation CertiÑcates''
in ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Guarantee Obligation for Participation Cer-
tiÑcates'' for additional information about the guarantee obligation.
Table 23 Ì Attribution of Change Ì Guarantee Obligation for 2002 (2004 and 2003 Income on Guarantee
Obligation is described in Table 22)
Total cash Öows paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Portion of cash Öows paid related to imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash paid representing reduction of guarantee obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on ""Guarantee obligation for Participation CertiÑcates''ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
Fair Value
(dollars in millions)
$422
(64)
358
234
$592
Table 24 summarizes the 2004 and 2003 quarterly and annual income on guarantee obligation.
Table 24 Ì Quarterly and Annual Income on Guarantee Obligation for 2004 and 2003
1Q 2004
2Q 2004
3Q 2004
(dollars in millions)
4Q 2004
Year Ended
December 31, 2004
Amortization income related to:
Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏ
Initial fair value of contractual guarantee fees
$
23
128
$
37
194
$
28
129
$
40
153
$ 128
604
Income on ""Guarantee obligation for
Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 151
$ 231
$ 157
$ 193
$ 732
Guarantee obligation for Participation
CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,241
$3,557
$3,727
$4,065
$4,065
Liquidation rate for Outstanding PCs and
Structured Securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
30%
36%
22%
25%
29%
1Q 2003
2Q 2003
3Q 2003
(dollars in millions)
4Q 2003
Year Ended
December 31, 2003
Amortization income related to:
Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏ
Initial fair value of contractual guarantee fees
$ Ì $
235
10
255
$
25
276
$
22
102
$
57
868
Income on ""Guarantee obligation for
Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 235
$ 265
$ 301
$ 124
$ 925
Guarantee obligation for Participation
CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,655
$1,956
$2,385
$2,904
$2,904
Liquidation rate for Outstanding PCs and
Structured Securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
65%
81%
80%
31%
63%
(1) Related to Outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and
investments portfolio.)
Quarterly Öuctuations in Guarantee obligation for Participation CertiÑcates during 2004 and 2003 are the
result of two factors: (a) the increase in the balance of our guarantee obligation subsequent to our adoption of
FIN 45 on January 1, 2003 and (b) Öuctuations in the rate of amortization under the Declining Unpaid
Principal Balance Method, which is driven by the liquidation rate for outstanding PCs and Structured
Securities. During this period, the annualized liquidation rate reached a high of 81 percent in the second
quarter of 2003 and fell to a low of 22 percent in the third quarter of 2004.
52
Freddie Mac
Derivative Gains (Losses)
Derivative gains (losses) represents the change in fair value of derivatives not accounted for in hedge
accounting relationships because the derivatives did not qualify for, or we did not elect to pursue, hedge
accounting, resulting in fair value changes being recorded to earnings. Derivative gains (losses) also includes
the accrual of periodic settlements for derivatives that are not in hedge accounting relationships. Although
derivatives are an important aspect of our management of interest-rate risk, they will generally increase the
volatility of reported net income, particularly when they are not accounted for in hedge accounting
relationships.
We generally use interest-rate swaps to mitigate contractual funding mismatches between our assets and
liabilities. A receive-Ñxed swap results in our receipt of a Ñxed interest-rate payment from our counterparty in
exchange for a variable rate payment to the counterparty. Conversely, a pay-Ñxed swap requires us to make a
Ñxed interest-rate payment in exchange for a variable rate payment. Call and put swaptions are options to
enter into receive- and pay-Ñxed interest-rate swaps, respectively. We use swaptions and other option-based
derivatives to adjust the contractual funding of our debt in response to changes in the expected lives of assets
in the Retained portfolio. Mortgage borrowers generally have the right to prepay their mortgages prior to
contractual maturity, and this prepayment option is sensitive to changes in interest rates.
Derivatives that are not in qualifying hedge accounting relationships generally increase the volatility of
reported Non-interest income (loss) because they are marked to fair value through earnings without the
oÅsetting change in value of the economically hedged exposures also being recognized in earnings. The fair
value of receive- and pay-Ñxed interest-rate swaps is primarily driven by changes in interest rates. Generally,
receive-Ñxed swaps increase in value and pay-Ñxed swaps decrease in value when interest rates decrease (and
the opposite being true when interest rates increase). The fair value of purchased call and put swaptions is
sensitive to changes in interest rates in a directionally similar manner to receive- and pay-Ñxed swaps,
respectively. Swaption values are also driven by the market's expectation of potential changes in future interest
rates (referred to as ""implied volatility''). Swaptions generally become more valuable as implied volatility
increases and less valuable as implied volatility decreases. Recognized losses on these purchased options in any
given period are limited to the premium paid to purchase the option plus any unrealized gains previously
recorded.
53
Freddie Mac
Table 25 provides a summary of our derivatives by hedge accounting designation at December 31, 2003
and 2004, respectively.
Table 25 Ì Derivatives by Hedge Accounting Designation
Notional Amount
(dollars in billions)
$1,200
$1,000
$800
$600
$400
$200
$1,084
$146 (13%)
$142 (13%)
$757
$113 (15%)
$21 (3%)
$796 (74%)
$623 (82%)
December 31, 2003
December 31, 2004
No hedge designation
Cash flow hedges
Fair value hedges
The notional balance of our derivative portfolio declined to $756.8 billion at December 31, 2004 from
$1,083.9 billion at December 31, 2003, driven by a reduction in the notional balance of option-based
derivatives, interest-rate swaps and commitments. Several factors contributed to the reduction in the notional
amounts of our derivatives during 2004. The asset mix in the Retained portfolio has moved toward a greater
proportion of non-agency, Öoating-rate mortgage-related securities, which generally require lower interest-rate
protection than Ñxed-rate products. Also, the gradual increase in market interest rates and the Öattening of the
yield curve in 2004 have reduced the interest-rate risk of our existing Ñxed-rate investments, thereby lowering
our need for option-based derivatives to manage the related risk. During 2004, we also oÅset a portion of the
optionality risk in the Retained portfolio by increasing the amount of our callable debt outstanding.
The notional balance of option-based derivatives declined by $127.2 billion as a result of adjusting the
options portfolio for risk management purposes in response to changes in market conditions and mortgage
portfolio composition. The notional balance of interest-rate swaps declined by $108.9 billion primarily as a
result of the termination of certain oÅsetting positions prior to their contractual maturity. The notional balance
of commitments declined by $56.6 billion, primarily as the result of a reduction in commitments related to the
Cash and investments portfolio as we ceased the PC market-making and support activities conducted through
our Securities Sales & Trading Group business unit during the fourth quarter of 2004.
EÅective as of the beginning of the second quarter of 2004, we determined that substantially all pay-Ñxed
interest-rate swaps and other derivatives that previously had been in cash Öow hedge accounting relationships
no longer met the hedge accounting requirements of SFAS 133. Consequently, we discontinued hedge
accounting treatment for these relationships for Ñnancial reporting purposes at that time resulting in pay-Ñxed
54
Freddie Mac
swaps with a notional balance of approximately $108 billion being moved from the cash Öow hedge designation
to no hedge designation. We also voluntarily discontinued hedge accounting treatment for a signiÑcant amount
of our receive-Ñxed interest-rate swaps eÅective November 1, 2004, resulting in receive-Ñxed interest-rate
swaps with a notional balance of approximately $50 billion being moved from a fair value hedge designation to
no hedge designation. We believe that the voluntary discontinuance of hedge accounting treatment for
receive-Ñxed swaps will assist us in addressing the period-to-period volatility of the value of our no hedge
designation derivatives, and will help us reduce the operational complexity and related control remediation
eÅorts that would otherwise be needed to ensure ongoing compliance with the requirements for obtaining and
maintaining hedge accounting treatment. We may consider implementing new hedge accounting strategies in
the future.
Table 26 provides a quarterly summary of our period-end notional amounts of receive- and pay-Ñxed
swaps by hedge accounting categories for 2004 and 2003.
Table 26 Ì Notional Amounts of Receive- and Pay-Fixed Swaps(1)
June 30, 2004
March 31, 2004
September 30, 2004
December 31, 2004
Description
Receive-Ñxed swaps:
Notional % of Total Notional % of Total Notional % of Total Notional % of Total
(dollars in billions)
Fair value hedgeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(2) ÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$113.0
0.8
$113.8
99% $ 97.6
0.7
1
100% $ 98.3
99% $127.2
2.7
1
100% $129.9
Pay-Ñxed swaps:
Cash Öow hedge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(2) ÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$107.8
29.7
$137.5
78% $ Ì
22
156.1
100% $156.1
Ì% $ Ì
100
150.1
100% $150.1
98%
2
100%
Ì%
100
100%
$58.0
25.6
$83.6
$ Ì
95.0
$95.0
69%
31
100%
Ì%
100
100%
Description
Notional % of Total Notional % of Total Notional % of Total Notional % of Total
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003
(dollars in billions)
Receive-Ñxed swaps:
Fair value hedgeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(2) ÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 89.1
52.6
$141.7
63% $ 92.2
37
24.0
100% $116.2
79% $ 81.5
21
31.5
100% $113.0
72% $ 93.5
13.8
28
100% $107.3
Pay-Ñxed swaps:
Cash Öow hedge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(2) ÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 90.0
28.9
$118.9
76% $ 98.1
24
60.5
100% $158.6
62% $149.8
38
57.8
100% $207.6
72% $132.0
47.1
28
100% $179.1
87%
13
100%
74%
26
100%
(1) Excludes swaps held as part of our external Money Manager program. As previously disclosed in our Information Statement
Supplement dated October 4, 2004, we ceased our PC market-making and support activities accomplished through our external
Money Manager program during the fourth quarter of 2004.
(2) For more information concerning all of our derivatives that are classiÑed as no hedge designation, see ""Table 27 Ì Derivatives Not
in Hedge Accounting Relationships.''
55
Freddie Mac
Table 27 provides a quarterly and full year summary of the period-end notional amounts and gains and
losses related to swaps, swaptions and other derivatives that we used to manage interest-rate risk but were not
accounted for in hedge accounting relationships for 2004 and 2003.
Table 27 Ì Derivatives Not in Hedge Accounting Relationships
1Q 2004
2Q 2004
3Q 2004
4Q 2004
Year Ended
December 31, 2004
Derivative
Gains
(Losses)
$2.7
(1.2)
(0.1)
(1.2)
0.1
0.3
Ì
(0.2)
(0.2)
$0.1
Notional
$226.4
88.7
0.7
156.1
379.8
851.7
$851.7
Derivative
Gains
(Losses)
Derivative
Gains
(Losses)
Notional
(dollars in billions)
$(5.0)
1.0
(0.1)
5.7
(0.6)
1.0
Ì
(0.6)
(0.6)
$ 0.4
$207.1
70.8
2.7
150.1
436.3
867.0
$867.0
$ 3.1
(1.1)
Ì
(5.0)
Ì
(3.0)
Ì
(0.6)
(0.6)
$(3.6)
Notional
$189.9
25.2
25.6
95.0
286.8
622.5
$622.5
Notional
$223.5
128.7
0.8
29.7
442.6
825.3
$825.3
Call swaptions ÏÏÏÏÏ
Put swaptionsÏÏÏÏÏÏ
Receive-Ñxed swaps
Pay-Ñxed swaps ÏÏÏÏ
Other(1)ÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏ
Accrual of periodic
settlements:
Receive-Ñxed
swaps ÏÏÏÏÏÏÏÏ
Pay-Ñxed swaps ÏÏ
Subtotal ÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏ
Derivative
Gains
(Losses)
Derivative Gains
(Losses)
$(0.4)
(0.1)
(0.2)
(0.4)
Ì
(1.1)
0.1
(0.4)
(0.3)
$(1.4)
$ 0.4
(1.4)
(0.4)
(0.9)
(0.5)
(2.8)
0.1
(1.8)
(1.7)
$(4.5)
1Q 2003
2Q 2003
3Q 2003
4Q 2003
Year Ended
December 31, 2003
Derivative
Gains
(Losses)
Notional
Notional
Derivative
Gains
(Losses)
Derivative
Gains
(Losses)
Notional
(dollars in billions)
Derivative
Gains
(Losses)
Notional
Derivative Gains
(Losses)
Call swaptions ÏÏÏÏÏ
Put swaptionsÏÏÏÏÏÏ
Receive-Ñxed
swaps(2)ÏÏÏÏÏÏÏÏÏ
Pay-Ñxed swaps ÏÏÏÏ
Other(1)(2)(3)ÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏ
Accrual of periodic
settlements ÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏ
$153.4
134.5
$0.3
(0.3)
$167.8
155.6
52.6
28.9
553.6
923.0
$923.0
0.2
0.2
0.6
1.0
(0.1)
$0.9
24.0
60.5
572.7
980.6
$980.6
$3.1
(0.3)
0.6
(0.4)
0.7
3.7
(0.2)
$3.5
$173.8
146.3
$(3.1)
0.3
$216.9
123.1
$(0.9)
Ì
31.5
57.8
487.7
897.1
$897.1
(0.5)
2.1
(1.5)
(2.7)
(0.4)
$(3.1)
13.8
47.1
395.4
796.3
$796.3
(0.5)
0.9
(0.5)
(1.0)
(0.3)
$(1.3)
$(0.6)
(0.3)
(0.2)
2.8
(0.7)
1.0
(1.0)
$ Ì
(1) Other consists of basis swaps, certain option-based contracts, futures, foreign-currency swaps, commitments, derivatives held as part
of our external Money Manager program and other derivatives not accounted for in hedge accounting relationships, including a
prepayment management agreement and credit derivatives.
(2) We reclassiÑed the notional amounts of certain foreign-currency swaps from Receive-Ñxed swaps to Other to conform with the 2004
presentation.
(3) Subsequent to the issuance of our Information Statement dated September 24, 2004, we increased the December 31, 2003 notional
amounts of commitments and swap guarantee derivatives that are subject to the requirements of SFAS 133 and SFAS 149 and are
not in hedge accounting relationships by $200 million and $31 million, respectively. The net eÅect of these changes was an increase
to the notional amount for no hedge designation to $796.3 billion from $796.0 billion at December 31, 2003. Also, subsequent to the
issuance of our Information Statement Supplement dated March 31, 2005, we revised the notional amounts of written options and
swap guarantee derivatives that are not in hedge accounting relationships for the following periods: (a) reduced 1Q 2003 notional
amount of written options by $708 million, (b) reduced 1Q 2004 notional amount of written options by $216 million, (c) reduced 4Q
2004 notional amount of written options by $134 million and increased 4Q 2004 notional amount of swap guarantee derivatives by
$13 million. The net eÅect of these changes were decreases to the notional amounts for no hedge designation to $923.0 billion from
$923.7 billion at March 31, 2003, to $825.3 billion from $825.5 billion at March 31, 2004 and to $622.5 billion from $622.6 billion at
December 31, 2004. The net eÅect of these changes on fair value and on Derivative gains (losses) was immaterial.
Derivative gains (losses) totaled ($4,475) million, $39 million, and $5,302 million in 2004, 2003 and
2002, respectively. As discussed previously, this Ñnancial statement caption is aÅected by the change in the
fair value of derivatives as well as the accrual of periodic settlements in accordance with the contractual terms
of all derivatives not in hedge accounting relationships. There was signiÑcant volatility in the quarterly results
due to changes in the fair values of our derivatives and changes in the composition of our portfolio of
derivatives not in hedge accounting relationships. In addition, the notional balance of our pay-Ñxed swaps not
56
Freddie Mac
in hedge accounting relationships increased signiÑcantly during the second quarter of 2004, and the notional
balance of our receive-Ñxed swaps not in hedge accounting relationships increased signiÑcantly during the
fourth quarter of 2004.
Changes in the fair value of our pay-Ñxed and receive-Ñxed interest-rate swaps are primarily driven by
changes in interest rates. Generally, the fair value of our interest-rate swaps is aÅected by changes in long-
term spot swap rates or, if our interest-rate swaps are forward-starting, long-term forward swap rates. Forward-
starting swaps represent interest-rate swap agreements scheduled to begin on a future date. During 2004,
signiÑcant portions of our swaps not in hedge accounting relationships were forward-starting.
Both spot and forward swap rates were volatile during the year causing signiÑcant changes in the fair
values of our interest rate swaps. Generally, these rates moved in tandem, however, in the fourth quarter of
2004 forward rates declined, ending the year lower than the prior year end, whereas spot rates increased,
ending the year at roughly the same level as the prior year end.
During 2004, net losses on our pay-Ñxed swap portfolio were driven by the overall decline in forward rates.
As shown in Table 27, our pay-Ñxed swap positions experienced net gains of $5.7 billion during the second
quarter of 2004 as spot rates increased from the prior quarter end. However, our pay-Ñxed swap positions
experienced losses of ($5.0) billion in the third quarter of 2004 as spot rates decreased from the prior quarter
end. In the fourth quarter of 2004, we experienced net losses on our forward starting pay-Ñxed swaps as
forward rates declined, partially oÅset by the eÅect of an increase in spot rates which aÅect our current starting
swaps. Our receive-Ñxed swap positions, which generally lose value with increases in interest rates,
experienced net losses during 2004 related primarily to increases in spot rates during the last two months of the
fourth quarter.
In addition, during 2004, there were net losses on our call and put swaption positions as the fair values of
these positions were driven by changes in swap rates and the decline in implied volatilities of interest rates
during the year. Our net swaption position resulted in net gains during the Ñrst and third quarters of 2004
driven by gains in call swaptions due to the decline in swap rates from the prior quarter ends. Our net swaption
position resulted in net losses of ($4.0) billion during the second quarter of 2004 driven by losses in call
swaptions as swap rates increased from the prior quarter end and implied volatilities of interest rates declined.
In the fourth quarter of 2004, our net swaption position resulted in net losses as implied volatilities of interest
rates declined.
The movement of the pay-Ñxed and receive-Ñxed swaps to no hedge designation during 2004 was the
primary driver of the increase in the accrual of periodic settlements (presented in Table 27 above) recorded in
derivative gains (losses) as compared to 2003. Had these pay-Ñxed and receive-Ñxed swaps remained in hedge
accounting relationships, the related accrual of periodic settlements would have been reported as a component
of Net interest income (loss). The increase in the notional balance of our pay-Ñxed swaps not in hedge
accounting relationships contributed to the $0.4 billion increase in the net expense associated with the accrual
of periodic settlements in the second quarter of 2004 as compared to the Ñrst quarter of 2004. This expense
continued to be high in the third and fourth quarters of 2004, but began to be partially oÅset by the accrual of
periodic settlements related to the receive-Ñxed swaps, which were moved to no hedge designation during the
fourth quarter of 2004.
Derivative gains (losses) Öuctuated signiÑcantly during 2003 due to the decrease in interest rates during
the Ñrst half of 2003 versus an increase in interest rates during the third quarter of 2003. During the second
quarter of 2003, derivative gains of $3.5 billion were primarily driven by a $3.1 billion gain in the value of call
swaptions, which was due to interest rate declines during the quarter. As interest rates increased during the
third quarter of 2003, our call swaptions declined in value by ($3.1) billion and we incurred ($1.4) billion of
losses on commitments to purchase or sell mortgages and mortgage-related securities. These losses were
partially oÅset by $2.1 billion in gains on pay-Ñxed swaps.
During 2002, derivative gains (losses) were largest in the third quarter when the gains totaled $6.3 billion.
This third quarter gain in 2002 was driven by a $4.8 billion gain on call swaptions, net of losses on put
swaptions and a $1.3 billion gain on receive-Ñxed swaps, net of losses on pay-Ñxed swaps. The decrease in
interest rates in the third quarter of 2002 increased the fair value of the interest-rate swaps underlying the call
57
Freddie Mac
swaptions, which combined with the increase in the implied volatility of interest rates, resulted in a signiÑcant
increase in the value of the call swaptions. While increases in implied volatility also have a favorable eÅect on
the value of put swaptions, the decrease in fair value of the underlying pay-Ñxed interest-rate swaps due to the
decrease in interest rates resulted in a net decrease in the fair value of these swaptions during 2002.
Hedge Accounting Gains (Losses)
For those derivatives that are accounted for in a hedge accounting relationship, hedge accounting
ineÅectiveness generally arises when the fair value change of a derivative Ñnancial instrument does not exactly
oÅset the fair value change of the hedged item. Our hedge accounting relationships primarily consist of
derivatives linked to either existing debt in a fair value hedge accounting relationship or the variability of
interest payments on the forecasted issuances of debt securities in a cash Öow hedge accounting relationship.
Hedge accounting gains were $743 million, $644 million and $187 million in 2004, 2003 and 2002,
respectively. Hedge ineÅectiveness in these years related primarily to our fair value hedge accounting
relationships. Hedge accounting gains (losses) will vary from period to period based on the notional amount of
derivatives accounted for in hedge accounting relationships and the extent to which diÅerences in the
characteristics or terms of the derivative and the hedged item result in fair value or cash Öow changes that are
not exactly oÅset. For example, a signiÑcant portion of derivatives in our fair value hedges is forward starting
and valued using forward rates while the hedged debt is valued using spot rates. Therefore, the diÅerence
between the spot rate and the forward rate generally produces ineÅectiveness in these fair value hedges, which
is recognized in this caption.
Gains (Losses) on Investment Activity
Gains (losses) on investment activity include gains and losses on certain assets and liabilities marked to
fair value through earnings. Also included are gains and losses related to sales, impairments and other
valuation adjustments.
Table 28 summarizes the components of Gains (losses) on investment activity for 2004, 2003 and 2002.
Table 28 Ì Gains (Losses) on Investment Activity
2004
Year Ended December 31,
2003
(dollars in millions)
2002
Gains (losses) on trading securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,071)
58
Gains (losses) on PC residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on sale of mortgage loans and available-for-sale securities(1)
793
Security impairments:
Mortgage-related interest-only security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total security impairments(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lower-of-cost-or-market valuation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(66)
(60)
(126)
(2)
Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (348)
$(1,606)
(144)
1,551
$ 921
(438)
1,958
(524)
(212)
(736)
(179)
$(1,114)
(568)
(82)
(650)
8
$1,799
(1) We reclassiÑed $524 million for full year 2003 from Gains (losses) on sale of mortgage loans and available-for-sale securities to
Gains (losses) on trading securities to conform with the 2004 presentation.
(2) Includes impairments on securities classiÑed as available-for-sale and trading. Impairments relating to securities within the scope of
Emerging Issues Task Force Issue 99-20, ""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial
Interests in Securitized Financial Assets,'' are calculated and recorded for both available-for-sale and trading securities.
Gains (Losses) on Trading Securities were ($1,071) million, ($1,606) million and $921 million in 2004,
2003 and 2002, respectively. Gains (losses) on securities we hold that are classiÑed for accounting purposes as
trading represent changes in the fair value of our trading positions, which include trading securities held,
certain forward commitments to purchase or sell trading securities, and Treasury and agency debt security
""short sale'' transactions (also referred to as ""securities sold, not yet purchased'') executed for asset/liability
management purposes. Historically, our trading positions arose primarily in connection with our Securities
58
Freddie Mac
Sales & Trading Group business unit, which ceased operations in the fourth quarter of 2004. To a lesser
degree, our trading positions also included certain securities held in the Retained portfolio and in the Cash and
investments portfolio. Our securities classiÑed as trading, excluding Participation CertiÑcates residuals and
guarantee assets, totaled $11.8 billion and $52.3 billion at December 31, 2004 and 2003, respectively.
Entering 2003, our trading portfolio consisted of mortgage-related securities that were in unrealized gain
positions because the average coupon rates of the securities were relatively high. The portfolio experienced
losses because these securities experienced signiÑcant prepayments during the Ñrst half of 2003 as interest
rates fell. In addition, during the third and fourth quarters of 2003 the portfolio experienced losses as rising
interest rates decreased the value of investments. In 2002, trading gains beneÑted from the decline in interest
rates during the year.
Gains (Losses) on PC Residuals were $58 million, ($144) million and ($438) million in 2004, 2003 and
2002, respectively. PC residuals relate to certain PCs and Structured Securities we hold and represent the fair
value of the future cash Öows of guarantee contracts that speciÑcally correspond to such PCs or Structured
Securities. Our estimates of the related cash Öows are impacted by several factors including changes in interest
rates, which aÅect the expected lives of the related PCs and Structured Securities, and changes in our default
experience and loss severity trends related to the underlying guarantee contracts. PC residuals that are
classiÑed as trading securities are marked to fair value as a component of Gains (losses) on investment
activity.
In 2004, we experienced a net increase in the fair value of PC residuals due to smaller decreases in
interest rates as compared to 2003 and reductions in expected default costs related to the mortgage collateral
underlying PCs held in the Retained portfolio due to continued house price appreciation. In 2003, losses on
PC residuals decreased compared with 2002 due to a smaller overall decline in mortgage interest rates
experienced during the year. In addition, the proportion of PCs and Structured Securities we held that had a
recognized PC residual associated with them increased to 72 percent in 2003 from 38 percent in 2002 due to
the adoption of FIN 45, together with an increase in the amount of Retained portfolio purchase activity.
Realization of cash Öows and decreases in interest rates, which reduced the expected lives of the associated
securities, accounted for the reported loss in 2002.
Gains (Losses) on Sale of Mortgage Loans and Available-for-Sale Securities were $793 million,
$1,551 million and $1,958 million in 2004, 2003 and 2002, respectively. Net gains declined during 2004 from
2003 levels primarily due to a decrease in the volume of transfers of PCs and Structured Securities that
qualiÑed as sales under SFAS 125/140. We issued 49 percent fewer PCs and Structured Securities (in terms
of unpaid principal balance) during 2004 than we issued during 2003, with roughly the same proportion of
these issuances resulting in a gain (loss) on sale of the underlying mortgage loans during each year.
The increased gains on the sale of mortgage loans and available-for-sale securities during 2003 compared
to 2002 were primarily attributable to the increasing volume of sales of PCs and Structured Securities in these
years, as well as sales of Treasury and agency debt securities originally purchased for asset/liability
management purposes during 2003.
Security Impairments were ($126) million, ($736) million and ($650) million in 2004, 2003 and 2002,
respectively. We record impairment losses on our investment portfolio when we have concluded that a
decrease in the fair value of a security is other than temporary. Impairment losses recognized in 2004, 2003
and 2002 were primarily related to certain investments in mortgage-related interest-only securities and
manufactured housing securities.
Impairment losses on mortgage-related interest-only securities totaled ($66) million, ($524) million and
($568) million during 2004, 2003 and 2002, respectively. GAAP requires the cost basis of a mortgage-related
interest-only security to be written down to fair value when there is both a decline in fair value below the
carrying amount and an adverse change in expected cash Öows. Decreasing interest rates cause our estimates
of the lives of these securities to shorten. As a result, the expected cash Öows from mortgage-related interest-
only securities decrease along with the fair value of these securities.
Impairments related to our mortgage-related interest-only securities were lower during 2004 than in prior
years because (a) the interest-rate environment in 2004 was less volatile than in prior years, causing the fair
59
Freddie Mac
value of these securities to remain more stable, (b) the carrying value of our mortgage-related interest-only
securities was reduced by impairments taken in prior years and (c) the balance subject to impairment
declined because we purchased fewer of these securities during 2004 compared to prior years. During the Ñrst
half of 2003, interest rates continued to decline from 2002 levels resulting in an increase in prepayments and,
in turn, a higher level of impairment losses than in the prior year. In 2003, interest rates decreased sharply
during the Ñrst and second quarters; as a result, the large majority of the 2003 mortgage-related interest-only
securities impairment losses were recognized in those quarters. As interest rates began to rise in the third and
fourth quarters of 2003, impairment losses recognized were greatly reduced. The large mortgage-related
interest-only security impairment losses during 2002 relate to the decline in interest rates.
Impairments recorded on non-interest-only securities totaled ($60) million, ($212) million and ($82)
million in 2004, 2003 and 2002, respectively, including impairments on manufactured housing securities
totaling ($44) million, ($208) million and ($67) million during the same periods as a result of the
comparatively low credit quality of these securities. See ""CONSOLIDATED BALANCE SHEETS
ANALYSIS Ì Cash and Investments'' for more information about our non-agency, mortgage-related
securities at December 31, 2004 and 2003. Also see ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES'' to our consolidated Ñnancial statements.
Lower-of-Cost-or-Market Valuation Adjustments were ($2) million, ($179) million and $8 million in
2004, 2003 and 2002, respectively. We record mortgage loans classiÑed as held-for-sale at the lower-of-
amortized-cost or market valuation with changes in the valuation of our held-for-sale portfolio recorded to this
caption. Losses related to the lower of amortized cost or market value adjustments were insigniÑcant during
2004 and 2002. The sharp decline in mortgage interest rates in the second quarter of 2003 resulted in an
increase in mortgage loans purchased as the market experienced heavy reÑnancing activity. A sharp increase
in mortgage interest rates during the third quarter of 2003 reduced the value of our held-for-sale mortgage
loan portfolio, resulting in lower of amortized cost or market valuation adjustments that totaled ($178)
million.
Gains (Losses) on Debt Retirement
We record gains and losses on debt repurchases that are accounted for as extinguishments of debt based
on the diÅerence between the principal amount of the debt securities repurchased (adjusted for deferred
premiums, discounts, and hedging gains and losses) and current market prices, and the write-oÅ of related
deferred debt issuance costs.
We incurred pre-tax losses of ($327) million, ($1,775) million and ($674) million on the repurchase of
approximately $14.5 billion, $27.3 billion and $20.3 billion in principal amount of debt outstanding in 2004,
2003 and 2002, respectively. The most signiÑcant debt repurchases occurred in the second quarter of 2003,
resulting in pre-tax losses of ($1,266) million, when we repurchased an aggregate of $17.1 billion of U.S.
dollar and Euro-denominated debt securities, most of which followed the announcement of changes in our
senior management. We executed these particular repurchases to support the liquidity and price performance
of these securities. The gains (losses) on debt extinguishments include amounts previously deferred under
SFAS 133 hedge accounting related to the repurchased debt securities.
Resecuritization Fees
Resecuritization fees are revenues we earn primarily in connection with the issuance of Structured
Securities for which we make a REMIC election, where the underlying collateral is provided by third parties.
These fees are also generated in connection with the creation of interest-only and principal-only strips as well
as other Structured Securities.
Resecuritization fees totaled $159 million, $352 million and $276 million in 2004, 2003 and 2002,
respectively. A steep yield curve generally increases the value of structured cash Öows, which results in greater
value diÅerences between PCs and Structured Securities as well as a corresponding increase in the volume of
new Structured Securities being issued. As the yield curve Öattened during 2004 and investor demand for
Structured Securities decreased, we experienced a 28 percent decline in the volume of Structured Securitiza-
tion activities based on unpaid principal balances compared to 2003. In addition, we decreased our average
60
Freddie Mac
fees to perform resecuritizations during 2004 in response to competitive pressures and to support the price of
our PCs, which represent most of the collateral that we resecuritize. Investors' demand for Structured
Securities remained high during 2003 and 2002 largely due to the comparatively steep yield curve during those
periods.
Other Income
Other income primarily consists of fees associated with servicing and technology-related programs,
including Loan Prospector», various fees related to multifamily loans (including application and other fees)
and various other fees received from mortgage originators and servicers. In 2004 and 2003, other income also
includes the correction of certain prior year accounting errors.
Other income totaled $230 million, $493 million and $321 million in 2004, 2003 and 2002, respectively.
Absent the Öuctuations related to the correction of certain prior year accounting errors in the Ñrst quarters of
2004 and 2003 (discussed in more detail below), Other income would have been $172 million and
$279 million in 2004 and 2003, respectively. We experienced a modest decline in fees earned associated with
Loan Prospector», our automated loan-underwriting tool, which was driven by lower usage of this tool.
In the process of reviewing our accounting policies and practices for 2004 and 2003, we identiÑed certain
errors not material to the Ñnancial statements that resulted in a cumulative net understatement of income in
previously reported periods. During 2004, we identiÑed approximately $58 million of income, net ($38 million
after-tax) of such errors aÅecting 2003 and prior periods that we recorded in the Ñrst quarter of 2004 as a
component of Other income. During 2003, we identiÑed approximately $214 million of income, net
($139 million after-tax) attributable to such errors aÅecting 2002 and prior periods that we recorded in the
Ñrst quarter of 2003 as a component of Other income.
Non-Interest Expense
Table 29 summarizes Non-interest expense for 2004, 2003 and 2002.
Table 29 Ì Non-Interest Expense
2004 vs. 2003
Year Ended
December 31,
2004
2003
2003 vs. 2002
Year Ended
December 31,
Change
(dollars in millions)
2002
Change
Non-interest expense
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Provision) beneÑt for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏ
REO operations income (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Housing tax credit partnershipsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (758)
(588)
(60)
(144)
(1,550)
(143)
3
(281)
$ (624)
(311)
(52)
(194)
(1,181)
5
(7)
(200)
(129)
(271)
$(2,371)
(157)
(696)
$(2,236)
$(134)
(277)
(8)
50
(369)
(148)
10
(81)
28
425
$(135)
$ (593)
(155)
(42)
(184)
(974)
(122)
(4)
(160)
(184)
(432)
$(1,876)
$ (31)
(156)
(10)
(10)
(207)
127
(3)
(40)
27
(264)
$(360)
Administrative Expenses
Salaries and employee beneÑts, Professional services, Occupancy expense and certain other administra-
tive expenses are collectively referred to as administrative expenses. Administrative expenses are generally
incurred to conduct daily operations and support functions. Also, other administrative expenses include
61
Freddie Mac
amortization expense related to previously capitalized software development costs, net of reductions for
current period capitalized software development costs.
Table 30 summarizes Administrative expenses for 2004, 2003 and 2002.
Table 30 Ì Administrative Expenses
Year Ended December 31,
2003
2004
(dollars in millions)
2002
Administrative expenses:
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional services(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other administrative expenses(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 758
588
60
144
$1,550
$ 624
311
52
194
$1,181
$593
155
42
184
$974
(1) We reclassiÑed certain expenses from Other administrative expenses to Professional services for 2003 and 2002 to conform with the
2004 presentation.
(2) Other charitable contributions are included in Other administrative expenses for 2004, 2003 and 2002. See ""Table 31 Ì Other
Expenses'' for the special charitable contributions made in 2002.
Administrative expenses totaled $1,550 million, $1,181 million and $974 million in 2004, 2003 and 2002,
respectively. Salaries and employee beneÑts rose in each year primarily because we increased the number of
employees. In addition, employee incentive compensation costs increased by approximately $50 million in
2004 over 2003 levels as a result of the increased number of employees and eÅorts to retain key employees
during the restatement period and to attract new employees. We also incurred approximately $18 million of
employee severance and related costs and approximately $5 million of other expenses related to ceasing the
PC market making and support activities of our Securities Sales & Trading Group business unit during the
fourth quarter of 2004. The increase in Professional services expense in 2004 was primarily driven by our
ongoing Ñnancial reporting and internal control remediation activities.
The increase in Salaries and employee beneÑts, Professional services and Other administrative expenses
in 2003 compared to 2002 was primarily driven by costs associated with the restatement. During 2003, we
incurred expenses associated with the restatement totaling $172 million, which consisted of approximately
$149 million of professional services expenses due to increased accounting, auditing, consulting and legal
services; $15 million of compensation costs; and $8 million of other costs.
Other administrative expenses are presented net of certain expenses deferred relating to capitalized
software development activities. The reduction to Other administrative expenses with respect to capitalized
software development was $157 million, $79 million and $57 million in 2004, 2003 and 2002, respectively.
These amounts were oÅset by related amortization expenses and impairments of $63 million, $37 million and
$22 million in 2004, 2003 and 2002, respectively, also recorded in Other administrative expenses. Capitalized
software development costs are amortized over periods of three years or less.
(Provision) BeneÑt for Credit Losses and Real Estate Owned, or REO, Operations Income (Expense)
We collectively refer to our Reserve for losses on mortgage loans held-for-investment and Reserve for
guarantee losses on Participation CertiÑcates as our Loan Loss Reserves. The Provision for credit losses
includes our provision for losses incurred on our mortgage loans held-for-investment, which are a component
of our Retained Portfolio; our provision for incurred losses related to (1) Outstanding PCs and (2) that
portion of Structured Securities held by third parties that are backed by non-Freddie Mac mortgage-related
securities, which are oÅ-balance sheet obligations; and our provision for uncollectible interest on single-family
loans underlying PCs held by third parties. REO operations income (expense) includes certain costs associated
with the acquisition of real estate at the time of foreclosure, gains and losses on the sale of foreclosed
properties we hold, as well as the cost to hold these properties, including real estate taxes, insurance, repairs
and fees incurred to prepare the properties for sale, and a provision for valuation losses occurring between
acquisition and disposition.
62
Freddie Mac
The (Provision) beneÑt for credit losses may be expense or income, depending on whether the Loan Loss
Reserves balance needs to be increased or decreased based on the inherent losses associated with our portfolio
at any time. The (Provision) beneÑt for credit losses increased to ($143) million in 2004 compared to a
beneÑt of $5 million in 2003. The (Provision) beneÑt for credit losses was ($122) million in 2002. The
balance of the Loan Loss Reserves totaled $264 million and $299 million at December 31, 2004 and 2003,
respectively.
The (Provision) beneÑt for credit losses increased in 2004 due to increases in the estimated incurred
losses in the single-family portfolio at December 31, 2004 compared to December 31, 2003, driven by lower
REO fair values and resulting in higher estimated losses on a per property basis in certain areas. However, this
was partially oÅset by a decrease in the estimated incurred losses in the Multifamily mortgage portfolio, driven
primarily by an increase in the estimated fair value of multifamily properties in certain areas. The beneÑt for
credit losses in 2003, as compared to the expense in 2002, resulted from loss mitigation strategies, strong house
price appreciation and recoveries in the single-family portfolio. In addition, the 2002 provision reÖected an
increase in expected losses on multifamily mortgage loans.
REO operations income (expense) totaled $3 million, ($7) million, and $(4) million in 2004, 2003 and
2002, respectively. The 2004 increase in income was largely driven by a gain of $7 million on the sale of a
multifamily property.
Our total credit losses, deÑned as ""Real estate owned operations income (expense)'' plus ""net charge-
oÅs,'' rose slightly in 2004 but were still low, totaling approximately 1.1 basis points of the average Total
mortgage portfolio (after excluding non-Freddie Mac securities). In 2005 we expect credit losses to increase
from their recent levels, but to be low relative to historic levels.
Housing Tax Credit Partnerships
Housing tax credit partnerships represent our share of the losses generated from our investments in
partnerships that develop or rehabilitate low-income, multifamily rental properties. We generally hold
interests in individual partnerships for Ñfteen years. Although these partnerships generate losses, we realize a
return on our investment through reductions in Income tax expense that result from tax credits and the
deductibility of the losses. The tax credits related to our investments in these partnerships are generally
recognized over a ten-year period.
Our share of losses generated from our investment in Housing tax credit partnerships totaled ($281)
million, ($200) million and ($160) million in 2004, 2003 and 2002, respectively. The year-over-year increases
in this expense primarily reÖect our increased investment in such partnerships. The related tax beneÑts, which
are reported as a reduction in Income tax expense, totaled $378 million, $302 million and $220 million in
2004, 2003 and 2002, respectively.
Minority Interest in Earnings of Consolidated Subsidiaries
Minority interest in earnings of consolidated subsidiaries represents the earnings due to third party
investors in our consolidated subsidiaries.
Minority interest in earnings of consolidated subsidiaries totaled ($129) million, ($157) million and
($184) million in 2004, 2003 and 2002, respectively. The majority of this amount for each of 2004, 2003 and
2002 relates to dividends on the preferred stock issued by our two majority-owned real estate investment trust,
or REIT, subsidiaries. These dividends are recorded using an eÅective interest method and, therefore, will
continue to decline over time as our recorded investment in the REITs decreases.
Other Expenses
Other expenses generally include those non-administrative expenses that are direct and incremental to
revenue producing activities (e.g., Loan Prospector» Ì related expenses) or are otherwise not related to
operational support activities.
63
Freddie Mac
Table 31 summarizes Other expenses for 2004, 2003, and 2002.
Table 31 Ì Other Expenses
Other expenses:
Year Ended December 31,
2002
2003
2004
(dollars in millions)
OFHEO civil money penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss contingency expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected aÅordable housing transaction feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized losses on certain guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan Prospector»-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special charitable contributions(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Disposition of certain technology-related assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$ Ì $125
Ì
75
Ì
124
Ì
134
Ì
60
86
99
Ì 225
52
Ì
69
79
$432
$696
Ì
41
86
33
56
Ì
Ì
55
$271
(1) Special charitable contributions represents a cash contribution to the Freddie Mac Foundation and corporate giving programs
announced in the fourth quarter of 2002. The contribution to the Freddie Mac Foundation is expected to provide operating funds for
the Foundation for six to eight years from the contribution date.
(2) We reclassiÑed certain expenses from Other administrative expenses as included in Administrative expenses (see ""Table 30 Ì
Administrative Expenses'' for additional information) to Other for 2003 and 2002 to conform with the 2004 presentation.
Total Other expenses totaled $271 million, $696 million and $432 million in 2004, 2003 and 2002,
respectively.
Total Other expenses in 2003 included two charges that totaled $200 million. First, we paid a
$125 million civil money penalty in connection with the OFHEO consent order, which was accrued in the
second quarter of 2003. Second, we recognized in the second quarter of 2003 a $75 million expense for a loss
contingency reserve related to legal proceedings arising from the restatement. See ""NOTE 13: LEGAL
CONTINGENCIES'' to our consolidated Ñnancial statements for additional information. We also entered
into certain multifamily aÅordable housing transactions during the third and fourth quarters of 2003 that
contained a number of contractual incentives, including the payment of fees totaling $124 million in the third
and fourth quarters of 2003 and $41 million in the Ñrst quarter of 2004.
Total Other expenses also include the amortization of credit enhancements, realized losses related to
certain guarantees as well as other costs associated with our ongoing activities. Beginning in 2003, credit
enhancements are included in Other assets and amortized into Other expenses over time. Amortization
expense related to credit enhancements declined $48 million in 2004 from 2003 levels primarily as a result of
declines in our liquidation rates during 2004 compared to 2003. In 2002, credit enhancements were included in
the carrying value of the guarantee asset and changes in their carrying value were included in Gains
(losses) on ""Guarantee asset for Participation CertiÑcates, at fair value.''
Beginning in 2003, due to the adoption of FIN 45, we began recording guarantee assets and guarantee
obligations at fair value at inception on (i) PCs issued through our Guarantor Program, (ii) that portion of
PCs issued through MultiLender Program transactions that did not qualify as a sale under SFAS 125/140 and
(iii) certain Structured Securities that we issue to third parties in exchange for non-agency mortgage-backed
securities. Consequently, we immediately recognize any excess of the related guarantee obligation over the
guarantee asset and Other assets (that relate to recognized credit enhancements described above) as realized
losses on certain guarantees. Such realized losses decreased $27 million to $33 million in 2004 from
$60 million in 2003 primarily as a result of interest-rate Öuctuations that aÅect our determination of the initial
fair value of the guarantee asset, credit-enhancement asset and guarantee obligation. In 2002, we did not
recognize guarantee assets and obligations related to PCs issued through our Guarantor Program or for that
portion of PCs transferred to third parties in MultiLender Program transactions that did not qualify as sales
under SFAS 125/140. Consequently, we did not recognize a similar expense in 2002.
64
Freddie Mac
Other expenses in 2002 included special charitable contributions of $225 million representing cash
contributions to the Freddie Mac Foundation and corporate giving programs announced in the fourth quarter
of 2002. The contribution to the Freddie Mac Foundation is expected to provide operating funds for the
Foundation for six to eight years from the date of the contribution. Other charitable contributions of
approximately $6 million, $6 million, and $35 million for 2004, 2003, and 2002, respectively, are included
within Other administrative expenses.
In 2002, Other expenses includes a $52 million loss recognized in the fourth quarter of 2002 related to the
disposition of certain technology-related assets.
Income Tax Expense
Income tax expense includes (a) deferred tax expense, which represents the net change in the deferred tax
asset or liability balance during the year plus any change in a valuation allowance, and (b) current tax
expense, which represents the amount of tax currently payable to, or receivable from, a tax authority plus
amounts accrued for expected tax deÑciencies (including both tax and interest). Income tax expense excludes
the tax eÅects related to adjustments recorded to AOCI.
Income tax expense was ($790) million, ($2,202) million and ($4,713) million in 2004, 2003 and 2002,
respectively. The eÅective tax rates for 2004, 2003 and 2002 were 21 percent, 31 percent and 32 percent,
respectively. The decrease in the eÅective tax rate over the past three years, particularly in 2004, is primarily
due to the decline in pre-tax income in relation to year-over-year increases in tax credits related to our
investments in housing tax credit partnerships and interest earned on tax-exempt securities. In addition, our
eÅective tax rate for 2004 beneÑted from a $110 million reduction to our tax reserves as a result of our
reaching a closing agreement with the Internal Revenue Service, or IRS, relating to the tax treatment of
dividends paid on step-down preferred stock issued by our two REIT subsidiaries. For more information
regarding this tax reserve adjustment, see ""SUBSEQUENT ACCOUNTING REVISIONS.'' These eÅects
were partially oÅset by a non-tax deductible ($125) million OFHEO civil money penalty and a ($75) million
loss contingency reserve related to legal proceedings arising from the restatement, that were recorded in the
second quarter of 2003. Our eÅective tax rate for 2002 beneÑted from a reduction to our tax reserve related to
favorable U.S. Tax Court rulings.
65
Freddie Mac
CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 32 provides summary consolidated balance sheets at December 31, 2004 and 2003.
Table 32 Ì Summary Consolidated Balance Sheets
December 31,
2004
2003
(dollars in millions)
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items included in total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items included in total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$664,468
97,280
15,257
4,516
13,763
$795,284
$731,697
4,065
226
26,371
762,359
1,509
31,416
$795,284
$660,357
109,078
16,180
3,686
14,148
$803,449
$739,613
2,904
357
27,159
770,033
1,929
31,487
$803,449
Our total assets remained relatively Öat as of December 31, 2004 compared to December 31, 2003,
declining by $8.2 billion, or 1 percent. This decrease was primarily driven by an $11.8 billion reduction in our
Cash and investments portfolio. During the same period, total liabilities, plus minority interests in consolidated
subsidiaries, decreased by $8.1 billion, which was driven by decreases in total debt securities. These and other
changes in our consolidated balance sheets are discussed below.
Retained Portfolio
The Retained portfolio includes mortgage loans and mortgage-related securities that we acquire for
investment purposes and primarily consists of PCs and Structured Securities and other agency and non-agency
mortgage-related securities.
The carrying value of the Retained portfolio increased by $4.1 billion, or 1 percent, to $664.5 billion as of
December 31, 2004 from $660.4 billion at December 31, 2003. The Retained portfolio unpaid principal
balance (which excludes premiums, discounts, deferred fees and other basis adjustments, the Reserve for
losses on mortgage loans held-for-investment, and unrealized gains or losses on mortgage-related securities
and PC residuals) increased by 1 percent during 2004. Mortgage-related investment opportunities in Ñxed-rate
products were generally not attractive in 2004. Strong demand from other investors, coupled with lower
mortgage loan originations, generally resulted in unattractive mortgage-to-debt option-adjusted spreads. While
Ñxed-rate investment opportunities were relatively less attractive than in 2003, this was mitigated by lower
liquidation rates compared to 2003 and purchases of Öoating rate, non-agency mortgage-related securities.
66
Freddie Mac
Table 33 provides additional detail regarding the mortgage loans and mortgage-related securities that
comprised our Retained portfolio at December 31, 2004 and 2003.
Table 33 Ì Credit Characteristics of Mortgages and Mortgage-Related Securities in the Retained Portfolio
December 31, 2004
December 31, 2003
Amount
% AAA
Rated
Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,360 N/A
PCs and Structured Securities(2) ÏÏÏÏÏÏÏÏÏÏ
356,698 N/A
Non-Freddie Mac mortgage-related
securities:
Agency mortgage-related securities:(3)
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total agency mortgage-related
securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-agency mortgage-related securities:(4)
Single-family and other mortgage-
related securities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial mortgage backed
securities(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage revenue bonds(7) ÏÏÏÏÏÏÏÏÏÏÏ
Manufactured housing(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-agency mortgage-related
58,004 N/A
1,711 N/A
59,715 N/A
123,411
99.2%
41,184
9,077
1,491
100.0
71.5
33.4
securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
175,163
97.4%
% of Total
Retained
Portfolio(1)
Amount
(dollars in millions)
% AAA
Rated
% of Total
Retained
Portfolio(1)
9%
55
$ 60,270 N/A
393,135 N/A
9%
61
9
Ì
9
19
6
2
Ì
27
74,529 N/A
2,760 N/A
77,289 N/A
72,161
99.8%
33,055
7,772
1,784
99.3
77.1
42.0
114,772
97.3%
12
Ì
12
11
5
2
Ì
18
652,936
100%
645,466
100%
Total unpaid principal balance of Retained
portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premiums, discounts, deferred fees and
other basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gains on mortgage-related
securities, pre-taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals at fair
4,039
6,762
value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
845
Reserve for losses on mortgage loans
held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(114)
Total Retained portfolio per consolidated
balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $664,468
4,793
9,601
671
(174)
$660,357
(1) Based on unpaid principal balance.
(2) With respect to our PCs and Structured Securities, we guarantee the payment of principal and interest and are subject to the credit
risk associated with the underlying mortgage loan collateral (or non-agency mortgage-related security collateral, where applicable).
(3) Agency mortgage-related securities are generally not separately rated by credit rating agencies, but are viewed as having a level of
credit quality at least equivalent to non-agency mortgage securities rated ""AAA'' or equivalent.
(4) Credit rating of most non-agency mortgage-related securities is designated by at least two nationally recognized credit rating
agencies.
(5) The ""other'' component of this line item consists of multifamily mortgage-related securities not structured in a commercial mortgage
backed security.
(6) Consists of pools of mortgages collateralized by multifamily, manufactured housing parks, and commercial (oÇce, retail, industrial,
and a smaller percentage of hotel or other) properties.
(7) Consists of obligations of states and political subdivisions.
(8) 43 percent and 84 percent of mortgage-related securities backed by manufactured housing were rated BBB¿ or above at
December 31, 2004 and 2003, respectively. For the same periods, 96 percent and 90 percent of these securities are supported by
credit-enhancements such as deal structure through subordination and bond insurance.
The non-agency mortgage-related securities portion of the Retained portfolio grew from December 31,
2003 to December 31, 2004 in both unpaid principal balance and as a percentage of the total Retained
portfolio. This growth is a result of the strong supply of non-agency mortgage-related securities, particularly
Öoating rate products, combined with the fact that investment opportunities in agency Ñxed-rate products have
67
Freddie Mac
not been as attractive to us because strong demand from other investors, and lower mortgage loan originations,
have generally resulted in unattractive mortgage-to-debt option-adjusted spreads.
Cash and Investments
Cash and investments include investments we acquire to manage recurring cash Öows, provide a source of
liquidity, temporarily deploy capital until the capital can be redeployed into Retained portfolio investments or
credit guarantee business opportunities and manage interest-rate risk exposure.
The carrying value of our Cash and investments portfolio decreased by $11.8 billion, or 11 percent, to
$97.3 billion at December 31, 2004 from $109.1 billion at December 31, 2003. At December 31, 2003, Cash
and investments included certain mortgage-related securities that were not included in the Retained portfolio
since they were acquired in conjunction with the PC market-making and support activities conducted through
our Securities Sales & Trading Group business unit and external Money Manager program, both of which
ceased operations during the fourth quarter of 2004. Consequently, we held no mortgage-related securities in
the Cash and investments portfolio at December 31, 2004, compared to $32.8 billion at December 31, 2003.
The Net proceeds from purchases and sales of trading securities reported in our consolidated statement of cash
Öows for 2004 of approximately $39.0 billion was primarily driven by the disposition of securities classiÑed as
trading from the Cash and investments portfolio.
Table 34 provides additional detail regarding the non-mortgage-related securities and mortgage-related
securities that comprised our Cash and investments portfolio at December 31, 2004 and 2003.
Table 34 Ì Cash and Investments
December 31, 2004
December 31, 2003
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments:
Non-mortgage-related securities:
Asset-backed securities(2) ÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and
municipalities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-mortgage-related securities
held for PC market-making and
support activities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other mortgage-related securities held
for PC market-making and support
activities(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements
to resell and Federal funds sold ÏÏÏÏÏ
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending
Balance at
Fair
Value
Average
Maturity
(Months)
$35,253
G3
% of
Portfolio A
Rated or
Better(1)
(dollars in millions)
N/A
$ 23,142
Ending
Average
Balance at Maturity
Fair Value
(Months)
% of
Portfolio A
Rated or
Better(1)
G3
N/A
21,733 N/A
Ì
Ì
100.0%
Ì
16,596 N/A
36
4,924
8,097
Ì
Ì
29,830
303
Ì
Ì
99.7
Ì
Ì
99.9%
Ì
Ì
32,197
$97,280
G3
N/A
9,494
150
64
31,228
1,314
32,812
20,582
$109,078
100.0%
59.8
100.0
100.0
100.0
93.8%
323
1
55
G3
N/A
(1) Credit ratings for most securities are designated by at least two nationally recognized credit rating agencies.
(2) Consists primarily of securities that can be prepaid prior to their contractual maturity without penalty.
(3) As previously disclosed in our Information Statement Supplement dated October 4, 2004, we ceased our PC market-making and
support activities accomplished through our Securities Sales & Trading Group business unit and our external Money Manager
program during the fourth quarter of 2004.
(4) The majority of these securities were agency mortgage-related securities.
As noted in Table 34, the balance of our total Cash and investments declined $11.8 billion during 2004.
Our Investments balance decreased $35.5 billion during 2004 due in large part to ceasing of the PC market-
68
Freddie Mac
making and support activities of our Securities Sales & Trading Group business unit and the discontinuation
of our external Money Manager program. In contrast, our balances of Cash and cash equivalents and
Securities purchased under agreements to resell and Federal funds sold increased by a combined $23.7 billion
during 2004 because of the investment of a portion of the proceeds realized from liquidating the securities held
by our Securities Sales & Trading Group.
During 2004, we adjusted the investment strategy for the Cash and investments portfolio and as a result
this portfolio did not hold corporate debt securities or preferred stock at December 31, 2004.
Derivative Assets and Liabilities, at Fair Value
All derivatives are reported at fair value. For derivatives that are in cash Öow hedge accounting
relationships, the change in fair value is recorded to AOCI for the eÅective portion of the hedge and to Hedge
accounting gains (losses) for the ineÅective portion of the hedge. For derivatives that are in fair value hedge
accounting relationships, the change in fair value is recorded to Hedge accounting gains (losses), along with
the change in fair value of the hedged item. Changes in fair value of derivatives not accounted for in hedge
accounting relationships are recorded to Derivative gains (losses). We use derivatives to manage our interest-
rate and other market risk exposures. However, hedge accounting has not been applied to many derivative
transactions since a signiÑcant number of transactions did not meet hedge accounting requirements or we
elected not to pursue hedge accounting.
69
Freddie Mac
Table 35 summarizes the notional balance and related fair value by product type at December 31, 2004
and 2003.
Table 35 Ì Total Derivative Portfolio
December 31,
2004
2003
Derivative
Notional or
Contractual
Amount(1)
Fair Value(2)
Derivative
Notional or
Contractual
Amount(1)
(dollars in millions)
Fair Value(2)
Interest-rate swaps:
Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 95,043
83,602
94
178,739
$(2,879)
2,394
1
(484)
$ 179,751
107,417
424
287,592
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
189,945
25,175
18,981
234,101
129,110
56,850
598,800
113,692
32,952
10,926
408
$756,778
4,988
267
2
5,257
(33)
10,303
15,043
Ì
(9)
(2)
(1)
$15,031
217,338
123,611
20,379
361,328
130,798
46,512
826,230
152,548
89,520
15,542
31
$1,083,871
$(3,821)
1,992
2
(1,827)
7,170
2,096
28
9,294
181
8,400
16,048
Ì
(230)
5
Ì
$15,823
(1) Notional or contractual amounts are used to calculate the periodic amounts to be received and paid and generally do not represent
actual amounts to be exchanged or directly reÖect our exposure to institutional credit risk. Notional or contractual amounts are not
recorded as assets or liabilities in our consolidated balance sheets.
(2) The fair value by derivative type presented on this table is shown prior to netting by counterparty. The fair value of derivatives
presented on the consolidated balance sheets, however, is netted by counterparty as permitted by GAAP, and is reported in the
Derivative assets, at fair value and Derivative liabilities, at fair value captions. The fair value for futures are directly derived from
quoted market prices. Fair values of other derivatives are derived primarily from valuation models with incorporation of market-based
inputs.
(3) Primarily represents written options.
(4) Subsequent to the issuance of our Information Statement dated September 24, 2004, we increased the December 31, 2003 notional
amounts of commitments and swap guarantee derivatives that are subject to the requirements of SFAS 133 and SFAS 149 and are
not in hedge accounting relationships by $200 million and $31 million, respectively. The net eÅect of these changes was an increase
to the notional amount of our total derivative portfolio at that date to $1,083,871 million from $1,083,640 million. Also, subsequent to
the issuance of our Information Statement Supplement dated March 31, 2005, we revised the December 31, 2004 notional amounts
of written options and swap guarantee derivatives that are not in hedge accounting relationships by ($134) million and $13 million,
respectively. The net eÅect of these changes was a decrease to the notional amount of our total derivative portfolio at that date to
$756,778 million from $756,899 million. The net eÅect of these changes on fair value was immaterial.
(5) Represents certain interest-rate swaps where we have guaranteed a third party's performance under the swap. Swap guarantees
entered into after June 30, 2003 are treated as derivatives in accordance with SFAS 149. See ""RISK MANAGEMENT Ì Interest-
Rate Risk and Other Market Risks Ì Use of Derivatives and Interest-Rate Risk Management Ì Types of Derivatives'' for more
information.
The balance of derivatives in a gain position (reported as Derivative assets, at fair value) decreased by
$0.9 billion, or 6 percent, to $15.3 billion as of December 31, 2004 from $16.2 billion as of December 31, 2003,
while the balance of derivatives in a loss position (reported as Derivative liabilities, at fair value) remained
relatively Öat at $0.2 billion and $0.4 billion as of December 31, 2004 and 2003, respectively. The carrying
value of our derivative assets and liabilities at each consolidated balance sheet date is equal to the fair value of
the derivatives that we held on those dates, which is aÅected by changes in market conditions such as the level
and expected volatility of interest rates. The composition of the derivatives we hold will change from period to
period as a result of derivative purchases, terminations prior to contractual maturity and expiration of the
derivative at its contractual maturity.
70
Freddie Mac
The notional balance of our derivative portfolio declined to $756.8 billion at December 31, 2004 from
$1,083.9 billion at December 31, 2003, driven by a reduction in the notional balance of option-based
derivatives, interest-rate swaps and commitments. The following factors contributed to the reduction in the
notional amounts of our derivatives during 2004. The asset mix in the Retained portfolio has moved toward a
greater proportion of non-agency, Öoating-rate mortgage-related securities, which generally require lower
interest-rate protection than Ñxed-rate products. Also, the gradual increase in market interest rates and the
Öattening of the yield curve in 2004 has reduced the interest-rate risk of our existing Ñxed-rate investments,
thereby lowering our need for option-based derivatives to manage the related risk. During 2004, we also oÅset
the optionality risk in the Retained portfolio by increasing the amount of our callable debt outstanding.
The notional balance of option-based derivatives declined by $127.2 billion, as a result of adjusting the
option portfolio for risk management purposes in response to changes in market conditions and mortgage
portfolio composition. The notional balance of interest-rate swaps declined by $108.9 billion, as a result of the
termination of certain oÅsetting positions prior to their contractual maturity. The notional balance of
commitments declined by $56.6 billion, primarily as the result of a reduction in commitments related to the
Cash and investments portfolio as we ceased the PC market-making and support activities conducted through
our Securities Sales & Trading Group business unit and external Money Manager Program during the fourth
quarter of 2004.
As noted previously, changes in fair values either are recorded in current income or, to the extent our
accounting hedge relationships are eÅective, may be deferred in AOCI or oÅset by basis adjustments to the
related hedged item. As a result, the increases or decreases in fair value by derivative categories, described
above, will not correspond directly to Derivative gains (losses) or Hedge accounting gains (losses) on our
consolidated statements of income.
Guarantee Asset for Participation CertiÑcates
The Guarantee asset for Participation CertiÑcates represents the fair value of future cash inÖows related
to our guarantee of PCs and Structured Securities transferred to third parties in transactions that qualify as
sales under SFAS 125/140 or that were subject to the requirements of FIN 45.
The guarantee asset balances increased by $0.8 billion, or 23 percent, to $4.5 billion at December 31,
2004 from $3.7 billion at December 31, 2003. The changes in the guarantee asset balances during 2004 and
2003 are summarized in Table 36.
Table 36 Ì Changes in Guarantee Asset for Participation CertiÑcates, at Fair Value
Beginning Balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in accounting(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions, net of repurchases(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair value''(3)ÏÏÏÏÏ
Ending balance, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
2003
(dollars in millions)
$2,445
$3,686
(128)
Ì
2,830
1,965
(1,461)
(1,135)
$3,686
$4,516
(1) As of January 1, 2003, the fair value of those credit enhancements previously recognized as a component of guarantee assets were
reclassiÑed to Other assets.
(2) Subsequent to the issuance of our Information Statement dated September 24, 2004, we reclassiÑed $7 million from Gains
(losses) on ""Guarantee asset for Participation CertiÑcates, at fair value'' to Additions, net of repurchases.
(3) Individual guarantee assets are marked to fair value based on the related PCs or Structured Securities. Consequently, the fair value
of some guarantee assets increases, while the fair value of other guarantee assets decreases.
In 2004 and 2003, the primary business drivers aÅecting the net increase in our guarantee asset balance
were our business volumes and changes in mortgage interest rates. Additions, net of repurchases declined from
2003 primarily because we issued 49 percent fewer PCs and Structured Securities (based on unpaid principal
balances) in 2004. Gains (losses) on guarantee asset decreased from 2003 due primarily to a smaller overall
decline in mortgage interest rates. Other factors contributing to the change in the fair value of the guarantee
asset are discussed in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Net Interest Income.''
71
Freddie Mac
Total Debt Securities, Net
We issue non-callable and callable short- and long-term debt securities in domestic and global capital
markets in a wide range of maturities to meet our funding needs. The balance of debt securities includes
deferred premiums, discounts and hedging gains and losses.
Total debt securities decreased by $7.9 billion, or 1 percent, to $731.7 billion at December 31, 2004 from
$739.6 billion at December 31, 2003. This decrease corresponds to the decrease in total assets during 2004.
During 2004, debt due within one year declined by $13.0 billion, partially oÅset by a $5.0 billion increase in
debt due after one year. We adjust our mix of long-term and short-term debt to reÖect our funding and
portfolio duration objectives.
Guarantee Obligation for Participation CertiÑcates
The Guarantee obligation for Participation CertiÑcates represents the unamortized balance of our
obligation to guarantee the payment of principal and interest of PCs and Structured Securities, an obligation
initially established at fair value in transactions that qualify as sales under SFAS 125/140 or that were subject
to the requirements of FIN 45.
The Guarantee obligation for Participation CertiÑcates increased by $1.2 billion to $4.1 billion as of
December 31, 2004 from $2.9 billion as of December 31, 2003. The changes in the guarantee obligation
balances during 2004 and 2003 are summarized in Table 37.
Table 37 Ì Changes in Guarantee Obligation for Participation CertiÑcates
Beginning balance, at January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in accounting(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfer-out to the loan loss reserve during the period(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions, net of repurchases:
Fair value of newly-issued guarantee obligations(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred gains on newly-executed guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization income related to:(4)
Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Initial fair value of contractual guarantee fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
2003
(dollars in millions)
$1,427
$2,904
(110)
Ì
(19)
(13)
1,174
732
1,684
847
(128)
(604)
(732)
$4,065
(57)
(868)
(925)
$2,904
(1) Represents the reclassiÑcation of the incurred losses included in the ""Guarantee obligation for Participation CertiÑcates'' at
January 1, 2003 in conjunction with the implementation of FIN 45.
(2) Represents portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that correspond to incurred
credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates at initial recognition of a guarantee obligation.
(3) Includes the fair value of guarantee obligations that were recognized in connection with transfers of PCs and Structured Securities
that qualiÑed as sales, as well as the fair value of guarantee obligations recognized that related to PCs and Structured Securities
issued in Guarantor swaps and other similar transactions subject to FIN 45. The amount is presented net of reductions attributable to
purchases of PCs and Structured Securities.
(4) Includes amortization of deferred revenue recognized for our guarantee obligation.
In 2004 and 2003, the primary drivers aÅecting the net increase in the guarantee obligation balance were
our business volume and changes in the mortgage interest rates resulting in Öuctuations in liquidation rates
from period to period. Additions, net of repurchases declined from 2003 primarily because we issued
49 percent fewer PCs and Structured Securities in 2004 (in terms of unpaid principal balances). Amortization
of guarantee obligations increased due to lower liquidation rates in 2004 compared to 2003. Other factors
contributing to the change in the amortization of the guarantee obligation are discussed in ""CONSOLI-
DATED RESULTS OF OPERATIONS Ì Net Interest Income.''
Total Stockholders' Equity
Total stockholders' equity decreased by $0.1 billion to $31.4 billion at December 31, 2004 from
$31.5 billion at December 31, 2003.
72
Freddie Mac
Table 38 summarizes the components of Total stockholders' equity.
Table 38 Ì Total Stockholders' Equity
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AOCI related to:
Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedge relationships(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total AOCI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2003
2004
(dollars in millions)
$ 4,609
$ 4,609
152
152
814
873
28,837
30,728
4,339
(7,924)
(8)
(3,593)
(1,353)
$31,416
6,349
(7,837)
(10)
(1,498)
(1,427)
$31,487
(1) Derivatives that meet speciÑc criteria are accounted for as cash Öow hedges under SFAS 133. Changes in the eÅective portion of the
fair value of these open derivatives contracts are recorded in AOCI. Net deferred gains and losses on closed cash Öow hedges (i.e.,
where the derivative is either terminated or redesignated) are also classiÑed in AOCI, until the related forecasted transaction is
determined to be probable of not occurring or it aÅects earnings.
Retained earnings increased $1.9 billion driven by net income reduced by preferred and common stock
dividends declared. AOCI declined by $2.1 billion. AOCI consists primarily of net deferred losses on cash Öow
hedge relationships, which totaled approximately ($7.9) billion and ($7.8) billion at December 31, 2004 and
2003, respectively, and net unrealized gains related to available-for-sale securities, which totaled approxi-
mately $4.3 billion and $6.3 billion as of December 31, 2004 and 2003, respectively.
The net deferred losses on cash Öow hedge relationships are composed of the period-end mark to fair
value (net of taxes) of existing derivative contracts in cash Öow hedge relationships and balances related to
closed cash Öow hedges. As described in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-
Interest Income (Loss) Ì Derivative Gains (Losses),'' we discontinued applying hedge accounting treatment
for a signiÑcant amount of our pay-Ñxed and receive-Ñxed swaps during 2004. As a result, the December 31,
2004 balance in AOCI is primarily composed of deferred losses related to closed cash Öow hedge relationships
that will be amortized into Income (expense) related to derivatives, a component of Net interest income, over
time. Fluctuations in prevailing market interest rates will have no impact on the balance of AOCI relating to
closed cash Öow hedges. We estimate that approximately $1.6 billion (net of taxes) of the $7.9 billion of
hedging losses (of which $7.9 billion are related to closed cash Öow hedges and less than $0.1 billion are net
unrealized losses on open cash Öow hedges) in AOCI at December 31, 2004 will be reclassiÑed into earnings
during 2005.
Table 39 presents the scheduled amortization of the net deferred losses in AOCI at December 31, 2004,
related to closed cash Öow hedges, into income over future periods based on certain assumptions that may
diÅer from our expectations of future events or from actual future events. For purposes of this table, a number
of hypothetical assumptions were made. It is likely that actual amortization in any given future period will
diÅer from the scheduled amortization, perhaps materially, as we make decisions or changes in market
conditions occur that diÅer from these assumptions. For example, the scheduled amortization for cash Öow
hedges related to future debt issuances is based on the assumption that we will not repurchase debt and that no
other factors aÅecting debt issuance probabilities will change. In addition, for purchase and sale commitments
in cash Öow hedge relationships, the scheduled amortization assumes no changes in prepayment activities or
other factors aÅecting the timing of reclassiÑcations.
73
Freddie Mac
Table 39 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to Closed Cash
Flow Hedge Relationships
Period of Scheduled Amortization to Income
December 31, 2004
Amount
(Pre-tax)
Amount
(After-tax)
(dollars in millions)
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 to 2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net deferred losses in AOCI related to closed cash Öow hedge relationships ÏÏÏÏ
Net deferred losses in AOCI related to open cash Öow hedge relationships ÏÏÏÏÏ
Total AOCI related to cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (2,477)
(1,967)
(1,461)
(1,326)
(1,103)
(2,858)
(960)
$(12,152)
(38)
$(12,190)
$(1,610)
(1,279)
(949)
(862)
(717)
(1,858)
(624)
$(7,899)
(25)
$(7,924)
The net unrealized gains related to available-for-sale securities decreased by approximately $2.0 billion,
after-tax, at December 31, 2004 compared to December 31, 2003. During 2004, higher yielding securities that
were generally in an unrealized gain position were liquidated or sold. The unpaid principal balance of the
mortgage-related and non-mortgage-related securities we held in our Retained portfolio and Cash and
investments portfolio that were classiÑed as available-for-sale totaled $610.1 billion and $598.5 billion at
December 31, 2004 and 2003, respectively.
AVERAGE CONSOLIDATED BALANCE SHEETS AND RATE/VOLUME ANALYSIS
Table 40 reÖects an analysis of net interest income and presents average balances and related yields
earned on assets and rates paid on liabilities. Average balance sheet information is presented because we
believe end-of-period balances may not always be representative of activity throughout the periods presented.
We also believe that the rate/volume analysis may be helpful in understanding how changes in business
volumes and yields inÖuenced our Ñnancial results, particularly net interest income on earning assets. For most
components of the average balances, a daily weighted average balance is calculated for the period. When daily
weighted average balance information is not available, a simple monthly average balance is calculated. In
addition, Net interest income/yield (fully taxable-equivalent basis) is presented on this table. Taxable
equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to
the equivalent amounts of interest income that would be necessary to derive the same net return if the
investments had been subject to income taxes using our statutory tax rate (35 percent).
74
Freddie Mac
Table 40 Ì Average Consolidated Balance Sheets and Rate/Volume Analysis
2004
Year Ended December 31,
2003
2002
Average
Balance(1)(2)
Interest
Income
Average
(Expense) Rate(3)(4)
Average
Balance(1)(2)
Interest
Income
Average
(Expense) Rate(3)(4)
Average
Balance(1)(2)
Interest
Income
Average
(Expense) Rate(3)(4)
(dollars in millions)
$ 61,566
$
4,007
6.51%
$ 63,396
$
4,251
6.70%
$ 61,077
$
4,290
7.02%
Interest-earning assets:
Mortgage loans(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities in
the Retained portfolio(6) ÏÏÏÏÏ
Total Retained portfolio ÏÏÏÏÏÏÏ
Investments(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under
agreements to resell and
Federal funds sold ÏÏÏÏÏÏÏÏÏÏ
Total interest-earning assets ÏÏÏ
Interest-bearing liabilities:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt(8) ÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities ÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate
investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-bearing liabilities
Income (expense) related to
derivatives(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of net non-interest
590,118
651,684
81,833
29,996
763,513
205,072
530,816
735,888
12,401
748,289
bearing fundingÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,224
Total funding of interest-
earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income/yield ÏÏÏÏÏÏ
Fully taxable-equivalent
adjustment(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income/yield (fully
taxable-equivalent basis) ÏÏÏÏÏÏ
$763,513
28,460
32,467
2,716
420
35,603
(2,908)
(22,950)
(25,858)
(708)
(26,566)
100
Ì
4.82
4.98
3.29
1.40
4.66
(1.39)
(4.32)
(3.50)
(5.71)
(3.54)
0.01
0.07
$(26,466)
9,137
$
(3.46)
1.20
267
$
9,404
0.03
1.24
544,396
607,792
94,768
49,085
751,645
226,850
478,028
704,878
26,234
731,112
29,051
33,302
3,246
550
37,098
(2,785)
(22,083)
(24,868)
(1,641)
(26,509)
5.34
5.48
3.40
1.12
4.93
(1.21)
(4.62)
(3.52)
(6.26)
(3.62)
470,450
531,527
91,794
29,032
652,353
209,551
406,802
616,353
18,110
634,463
30,039
34,329
3,693
454
38,476
(4,303)
(21,337)
(25,640)
(1,236)
(26,876)
6.39
6.46
3.99
1.56
5.89
(2.03)
(5.24)
(4.15)
(6.82)
(4.23)
(1,091)
(0.15)
(2,075)
(0.32)
20,533
Ì
0.10
17,890
Ì
0.13
$751,645
$(27,600)
9,498
$
(3.67)
1.27
$652,353
$(28,951)
9,525
$
(4.43)
1.46
227
0.03
252
0.04
$
9,725
1.30%
$
9,777
1.50%
2004 vs. 2003 Variance
Due to
2003 vs. 2002 Variance
Due to
Interest-earning assets:
Mortgages loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-bearing liabilities:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-bearing liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total funding of interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income/yield (fully taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate(11)
$ (123)
(2,921)
(3,044)
(98)
116
$(3,026)
$ (406)
1,472
1,066
133
1,199
1,191
$ 2,390
$ (636)
38
$ (598)
Total
Volume(11) Change
Rate(11)
(dollars in millions)
Total
Volume(11) Change
$ (121)
2,330
2,209
(432)
(246)
$ 1,531
$
283
(2,339)
(2,056)
800
(1,256)
Ì
$(1,256)
275
$
2
277
$
$ (244)
(591)
(835)
(530)
(130)
$(1,495)
$ (123)
(867)
(990)
933
(57)
1,191
$ 1,134
$ (361)
40
$ (199)
(5,330)
(5,529)
(563)
(155)
$(6,247)
$ 1,849
2,725
4,574
110
4,684
984
$ 5,668
$ (579)
9
$ (321)
$ (570)
$
160
4,342
4,502
116
251
$ 4,869
$ (331)
(3,471)
(3,802)
(515)
(4,317)
Ì
$(4,317)
552
$
(34)
518
$
$
(39)
(988)
(1,027)
(447)
96
$(1,378)
$ 1,518
(746)
772
(405)
367
984
$ 1,351
$
(27)
(25)
(52)
$
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) For securities classiÑed as available-for-sale, we calculate average balances based on their unpaid principal balance plus their associated deferred fees and costs
(e.g., premiums and discounts), but exclude the eÅects of other-than-temporary impairments. For securities in the Retained portfolio classiÑed as trading, we
calculate average balances excluding their mark-to-fair-value adjustments. For securities in the Cash and investments portfolio classiÑed as trading, we
calculate average balances based on their fair values.
(3) May not sum due to rounding.
(4) Average rates for securities classiÑed as available-for-sale are on the historical cost basis, which is not aÅected by the change in fair value that is reÖected in the
AOCI component of Stockholders' equity.
(5) Non-accrual loans are included in average balances.
(6) Rates calculated on a fully taxable-equivalent basis were 4.86%, 5.37% and 6.43% for the years ended December 31, 2004, 2003 and 2002, respectively, based
upon related income of $28,688 million, $29,246 million and $30,253 million, respectively.
(7) Investments consist of Cash and cash equivalents and the Total mortgage-related and non-mortgage-related securities subtotal of Investments as reported on
the consolidated balance sheets.
(8) Includes current portion of long-term debt.
(9) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements in accordance with the contractual
terms of all derivatives in qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our
consolidated Ñnancial statements for more information.
(10) Represents the adjustment necessary to calculate the tax-exempt income and yield on a tax equivalent basis. We analyze Net interest income, and the related
Net interest yield, on a taxable-equivalent basis. Analysis on a taxable-equivalent basis allows the comparison of ratios related to tax-exempt or tax-advantaged
securities to those of fully taxable securities with higher yields.
(11) Combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.
75
Freddie Mac
CONSOLIDATED FAIR VALUE BALANCE SHEETS
The consolidated fair value balance sheets in Table 41 present our estimates of the fair value of our
recorded assets and liabilities and oÅ-balance sheet Ñnancial instruments at December 31, 2004 and 2003.
Table 41 Ì Consolidated Fair Value Balance Sheets(1)
December 31, 2004
December 31, 2003
Carrying
Amount(2)
Fair Value
Carrying
Amount(2)
Fair Value
(dollars in billions)
Assets
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal
funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities and minority interest
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏ
Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for guarantee losses on Participation CertiÑcates ÏÏÏ
Other liabilities(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets attributable to stockholders
Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 61.3
603.2
664.5
35.3
29.8
32.2
15.3
4.5
13.7
$795.3
$731.7
4.1
0.2
0.2
26.2
1.5
763.9
4.6
26.8
31.4
$795.3
$ 63.3
603.4
666.7
35.3
29.8
32.2
15.3
5.0
13.3
$797.6
$737.0
2.1
0.2
Ì
25.7
1.7
766.7
4.1
26.8
30.9
$797.6
$ 60.2
600.2
660.4
23.1
65.4
20.6
16.2
3.7
14.0
$803.4
$739.6
2.9
0.4
0.1
27.0
1.9
771.9
4.6
26.9
31.5
$803.4
$ 62.5
600.4
662.9
23.1
65.4
20.6
16.2
4.5
13.2
$805.9
$749.8
2.4
0.4
Ì
23.9
2.1
778.6
4.4
22.9
27.3
$805.9
(1) The consolidated fair value balance sheets do not purport to present our net realizable, liquidation or market value as a whole.
Furthermore, amounts we ultimately realize from disposition of assets or settlement of liabilities may vary signiÑcantly from the fair
values presented.
(2) Carrying amounts equal the amounts reported on our GAAP consolidated balance sheets.
(3) The fair value of Mortgage-related securities reported in this table exceeds the carrying value because the fair value includes PC
residuals related to Participation CertiÑcates held in the Retained portfolio that are not recognized under GAAP because such PCs
were issued prior to the implementation of FIN 45.
(4) Fair values include estimated income taxes on the diÅerence between the consolidated fair value pre-tax net assets and the
consolidated GAAP pre-tax net assets.
The fair value information on the consolidated fair value balance sheets includes the estimated fair values
of all items recorded in the consolidated balance sheets prepared in accordance with GAAP, as well as all oÅ-
balance sheet Ñnancial instruments that represent our assets or liabilities that are not recorded in the GAAP
consolidated balance sheets. These oÅ-balance sheet items predominantly consist of the unrecognized
guarantee assets and obligations associated with a portion of our PCs issued through our Guarantor Program
as well as commitments to purchase multifamily and single-family mortgage loans that will be classiÑed as
held-for-investment in the GAAP consolidated Ñnancial statements and insurance contracts on manufactured
housing investments. See ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES'' and ""OFF-
BALANCE SHEET ARRANGEMENTS'' as well as ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to the consolidated
Ñnancial statements for more information on fair values.
76
Freddie Mac
In conjunction with the preparation of our consolidated fair value balance sheets, we make use of a
number of Ñnancial models. See ""RISK MANAGEMENT Ì Operational Risks'' and ""RISK MANAGE-
MENT Ì Interest-Rate Risk and Other Market Risks'' for information concerning the risks associated with
these models.
Key Components of Changes in Fair Value of Net Assets
Changes in the fair value of net assets from period to period result from returns (measured on a fair value
basis) and capital transactions. Changes in fair value are attributable to changes in a number of key
components. The key components of changes in fair value of net assets are as follows:
Core spread income
Core spread income on the Retained portfolio is a fair value estimate of the current period accrual of
income from the spread between mortgage-related investments and debt, calculated on an option-adjusted
basis. An option-adjusted spread is an estimate of the yield spread between a given security and a benchmark
(London Interbank OÅered Rate, or LIBOR, agency or Treasury) yield curve, after consideration of the
security's variability in cash Öows across diÅerent potential future interest rate scenarios resulting from any
options embedded in the security, such as prepayment options. Core spread income approximates the amount
of current net interest income resulting from the net option-adjusted spread between assets and debt.
Return on risk positions
The types of interest-rate risk to which we are exposed as a result of our Retained portfolio activities
include duration and convexity risk, yield curve risk, volatility risk and basis risk. It is our business policy to
actively manage, or hedge, the majority of these risks to keep interest-rate risk exposure within prescribed
limits. We do not, however, hedge all interest-rate risk that exists at the time a mortgage is purchased or that
arises over its life. Therefore, in the normal course of business, we consistently have limited net exposures to
these risks. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more
information. Return on risk positions are fair value estimates of the return on all such market risks that we
actively hedge, or represents the estimated net gain or loss in fair value of net assets attributable to common
stockholders resulting from all net exposures related to these managed risks.
EÅect of changes in option-adjusted spread (mortgage-to-debt spread)
One risk that we do not attempt to hedge or actively manage is mortgage-to-debt spread risk, which is the
net option-adjusted spread between mortgage and agency debt sectors. Because we generally hold a substantial
portion of our mortgage assets for the long term, we do not believe that periodic Öuctuations in mortgage-to-
debt net option-adjusted spreads will signiÑcantly aÅect the long-term return of the retained portfolio. The
eÅect of changes in option-adjusted spreads is a fair value estimate of the net unrealized gain or loss in fair
value of net assets attributable to common stockholders that results from net option-adjusted spread
Öuctuations occurring during the period.
Core guarantee fees, net
Core guarantee fees, net is a fair value estimate of the current period accrual of income from the
diÅerence between fees we receive related to the credit guarantee business and associated costs and
obligations. Both contractual guarantee fees collected over the life of the credit guarantee portfolio and credit-
related delivery fees collected up-front when pools are formed are included. Associated costs are default and
capital costs. Core guarantee fees, net represents an estimate of the long-term expected annual income of the
credit guarantee portfolio, based on current portfolio characteristics and market conditions.
Change in fair value of guarantee portfolio
Change in fair value of guarantee portfolio represents the estimated impact on the fair value of the credit
guarantee business of additions to the portfolio (net diÅerence between the fair values of the guarantee asset
and guarantee obligation recorded when pools are formed) plus the eÅect of changes in interest rates and other
market factors (e.g., impact of the passage of time on cash Öow discounting and changes in projections of the
future credit outlook) on the fair value of the existing credit guarantee portfolio.
77
Freddie Mac
We generally do not hedge changes in the fair value of our existing credit guarantee portfolio, with two
exceptions discussed below. While periodic changes in the fair value of the guarantee portfolio may have a
signiÑcant impact on the fair value of net assets, we believe that changes in the fair value of our existing
guarantee portfolio are not the best indication of long-term fair value expectations because such changes do
not reÖect the strong probability that over time, replacement business will largely replenish guarantee fee
income lost because of prepayments.
We hedge interest rate exposure related to net buy-ups (up-front payments made by us that increase the
guarantee fee that we will receive over the life of the pool) and Öoat (expected gains or losses resulting from
our mortgage security program remittance cycles). These value changes are excluded from our estimate of the
change in fair value of the guarantee portfolio, so that it reÖects only the impact of changes in interest rates
and other market factors on the unhedged portion of the projected cash Öows from the credit guarantee
business. The value changes associated with net buy-ups and Öoat are considered in return on risk positions
(deÑned above) because they relate to hedged positions.
Fee income
Fee income includes miscellaneous fees, such as resecuritization fees, fees generated by our automated
underwriting service and delivery fees on some mortgage purchases.
Discussion of Fair Value Results
We believe fair value measures provide an important view of our business economics and risks because
fair value takes a consistent approach to the representation of all Ñnancial assets and liabilities, rather than an
approach that combines historical cost and fair value techniques, as is the case with our GAAP-based
consolidated Ñnancial statements. The consolidated fair value balance sheet is an important component of our
risk management processes as we use daily estimates of the changes in fair value to calculate our PMVS and
duration gap measures.
At December 31, 2004, the fair value of net assets (net of tax eÅect) was $30.9 billion, a $3.6 billion, or
13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to
common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets
attributable to preferred stockholders) was $26.8 billion, a $3.9 billion, or 17 percent, increase from
December 31, 2003. The fair value of net assets attributable to common stockholders, before common
dividends and capital transactions, increased by $4.7 billion, or 21 percent, from December 31, 2003, a return
that exceeds our long-term expectations.
The primary contributors to the increase in fair value of net assets in 2004 were core spread income from
the Retained portfolio, fee-based income (including guarantee fees and credit fees related to our PCs and
Structured Securities) and a gain in the fair value of our guarantees related to our outstanding PCs and
Structured Securities. The fair value increase also included gains resulting from tighter mortgage-to-debt
option-adjusted spreads. In 2004, we made improvements to our fair value estimation methodologies,
including reÑnements that better capture available market data relevant to determining the fair value of our
debt. The implementation of these improvements resulted in net increases in the fair value of total net assets
of approximately $0.6 billion (after-tax).
The most signiÑcant change occurred in the fourth quarter of 2004 when we began using newly available
market prices received from broker/dealers and reliable third-party providers for the valuation of a greater
portion of our debt instruments. Previously, the calculation of the fair value of these instruments was based
primarily on an internal model using available market inputs. The eÅect of the change was an increase of
approximately $0.4 billion (after-tax) to the fair value of net assets.
78
Freddie Mac
VOLUME STATISTICS
Table 42 summarizes purchases into our Total mortgage portfolio and securitization activity for the
periods presented. See ""OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' for more
information about the Total mortgage portfolio.
Table 42 Ì Volume Statistics(1)
New business purchases(2)(3)
Mortgage purchases
Single-family:
30-year Ñxed-rate(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ARMs/Floating-Rate(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balloon/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Freddie Mac mortgage-related securities purchased for
Structured Securities:
Alternative collateral deals(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Structured Securities backed by Ginnie Mae CertiÑcates ÏÏÏÏÏÏ
Total Non-Freddie Mac mortgage-related securities purchased for
Structured SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Freddie Mac mortgage-related securities purchased into the
Retained portfolio:
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family and other mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial mortgage backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Manufactured housingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-agency mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Non-Freddie Mac mortgage-related securities purchased into
the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total new business purchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage purchases with credit enhancements(8)(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentage of reÑnance mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average loan-to-value of single-family purchases:
$220,905
72,754
50,969
9,658
319
207
354,812
12,712
12,712
$367,524
$
$
$
7,205
85
7,290
4,038
Ì
4,038
102,914
10,878
1,944
Ì
115,736
$119,774
$494,588
19%
60
ReÑnance mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase money mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage liquidations(10)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage liquidation rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities Settlements:
67
78
$401,029
28%
2004
Year Ended December 31,
2003
(dollars in millions)
2002
60% $377,847
239,684
20
52,556
14
29,714
3
1,417
Ì
265
Ì
701,483
97
53% $315,375
153,346
34
44,917
7
18,531
4
845
Ì
180
Ì
533,194
98
3
3
15,292
15,292
100% $716,775
2
2
10,654
10,654
100% $543,848
58%
28
8
4
Ì
Ì
98
2
2
100%
$
3,918
539
$
4,457
$ 47,806
166
47,972
54,109
10,588
963
Ì
65,660
$113,632
$834,864
16%
81
66
79
$719,608
55%
$ 14,507
265
$ 14,772
$ 45,798
820
46,618
36,004
8,282
863
318
45,467
$ 92,085
$650,705
20%
74
67
79
$464,960
40%
$360,933
4,175
$365,108
Single-family PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Resecuritization activity(11)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Freddie Mac securities repurchased into the Retained portfolio(12)ÏÏÏÏÏ
(1) Based on unpaid principal balances.
(2) Based on our Total mortgage portfolio. Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(3) Includes certain mortgage-related securities that have been transferred from the Investments caption on the consolidated balance sheets.
(4) Also includes 40 and 20 year Ñxed-rate mortgages.
(5) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.
(6) Excludes FHA/VA loans that may be collateral for alternative collateral deals.
(7) Prior to 2004, alternative collateral deals included Structured Securities backed by non-agency securities, which were primarily backed by subprime mortgage loans;
and to a lesser extent, FHA/VA loans and home equity loans. Beginning in 2004, alternative collateral deals included Structured Securities backed by non-agency
securities, which were backed by a mixture of subprime and other (i.e., prime) mortgage loans.
$705,450
8,337
$713,787
$543,716
3,596
$547,312
$266,989
$192,817
$331,672
$298,118
$215,430
$ 96,235
(8) Credit enhancements include loans for which the lender or a third party has retained a portion of the default risk by pledging collateral or agreeing to accept losses
on loans that default. In some cases, the lender's or the third party's risk is limited to a speciÑc level of losses at the time the credit enhancement becomes eÅective.
(9) Excludes Structured Securities backed by Ginnie Mae CertiÑcates.
(10) Excludes the eÅect of sales of non-Freddie Mac mortgage-related securities. Subsequent to the issuance of our Information Statement dated September 24, 2004,
we reclassiÑed certain amounts related to credit impairments, increasing the dollar amount of liquidations for 2003 and 2002.
(11) Includes activity where we have resecuritized PCs and other previously issued Structured Securities related to multi-class Structured Securities, primarily
REMICs, as well as principal-only strips and other Structured Securities, backed by non-Freddie Mac mortgage-related collateral. These amounts exclude
resecuritizations of PCs into single-class securities.
(12) Excludes the repurchase of PCs and Structured Securities held by us in connection with our PC market-making and support activities that historically have been
reÖected in the Investments caption on the consolidated balance sheets. As previously disclosed in our Information Statement Supplement dated September 24,
2004, we ceased our PC market-making and support activities accomplished through our Securities Sales & Trading Group business unit and our external Money
Manager program during the fourth quarter of 2004.
79
Freddie Mac
Our Total new business purchases, which consist of mortgage loans and non-Freddie Mac mortgage-
related securities that are purchased for our Retained portfolio, as well as to become collateral for issued PCs
and Structured Securities, totaled $494,588 million, $834,864 million and $650,705 million during 2004, 2003
and 2002, respectively. Our Total new business purchases during 2003 were the highest in our history.
Interest rates for Ñxed-rate mortgages declined during 2002 and through the Ñrst half of 2003, resulting in
a surge of mortgage reÑnancing activity during both of these years. In the latter half of 2003, interest rates for
Ñxed-rate mortgages rose from the low point reached in mid-2002, but still ended the year at relatively low
levels compared to historical standards. During 2004, interest rates were less volatile than in prior years.
Total mortgage purchases were $367,524 million, $716,775 million and $543,848 million during 2004,
2003 and 2002, respectively. Mortgage lenders tend to deliver more Ñxed-rate residential mortgages to the
GSEs as compared to ARM/Öoating-rate products. 30-year and 15-year Ñxed-rate mortgages represented
80 percent, 87 percent and 86 percent of our Total mortgage purchases for 2004, 2003 and 2002. Fixed-rate
mortgage volume peaked in 2002 because declining interest rates increased the number of borrowers that
qualiÑed for and chose this mortgage product. ARMs/Floating-Rate and Balloon/Resets mortgages repre-
sented 17 percent, 11 percent and 12 percent of our Total mortgage purchases for 2004, 2003 and 2002,
respectively, highlighting borrowers increasing preference for ARMs/Floating-Rate products.
Total non-Freddie Mac mortgage-related securities purchased were $127,064 million, $118,089 million
and $106,857 million during 2004, 2003 and 2002, respectively. During 2004, the mix of purchases changed
signiÑcantly compared to 2003 and 2002. SpeciÑcally, we purchased signiÑcantly more non-agency single-
family and other mortgage-related securities due to a number of factors described in ""CONSOLIDATED
BALANCE SHEETS ANALYSIS Ì Retained Portfolio,'' partially oÅset by a reduction in the purchase of
Fannie Mae securities. In addition, during 2003 and 2004, part of our strategy to support PC price
performance included the purchase and sale of other agency securities.
The liquidation rate on the Total mortgage portfolio totaled 28 percent, 55 percent and 40 percent for the
years ended December 31, 2004, 2003 and 2002, respectively. The relatively higher liquidation rates in 2003
and 2002 compared to 2004 reÖect accelerated borrower prepayments due to low Ñxed interest rates during
2002 and the Ñrst half of 2003.
The percentage of purchases with credit enhancements totaled 19 percent, 16 percent and 20 percent for
the years ended December 31, 2004, 2003 and 2002, respectively. Credit enhancements primarily include
third-party, primary loan-level mortgage insurance, third-party pool issuance or other arrangements in which
the third party has retained a portion of the default risk by pledging collateral or agreeing to accept losses on
loans that default. The drop in purchases with credit enhancements in 2003 compared to 2004 and 2002 was
due primarily to a decline in the number of loans purchased that are covered by primary mortgage insurance,
or PMI, which is not required for mortgage loans with low loan-to-value ratios. Purchases in 2003 had the
lowest weighted average loan-to-value ratio for the three years presented (i.e., 68 percent for 2003 compared
to 71 percent and 70 percent for 2004 and 2002, respectively) because the percentage of reÑnance mortgage
purchases was highest in 2003 of the three years presented (i.e., 81 percent for 2003 compared to 60 percent
and 74 percent for 2004 and 2002, respectively). Loan-to-value ratios tend to be lower for reÑnance mortgages
as compared to purchase money mortgages due to the strong house price appreciation experienced in recent
years. Our future ability and desire to utilize credit enhancements will depend on our evaluation of the credit
quality of new business purchase opportunities and the future availability of eÅective credit enhancements at
prices that permit an attractive return. See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit
Risk Ì Mortgage Credit Risk Management Strategies'' for more information.
We generate a signiÑcant portion of our mortgage purchase volume through several key mortgage lenders
that have entered into special business arrangements with us. See ""BUSINESS Ì Credit Guarantee
Activities'' for information about these relationships and consequent risks.
For a discussion of Resecuritization Activity, see ""CONSOLIDATED RESULTS OF OPERA-
TIONS Ì Resecuritization Fees.''
80
Freddie Mac
Table 43 summarizes the characteristics of the single-family loan purchases deÑned as ""New business
purchases'' in ""Table 42 Ì Volume Statistics'' by original loan-to-value ratio range, credit score, loan
purpose, property type and occupancy type. See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage
Credit Risk'' for deÑnitions of those risk characteristics.
Table 43 Ì Characteristics of Purchases into the Single-Family Mortgage Portfolio(1)
Original Loan-to-Value Ratio Range(2)
Year Ended December 31,
2003
2002
2004
0% to 60%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
23%
16
46
8
6
1
100%
29%
19
40
7
4
1
100%
25%
16
43
9
6
1
100%
Weighted average original loan-to-value ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit Score(3)
71%
68%
70%
41%
740 and above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
24
700 to 739ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
20
660 to 699ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11
620 to 659ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4
Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100%
49%
23
17
8
3
Ì
100%
44%
24
18
9
4
1
100%
Weighted average credit score ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan Purpose(3)
719
729
722
Purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other reÑnanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40%
27
33
100%
Property Type(3)
1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2-4 units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
97%
3
100%
Occupancy Type(3)
Primary residenceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
92%
4
4
100%
19%
26
55
100%
98%
2
100%
95%
3
2
100%
26%
29
45
100%
98%
2
100%
94%
3
3
100%
(1) Based on purchase activity related to the single-family mortgage portfolio (excluding non-Freddie Mac mortgage-related securities,
alternative collateral deals and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates), which totaled
$355 billion, $701 billion and $533 billion at December 31, 2004, 2003 and 2002, respectively.
(2) Our charter requires that mortgage loans we purchase with loan-to-value ratios above 80 percent have mortgage insurance for the
portion of the mortgage loan balance and that exceeds 80 percent of the property's value or other credit protections.
(3) See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risk'' for more information.
Single-family mortgage loans purchased with loan-to-value ratios above 80 percent accounted for
15 percent, 12 percent and 16 percent for the years ended December 31, 2004, 2003 and 2002, respectively. In
addition, the weighted average loan-to-value ratio of the mortgage loans purchased decreased from 70 percent
for the year ended December 31, 2002 to 68 percent for the year ended December 31, 2003 and increased to
71 percent for the year ended December 31, 2004. The lower loan-to-value ratios in 2002 and 2003 as
81
Freddie Mac
compared to 2004 are primarily the result of house-price appreciation combined with the surge in reÑnance
activity in these years as a result of the reduction in interest rates.
The proportion of mortgage loans purchased resulting from reÑnancing transactions decreased from a
total of 81 and 74 percent for the years ended December 31, 2003 and 2002, respectively, to 60 percent for the
year ended December 31, 2004. This decrease in reÑnance activity is a result of the higher interest rates
experienced during the second half of 2003 and 2004.
The quality of mortgage loans purchased continued to be strong. The strong credit quality of borrowers is
evidenced by the high average credit scores of mortgage loans purchased of 719, 729 and 722 for the years ended
December 31, 2004, 2003 and 2002, respectively. Credit scores are ranked on a scale of approximately 300 to
850 points. The slight decrease in the average credit score in 2004 resulted from a decline in the proportion of
refinance mortgage loans, which generally have higher credit scores than purchase mortgage loans. The
proportion of one-unit properties in our mortgage loan purchase volume remained stable over the past three
years, accounting for 97 percent for the year ended December 31, 2004, a slight decrease from 98 percent for the
years ended December 31, 2003 and 2002. The proportion of primary and secondary residences in our mortgage
loan purchase volume remained stable over the past three years, accounting for 96 percent, 98 percent and
97 percent in 2004, 2003 and 2002, respectively.
82
Freddie Mac
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities present liquidity demands driven by maturities and repurchases of our debt,
purchases of mortgage loans, mortgage-related securities and other investments, payments of principal and
interest to PC and Structured Securities holders, general operations and the payment of dividends to our
stockholders. Our sources of cash to meet the needs of our business activities and general operations include:
‚ issuances of long-term and short-term debt;
‚ receipts of principal and interest on securities we hold or mortgages we have securitized and sold;
‚ sales of securities we hold, particularly those in the Cash and investments portfolio;
‚ borrowings against mortgage-related securities and other investment securities we hold;
‚ other cash Öows from operating activities including guarantee activities; and
‚ issuances of common and preferred stock.
We measure our cash Öow position on a daily basis, netting uses of cash (principally, the settlement of
mortgage and non-mortgage investment security purchases, principal and interest payments on debt and
mortgage securities, net payments on derivative instruments and other operating cash Öows) with sources of
cash (principally, the settlement of debt borrowings and principal and interest receipts on mortgage and non-
mortgage investment securities held in portfolio and mortgages we have securitized and sold). The net cash
position is managed over a rolling forecasted period of 90 days, so that the amount of debt funding needed to
cover expected negative balances does not adversely aÅect our overall funding levels. We maintain alternative
sources of liquidity to allow normal operations for 90 days and comply with the principles of sound liquidity
management set forth by the Basel Committee on Banking Supervision. See ""BUSINESS Ì Regulatory and
Governmental Matters Ì Other Regulatory Matters'' for additional information on the Basel Committee on
Banking Supervision. We ensure that three months' worth of liquidity is maintained (based on internal
models) assuming we have no access to new-issue public debt markets. This daily management of our
liquidity is in accordance with the Liquidity Management and Contingency Planning voluntary commitment.
See ""VOLUNTARY COMMITMENTS'' for further information.
To reÑnance maturing debt, we depend on the continuing willingness of investors to purchase our debt
securities (for more information regarding the maturity proÑle of our outstanding debt securities, see
""Table 44 Ì Total Capitalization''). Our inability to prepare timely consolidated Ñnancial statements, as
discussed in ""RISK MANAGEMENT Ì Operational Risks,'' or any change in legislative or regulatory
exemptions as described in ""BUSINESS Ì Regulatory and Governmental Matters,'' could adversely aÅect
our access to some debt investors, thereby potentially increasing our debt funding costs. However, because of
our Ñnancial performance and our regular and signiÑcant participation as an issuer in the funding markets, our
sources of liquidity have remained adequate to meet our needs and we anticipate that they will continue to do
so. Our ability to issue common stock, preferred stock or subordinated debt may be limited until we have
returned to timely Ñnancial reporting.
Under our charter, the Secretary of the Treasury has discretionary authority to purchase our obligations
up to a maximum of $2.25 billion principal balance outstanding at any one time. However, we do not rely on
this authority as a source of liquidity to meet our obligations. See ""BUSINESS Ì Regulatory and
Governmental Matters'' for more information.
Depending on market conditions and the mix of our derivatives employed in connection with our ongoing
risk management activities, our derivative portfolio can be either a net source of or a net use of cash. For
example, depending on the prevailing interest-rate environment, interest-rate swap agreements could cause us
either to make interest payments to counterparties or to receive interest payments from counterparties.
Purchased options require us to pay a premium while written options allow us to receive a premium.
Also, the legal proceedings discussed in ""NOTE 13: LEGAL CONTINGENCIES'' to the consolidated
Ñnancial statements may result in a use of cash.
83
Freddie Mac
Total Capitalization
Table 44 sets forth our capitalization at the dates presented. We engage in transactions and issue or
repurchase debt obligations on an ongoing basis, all of which cause our total capitalization to change.
Therefore, on any date after December 31, 2004, our total capitalization will diÅer (perhaps substantially)
from the Ñgures contained in this capitalization table.
Table 44 Ì Total Capitalization
Total debt securities, net:
Senior debt, due within one year:
December 31,
2003
2004
(dollars in millions)
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior and subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$196,639
85,664
282,303
443,772
5,622
449,394
731,697
31,416
$763,113
$212,035
83,227
295,262
438,738
5,613
444,351
739,613
31,487
$771,100
(1) The year-over-year increase in the balance of subordinated borrowings results from principal accretion related to zero-coupon
subordinated debt.
See ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' and ""NOTE 9:
STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements for further information.
Debt Securities
We Ñnance our purchases of mortgage loans, mortgage-related securities and non-mortgage-related
securities held in our Retained portfolio and Cash and investments portfolio primarily through the issuance of
both long-term and short-term debt. Table 45 below summarizes the par value of our debt security issuances
based on settlement dates during 2004 and 2003. We seek to maintain consistent, active funding programs that
promote investor conÑdence and high-quality coverage by market makers. By diversifying our investor base
and the types of debt securities we oÅer, we enhance our ability to maintain continuous access to the debt
markets under a variety of conditions.
Table 45 Ì Debt Security Issuances by Product(1)
Short-term debt:
Short-term Reference Bills» and discount notes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term Notes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt:
Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. dollar denominated Reference Notes»ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4Reference Notes» ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2004
2003
(dollars in millions)
$793,462
191
793,653
150,859
40,000
8,680
199,539
$993,192
$ 779,004
5,610
784,614
213,924
54,000
4,347
272,271
$1,056,885
(1) Excludes securities sold under agreements to repurchase and Federal funds purchased, swap collateral obligations, and securities
sold, not yet purchased.
(2) Amounts for 2003 have been revised to present additional detail and to conform with the 2004 presentation.
84
Freddie Mac
Short-Term Debt. We raise funds to meet our operating cash needs primarily through the issuance of
Reference Bills» securities and other discount notes, which are short-term instruments with maturities of one
year or less that are sold on a discounted basis, paying only principal at maturity. Our Reference Bills»
program consists of large issues of short-term debt that we auction to dealers through the Internet on a regular
schedule. We currently auction Reference Bills» securities with one-, three- and six-month maturities weekly.
We auction Reference Bills» securities with 12-month maturities every four weeks. We issue discount notes
with maturities ranging from one day to one year in response to investor demand and our cash needs.
Short-term debt also includes certain Medium-term Notes that have original maturities of one year or
less.
Long-Term Debt. We issue long-term debt primarily through our Medium-term Notes program and
our Reference Notes» securities program. Medium-term Notes have a variety of structures, including callable
and non-callable Ñxed-rate securities, zero coupon securities and variable-rate securities. Reference Notes»
securities are regularly issued non-callable Ñxed-rate securities.
Medium-term Notes. We issue a variety of Ñxed- and Öoating-rate Medium-term Notes with
various maturities ranging up to 30 years. Medium-term Notes with original maturities of one year or less
are classiÑed as short-term debt. Medium-term Notes typically contain call provisions, eÅective as early
as three months or as late as ten years after the securities are issued.
Reference Notes». Through our Reference Notes» securities program, we sell large issues of long-
term debt that provide investors worldwide with a high-quality, liquid investment vehicle. Some of our
Reference Notes» securities are sold through Internet auctions. Newly issued Reference Notes»
securities have maturities ranging from two through ten years. We primarily issue securities denominated
in U.S. dollars, although we also issue securities denominated in various other currencies, particularly
Euros. We hedge our exposure to changes in foreign currency exchange rates by entering into swap
transactions that eÅectively convert foreign-denominated obligations to U.S. dollar denominated obliga-
tions. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Sources of
Interest-Rate Risk and Other Market Risks'' for more information.
The investor base for our debt is predominantly institutional. However, we also conduct weekly oÅerings
of FreddieNotes» securities, a Medium-term Notes program designed to meet the investment needs of retail
investors.
Subordinated Debt.
In October 2000, we announced plans to initiate periodic issuances of subordinated
debt securities, which we refer to as Freddie SUBS» securities, as part of a series of voluntary commitments
regarding our Ñnancial operations and disclosures designed to further strengthen our transparency, capital
adequacy and market discipline. The Freddie SUBS» program is in addition to the subordinated debt issued
prior to October 2000. During 2001 and 2002, we completed a total of four oÅerings of Freddie SUBS» that
provided approximately $5.5 billion in net proceeds. During 2004 and 2003, we did not issue any Freddie
SUBS». Our ability to issue subordinated debt may be limited until we return to timely Ñnancial reporting.
See ""VOLUNTARY COMMITMENTS'' for additional information.
Financing Calendars. Annually, we publish Ñnancing calendars for the upcoming year, which are
intended to provide clarity and transparency with regard to the timing of new debt issues and reopening of
prior issues, the anticipated size of individual oÅerings and settlement dates. All Reference Notes» securities,
4Reference Notes» securities and Reference Bills» securities issued during 2004 and the Ñrst Ñve months of
2005 were issued in accordance with our previously announced Ñnancing calendars.
Our Ñnancing calendars underscore our goal of aligning our interests with investors while also ensuring
that we have the Öexibility to oÅer the marketplace securities of the appropriate size and maturity. In addition,
we have supplemented our calendars by publishing the ""Quarterly Funding Announcement,'' or QFA, which
promotes additional transparency and predictability by detailing our expected funding activity for the
upcoming quarter. We also publish detailed funding summaries on a monthly basis, which outline our funding
activity for the previous month. The QFA and the monthly funding summaries are available on our website,
www.FreddieMac.com. (We are providing this Internet address solely for the information of interested
persons. We do not intend this Internet address to be an active link and are not using references to this
85
Freddie Mac
Internet address here or elsewhere in this Information Statement to incorporate additional information into
this Information Statement.)
By adhering to our Ñnancing calendars, we are able to provide our debt investors with a predictable source
of investment opportunities. However, there is no assurance that we will be able to continue to adhere to our
Ñnancing calendars in the future. In order to continue our debt oÅerings as scheduled and properly manage our
asset/liability mix, we regularly conduct repurchases of outstanding debt securities. Our repurchase operations
support the transparency, liquidity and predictability of Reference Notes» securities, 4Reference Notes»
securities and callable debt securities. During 2004 and 2003, we repurchased approximately $9.0 billion and
$24.8 billion, respectively, of our outstanding Reference Notes» securities and 4Reference Notes» securities.
In addition, primarily as a response to declining interest rates, we called approximately $120.0 billion and
$153.0 billion of our higher-rate long-term callable debt during 2004 and 2003, respectively. From time to
time, we may also enter into transactions in which we exchange newly issued debt securities for similar
outstanding debt securities held by investors. These transactions are not accounted for as repurchases, but
rather as debt exchanges.
Credit Ratings. Our ability to access the capital markets and other sources of funding, as well as our
cost of funds, are highly dependent upon our credit ratings. Table 46 indicates our credit ratings at May 23,
2005.
Table 46 Ì Freddie Mac Credit Ratings
Standard & Poor's
Rating Agency
Moody's
Fitch
Senior long-term debt(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AAA
A-1°
AA¿
AA¿
Aaa
Prime-1
Aa2
Aa3
AAA
F-1°
AA¿Watch Negative
AA¿Watch Negative
(1) Includes Medium-term Notes, U.S. dollar denominated Reference Notes» securities and 4Reference Notes» securities.
(2) Includes Reference Bills» securities and discount notes.
In addition to the ratings described in Table 46, Standard & Poor's, or S&P, provides a ""Risk-To-The-
Government'' rating that measures our ability to meet our debt obligations and the value of our franchise in
the absence of any implied government support. Our ""Risk-To-The-Government'' rating was AA- at May 23,
2005. Moody's also provides a ""Bank Financial Strength'' rating that represents Moody's opinion of our
intrinsic safety and soundness and, as such, excludes certain external credit risks and credit support elements.
Ratings under this measure range from A, the highest, to E. Our ""Bank Financial Strength'' rating was A- at
May 23, 2005.
Equity Securities
During the Ñrst Ñve months of 2005 and all of 2004 and 2003, we did not issue, redeem or repurchase any
equity securities, other than transfers of previously issued treasury stock under our stock compensation plans.
During 2002, we redeemed $287 million of 6.125 percent preferred stock issued in November 1996, and
eÅectively replaced it with a 5.81 percent perpetual non-cumulative preferred stock issuance with a
redemption value of $300 million, resulting in additional net cash proceeds to us of approximately $13 million.
We repurchased approximately 9.1 million common shares during 2002 for approximately $555 million.
Cash and Investments Portfolio
We maintain a Cash and investments portfolio that is important to our Ñnancial management and our
ability to provide liquidity and stability to the mortgage market. At December 31, 2004, the investments in this
portfolio consisted of liquid non-mortgage-related securities that could be sold or Ñnanced to:
‚ protect against temporary disruptions in our ability to obtain funding for our business operations;
‚ manage recurring cash Öows and meet other cash management needs;
86
Freddie Mac
‚ temporarily deploy capital until the capital can be redeployed into Retained portfolio investments
or credit guarantee business opportunities;
‚ maintain capital reserves to meet mortgage funding needs;
‚ provide diverse sources of liquidity; and
‚ help manage the interest-rate risk inherent in mortgage-related assets.
The non-mortgage-related securities in the Cash and investments portfolio consist principally of asset-
backed securities and other marketable assets that can be readily converted to cash. During 2004, we adjusted
the investment strategy for the Cash and investments portfolio and, as a result, this portfolio did not hold
corporate debt securities or preferred stock at December 31, 2004. The non-mortgage investments in this
portfolio may expose us to institutional credit risk and the risk that the investments will decline in value due to
market-driven events such as credit downgrades or changes in interest rates and other market conditions. See
""RISK MANAGEMENT Ì Credit Risks Ì Institutional Credit Risk'' for more information.
At December 31, 2003, the Cash and investments portfolio included certain mortgage-related securities
that were not included in the Retained portfolio since they were acquired in conjunction with the PC market-
making and support activities conducted through our Securities Sales & Trading Group business unit and
external Money Manager program, both of which ceased operations during the fourth quarter of 2004.
Consequently, we held no mortgage-related securities in the Cash and investments portfolio at December 31,
2004, compared to $32.8 billion at December 31, 2003. In addition, our Securities Sales & Trading Group
business unit and external Money Manager program held approximately $8.3 billion of securities purchased
under agreements to resell at December 31, 2003, which we subsequently disposed of during 2004. For
additional information on our Cash and investments portfolio, see ""CONSOLIDATED BALANCE
SHEETS ANALYSIS Ì Cash and Investments.''
Contractual Obligations
""Table 47 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2004)'' includes aggregated
information about the listed categories of our contractual obligations. These contractual obligations aÅect our
short- and long-term liquidity and capital resource needs. Table 47 includes information about undiscounted
future cash payments due under these contractual obligations, aggregated by type of contractual obligation,
including the contractual maturity proÑle of our consolidated debt securities and other liabilities reported on
our consolidated balance sheets and our operating leases at December 31, 2004. The timing of actual future
payments may diÅer from those presented in this table due to a number of factors, including discretionary debt
repurchases. Our contractual obligations include other purchase obligations that are enforceable and legally
binding. For purposes of the table, purchase obligations are included through the termination date speciÑed in
the respective agreements, even if the contract is renewable. Many of the purchase agreements for goods or
services include clauses that would allow us to cancel the agreement prior to the expiration of the contract
within a speciÑed notice period; however, the table includes such obligations without regard to such
termination clauses (unless actual notice of our intention to terminate the agreement has been communicated
to the counterparty).
Table 47 excludes guarantee obligations, which represent our obligations to stand ready to perform under
our guarantees of the payment of principal and interest of PCs and Structured Securities, as the amount and
timing of payments under these arrangements are generally contingent upon the occurrence of future events.
The liabilities on our consolidated balance sheets associated with our guarantee obligations are included in the
caption Guarantee obligation for Participation CertiÑcates. See ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for additional information about our
guarantee obligations.
The funding policy for our tax-qualiÑed deÑned beneÑt pension plan, or Pension Plan, is generally to
contribute an amount equal to at least the minimum required contribution, if any, but no more than the
maximum amount deductible for federal income tax purposes each year. Based on a preliminary analysis, we
currently believe that under applicable law no minimum contribution will be required and no tax-deductible
contribution will be permitted for 2005. Therefore, we do not currently expect to contribute to our Pension
87
Freddie Mac
Plan in 2005. For additional information regarding our retirement beneÑt obligations see ""NOTE 15:
EMPLOYEE BENEFITS'' to the consolidated Ñnancial statements.
With the exception of purchase commitments that are accounted for as derivatives, derivative transac-
tions that may require cash settlement in future periods are not reÖected on Table 47. See ""Table 54 Ì
Derivative Fair Values and Maturities,'' which describes the notional amount and fair value for each derivative
type and the maturity proÑle of the positions in ""RISK MANAGEMENT Ì Interest-Rate Risk and Other
Market Risks.''
Dividend payments on preferred stock are not reÖected on Table 47, since all classes of preferred stock
are non-cumulative. See ""NOTE 9: STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements
for additional information.
Table 47 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2004)
Total
2005
Long-term debt securities(1) ÏÏÏÏÏ $551,707
Short-term debt securities(1)(2) ÏÏÏ
196,639
Other liabilities reÖected on our
consolidated balance sheets:
Due to Participation CertiÑcate
$ 83,625
196,639
2006
2007
(dollars in millions)
$64,838
Ì
$83,447
Ì
2008
2009
Thereafter
$46,092
Ì
$55,574
Ì
$218,131
Ì
investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued interest payable(3) ÏÏÏÏ
Other contractual liabilities(4)(5)
Purchase obligations:
Purchase commitments(6)ÏÏÏÏÏÏ
Other purchase obligationsÏÏÏÏÏ
Operating lease obligations ÏÏÏÏÏÏ
Total speciÑed contractual
13,654
7,329
3,482
23,394
139
106
13,654
7,329
1,625
23,394
81
17
Ì
Ì
842
Ì
23
17
Ì
Ì
629
Ì
19
16
Ì
Ì
162
Ì
15
10
Ì
Ì
80
Ì
Ì
9
Ì
Ì
144
Ì
1
37
obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $796,450
$326,364
$84,329
$65,502
$46,279
$55,663
$218,313
(1) The amounts presented for long-term debt securities exclude net premiums, discounts, and foreign-currency-related and hedging-
related basis adjustments of $16,649 million at December 31, 2004. Callable debt is included in this table at its contractual maturity.
For additional information about long-term and short-term debt securities, see ""NOTE 8: DEBT SECURITIES AND SUBORDI-
NATED BORROWINGS'' to the consolidated Ñnancial statements.
(2) Includes unamortized discounts and premiums.
(3) Accrued interest payable primarily represents the accrual of interest on our short-term and long-term debt securities, as well as the
accrual of periodic cash settlements in accordance with the contractual terms of all derivatives, netted by counterparty as permitted
by GAAP.
(4) Other contractual liabilities primarily represent future cash payments due under our contractual obligations to make delayed equity
contributions to low-income housing tax credit, or LIHTC, partnerships that are unconditional and legally binding.
(5) Accrued obligations related to our deÑned beneÑt pension plans and executive deferred compensation plan are included in the Total
and 2005 columns. However, the timing of payments due under these obligations is uncertain. See ""NOTE 15: EMPLOYEE
BENEFITS'' to the consolidated Ñnancial statements for additional information.
(6) Purchase commitments represent our obligations to purchase mortgage loans and mortgage-related securities from third parties. The
majority of purchase commitments included in this caption are accounted for as derivatives in accordance with SFAS 133.
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Freddie Mac
Capital Resources
We manage our capital resources to provide attractive returns on our common equity, while maintaining
suÇcient capital to satisfy regulatory capital requirements and assuring that capital is available to absorb
unforeseen losses that might arise in fulÑlling our obligations and conducting our business programs.
Table 48 summarizes the components of our Core capital as of the dates presented. Core capital excludes
AOCI consistent with our regulatory capital requirements, which are described under ""Capital Adequacy''
below.
Table 48 Ì Summary of Core Capital
December 31,
2004
2003
(dollars in millions)
Common stock, at par valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
152
4,609
873
30,728
(1,353)
$35,009
$
152
4,609
814
28,837
(1,427)
$32,985
Capital Transactions
During 2004 and 2003, we added approximately $2.0 billion and $4.0 billion, respectively, to Core capital
primarily from Net income, partially oÅset by the payment of common and preferred stock dividends.
Our Board of Directors approved a dividend per common share of $0.35 for Ñrst quarter 2005, an increase
of 17 percent over the quarterly dividend in 2004. The dividend per common share was $0.30 for each quarter
in 2004, an increase of 15 percent over the $0.26 quarterly dividend paid each quarter during 2003. We paid a
quarterly dividend per common share of $0.22 in 2002. Dividends declared and paid in any quarter will be
determined by our Board of Directors after considering our capital position and earnings and growth prospects,
among other factors.
In addition, under the capital monitoring framework established by OFHEO in January 2004, we are
required to obtain prior written approval from the Director of OFHEO before engaging in certain capital
transactions, including the repurchase of any shares of common stock, redemption of any preferred stock or
payment of preferred stock dividends above stated contractual rates. We also must submit a written report to
the Director of OFHEO after the declaration, but before the payment, of any dividend on our common stock.
The report must contain certain information on the amount of the dividend, the rationale for the payment and
the impact on our capital surplus.
As we return to timely Ñnancial reporting, in periods when we are adequately capitalized and attractive
investment opportunities are not available, we will consult with OFHEO and consider options to return capital
to our stockholders through dividends or common stock repurchases. The amount of capital available to
distribute to our stockholders will be aÅected primarily by our capital position and earnings and growth
prospects, among other factors.
All repurchases of our common stock have been made as part of the stock repurchase plan approved by
our Board of Directors on September 5, 1997. This plan allows repurchases of common stock not to exceed
Ñve percent of shares outstanding as of September 5, 1997, which was approximately 34 million shares. At
December 31, 2004, approximately 13 million common shares remained available for repurchase under this
plan. During 2003, 2004 and the Ñrst Ñve months of 2005, we did not repurchase any common shares. We
repurchased approximately 9.1 million shares of common stock during 2002 for approximately $555 million. In
addition, we may not be able to issue or redeem preferred stock or subordinated debt until we resume timely
Ñnancial reporting and therefore, changes in Core capital will generally be limited to net income and
dividends. See ""BUSINESS Ì Regulatory and Governmental Matters Ì OFHEO'' for a discussion of the
framework established by OFHEO for monitoring our capital. In addition, we periodically reissue treasury
89
Freddie Mac
stock to employees and non-employee directors as part of our stock-based compensation plans. See
""NOTE 11: STOCK-BASED COMPENSATION'' to the consolidated Ñnancial statements for a description
of these plans.
For a summary of our preferred stock outstanding at December 31, 2004 and information on redemption
dates for our preferred stock issuances, see ""NOTE 9: STOCKHOLDERS' EQUITY'' to the consolidated
Ñnancial statements.
Capital Adequacy
We regularly assess the adequacy of our capital to conÑrm that we hold capital suÇcient to satisfy all of
our Ñnancial obligations, even if economic circumstances deteriorate unexpectedly and severely.
The GSE Act establishes our capital standards, and OFHEO has issued regulations that set our
minimum, critical and risk-based capital requirements. We operate with the intention to hold capital that
exceeds all regulatory requirements.
The risk-based capital standard determines the amount of capital that we must hold to absorb projected
losses resulting from future adverse interest-rate and credit-risk conditions speciÑed by the GSE Act, plus
30 percent mandated by the GSE Act to cover management and operations risk. The risk-based capital
standard is based on stress test results calculated under two interest-rate scenarios prescribed by the GSE Act,
one in which 10-year Treasury yields rise by as much as 75 percent (up-rate scenario) and one in which they
fall by as much as 50 percent (down-rate scenario). The credit component of the stress tests simulates the
performance of our mortgage portfolio based on loss rates for the Benchmark Region. The criteria for the
Benchmark Region are set forth by the GSE Act and are intended to capture the region that experienced the
highest historical rates of default and severity of mortgage losses for two consecutive origination years. The
risk-based capital requirement is the amount of Total capital needed to absorb the stress test losses in the most
adverse scenario, plus 30 percent of that amount to cover management and operations risk. Total capital
includes Core capital and general reserves for mortgage and foreclosure losses and any other amounts available
to absorb losses that OFHEO includes by regulation. Core capital consists of the par value of outstanding
common stock (common stock issued less common stock held in treasury), the par value of outstanding
perpetual noncumulative preferred stock, additional paid-in capital and retained earnings as determined in
accordance with GAAP.
The minimum capital standard requires us to hold an amount of Core capital that is generally the sum of
2.50 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and approxi-
mately 0.45 percent of outstanding mortgage-related securities guaranteed by us and other aggregate oÅ-
balance sheet obligations. As discussed below, in 2004 OFHEO implemented a framework for monitoring our
capital adequacy which includes a targeted capital surplus of 30 percent of our minimum capital requirement.
The critical capital standard requires us to hold an amount of Core capital that is generally the sum of
1.25 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and approxi-
mately 0.25 percent of outstanding mortgage-related securities guaranteed by us and other aggregate oÅ-
balance sheet obligations.
We evaluate ongoing capital compliance under changing market conditions through regular assessments
of the impact of these conditions on the level of our minimum capital surplus and our actions. We measure the
eÅects of key drivers, including the level of interest rates, the slope of the yield curve and changes in implied
market volatilities. Our assessment process is designed to ensure that we maintain a signiÑcant minimum
capital surplus across a wide range of economic scenarios. We also monitor the level and variability of our
capital surplus relative to our targeted 30 percent surplus under the capital monitoring framework temporarily
mandated by OFHEO. Our estimated surplus in excess of the 30 percent target surplus was approximately
$3.6 billion at December 31, 2004. Our sensitivity analysis currently indicates that our actual surplus would
exceed the targeted surplus across a wide range of economic scenarios. We also evaluate ongoing compliance
with the risk-based capital requirement through regular intra-quarter analysis and reporting. We monitor the
eÅects of interest rate changes and risk management actions on the level of risk-based capital surplus.
90
Freddie Mac
Table 49 summarizes our regulatory capital requirements and surpluses at December 31, 2004 and 2003.
Amounts for 2004 are as currently reported to OFHEO. See ""NOTE 10: REGULATORY CAPITAL'' to the
consolidated Ñnancial statements for further information.
Table 49 Ì Regulatory Capital Requirements
Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital surplus(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2004
2003
(dollars in millions)
$23,774
$24,131
32,985
35,009
9,211
10,878
12,308
35,009
22,701
11,108
34,691
23,583
12,097
32,985
20,888
5,426
33,436
28,010
(1) OFHEO is the authoritative source of the capital calculations that underlie our capital classiÑcations. For 2004, we amended the
minimum and critical capital requirements, core capital and surplus amounts previously reported to OFHEO to incorporate
adjustments reÖected in our consolidated Ñnancial statements. The 2004 minimum and critical capital requirements, core capital and
surplus amounts are estimates and have been revised to reÖect changes related to a closing agreement entered into with the IRS
concerning our REIT subsidiaries. See ""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements for further
information.
(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par
value of outstanding perpetual noncumulative preferred stock, additional paid in capital and retained earnings, as determined in
accordance with GAAP.
(3) Risk-based and Total capital amounts are those calculated by OFHEO prior to the issuance of our 2004 and 2003 Ñnancial results.
OFHEO determined not to recalculate the risk-based capital amounts given that the minimum capital requirement remained the
determining requirement for our classiÑcation as adequately capitalized.
(4) Total capital includes Core capital and general reserves for mortgage and foreclosure losses.
91
Freddie Mac
OFF-BALANCE SHEET ARRANGEMENTS
OÅ-Balance Sheet Transactions
In the ordinary course of business, we fulÑll our statutory purposes by engaging in various transactions.
These transactions enable us to:
‚ maintain the lowest possible cost of Ñnancing for our mortgage investments;
‚ bring eÇciency to the mortgage market;
‚ manage interest-rate risk, credit risk and other business and market risks; and
‚ enhance our liquidity and capital resources.
Financial instruments created through these transactions may or may not be recorded on our consolidated
balance sheets at their fair value or on a cost basis. A transaction's contractual or notional amount usually does
not equal the related fair value or carrying amount. See ""CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Ì Issuances and Transfers of PCs and Structured Securities'' for more discussion on oÅ-
balance sheet arrangements.
Guaranty of PCs and Structured Securities
As discussed in ""BUSINESS Ì Credit Guarantee Activities,'' we participate in the secondary mortgage
market by issuing PCs and Structured Securities to third party investors. PCs represent undivided interests in
pools of mortgage loans that are backed by either single-family or multifamily mortgage loans. Structured
Securities represent undivided interests in PCs or other mortgage-related securities issued by either Ginnie
Mae or non-agency issuers. In each case, we guarantee the payment of principal and interest on issued PCs or
Structured Securities. In these transactions, mortgage-related assets that back PCs and Structured Securities
held by third parties are not reÖected as our assets under GAAP, unless we retained an interest in PCs that
back Structured Securities that were issued as part of a sale transaction.
We assume the mortgage credit risk on the mortgages underlying PCs and Structured Securities by
guaranteeing the payment of principal and interest to holders of these securities. We manage this risk
carefully, sharing the risk in some cases with third parties through the use of primary loan-level mortgage
insurance, pool insurance and other credit enhancements. ""NOTE 4: FINANCIAL GUARANTEES'' to the
consolidated Ñnancial statements provides details related to credit protections and maximum coverages that
we obtain through credit enhancements in our credit guarantee activities. Also, see ""RISK MANAGE-
MENT Ì Credit Risks'' for more information.
Our PCs and Structured Securities are an integral part of our mortgage purchase program and any
decline in the price performance of or demand for our PCs could have a material adverse eÅect on the
proÑtability of our new credit guarantee business.
Most of our credit guarantee activity occurs through the Guarantor Program in the form of mortgage
swap transactions. In a mortgage swap transaction, a mortgage lender delivers mortgages to us in exchange for
PCs that represent undivided interests in those same mortgages. We receive various forms of consideration in
exchange for providing our guarantee on issued PCs, including (i) the contractual right to receive a
management and guarantee fee, (ii) delivery or credit fees for higher-risk mortgages and (iii) other forms of
credit enhancements received from counterparties or mortgage loan insurers.
Most of the remaining credit guarantee activity occurs through our Cash Window or our MultiLender
Program. Single-family mortgage loans we purchase for cash through the Cash Window are typically either
retained by us in our Retained portfolio or pooled together with other single-family mortgage loans we
purchase in connection with PC swap-based transactions in our MultiLender Program executed with various
lenders. We may issue such PCs to these lenders in exchange for the mortgage loans we purchase from them
or, to the extent these loans are pooled with loans purchased for cash, we may sell them to third parties for
cash consideration through an auction.
92
Freddie Mac
In addition to the issuance and transfer of PCs to third parties, we also sell PCs from our Retained
portfolio in resecuritized form. More speciÑcally, we issue single- and multi-class Structured Securities that
are backed by securities held in our Retained portfolio and subsequently transfer such Structured Securities to
third parties in exchange for cash, or for PCs and other mortgage-related securities delivered to us by third
party dealers who sell such Structured Securities to mortgage security investors. We generally earn
resecuritization fees in connection with the creation of Structured Securities and can earn an ongoing
management and guarantee fee for certain issued Structured Securities. Our principal exposure on Structured
Securities relates only to that portion of resecuritized assets that are represented by non-Freddie Mac
mortgage-related securities.
See ""Table 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based
on Unpaid Principal Balances'' for our total PCs and Structured Securities outstanding (held by third parties)
at December 31, 2004 and 2003. Our outstanding PCs and Structured Securities also include:
‚ Structured Securities backed by Ginnie Mae CertiÑcates;
‚ multifamily mortgage loans for which we provide our guarantee of the payment of principal and
interest, and that are originated and held by state and municipal agencies to support tax-exempt
multifamily housing revenue bonds (see ""NOTE 4: FINANCIAL GUARANTEES'' to the
consolidated Ñnancial statements);
‚ tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates issued by
third parties for which we provide our guarantee of the payment of principal and interest;
‚ Freddie Mac pass-through certiÑcates which are backed by tax-exempt housing revenue bonds
and related taxable bonds and/or loans; and
‚ mortgage loans held by third parties for which we provide a credit guarantee.
For our purchase and securitization activity for 2004 and 2003, see ""Table 42 Ì Volume Statistics''.
The accounting policies we apply to our credit guarantee activities signiÑcantly aÅect the volatility of our
reported earnings through the initial recognition of the fair value of guarantee assets and guarantee obligations
in connection with sales of PCs and Structured Securities, the recognition of subsequent gains or losses from
the change in fair value of guarantee assets and PC residuals generated from such sales and the repurchase
and sale of PCs into and out of our Retained portfolio and our Cash and investments portfolio. See
""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-Interest Income (Loss) Ì Management and
Guarantee Income'' for an analysis of management and guarantee income and other aÅected consolidated
statements of income captions related to our credit guarantee activities. See ""CONSOLIDATED BAL-
ANCE SHEETS ANALYSIS'' for discussion of our guarantee assets and guarantee obligations. The
accounting and Ñnancial results for our securitization transactions (including gains and losses on transfers of
PCs and Structured Securities that are accounted for as sales and periodic cash Öows on transfers of
securitized interests and corresponding retained interests) and the signiÑcant assumptions used to determine
the gains or losses from such transfers that are accounted for as sales are discussed in ""NOTE 2:
TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' to the consoli-
dated Ñnancial statements. The maximum potential amount of future principal payments we could be required
to make in connection with the unpaid principal balance of all PCs and Structured Securities held by third
parties totaled $852 billion and $752 billion at December 31, 2004 and 2003, respectively. See
""NOTE 4: FINANCIAL GUARANTEES'' to the consolidated Ñnancial statements for additional
information.
Other
We extend other guarantees and provide indemniÑcation to counterparties for breaches of standard
representations and warranties in contracts entered into in the normal course of business based on an
assessment that the risk of loss would be remote. See ""NOTE 4: FINANCIAL GUARANTEES'' to the
consolidated Ñnancial statements for additional information.
We are a party to numerous entities that are considered to be variable interest entities, or VIEs, under
FASB Interpretation No. 46 (Revised December 2003), ""Consolidation of Variable Interest Entities'', or
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Freddie Mac
FIN 46-R. These VIEs include low-income multifamily housing tax credit partnerships, certain Structured
Securities trusts (T-Series transactions or alternative collateral deals), and certain asset-backed investment
entities. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' to the consolidated Ñnancial statements for
additional information related to our signiÑcant variable interests in these VIEs.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments
for mortgage loans and mortgage-related securities. Pursuant to SFAS 133, a portion of these commitments
are accounted for as derivatives under GAAP, with their fair value reported as either Derivative assets, at fair
value or Derivative liabilities, at fair value on the consolidated balance sheets. See ""RISK MANAGE-
MENT Ì Interest-Rate Risk and Other Market Risks Ì Derivative Tables'' for further information. Certain
non-derivative commitments are related to commitments arising from mortgage swap transactions and
commitments to purchase certain multifamily mortgage loans that will be classiÑed as held-for-investment
under GAAP. These non-derivative commitments totaled $183.0 billion and $178.4 billion at December 31,
2004 and 2003, respectively. Such commitments were not accounted for as derivatives in accordance with
SFAS 133 and were not recorded on our consolidated balance sheets at fair value.
We have individually negotiated several arrangements providing for a mortgage lender's commitment to
sell a high proportion of its conforming mortgage origination volume to us. We are exposed to the risk that we
could lose purchase volume to the extent these agreements are terminated or modiÑed without replacement
from other lenders.
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Freddie Mac
RISK MANAGEMENT
Our business of purchasing mortgages and mortgage-related securities, funding these purchases and
guaranteeing the payment of principal and interest on the mortgage-related securities we issue exposes us to
three broad categories of risk: operational risks, market risk, and credit risk. Managing these risks is a critical
function for us as our eÅectiveness inÖuences our ability to accomplish our mission as well as the level and
stability of our earnings and long-term value. Our strategies for managing operational risks, market risk, and
credit risk are based upon the principle that risk should be understood, measured and managed directly by our
business areas, with appropriate, independent oversight.
Risk Oversight
We oversee business area management of operational, market and credit risks through our Enterprise
Risk Oversight group led by the Chief Enterprise Risk OÇcer, who reports directly to the Chief Executive
OÇcer. The Chief Enterprise Risk OÇcer provides advice to senior management on key risk management
issues and provides reporting on risk matters to the Audit Committee of the Board of Directors. Within the
Enterprise Risk Oversight function, the Operational Risk Oversight group, the Market Risk Oversight group
and the Credit Risk Oversight group each provide independent oversight. Oversight of our financial reporting
processes and internal controls occurs through the Chief Financial OÇcer. The Chief Financial OÇcer
provides overall guidance on the internal controls framework and communicates an assessment of internal
controls to senior management and the Audit Committee of the Board of Directors on a regular basis. The
Chief Financial OÇcer has established an internal controls organization to oversee the adequacy of internal
controls across the enterprise.
Our Internal Audit and Corporate Compliance Divisions play key roles in our risk oversight process.
Internal Audit assesses whether our risk management, control and governance processes are adequate and
functioning eÅectively. Corporate Compliance helps ensure that we comply with statutory and regulatory
requirements, and related corporate policies that govern our business activities. Internal Audit reports to the
Audit Committee. The Chief Compliance OÇcer reports directly to the Chief Executive OÇcer and provides
reports on compliance matters to the Audit Committee.
The Board of Directors oversees risk management through the Audit Committee, the Finance and
Capital Deployment Committee and the Mission and Sourcing Committee. An independent director chairs
each of these Committees.
Operational Risks
Summary
Operational risks represent the potential for Ñnancial loss resulting from failed or inadequate controls with
respect to process, technology, people or external events. Operational risks are present in all of our business
processes, including Ñnancial reporting. While we have made strides in remediating internal control
weaknesses with respect to Ñnancial reporting, we have a signiÑcant number of internal control issues that
have not been fully remediated and considerable challenges remain. Some of these control issues represent
""material weaknesses'' in our internal controls over Ñnancial reporting. We have detailed these material
weaknesses and remediation activities in Ì ""Internal Controls over Financial Reporting''. We have focused
intense eÅort in 2004 on identifying and remediating control design issues; however, we may discover new
control weaknesses as we complete our controls eÅectiveness testing eÅort which is currently underway.
Our process for managing operational risks is to identify, measure, remediate, and monitor all key sources
of operational risks. To improve our ability to manage operational risks, we have undertaken a number of
corporate initiatives. In 2004 we implemented corporate-wide ethics training; an enhanced employee hotline
process for reporting concerns, including those relating to our Ñnancial reporting processes; a revised corporate
disclosure policy; an enhanced Disclosure Committee; and a New Products Committee. We believe these
initiatives have strengthened our entity-level control, and emphasized a ""tone from the top'' of strong integrity
and ethical behavior.
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Freddie Mac
A major corporate reorganization in early 2005 resulted in a functional organization structure with
responsibilities for operations and technology under a new executive vice president position. We also
completed a full integration of all Ñnancial accounting functions under the Chief Financial OÇcer to enable
greater accountability and role clarity.
Finally, we have undertaken a key initiative to improve our capabilities to better measure our operational
risks. We have deÑned an operational risks framework that we believe is consistent with the Basel II Advanced
Measurement Approach scheduled to be adopted by large U.S. banks. See ""BUSINESS Ì Regulatory and
Governmental Matters Ì Other Regulatory Matters.'' The framework includes common risk language, the
operational loss event, tracking key risk indicators and control self-assessments. We believe that the
implementation of this framework improves our operational risks management capabilities. We are in the early
stage of a multi-year eÅort to fully implement the components of this framework.
Sources of Operational Risks
Process Risk. Process risk includes transaction execution, modeling, and vendor management risk.
Transaction execution risk is mitigated through comprehensive product development processes, suitable
approval authorities, data quality standards and identiÑcation and execution of control procedures. While we
are exposed to the risk of loss from failure to develop or follow appropriate processes for our business
transactions, process risk management enables us to fulÑll our commitment to introduce new products and
programs to improve homeownership opportunities for low- and moderate-income borrowers and to meet our
customers' needs. We have strengthened our controls over the new product process with the creation of a New
Products Committee, designed to clearly identify the requirements for implementing all new product ideas.
We make signiÑcant use of business and Ñnancial models. In 2004, we strengthened our processes to
validate assumptions, model code and theory. We have enhanced our oversight processes, including
establishing a corporate function to focus on the key models used in management decisions and Ñnancial
reporting. While controls over model risk have been enhanced, signiÑcant eÅorts remain with respect to
controls over model applications. We plan to further remediate model oversight issues during 2005.
Vendor management is critical for us because we currently outsource to external parties certain key
functions. These functions include processing functions for trade capture, market risk management analytics,
asset valuation (Blackrock Financial Management, Inc.), and processing functions for mortgage loan
underwriting (Electronic Data Systems Corporation). We may enter into similar outsourcing relationships in
the same or other business areas in the future. If one or more of these key external parties were not able to
perform their functions for a period of time or at an acceptable service level, there is a risk that our Ñnancial
condition or results of operations would be adversely aÅected, perhaps materially. Our use of vendors also
exposes us to the risk of a loss of intellectual property or a breach of conÑdentiality or other harm. We
endeavor to mitigate these risks through detailed vendor requirements, active vendor management, legal
contracts, business continuity planning, and third party review of vendors. In addition, to ensure the integrity
of data used in Ñnancial reporting, we have implemented quality assurance processes valuations and processes
performed by Blackrock.
Technology Risk. Technology risk includes the risk of inadequate or failed systems, inappropriate
systems implementation and inadequate system security that allows unauthorized access to computer systems.
We monitor computer security measures and applications and we use corporate information access policies
and periodic access reviews to verify that only authorized personnel have access to our systems. We identiÑed
material weaknesses related to system security, change management and information technology application
and general controls during our control reviews in 2004. These weaknesses related not only to Ñnancial
reporting systems, but other business applications as well. Remediation eÅorts to correct these weaknesses
began in 2004 and will continue through 2005. See ""Internal Controls over Financial Reporting'' for more
information concerning internal control issues related to our systems.
We are making signiÑcant investments to build new Ñnancial reporting systems and to move to more
eÅective and eÇcient business processing systems. During the transition period, however, we are more reliant
on end-user computing systems than we prefer. End-user computing systems increase the risk of errors in
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Freddie Mac
some of our core operational processes and increase our reliance on monitoring controls. In addition, changes
in management controls for these systems required signiÑcant enhancement in 2004. We are mitigating this
risk by improving our documentation and moving responsibility for key end-user systems to the Information
Technology Group. See ""Ì Internal Controls over Financial Reporting'' for more information concerning
end-user system issues and mitigation activities.
People Risk. People risk includes the risk of inadequate or unqualiÑed staÇng, as well as the risk of
employee errors and internal fraud. We mitigate this risk at the entity-level through the use of professional
recruiting staÅ, employee screening and targeted retention actions. At the business-unit level this risk is
mitigated by employee training and development activities and supervisory review of staÅ. People risk was
generally a signiÑcant risk during 2003 and, to a lesser extent, during 2004, with large staÅ additions in both
the accounting and information technology areas to address Ñnancial reporting processes and control
remediation. During 2003 and 2004, we also made extensive use of consultants. In the fourth quarter of 2004
the use of consultants began to decline signiÑcantly. This trend has continued in 2005, and while people risk is
still elevated, it has begun to decline.
External Event Risk. We are exposed to the risk that a catastrophic event, such as a terrorist event or
natural disaster, could result in a signiÑcant business disruption and an inability to process transactions
through normal business processes. To mitigate this risk, we maintain and test a business continuity plan and
have established backup facilities for critical business processes and systems away from, although in the same
metropolitan area as, our main oÇces. In 2004, we began an eÅort to determine the feasibility of establishing
an alternate site for critical business processes that has a separate power grid, labor pool and geographic
location. We are in the early phases of this eÅort.
We are also exposed to the risk that our sellers or servicers misrepresent the mortgages they sell to us, or
sell or service these mortgages in a manner inconsistent with our selling requirements or servicing guidelines,
and as a result, adversely aÅect our income or asset values. We rely on a variety of preventative and detective
controls to mitigate this risk. In particular, we use quality control reports and reviews, on-site audits and
investigations of situations involving possible fraud to identify problems. We also require sellers and servicers
to represent and warrant to us that the loans they sell to us or service for us meet our standards. We impose
minimum net worth, insurance and other eligibility requirements to help ensure that our sellers and servicers
have the capability and incentive to meet our standards. See ""Credit Risks'' and ""BUSINESS Ì Predatory
Lending'' for more information on how we manage the risk of sellers and servicers.
Internal Controls over Financial Reporting
Improving internal controls over Ñnancial reporting and addressing material weaknesses were top
priorities in 2004 and continue to be in 2005. As we are working to strengthen our control environment we
focused on managing the operational risks related to inaccurate or incomplete Ñnancial reporting to our
stakeholders. Throughout 2004, there were a number of material weaknesses and other control deÑciencies in
our internal controls over Ñnancial reporting that required our attention. They were:
‚ signiÑcant integration issues among numerous core business, accounting, and external service
provider operations and over-reliance on end-user computing systems for certain major activities;
‚ inadequate controls over data input and systems limitations in Ñnancial processes;
‚ inadequate supervisory review of the preparation of journal entries in certain accounting units;
‚ end-user computing solutions with both insuÇcient documentation and change controls;
‚ inadequate staÇng and systems to support the appropriate scope of independent price veriÑcation
of Ñnancial instruments used in the preparation of Ñnancial statements;
‚ lack of formal change management and oversight processes over certain models used to support
Ñnancial reporting;
‚ insuÇcient monitoring controls within Ñnancial operations and related reporting functions;
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Freddie Mac
‚ insuÇcient documentation controls regarding roles and responsibilities related to certain data
correction activities;
‚ technology implementation control deÑciencies, including changes in management processes that
allow access to production environments by developers; and
‚ access by some business end-users to production databases.
In order to compensate for these material weaknesses we have had to perform extensive veriÑcation and
validation procedures to ensure our Ñnancial statements are fairly presented in accordance with GAAP. This
work began with the completion of process documentation for our controls over Ñnancial reporting and an
internal review to assess the design of internal controls over these processes. Our objective was to assess the
quality of the controls design and to initiate substantive actions to improve any design weaknesses. This eÅort
identiÑed additional material weaknesses in our controls design related to:
‚ lack of documentation and evaluation of information technology general and application controls;
‚ weaknesses in certain processes surrounding the accounting for security impairment; and
‚ weaknesses in management's processes for identifying deÑciencies in controls over Ñnancial
reporting.
We undertook considerable work in 2004 to address the risks of the material weaknesses in our Ñnancial
reporting processes. This work resulted in the risks related to many weaknesses either being fully remediated
or reduced. However, as of the end of 2004, we still had several material weaknesses within our Ñnancial
reporting controls. These weaknesses must be monitored closely and compensating procedures must be
executed to ensure there is no material impact to our Ñnancial reporting. We continue to place considerable
management emphasis on the development and execution of plans to reduce and eventually eliminate the risk
associated with these remaining weaknesses. The remaining material weaknesses as of December 31, 2004
include:
‚ end-user computing controls;
‚ monitoring controls within Ñnancial operations;
‚ information technology general and application controls;
‚ management risk and control self-assessment process; and
‚ integration between Operations and Finance.
In 2004 the focus was on improving the controls design and in addressing design weaknesses in our
Ñnancial reporting controls. We plan to remediate the existing material weaknesses described above by the end
of 2005, except for the material weakness related to integration between Operations and Finance. For this
weakness, we will apply risk reduction techniques in 2005, but do not expect to remediate fully until 2006.
Further, we are addressing other control deÑciencies that are not material weaknesses, as they still represent
risks in our control environment.
The next step in our plan is to test the operating eÅectiveness of the controls over Ñnancial reporting.
Controls testing will provide evidence that the controls are working as designed, or will indicate where we have
deÑciencies. Additionally, we are pursuing actions to fully document and test our entity-level controls and
controls over third party vendors. Entity-level controls include components such as: our Code of Conduct,
employee hotline, anti-fraud program and compliance program. Third party controls are those controls that
ensure the information and services we receive from third party vendors are well controlled and meet our
quality requirements.
There are continued risks to our Ñnancial reporting timeline as we strive to fully remediate the remaining
material weaknesses and enhance our internal control environment. As we execute testing we may also
encounter additional material weaknesses that we need to address. We manage these timeline and scope risks
through a centralized internal controls and program management oÇce with signiÑcant involvement of key
executives.
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Freddie Mac
Interest-Rate Risk and Other Market Risks
We are exposed to the risk that changes in interest rates or in other market factors will adversely aÅect
our cash Öows, the fair value of net assets and/or future earnings. We take an active and disciplined approach
to the management of these risks. Our disciplined approach to risk management is essential to generating fair
value growth for stockholders in a wide range of interest-rate environments. Our interest-rate risk exposure
results primarily from mortgage loans and mortgage-related securities held in our Retained portfolio and the
liabilities funding this portfolio. To a lesser extent, we are also exposed to interest-rate risk through our credit
guarantee activities.
Oversight of Interest-Rate Risk and Other Market Risks
The purpose of the Market Risk Oversight group is to provide independent oversight of market risk,
including interest-rate risk, and to enhance our market risk measurement and management capabilities so that
they are consistent with industry best practice. Market Risk Oversight fulÑlls its mission by reporting to senior
management concerning the key investment strategies and market risks taken throughout the corporation, the
consistency of market risk positions with stated strategies and the appropriateness of limits and policies related
to risk exposure. The Models and Methods group, also a part of the Enterprise Risk Oversight function, is
responsible for independently assessing the design and adequacy of all key models, including prepayment
models.
Sources of Interest-Rate Risk and Other Market Risks
Retained Portfolio. Our Retained portfolio activities expose us to interest-rate risk and other market
risks. This exposure results primarily from the uncertainty as to when borrowers will pay the outstanding
principal balance of mortgage loans and mortgage-related securities held in the Retained portfolio, known as
prepayment risk, and the resulting potential mismatch in the timing of our receipt of cash Öows on our assets
versus the timing of our obligation to make payments on our liabilities. For the vast majority of our mortgage-
related investments, the mortgage borrower has the option to make unscheduled payments of additional
principal or to completely pay oÅ a mortgage loan at any time before its scheduled maturity date (without
having to pay prepayment penalties) or to hold the mortgage to its stated maturity. The borrower's option
makes the timing and amount of mortgage prepayments (and thus the timing and amount of mortgage cash
Öows received by us) very sensitive to changes in interest rates, among other factors.
The Retained portfolio comprises mortgage investments with a range of diÅerent characteristics,
including diÅerent stated maturities, underlying collateral, principal and interest payment structures and
prepayment patterns. To manage the interest-rate risk associated with this wide range of mortgage-related
investments, we employ a risk management strategy that seeks to substantially match the duration
characteristics of our assets and liabilities. We use various instruments, including short-term debt, callable and
non-callable long-term debt and interest-rate derivatives, to mitigate the risk that mortgage investments may
prepay faster or slower than expected.
The types of interest-rate risk and other market risks to which we are exposed through our Retained
portfolio are described below.
‚ Duration Risk. Duration is a measure of a Ñnancial instrument's price sensitivity to changes in
interest rates. We actively manage duration risk through asset selection and structuring (that is,
by identifying or structuring mortgage-related securities with attractive prepayment and other
characteristics), by issuing a broad range of both callable and non-callable debt instruments and
by transacting in interest-rate derivatives.
We monitor duration against limits and reporting thresholds established by senior management
and the Board of Directors. Our interest-rate sensitivity is estimated and reported through our
PMVS and duration gap measures. These measures are estimated on a daily basis and publicly
reported on a monthly basis. See ""Measurement of Interest-Rate Risk'' below.
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Freddie Mac
Although duration risk has been maintained at relatively low levels as indicated by our PMVS and
duration gap estimates (see ""Measurement of Interest-Rate Risk Ì PMVS and Duration Gap''),
fair value gains or losses will generally occur as market conditions change. For example, fair value
gains or losses occur when our duration gap is positive or negative and the level of interest rates or
shape of the yield curve changes.
‚ Convexity Risk. Convexity is a measure of how much duration changes as interest rates change.
Convexity risk primarily results from mortgage prepayment risk. We actively mitigate this risk by
maintaining a high percentage of callable debt and option-based derivatives relative to the Ñxed-
rate mortgage assets held in the Retained portfolio.
We do not, however, hedge all prepayment option risk that exists at the time a mortgage is
purchased or that arises over its life. For the portion of risk not hedged at the time of purchase, we
undertake frequent rebalancing actions in order to keep our interest-rate risk exposure within our
internal limits (see ""Use of Derivatives and Interest-Rate Risk Management Ì Use of Deriva-
tives Ì Adjust Funding Mix'' below). Although convexity risks have been maintained at relatively
low levels as indicated by our PMVS estimate (see ""Measurement of Interest-Rate Risk Ì
PMVS and Duration Gap''), fair value gains or losses will generally occur as market conditions
change. For example, because we do not hedge all of the prepayment risk inherent in our
mortgage investment portfolio, fair value gains or losses occur from changes in the relationship
between interest-rate volatility expected at the time a mortgage loan is acquired and the volatility
actually experienced (see ""Volatility Risk'' below for more information).
‚ Yield Curve Risk. Yield curve risk is the risk that non-parallel shifts in the yield curve (such as
a Öattening or steepening) will adversely aÅect our cash Öows, fair value of net assets and/or
future earnings. Changes in the shape, or slope, of the yield curve often arise due to changes in the
market's expectation of future interest rates at diÅerent points along the yield curve, including
expectations regarding action by the Federal Reserve Board. For this reason, we evaluate our
exposure to yield curve risk by examining potential reshaping scenarios at various points along the
yield curve. Our yield curve risk under a speciÑed yield curve scenario is reÖected in our PMVS-
Yield Curve, or PMVS-YC, disclosure.
‚ Volatility Risk. Volatility risk is the risk that changes in the market's expectation of the
magnitude of future variations in interest rates will adversely aÅect our cash Öows, fair value of net
assets and/or future earnings. The market's expectation about the future volatility of interest rates,
or implied volatility, is a key determinant of the value of an interest-rate option. Higher expected
volatility implies a greater likelihood that the expected life of a mortgage asset will either extend
or contract. For example, higher interest-rate volatility implies a higher likelihood that interest
rates will decline to levels that make mortgage prepayments attractive to homeowners, thereby
making their prepayment option more valuable and making our mortgage assets subject to their
prepayment option less valuable. We manage volatility risk through asset selection and by
maintaining a consistently high percentage of option-embedded liabilities (e.g., callable debt) and
option-based derivatives relative to our mortgage assets. We monitor volatility risk by measuring
exposure levels on a daily basis and we maintain internal limits on the amount of volatility risk
exposure.
‚ Basis Risk. Basis risk is the risk that interest rates in diÅerent market sectors will not move in
tandem and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.
This risk arises principally because we hedge mortgage-related investments with LIBOR- and
Treasury-based interest-rate derivatives. We do not actively manage the basis risk arising from
funding Retained portfolio investments with our debt securities, also referred to as mortgage-to-
debt option-adjusted spread risk. See ""CONSOLIDATED FAIR VALUE BALANCE
SHEETS Ì Key Components of Changes in Fair Value of Net Assets Ì EÅect of changes in
option-adjusted spread (mortgage-to-debt spread)'' for additional information. We also incur
basis risk when we use LIBOR- or Treasury-based instruments in our risk management activities.
We monitor the fair value Öuctuations associated with these basis risks and manage this exposure
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Freddie Mac
by adjusting our mix of LIBOR- and Treasury-based instruments and our debt in response to
changes in the expected interest-rate relationships in these diÅerent markets. We monitor basis
risk on a daily basis and maintain internal limits on the amount of basis risk exposure.
‚ Prepayment Model Risk. Prepayment model risk is the risk that actual mortgage prepayment
behavior will diÅer from the prepayment behaviors we forecast using our proprietary internal
models and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.
These models are used to determine the estimated duration and convexity of mortgage assets for
our PMVS and duration gap measures. To mitigate prepayment model risk, we perform extensive
monthly testing of actual results against model results and sensitivity analysis to facilitate
informed asset selection and risk management decisions. However, expected returns can be
aÅected by diÅerences between prepayments forecasted by the models and actual prepayments.
‚ Foreign Currency Risk. Foreign currency risk is the risk that Öuctuations in currency exchange
rates (e.g., foreign currencies to the U.S. dollar) will adversely aÅect our cash Öows, fair value of
net assets and/or future earnings. Our exposure to foreign currency risk arises primarily because
we issue debt denominated in currencies other than the U.S. dollar, our functional currency. In
the case of our 4Reference Notes» securities program, we are obligated to make periodic interest
and principal payments in Euros. We mitigate the risk associated with Öuctuations in currency
exchange rates by entering into swap transactions that eÅectively convert foreign-denominated
obligations into U.S. dollar denominated obligations.
Credit Guarantee Activities. Changes in interest rates and credit expectations cause Öuctuations in the
fair value of our existing credit guarantee portfolio. We do not hedge these changes in the fair value of our
existing credit guarantee portfolio, other than the interest-rate exposure related to net buy-ups. We also hedge
expected gains or losses resulting from our mortgage security program cycles. Timing diÅerences caused by
mortgage security program cycles can lead to signiÑcant interest expense, particularly in a rapidly declining
interest-rate environment. If the interest rate paid to a PC investor is higher than the reinvestment rate on
payments received from mortgage borrowers, we bear the cost diÅerence, recognized as interest expense, for
the time period between when the borrower pays us and when we reduce the PC balance.
While year-to-year changes in the fair value of the guarantee portfolio may have a signiÑcant impact on
the fair value of net assets, we believe that changes in the fair value of our existing guarantee portfolio are not
a good indication of long-term fair value expectations because such changes do not reÖect the strong
probability that, over time, replacement business will largely replenish guarantee fee income lost because of
prepayments.
Use of Derivatives and Interest-Rate Risk Management
Use of Derivatives. To manage interest-rate and other market risks, we use derivatives primarily to:
‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;
‚ hedge foreign-currency exposure associated with certain debt issuances; and
‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the
interest-rate characteristics of our mortgage assets.
Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase
mortgage investments on an opportunistic basis for a future settlement date that often ranges from two weeks
to three months after the date of the commitment. To facilitate larger and more predictable debt issuances
that contribute to lower funding costs, we use interest-rate derivatives to hedge the anticipated debt issuances
associated with these periodic mortgage purchases. In doing so, we economically hedge the interest-rate risk
exposure from the time the mortgage is committed to be purchased to the time the debt is issued. We typically
fund mortgage investments with a combination of callable and non-callable debt of various maturities in order
to better match the cash-Öow and optionality characteristics of the mortgage investments. Through the use of
interest-rate derivatives, we can synthetically create the substantive economic equivalent of these various
funding structures. For example, the combination of a series of short-term debt issuances over a deÑned
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longer-term period and a pay-Ñxed swap with the same maturity is the substantive economic equivalent of a
long-term debt instrument of comparable maturity. Similarly, the combination of non-callable debt and a
swaption, or option to enter into a receive-Ñxed swap, with the same maturity as the non-callable debt, is the
substantive economic equivalent of callable debt. The ability to either issue debt or synthetically create its
substantive economic equivalent through derivatives increases funding Öexibility, allows us to better match
asset and liability cash Öows and often reduces the overall funding cost.
Hedge Foreign-Currency Exposure. We also use derivatives to hedge foreign-currency exposure
associated with foreign currency denominated debt issuances, such as our 4Reference Notes» securities
program, as discussed above in ""Sources of Interest-Rate Risk and Other Market Risks Ì Retained
Portfolio Ì Foreign Currency Risk.'' Through the use of derivatives, we are able to mitigate nearly all
currency risk at the time of debt issuance.
Adjust Funding Mix. As market conditions dictate, we undertake rebalancing actions in order to keep
our interest-rate risk exposure within management limits. As interest rates decline, mortgage prepayments
tend to increase and the expected life of mortgages tends to decrease. In this environment, we typically enter
into receive-Ñxed swaps or purchase Treasury-based derivatives to adjust the duration of our funding to oÅset
the declining mortgage duration. As interest rates increase, prepayments tend to decrease and lengthen the
expected life of mortgages. In this case, we typically enter into pay-Ñxed swaps or sell Treasury-based
derivatives in order to adjust the duration of our funding to oÅset increasing mortgage duration.
Types of Derivatives. We use derivatives that are common in the Ñnancial markets to conduct our risk
management activities. The majority of our derivative positions fall into the following four categories:
‚ LIBOR-based interest-rate swaps;
‚ LIBOR- and Treasury-based exchange-traded futures;
‚ LIBOR- and Treasury-based options (including swaptions); and
‚ Foreign currency swaps.
In addition to swaps, futures and options, our derivative positions include certain purchase and sale
commitments and other contractual agreements including swap guarantee derivatives and credit risk-sharing
agreements discussed further below.
Forward Purchase and Sale Commitments. We routinely enter into forward purchase and sale
commitments for mortgage loans and mortgage-related securities. Most of these commitments are derivatives
subject to the requirements of SFAS 133 and accordingly must be recorded at fair value on our consolidated
balance sheets.
Prepayment Management Agreement. Practices of seller/servicers may aÅect prepayment levels on
mortgages that underlie PCs. As a result, mortgages underlying some PCs may be prepaid faster than similar
mortgages underlying other PCs, adversely aÅecting our management and guarantee income and the
performance of our mortgage-related securities. We have taken steps to achieve prepayment experience on
PCs that is consistent with market norms. Beginning in 2002, we required that certain mortgage pools
delivered to us between 2001 and 2003, which we considered to pose elevated risk of prepayment, be covered
by a prepayment management agreement to partially compensate us for the adverse Ñnancial impacts caused
by disproportionately higher mortgage prepayments. We also oÅered an incentive through an adjusted
guarantee fee level on certain mortgage deliveries when the prepayment experience of the mortgage pools is
within deÑned ranges. This type of agreement is accounted for as a derivative in accordance with SFAS 133
and classiÑed as no hedge designation, with changes in fair value recorded as Derivative gains (losses) on the
consolidated statements of income. This type of agreement is reÖected at fair value on our consolidated
balance sheets in the Derivative assets, at fair value, or Derivative liabilities, at fair value, caption. At
December 31, 2004 and 2003, approximately $113.7 billion and $152.5 billion, respectively, of the mortgages
underlying PCs included in our Total mortgage portfolio (see ""Table 8 Ì Freddie Mac's Total Mortgage
Portfolio Based on Unpaid Principal Balances'') were subject to this type of agreement. Amounts due to us
under this type of agreement are reported as a component of our Management and guarantee income.
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Freddie Mac
Swap Guarantee Derivatives. We guarantee the payment of principal and interest on (a) multifamily
mortgage loans that are originated and held by state and municipal housing Ñnance agencies to support tax-
exempt multifamily housing revenue bonds, (b) tax-exempt multifamily housing revenue bonds that support
pass-through certiÑcates issued by third parties, and (c) Freddie Mac pass-through certiÑcates which are
backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans. In
connection with these guarantees we have also guaranteed the sponsor's or the borrower's performance as a
counterparty on any related interest-rate swaps used to mitigate interest-rate risk. Guarantees of these
interest-rate swaps entered into after June 30, 2003 are treated as derivatives in accordance with SFAS 149
and are reported as swap guarantee derivatives. The notional amount of these swap guarantees was
$408 million and $31 million at December 31, 2004 and 2003, respectively.
Summary of Derivative Positions. The fair value of our derivatives was a net asset balance of
$15.0 billion and $15.8 billion at December 31, 2004 and 2003, respectively. In our consolidated balance
sheets, derivative instruments are presented in Derivative assets, at fair value or Derivative liabilities, at fair
value. See ""Table 35 Ì Total Derivative Portfolio'' for a summary of notional amounts and fair values by
product type.
Derivative-Related Risks
Our use of derivatives exposes us to derivative market liquidity risk and counterparty credit risk. We are
subject to derivative market liquidity risk, described below, arising from possible diÇculties in entering into
and exiting out of derivatives to meet our needs. Counterparty credit risk arises from the possibility that the
counterparty will not be able to meet its contractual obligations.
Derivative Market Liquidity Risk. Derivative market liquidity risk is the risk that we may not be able to
enter into or exit out of derivative transactions at a reasonable cost. A lack of suÇcient capacity or liquidity in
the derivatives market could limit our risk management activities, increasing our exposure to interest-rate risk.
Limited liquidity or capacity in the derivatives market could make derivatives that we need for risk
management purposes either unavailable or prohibitively expensive. To help maintain continuous access to
derivative markets, we use a variety of products and transact with many diÅerent derivative counterparties. In
addition to over-the-counter, or OTC, derivatives, we also use exchange-traded derivatives, asset securitization
activities, callable debt, and short-term debt to rebalance our portfolio.
To mitigate the risk that we may be unable to enter into or replace derivatives transactions at reasonable
cost, we limit our duration and convexity exposure to each counterparty. At December 31, 2004, the largest
single notional balance of our 25 approved OTC counterparties listed in ""Table 50 Ì Derivative Counterparty
Credit Exposure'' was $60.9 billion, or 13 percent, of the total notional balance of our OTC interest-rate
swaps, option-based derivatives and foreign currency swaps.
Derivative Counterparty Credit Risk. Exchange-traded derivatives, such as futures contracts, do not
measurably increase our counterparty credit risk because changes in the value of open exchange-traded
contracts are settled daily through a Ñnancial clearinghouse established by each exchange. OTC derivatives,
however, expose us to counterparty credit risk because transactions are executed and settled between us and
the counterparty. When an OTC derivative has a market value above zero at a given date (i.e., an asset
reported as Derivative assets, at fair value on the consolidated balance sheets), then the counterparty could
potentially be obligated to deliver cash, securities or a combination of both having that market value to satisfy
its obligation to us under the derivative.
We actively manage our exposure to counterparty credit risk. We use several tools to manage and
minimize counterparty credit risk including:
‚ review of external rating analyses;
‚ strict standards for approving new derivative counterparties;
‚ ongoing monitoring of our positions with each counterparty by type of derivative;
‚ diversiÑcation of counterparties (discussed under ""Derivative Market Liquidity Risk'');
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Freddie Mac
‚ master netting agreements and collateral agreements; and
‚ stress-testing to evaluate potential exposure under possible adverse market scenarios.
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to conÑrm
that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are assigned to
each counterparty based on quantitative and qualitative analysis, which we update and monitor on a regular
basis. Additional reviews are completed when market conditions dictate or events aÅecting an individual
counterparty occur.
Derivative Counterparties. Our standards for entering into OTC interest-rate swaps, option-based
derivatives and foreign-currency swaps include rigorous internal credit and legal reviews. Our derivative
counterparties carry external credit ratings among the highest available from major rating agencies. All of
these counterparties are major Ñnancial institutions and are experienced participants in the OTC derivatives
market.
Master Netting and Collateral Agreements. We use master netting and collateral agreements to reduce
our credit risk exposure to our active OTC derivative counterparties for interest-rate swaps, option-based
derivatives and foreign-currency swaps. Master netting agreements provide for the netting of amounts
receivable and payable from an individual counterparty, which reduces our exposure to a single counterparty in
the event of default. For example, if we have a gain position on one derivative and a loss position on another
derivative with the same counterparty, then the gain can be netted with the loss to determine the amount of
our net exposure to the counterparty. On a daily basis, the market value of each counterparty's derivatives
outstanding is calculated to determine the amount of our net credit exposure, which is equal to derivatives in a
net gain position by counterparty after giving consideration to collateral posted. Our collateral agreements
require most counterparties to post collateral for the amount of our net exposure to them above the applicable
threshold. Collateral posting thresholds are generally tied to a counterparty's credit rating. Derivative
exposures and collateral amounts are monitored on a daily basis using both internal pricing models and dealer
price quotes. Our derivative counterparties typically transfer collateral within one to three business days based
on the values of the related derivatives. As described further below, this time lag in posting collateral can
aÅect our net uncollateralized exposure to derivative counterparties.
The collateral posted by counterparties serves to protect us against the risk of counterparty credit losses.
Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities, agency
securities or other mortgage-related securities. In the event a counterparty defaults on its obligations under the
derivatives agreement and the default is not remedied in the manner prescribed in the agreement, we have the
right under the agreement to direct the custodian bank to transfer the collateral to us or, in the case of non-
cash collateral, to sell the collateral and transfer the proceeds to us.
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Freddie Mac
Table 50 summarizes our exposure to counterparty credit risk in our derivatives. This table is useful in
understanding our credit risk related to our derivative portfolio.
Table 50 Ì Derivative Counterparty Credit Exposure
Rating(1)
Number of
Counterparties(2)
Notional
Amount
December 31, 2004
Total
Exposure at
Fair Value(3) Collateral(4)
Exposure,
Net of
Weighted Average
Contractual
Maturity
(in years)
2
1
5
7
6
3
1
25
AAA(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A- ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives(8) ÏÏÏÏÏÏÏÏÏÏ
Prepayment management
agreement(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments(10) ÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives(11) ÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives(9)ÏÏ
Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ
$
3,041
597
110,692
135,041
153,867
56,530
210
459,978
138,822
113,692
32,952
10,926
408
$756,778
$
498
399
3,096
5,199
6,505
1,478
11
17,186
Ì
Ì
40
Ì
Ì
$17,226
(dollars in millions)
$498
32
25
36
Ì
8
2
601
Ì
2.5
23.9
4.4
5.2
5.1
5.1
7.0
5.0
Ì
40
Ì
Ì
$641
Rating(1)
Number of
Counterparties(2)
Notional
Amount
December 31, 2003
Total
Exposure at
Fair Value(3) Collateral(4)
Exposure,
Net of
Weighted Average
Contractual
Maturity
(in years)
AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives(8) ÏÏÏÏÏÏÏÏÏÏ
Prepayment management
agreement(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments(10) ÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives(11) ÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives(9)ÏÏ
Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ
2
1
4
7
6
3
4
27
$
2,825
604
119,409
237,048
236,944
87,001
1,018
684,849
141,381
$
(dollars in millions)
$283
5
29
250
133
95
1
796
Ì
283
303
1,610
7,091
5,922
2,143
19
17,371
Ì
3.6
24.7
4.6
4.1
5.4
5.2
3.3
4.8
152,548
89,520
15,542
31
$1,083,871
Ì
101
7
Ì
$17,479
Ì
101
7
Ì
$904
Collateral Posting
Threshold(5)
Mutually agreed upon
$10 million or less
$10 million or less
$10 million or less
$1 million or less
$1 million or less
$1 million or less
Collateral Posting
Threshold(5)
Mutually agreed upon
$10 million or less
$10 million or less
$10 million or less
$1 million or less
$1 million or less
$1 million or less
(1) We use the lower of S&P and Moody's ratings to manage collateral requirements. In this table, the rating of the legal entity (or the
guarantor of the legal entity) is stated in terms of the S&P equivalent.
(2) Based on legal entities. AÇliated legal entities are reported separately.
(3) For each counterparty, this amount includes derivatives with a net positive fair value (recorded as Derivative assets, at fair value)
including the related accrued interest receivable/payable (net) (recorded in Accounts and other receivables, net and Accrued
interest payable).
(4) Total Exposure at Fair Value less collateral held as determined at the counterparty level.
(5) Counterparties are required to post collateral when their exposure exceeds agreed-upon collateral posting thresholds. These
thresholds are typically based on the counterparty's credit rating and are individually negotiated.
(6) At December 31, 2004, two of our derivative counterparties were rated AAA. In early 2005, one of these counterparties was
downgraded to AA°. With respect to this downgraded counterparty, there was no Total Exposure at Fair Value at December 31,
2004 as the fair value of the underlying derivatives were in a net liability position at that date.
(7) Consists of OTC derivative agreements for interest-rate swaps, option-based derivatives, excluding written options, and for-
eign-currency swaps. Written options do not present counterparty credit exposure, because we receive a one-time up-front premium
in exchange for giving the holder the right to execute a contract under speciÑed terms, which generally puts us in a liability position.
(8) Consists primarily of exchange-traded contracts, which do not measurably increase our exposure to counterparty credit risk because
changes in value of open exchange-traded contracts are settled daily through a Ñnancial clearinghouse established by each
exchange.
(9) See ""Use of Derivatives and Interest-Rate Risk Management Ì Types of Derivatives'' for additional information concerning the
nature of the prepayment management agreement and swap guarantee derivatives.
(10) Consists of OTC derivative agreements for forward purchase and sale commitments.
(11) See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for additional information about
credit derivatives.
105
Freddie Mac
Over time, our exposure to certain counterparties for OTC interest-rate swaps, option-based derivatives
and foreign-currency swaps varies depending on changes in fair values which are aÅected by changes in
period-end interest rates, the implied volatility of interest rates, foreign-currency exchange rates and the
amount of derivatives held. Our uncollateralized exposure to counterparties for OTC interest-rate swaps,
option-based derivatives and foreign-currency swaps, after applying netting agreements and collateral,
decreased to $601 million as of December 31, 2004 from $796 million as of December 31, 2003. This decrease
in uncollateralized exposure was due to the following three factors:
‚ decreases in the diÅerences between fair value estimates used by our derivative counterparties in
determining the value of collateral to be posted and the estimates of derivative fair values used in
our Ñnancial reporting;
‚ smaller market movements during the time period between when a derivative was marked to fair
value and the date we received the related collateral. Our derivative counterparties typically post
collateral one to three business days after we request collateral; and
‚ decreases in the exposure below the posting thresholds of our derivative counterparties.
As indicated in Table 50, approximately 97 percent of our counterparty credit exposure for OTC interest-
rate swaps, option-based derivatives and foreign currency swaps was collateralized at December 31, 2004. In
the extremely unlikely event that all of our counterparties for these derivatives were to have defaulted
simultaneously on December 31, 2004, our maximum loss for accounting purposes would have been
approximately $601 million. As discussed below, in ""Derivative Portfolio Stress-Testing,'' however, our
economic loss, as measured by our potential additional uncollateralized exposure, may be higher than the
$601 million uncollateralized exposure of our derivatives if we were not able to replace the defaulted
derivatives in a timely fashion.
OTC Forward Purchase and Sale Commitments Treated as Derivatives. Since the typical maturity for our
OTC commitments is less than one year, we do not require master netting and collateral agreements for the
counterparties of these commitments. Therefore, as indicated in Table 50, the exposure to OTC commitments
counterparties of $40 million and $101 million as of December 31, 2004 and 2003, respectively, was
uncollateralized. The decrease in uncollateralized exposure was due to a signiÑcant decrease in the volume of
unsettled commitments as of December 31, 2004, which contributed to the reduction of notional amounts for
OTC commitments treated as derivatives.
Similar to counterparties for OTC interest-rate swaps, option-based derivatives and foreign-currency
swaps, we monitor the credit fundamentals of our OTC commitments counterparties on an ongoing basis to
ensure that they continue to meet our internal risk-management standards.
Derivative Portfolio Stress-Testing. Market values of derivatives can change signiÑcantly when market
conditions change. As a result, we monitor the risk that our uncollateralized exposure to each of our OTC
counterparties for interest-rate swaps, option-based derivatives and foreign-currency swaps will increase under
certain adverse market conditions. We perform severe market stress tests on a daily basis to evaluate the
potential additional uncollateralized exposure we have to each of these derivative counterparties. The market
stress test assumes changes in the level, slope and implied volatility of interest rates and changes in foreign-
currency exchange rates over a brief time period. The market stress test also assumes high OTC counterparty
default rates coupled with low recovery rates to calculate our potential exposure to each OTC counterparty.
To date, we have not incurred any credit losses on OTC derivative counterparties or set aside speciÑc
reserves for institutional credit risk exposure. We do not believe such reserves are necessary, given our
counterparty policies and collateral requirements.
Derivative Tables
Table 51 shows the notional amount for each of our hedge accounting categories under SFAS 133 and
the corresponding impact of those positions on our consolidated Ñnancial statements. The application and
eÅectiveness of our hedging strategies can materially aÅect Stockholders' equity and the timing of our
106
Freddie Mac
recognition of earnings. See ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements for more
information concerning our hedging activity.
Table 51 Ì Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions
Consolidated Balance Sheets
Description
Notional
Amount
December 31, 2004
Fair Value
(Pre-Tax)(1)
AOCI
(Net of Tax)(2)
Notional
Amount
(dollars in millions)
December 31, 2003
Fair Value
(Pre-Tax)(1)
AOCI
(Net of Tax)(2)
Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $113,101
21,214
Cash Öow hedges-openÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
622,463
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance related to closed cash Öow hedges ÏÏÏ
756,778
Ì
$12,317
228
2,486
15,031
Ì
$ Ì
(25)
Ì
(25)
(7,899)
$ 145,690
141,903
796,278
1,083,871
Ì
$10,185
(2,808)
8,446
15,823
Ì
$ Ì
(1,927)
Ì
(1,927)
(5,910)
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $756,778
$115,031
$(7,924)
$1,083,871
$15,823
$(7,837)
Description
Year Ended
December 31, 2004
Hedge
Accounting
Gains
(Losses)(4)
Derivative
Gains
(Losses)(5)
Consolidated Statements of Income
Year Ended
December 31, 2003
Hedge
Accounting
Gains
(Losses)(4)
Derivative
Gains
(Losses)(5)
Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedges-openÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$742
1
Ì
$743
$ Ì
2
(4,477)
$(4,475)
(dollars in millions)
$Ì
$697
29
(53)
10
Ì
$39
$644
Year Ended
December 31, 2002
Hedge
Accounting
Gains
(Losses)(4)
Derivative
Gains
(Losses)(5)
$241
(54)
Ì
$187
$ Ì
116
5,186
$5,302
(1) The fair values of derivatives (netted by counterparty as permitted by GAAP) are presented as Derivative assets, at fair value, and
Derivative liabilities, at fair value, on our consolidated balance sheets. The fair values for futures are directly derived from quoted
market prices. Fair values of other derivatives are derived primarily from valuation models with incorporation of market-based inputs.
(2) Derivatives that meet speciÑc criteria are accounted for as cash Öow hedges under SFAS 133. Changes in the eÅective portion of the
fair value of these open derivatives contracts are recorded in AOCI, net of taxes. Net deferred gains and losses on closed cash Öow
hedges (i.e., where the derivative is either terminated or redesignated) are also classiÑed in AOCI, net of taxes, until the related
forecasted transaction is determined to be probable of not occurring or aÅects earnings.
(3) A signiÑcant portion of our derivatives is not designated in hedge accounting relationships and is reported as no hedge designation.
For most derivatives not qualifying as an accounting hedge, fair value gains and losses are reported as Derivative gains (losses) on our
consolidated statements of income. For purchase and sale commitments of securities classiÑed as trading under SFAS 115 (with
notional balances of approximately $0 billion, $78 billion and $147 billion at December 31, 2004, 2003 and 2002, respectively), fair
value gains and losses are reported as Gains (losses) on investment activity on our consolidated statements of income and therefore,
those fair value gains and losses are not included above.
(4) Hedge accounting gains (losses) arise when the fair value change of a derivative does not exactly oÅset the fair value change of the
hedged item. For further information, see ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements.
(5) Includes gains or losses reclassiÑed from AOCI, net of taxes, as a result of the termination of cash Öow hedge designations because
we determined that the related forecasted transaction is probable of not occurring.
EÅect on Consolidated Financial Statements. As Table 51 shows, a signiÑcant portion of our derivatives
was not designated in hedge accounting relationships at December 31, 2004 and 2003. Derivatives that are not
in qualifying hedge accounting relationships generally increase the volatility of reported Net income because
they are marked to fair value through earnings without the oÅsetting change in value of the economically
hedged exposures also being recognized in earnings. For information about our hedging activities, see
""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-Interest Income (Loss) Ì Derivative Gains
(Losses).''
To qualify for cash Öow hedge accounting treatment, hedged forecasted transactions must be considered
probable of occurring. In addition, SFAS 133 imposes a variety of operational requirements that must be met.
At December 31, 2004, $21,214 million notional amount of derivative contracts was designated in cash Öow
hedge relationships, including $1,576 million notional amount of foreign-currency swaps and $19,638 million
notional amount of commitments. The current fair value of the derivatives included in cash Öow hedge
relationships is recorded on the consolidated balance sheets as Derivative assets, at fair value, or Derivative
liabilities, at fair value. For derivatives that receive cash Öow hedge accounting treatment under SFAS 133,
the eÅective portion of the change in fair value of the derivative asset or derivative liability is presented in the
Stockholders' equity section of our consolidated balance sheets in AOCI, net of taxes. The eÅective portion of
107
Freddie Mac
the derivative generally oÅsets, on a cumulative basis, the cumulative change in the present value of the
hedged cash Öows.
As of December 31, 2004, the net cumulative change in the fair value of all derivatives designated in cash
Öow hedge relationships that were still open or for which the forecasted transactions had not yet occurred since
SFAS 133 was implemented on January 1, 2001 (net of amounts previously reclassiÑed to earnings through
December 31, 2004) was a loss of approximately $7.9 billion on an after-tax basis. This amount was related
almost entirely to $7.9 billion of deferred losses on closed cash Öow hedge relationships. The majority of the
closed cash Öow hedges related to the hedging of the variability of cash Öows from forecasted issuances of debt
with various derivatives. Closed cash Öow hedges involve derivatives that have been terminated or are no
longer designated in cash Öow hedge relationships. Fluctuations in prevailing market interest rates have no
impact on the deferred portion of AOCI, net of taxes, relating to losses on closed cash Öow hedges. Therefore,
the $7.9 billion in deferred losses related to closed cash Öow hedges will be recognized as a reduction of
earnings as the originally hedged forecasted transactions aÅect earnings, unless it becomes probable that the
forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur, then the
entire deferred amount associated with the forecasted transaction will be reclassiÑed into earnings immedi-
ately. See ""Table 39 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to
Closed Cash Flow Hedge Relationships'' for more information on expected reclassiÑcations to income of net
deferred losses related to closed cash Öow hedges during future periods.
Table 52 summarizes the notional amounts for each type of derivative, including our new contracts,
maturities and terminations during the year. This information indicates the level and type of derivative activity
undertaken during the year and reÖects our use of diÅerent derivative products in the execution of our risk
management strategies. The notional amounts of our derivatives are a reference point to determine the
payments owed between us and our counterparties under the contracts. The notional amount of a derivative is
not an indication of the fair value of the position or of the cash Öows related to the position. In most market
environments, derivatives have fair values that are a small percentage of their notional amount.
108
Freddie Mac
Table 52 Ì Changes in Derivative Notional Amounts
Year Ended December 31, 2004
Derivative Notional Amount(1)
Beginning
Balance
New
Contracts
Maturities/
Terminations(2)
Ending
Balance
(dollars in millions)
Interest-rate swaps:
Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$179,751
107,417
424
287,592
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
217,338
123,611
20,379
361,328
130,798
46,512
$826,230
$163,369
230,194
Ì
393,563
45,555
32,911
17,923
96,389
489,176
19,428
$998,556
Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (248,077)
(254,009)
(330)
(502,416)
$ 95,043
83,602
94
178,739
(72,948)
(131,347)
(19,321)
(223,616)
(490,864)
(9,090)
$(1,225,986)
189,945
25,175
18,981
234,101
129,110
56,850
$598,800
113,692
32,952
10,926
408
$756,778
Year Ended December 31, 2003
Derivative Notional Amount(1)
Beginning
Balance
New
Contracts
Maturities/
Terminations(2)
Ending
Balance
(dollars in millions)
Interest-rate swaps:
Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$135,758
149,397
4,941
290,096
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
131,679
129,881
27,522
289,082
228,411
43,687
$851,276
$ 228,727
162,363
136
391,226
125,839
93,237
26,519
245,595
444,830
23,193
$1,104,844
$ (184,734)
(204,343)
(4,653)
(393,730)
$ 179,751
107,417
424
287,592
(40,180)
(99,507)
(33,662)
(173,349)
(542,443)
(20,368)
$(1,129,890)
217,338
123,611
20,379
361,328
130,798
46,512
$ 826,230
152,548
89,520
15,542
31
$1,083,871
(1) Notional amounts are used to calculate the periodic amounts to be received and paid and generally do not represent actual amounts to be
exchanged or directly reÖect our exposure to institutional credit risk. Notional amounts are not recorded as assets or liabilities in our
consolidated balance sheets.
(2) Includes foreign currency translation adjustments to notional amounts as of the date presented.
(3) Primarily represents written options.
(4) Subsequent to the issuance of our Information Statement dated September 24, 2004, we decreased the beginning balance of Other
option-based derivatives for the year ended December 31, 2003 by $585 million. The eÅect of this change was a decrease to the
beginning balance at that date to $851,276 million from $851,861 million. We also increased new contracts of Other option-based
derivatives by $585 million. The eÅect of this change was an increase to new contracts at that date to $1,104,844 million from
$1,104,259 million.
109
Freddie Mac
The total notional amount of our derivatives (excluding the prepayment management agreement,
commitments, credit derivatives and swap guarantee derivatives) decreased by $227.4 billion from Decem-
ber 31, 2003 to December 31, 2004. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì
Derivative Assets and Liabilities, at Fair Value'' for information on the factors driving the decrease in notional
amounts during 2004.
Table 53 summarizes the change in derivative fair values for the periods presented. See ""Table 54 Ì
Derivative Fair Values and Maturities'' for a breakdown of our derivative fair values by derivative type. Also
see ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Fair Value Measurement'' for a
discussion of how changes in fair values aÅect our Ñnancial results under GAAP.
Table 53 Ì Changes in Derivative Fair Values
Beginning balance Ì Net asset (liability)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in:
Futures(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives:(2)
Year Ended
December 31,
2004
2003
(dollars in millions)
$ 9,426
$15,823
(214)
221
(7)
(1)
(609)
(483)
1
Ì
Changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of new contracts entered into during the period(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contracts realized or otherwise settled during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(627)
1,733
(1,897)
6,572
4,841
(3,925)
$15,031
$15,823
(1) The fair value changes for futures are determined by the individual exchanges on which they are traded, and not by us.
(2) Includes fair value changes for OTC interest-rate swaps, option-based derivatives and foreign-currency swaps.
(3) Consists primarily of cash premiums paid or received on options and the initial value of interest-rate swaps after we have exercised
related swaptions.
110
Freddie Mac
Table 54 shows the notional amount and fair value for each derivative type and the maturity proÑle of the
positions. The fair values of the derivative positions are presented on a product-by-product basis, without
netting by counterparty. The fair value of a longer-term derivative generally will vary more over time than a
comparable derivative with a shorter maturity. A positive fair value in Table 54 for a derivative product
category is the estimated amount, prior to netting by counterparty, that we would be entitled to receive if we
terminated those transactions. A negative fair value is the estimated amount, prior to netting by counterparty,
that we would owe if we terminated the derivatives in that product category.
Table 54 Ì Derivative Fair Values and Maturities
December 31, 2004
Fair Value(2)
Notional
Amount
Total Fair
Value(1)
1 to 3
Less than
1 Year
Years
(dollars in millions)
Greater than
3 and up to
5 Years
In Excess
of 5 Years
Interest-rate swaps:
Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis (Öoating to Öoating)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 95,043
83,602
94
178,739
$(2,879)
2,394
1
(484)
$
20
40
Ì
60
$ (21)
319
Ì
298
$ (20)
170
Ì
150
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
189,945
25,175
18,981
234,101
129,110
56,850
113,692
32,952
408
745,852
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,926
$756,778
4,988
267
2
5,257
(33)
10,303
Ì
(9)
(1)
15,033
(2)
$15,031
237
207
Ì
444
(33)
3,370
Ì
(9)
Ì
$3,832
1,997
56
4
2,057
Ì
2,116
Ì
Ì
Ì
$4,471
1,158
Ì
2
1,160
Ì
1,026
Ì
Ì
Ì
$2,336
$(2,858)
1,865
1
(992)
1,596
4
(4)
1,596
Ì
3,791
Ì
Ì
(1)
$ 4,394
(1) The fair value by derivative type presented on this table is shown prior to netting by counterparty. The fair value of derivatives
presented on the consolidated balance sheets, however, is netted by counterparty as permitted by GAAP, and is reported in the
Derivative assets, at fair value, and Derivative liabilities, at fair value captions.
(2) Fair value is categorized based on the years from December 31, 2004 until the contractual maturity of the derivative.
See ""CONSOLIDATED RESULTS OF OPERATIONS'' and ""CONSOLIDATED BALANCE
SHEETS ANALYSIS'' for more information regarding how these changes in fair value aÅect our Ñnancial
results.
111
Freddie Mac
Table 55 provides a summary of the contractual terms of our pay-Ñxed and receive-Ñxed swaps. This
table provides information about the eÅect of interest-rate swaps on net interest yield if the derivative is in a
fair value or cash Öow hedge relationship. If the derivative is classiÑed as no hedge designation, the derivative
does not aÅect our net interest yield, but rather is reported in Derivative gains (losses) on our consolidated
statements of income.
Table 55 Ì Contractual Terms of Pay-Fixed and Receive-Fixed Swaps
December 31, 2004
Pay-Fixed/
Receive-Variable
Receive-Fixed/
Pay-Variable
Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate
(dollars in millions)
Swaps
Maturity less than 1 yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,282
4,703
Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,147
Maturity greater than 3 and up to 5 yearsÏÏÏ
27,205
Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
51,337
Forward-starting swaps(2)
Maturity greater than 3 and up to 5 yearsÏÏÏ
Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,625
42,081
43,706
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $95,043
2.34%
3.84
3.99
4.91
3.73
6.20
2.19%
2.38
2.37
2.30
Ì
Ì
$11,032
24,581
15,751
32,238
83,602
Ì
Ì
Ì
$83,602
3.48%
3.92
3.67
5.19
2.17%
2.20
2.22
2.22
Ì
Ì
Ì
Ì
December 31, 2003
Pay-Fixed/
Receive-Variable
Receive-Fixed/
Pay-Variable
Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate
(dollars in millions)
Swaps
Maturity less than 1 yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturity greater than 3 and up to 5 yearsÏÏÏ
Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forward-starting swaps(2)
Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturity greater than 3 and up to 5 yearsÏÏÏ
Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
220
62,196
62,416
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $179,751
4,900
31,073
15,967
65,395
117,335
5.76%
2.69
3.63
4.91
Ì
4.49
6.11
1.18%
1.17
1.17
1.17
Ì
Ì
Ì
$ 21,106
18,247
11,249
24,202
74,804
8,520
3,260
20,833
32,613
$107,417
1.40%
1.73
1.99
1.66
Ì
Ì
Ì
2.38%
3.88
3.99
5.64
2.83
3.21
5.07
(1) The weighted-average rate payable and receivable is as of the date indicated. Because the rates of the swaps are Öoating, these rates will
change as prevailing interest rates change. The variable legs of these swaps are generally based on LIBOR or Euro Interbank OÅered Rate.
(2) Represents interest-rate swap agreements scheduled to begin on a future date. Generally, the interest rate associated with the variable leg of
the swap is set when the Ñrst payment cycle begins and is periodically reset thereafter.
Measurement of Interest-Rate Risk
We measure our exposure to key interest-rate risks every day against both internal management limits
and limits set by the Board of Directors. Throughout 2004 our interest-rate risk remained low and well below
management and Board limits.
PMVS and Duration Gap. Our interest-rate sensitivity disclosures provide a set of management
estimates that convey a useful assessment of the amount of our interest-rate risk at a given point in time. This
section describes our primary interest-rate risk measures: PMVS and duration gap. PMVS is measured in two
ways, one measuring the estimated sensitivity of our portfolio market value (as deÑned below) to parallel
moves in interest rates (PMVS-L) and the other to nonparallel movements (PMVS-YC). We calculate
PMVS-L and PMVS-YC every business day. PMVS-L and PMVS-YC are based on the assumption of
instantaneous yield curve shifts; therefore neither measure includes the eÅect on fair value of any rebalancing
actions that we would typically take to reduce our risk exposure.
112
Freddie Mac
‚ PMVS-L shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our
after-tax fair value of net assets attributable to common stockholders (measured as fair value of net
assets less the fair value of preferred stock) from an immediate adverse 50 basis point parallel shift in
the level of LIBOR rates (that is, when the yield at each point on the LIBOR yield curve increases or
decreases by 50 basis points). We believe the use of an immediate 50 basis point shift in the LIBOR
yield curve is a conservative estimate of interest-rate risk. The periodic disclosure in our Monthly
Volume Summary report, which is available on our website at www.FreddieMac.com, reÖects the
average of the daily PMVS-L estimates for a given reporting period (a month, quarter or year). (We
are providing this Internet address solely for the information of interested persons. We do not intend
this Internet address to be an active link and are not using references to this Internet address here or
elsewhere in this Information Statement to incorporate additional information into this Information
Statement.)
‚ PMVS-YC shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our
after-tax fair value of net assets attributable to common stockholders, from an immediate adverse
25 basis point change in the slope (up and down) of the LIBOR yield curve. The 25 basis point change
in slope for the PMVS-YC measure is obtained by shifting the two-year and ten-year LIBOR rates by
an equal amount (12.5 basis points), but in opposite directions. LIBOR rate shifts between the two-
year and ten-year points are interpolated. The periodic disclosure in our Monthly Volume Summary
report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily
PMVS-YC estimates for a given reporting period (a month, quarter or year).
‚ Duration gap estimates the net sensitivity of the fair value of our Ñnancial instruments to movements in
interest rates. Duration gap is presented in units expressed as months. On a daily basis, we estimate the
fair value and eÅective duration of our Ñnancial assets and liabilities, including derivatives. The fair
value of each instrument is multiplied by its duration to determine the instrument's duration dollars.
Duration dollars are then aggregated to estimate the portfolio's net duration dollar exposure. To
calculate duration gap, the net duration dollar exposure is divided by the fair value of total interest-
earning assets and expressed in months. A duration gap of zero implies that the change in value of
assets from an instantaneous rate move will be accompanied by an equal and oÅsetting move in the
value of debt and derivatives thus leaving the net fair value of equity unchanged. However, because
duration does not capture convexity exposure (the amount by which duration itself changes as rates
move), actual changes in fair value from interest-rate changes may diÅer from those implied by
duration gap alone. For that reason, management believes duration gap is most useful when used in
conjunction with PMVS. The periodic duration gap disclosure in our Monthly Volume Summary
report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily
duration gap estimates for a given reporting period (a month, quarter or year).
In measuring the expected loss in portfolio market value, which is the numerator in the fraction used to
calculate the PMVS percentages, we estimate the sensitivity to changes in interest rates of the fair value of all
interest-earning assets and interest-bearing liabilities, including short-term interest-earning assets and interest-
bearing liabilities and all derivatives on a pre-tax basis. When we calculate the expected loss in portfolio
market value and duration gap, we also take into account the cash Öows related to certain credit guarantee-
related items, including net buy-ups and expected gains or losses due to net interest from security program
cycles. In calculating the expected loss in portfolio market value and duration gap, we do not consider the
sensitivity to interest-rate changes of the following assets and liabilities:
‚ Guarantee fee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups
and net interest from security program cycles), the sensitivity of the fair value of the guarantee fee
portfolio to changes in interest rates is not included in calculating the expected loss in portfolio market
value or duration gap because we believe the expected beneÑts from replacement business provide an
adequate hedge against interest-rate changes.
‚ Other assets with minimal interest-rate sensitivity. Other assets, primarily including non-Ñnancial
instruments such as Ñxed assets and REO, are not included in the calculation of the expected loss in
113
Freddie Mac
portfolio market value or duration gap because of the minimal impact they would have on both PMVS
and duration gap.
The fair value of the guarantee fee portfolio and certain other assets with minimal interest-rate risk
sensitivity is included in the estimate of the after-tax fair value of net assets attributable to common
stockholders, which is the denominator of the fraction used to calculate the PMVS-L and PMVS-YC
percentages.
While PMVS and duration gap estimate the exposure of the fair value of net assets attributable to
common stockholders to changes in interest rates, they do not capture the potential impact of certain other
market risks, such as changes in volatility, basis, prepayment model, mortgage-to-debt spread and foreign
currency risk. The impact of these other market risks can be signiÑcant. See ""Sources of Interest-Rate Risk
and Other Market Risks'' for further information.
Our PMVS and duration gap estimates are determined using models that involve interest-rate and
prepayment assumptions made in our best judgment. In addition, in the case of PMVS, daily calculations are
based on an estimate of the fair value of our net assets attributable to common stockholders. Accordingly,
while we believe that PMVS and duration gap are useful risk management tools, they should be understood as
estimates rather than precise measurements.
PMVS Results. Table 56 provides estimated point-in-time PMVS-L and PMVS-YC results at Decem-
ber 31, 2004 and 2003. To supplement the PMVS-L results based on an assumed 50 basis point shift in the
LIBOR yield curve, Table 56 also provides year-end PMVS-L estimates assuming an immediate 100 basis
point shift in the LIBOR yield curve. Because we do not hedge all prepayment option risk, the duration of our
mortgage assets changes more rapidly as changes in interest rates increase. Accordingly, as shown in Table 56,
the PMVS-L results based on a 100 basis point shift in the LIBOR curve are disproportionately higher than
the PMVS-L results based on a 50 basis point shift in the LIBOR curve. We disclose the average daily,
quarterly and annual PMVS-L and PMVS-YC results in our Monthly Volume Summary report.
Table 56 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve
Portfolio Market Value Sensitivity
Potential Pre-Tax Loss in
Portfolio Market Value (millions)
PMVS-YC
25 bp
PMVS-L
50 bp
100 bp
PMVS-YC
25 bp
PMVS-L
50 bp
100 bp
At:
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0%
0%
3%
2%
8%
9%
$25
$20
$725
$559
$2,083
$2,171
Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a wide
range of interest-rate environments. By keeping PMVS-L and PMVS-YC low, we have been able to reduce
the exposure of the fair value of our stockholders' equity to adverse changes in interest rates.
Table 57 shows that the low PMVS-L risk levels for the periods presented would generally have been
substantially higher if we had not used derivatives to manage our interest-rate risk exposure.
Table 57 Ì Derivative Impact on PMVS
Before
Derivatives
After
Derivatives
EÅect of
Derivatives
At December 31, 2004
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
At December 31, 2003
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7%
1%
6%
0%
3%
0%
2%
0%
(4)%
(1)%
(4)%
0%
Freddie Mac
114
Duration Gap Results. We disclose the average daily, quarterly and annual duration gap in our Monthly
Volume Summary report. Table 58 provides estimated average duration gap results for December 2004 and
2003.
Table 58 Ì Duration Gap
Average for the Month of December,
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit Risks
Duration Gap
(in months)
(1)
0
Our Total mortgage portfolio is subject to credit risks. See ""Table 8 Ì Freddie Mac's Total Mortgage
Portfolio Based on Unpaid Principal Balances'' for more information on the composition of our Total
mortgage portfolio. We are subject primarily to two types of credit risk Ì mortgage credit risk and
institutional credit risk. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a
mortgage owned or guaranteed by us. Institutional credit risk is the risk that a counterparty that has entered
into a business contract or arrangement with us will fail to meet its obligations. A portion of the revenue that
Freddie Mac earns from management and guarantee fees is designed to compensate the Ñrm for taking on
credit risk.
Oversight of Credit Risks
The purpose of the Credit Risk Oversight group is to provide independent oversight of the corporate-wide
credit risk management functions, including asset selection, portfolio management, loss mitigation, and
institutional counterparty risk. In particular, Credit Risk Oversight is responsible for providing senior
management with regular, independent evaluations of whether credit risks are eÅectively identiÑed, measured,
managed, and controlled. The Models and Methods Oversight group, a part of the Enterprise Risk Oversight
function, is responsible for independently assessing the design and adequacy of all key credit risk models.
Mortgage Credit Risk
Defaults by mortgage borrowers result in losses if we are unable to collect amounts due through the sale
of the underlying properties, restructuring the mortgage loans or by using other loss mitigation strategies. The
discussion below describes our mortgage credit risk management strategies and summarizes our credit
performance.
Mortgage Credit Risk Management Strategies. Our strategies for managing mortgage credit risk focus
on Ñve primary areas:
‚ underwriting requirements and quality control standards;
‚ credit enhancements;
‚ portfolio diversiÑcation;
‚ loss mitigation activities; and
‚ other risk management activities.
Underwriting Requirements and Quality Control Standards. All mortgages that we purchase have an
inherent risk of default. Through our underwriting and quality control processes, we seek to understand the
underlying risk in a given mortgage we securitize or purchase for our Retained portfolio to ensure that we
adequately price for the risk we assume. Our current business model relies on a process of delegated
underwriting for the single-family mortgages we purchase or securitize. That is, we provide originators with a
series of guidelines to follow in the underwriting of a mortgage and they represent and warrant to us that the
mortgages sold to us meet these guidelines. We subsequently review a sample of these loans and if we
determine that any loan is not in compliance with our underwriting standards, we may require the seller/
115
Freddie Mac
servicer to repurchase that mortgage or make us whole in the event of a default. To assist us in purchasing
mortgages that can be sold to us, we provide originators with automated underwriting software tools, such as
Loan Prospector» and other quantitative credit risk management tools to evaluate and purchase single-family
mortgages and monitor the related mortgage credit risk. Loan Prospector» combines information on the key
indicators of mortgage default risk, such as loan-to-value ratios, credit scores and other mortgage and borrower
characteristics to generate credit risk classiÑcations. These statistically-based risk assessment tools increase
our ability to distinguish among single-family loans based on their risk, return and importance to our mission.
On a negotiated basis, we may allow seller/servicers to underwrite mortgages for sale to us using other
proprietary automated underwriting systems.
For 2004 and 2003, Loan Prospector» was used to evaluate approximately 61 percent and 64 percent,
respectively, of our single-family purchase volume prior to purchase. As part of our post-purchase quality
control review process, we use Loan Prospector» to evaluate the credit quality of virtually all single-family
mortgages that were not evaluated by Loan Prospector» prior to purchase. Loan Prospector» risk classiÑca-
tions inÖuence both the price we charge to guarantee loans and the sample of loans we review in quality
control. As such, Loan Prospector» provides an eÅective credit risk management tool.
For multifamily mortgage loans, unless the mortgage loans have signiÑcant credit enhancements, we use
an intensive pre-purchase underwriting process for the mortgages we purchase. Our underwriting process
includes assessments of the local market, the borrower, the property manager, the property's historical and
projected Ñnancial performance and the property's physical condition, which may include a physical inspection
of the property. In addition to our own inspections, we utilize third-party appraisals and environmental and
engineering reports.
Credit Enhancements. For most of the mortgage loans in our Total mortgage portfolio (other than non-
Freddie Mac mortgage-related securities and that portion of issued Structured Securities that is backed by
Ginnie Mae CertiÑcates), we retain the primary risk of loss in the event of default by the borrower on the
underlying mortgage. Our charter requires that, to be eligible for purchase, single-family mortgages with loan-
to-value ratios above 80 percent at the time of purchase be covered by (a) primary mortgage insurance or
(b) certain other credit protections. In addition, for some mortgage loans, we elect to share the default risk by
transferring a portion of that risk to various third parties through a variety of other credit enhancement
vehicles. Mortgage loans covered by primary mortgage insurance and these other credit protections are
referred to as credit-enhanced mortgages. Proceeds received from these credit enhancements are applied to
oÅset credit losses and to Net interest income for that portion that represents forgone interest not previously
recognized related to individual mortgage loans that default.
Table 59 shows the credit-enhanced portion of our Total mortgage portfolio (excluding non-Freddie Mac
mortgage-related securities and Structured Securities issued by us that are backed by Ginnie Mae
CertiÑcates).
Table 59 Ì Credit-Enhanced Percentage of the Total Mortgage Portfolio(1)
December 31,
2003
2004
2002
Credit-enhanced(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
19% 21% 27%
(1) Non-Freddie Mac mortgage-related securities are excluded from this table because they do not expose us to primary risk of loss in
the event of a default by the borrower on the underlying mortgage. That portion of Structured Securities backed by Ginnie Mae
CertiÑcates is excluded because the incremental credit risk to which it exposes us is considered de minimis. See ""Table 33 Ì Credit
Characteristics of Mortgages and Mortgage-Related Securities in the Retained Portfolio'' for additional information about our non-
Freddie Mac mortgage-related securities.
(2) Credit enhancements primarily include third party primary loan-level mortgage insurance, third party pool insurance and other
arrangements in which the lender or a third party has retained a portion of the default risk by pledging collateral or agreeing to accept
losses on loans that default. In many cases, the lender's or third party's risk is limited to a speciÑc level of losses at the time the credit
enhancement becomes eÅective.
The percentage of our Total mortgage portfolio (excluding Structured Securities backed by Ginnie Mae
CertiÑcates and non-Freddie Mac mortgage-related securities held by us) with credit-enhancements de-
creased from 2002 to 2004. This decrease was primarily due to a high level of reÑnance loans acquired in 2003
and 2004, which tend to have lower loan-to-value ratios and, therefore, generally do not require credit
116
Freddie Mac
enhancements. Our ability and desire to expand the portion of our Total mortgage portfolio with credit
enhancements will depend on our evaluation of the credit quality of new business purchase opportunities, our
portfolio risk proÑle and the future availability of eÅective credit enhancements at prices that permit an
attractive return.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our Total
mortgage portfolio and is obtained on a loan-level basis for certain single-family mortgages. Primary mortgage
insurance transfers varying portions of the credit risk associated with the mortgage to a third party insurer. The
amount we obtain on any mortgage depends on our charter requirement and our assessment of risk. We may
from time to time agree with the insurer to reduce the amount of coverage that is in excess of our charter's
minimum requirement and may also furnish certain services to the insurer in exchange for fees paid by the
insurer. As is the case with credit enhancement agreements generally, these agreements often improve the
overall value of purchased mortgages and thus may allow us to oÅer lower guarantee fees to sellers.
After primary mortgage insurance, the most prevalent type of credit enhancement that we use is pool
insurance. With pool insurance, a mortgage insurer provides insurance on a pool of loans up to a stated
aggregate loss limit. Our pool insurance contracts cover losses ranging between approximately 0.69 percent
and 5.00 percent of the aggregate unpaid principal balance of the pooled loans at the time of purchase. In
addition to a pool-level loss coverage limit, some pool insurance contracts may have limits on coverage at the
loan level. For pool insurance contracts that expire before the completion of the contractual term of the
mortgage loan, we seek to ensure that the contracts cover the period of time during which we believe the
mortgage loans are most likely to default.
Other forms of credit enhancements on single-family mortgage loans include collateral (including cash or
high-quality marketable securities) pledged by a lender, government guarantees, and recourse agreements
(under which we may require a lender to repurchase loans that default). In some instances, our agreements
with insurers limit the insurance to a stated aggregate loss.
For multifamily mortgages, we occasionally utilize credit enhancements to mitigate risk. The types of
credit enhancements used for multifamily mortgage loans include recourse, third-party guarantees or letters of
credit, subordinated participations in mortgage loans or structured pools, and cross-default and cross-
collateralization provisions. With a cross-default provision, if the loan on a property goes into default, we have
the right to declare speciÑed other mortgage loans of the same borrower or certain of its aÇliates to be in
default and to foreclose those other mortgages. With a cross-collateralization provision, we have the additional
right to apply excess proceeds from the foreclosure of one mortgage to amounts owed to us by the same
borrower or certain of its aÇliates relating to other multifamily mortgage loans we own. We also receive
similar credit enhancements for Multifamily PC guarantor swaps; for tax-exempt multifamily housing revenue
bonds that support pass-through certiÑcates issued by third parties for which we provide our guarantee of the
payment of principal and interest; for Freddie Mac pass-through certiÑcates that are backed by tax-exempt
multifamily housing revenue bonds and related taxable bonds and/or loans, and for multifamily mortgage
loans that are originated and held by state and municipal agencies to support tax-exempt multifamily housing
revenue bonds for which we provide our guarantee of the payment of principal and interest. For information
about our maximum coverage in regards to these credit enhancements, see ""NOTE 4: FINANCIAL
GUARANTEES'' to the consolidated Ñnancial statements.
While the use of credit enhancements reduces our exposure to mortgage credit risk, it increases our
exposure to institutional credit risk. See ""Institutional Credit Risk'' for more information.
Portfolio DiversiÑcation. A key characteristic of our credit risk portfolio is broad diversiÑcation along a
number of critical risk dimensions. We continually monitor a variety of mortgage loan characteristics such as
product mix, loan-to-value ratios and geographic concentration, which may aÅect the default experience on
our overall mortgage portfolio, and may seek to reinsure a portion of our portfolio if we observe unacceptable
levels of concentration.
117
Freddie Mac
Product Mix. Table 60 presents the distribution of underlying mortgage assets for total PCs and
Structured Securities issued and outstanding.
Table 60 Ì Freddie Mac Issued and Outstanding PCs and Structured Securities(1)
December 31,
2004
2003
Total Issued PCs Outstanding PCs Total Issued PCs
and Structured
Securities(2)
and Structured
Securities
and Structured
Securities
Freddie Mac issued PCs and Structured
Securities
Single-family:
Conventional:
30-year Ñxed-rate(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ARMs/Öoating-rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Seconds(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS and other federal guarantee loans
Alternative collateral deals(6) ÏÏÏÏÏÏÏÏÏÏ
Balloons/resets(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Structured Securities backed by Ginnie
Mae CertiÑcates(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 689,945
347,135
102,273
Ì
1,350
178
16,560
32,966
3,015
1,193,422
Multifamily:
Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,546
$1,208,968
(dollars in millions)
$509,923
224,627
59,089
Ì
1,340
178
8,125
31,075
2,628
836,985
15,285
$852,270
$ 649,719
355,800
81,184
2
2,098
164
17,486
34,788
4,729
1,145,970
16,098
$1,162,068
Outstanding PCs
and Structured
Securities(2)
$449,281
197,677
39,868
2
2,058
164
11,478
31,818
4,059
736,405
15,759
$752,164
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Represents PCs and Structured Securities held by third parties.
(3) Also includes 20-year and 40-year Ñxed-rate mortgages.
(4) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.
(5) Represents mortgage loans on properties that are subordinate to the superior mortgage lien.
(6) Prior to 2004, alternative collateral deals included Structured Securities backed by non-agency securities, which were primarily
backed by subprime mortgage loans; and to a lesser extent, FHA / VA loans and home equity loans. Beginning in 2004, alternative
collateral deals included Structured Securities backed by non-agency securities, which were backed by a mixture of subprime and
other (i.e., prime) mortgage loans. The alternative collateral deal portion of outstanding PCs and Structured Securities consisted of
$1,587 million and $2,572 million of Ñxed-rate, $1,165 million and $2,723 million of ARMs/Öoating rate, $5,286 million and
$6,040 million of FHA/VA, $17 million and $5 million of the Rural Housing Service and other federal guarantee loans, and
$70 million and $138 million of seconds at December 31, 2004 and 2003, respectively.
(7) Mortgages whose terms require lump sum principal payments on contractually determined future dates unless the borrower qualiÑes
for and elects an extension of the maturity date at an adjusted interest rate.
(8) Ginnie Mae CertiÑcates which underlie the Structured Securities are backed by FHA/VA loans.
118
Freddie Mac
Table 61 presents the distribution of unsecuritized whole mortgage loans held in our Retained portfolio.
Table 61 Ì Mortgage Loans Held in the Retained Portfolio(1)
Single-family:
Conventional
Fixed-rate(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustable-rate(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Seconds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ConventionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA Ì Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS and other federal guarantee loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily Mortgages:
ConventionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2004
2003
(dollars in millions)
$21,409
990
Ì
22,399
344
646
23,389
37,968
3
37,971
$24,902
1,245
1
26,148
513
613
$27,274
$32,993
3
32,996
Total mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$61,360
$60,270
(1) Based on unpaid principal balances. Excludes mortgage loans traded, but not yet settled.
(2) We reclassiÑed $374 million of mortgage loans from Single-family Conventional Fixed-rate to Single-family Conventional
Adjustable-rate for the year ended December 31, 2003 to conform with the 2004 presentation.
Product mix aÅects the credit risk proÑle of our Total mortgage portfolio. In general, 15-year Ñxed-rate
mortgages exhibit the lowest default rate among the types of single-family mortgage loans we securitize and
purchase, due to the accelerated rate of principal amortization on these mortgages and the credit proÑles of
borrowers who seek and qualify for them. The next lowest rate of default is associated with 30-year Ñxed-rate
mortgages. Balloon/reset mortgages and ARMs typically default at a higher rate than Ñxed-rate mortgages,
although default rates for diÅerent types of ARMs may vary. While ARMs are typically originated with
interest rates that are initially lower than those available for Ñxed-rate mortgages, their interest rates also
change over time based on changes in an index or reference interest rate. As a result, the borrower's payments
may rise or fall, within limits, as interest rates change. As payment amounts increase, the risk of default also
increases. In the low interest rate environment experienced during 2002, 2003 and 2004, this trend was
reversed with ARMs exhibiting lower default rates than Ñxed-rate mortgages.
During 2004, there was a rapid proliferation of alternative product types, including initial interest-only
loans (loans where the borrower pays only interest for a period of time before the loan begins to amortize),
negative amortization loans (loans where the borrower's payment is capped and as a result the loan balance
may actually increase due to the diÅerence between the capped payment and the fully indexed payment), and
Alternative A products (primarily loans originated based on stated income or asset information or where the
borrower provides no supporting documentation of income, assets or employment). While each of these
products has been on the market for some time, their prevalence increased in 2004. These products are
designed to address a variety of borrower needs, including aÅordability issues and documentation issues. Each
of these products is expected to default more often than our traditional product types. To date, we have
purchased a limited amount of these products through our securitization programs, although we expect our
participation in these products to grow over the coming years. We will monitor the growth of these products in
our portfolio, and if appropriate, may seek credit enhancements to manage the incremental risk.
The subprime segment of the mortgage market primarily serves borrowers with lower quality credit
payment histories. These mortgages typically carry a higher risk of default. Our participation in this market
helps to increase the availability of mortgage credit and reduce the costs of homeownership for a broader
spectrum of borrowers.
We participate in the subprime market segment in two ways. First, our Retained portfolio makes
investments in non-Freddie Mac mortgage-related securities that were originated in this market segment.
Substantially all of these securities were rated ""AAA'' by one or more rating agencies at the time of purchase.
119
Freddie Mac
These investments are included in the single-family and other mortgage-related securities portion of our non-
Freddie Mac mortgage-related securities portfolio shown in ""Table 33 Ì Credit Characteristics of Mortgages
and Mortgage-Related Securities in the Retained Portfolio.'' Second, we guarantee securities backed by
subprime mortgages. (These securities comprise a portion of our ""alternative collateral deals.'') These
securities have previously been credit enhanced and at the time of our purchase most of these securities were
""shadow rated'' at least ""BBB'' (based on the S&P rating scale) by at least one nationally recognized credit
rating agency which assessed the risks of the securities without regard to the beneÑts of our guarantee. In
addition to the non-Freddie Mac mortgage-related securities discussed above, our Retained portfolio makes
investments in some of the Structured Securities issued in these transactions.
The distribution of the single-family loans underlying our Total mortgage portfolio (excluding non-
Freddie Mac mortgage-related securities, alternative collateral deals and that portion of Structured Securities
that is backed by Ginnie Mae CertiÑcates) by original and estimated current loan-to-value ratio ranges, credit
scores, loan purpose, property type and occupancy type is shown in Table 62.
120
Freddie Mac
Table 62 Ì Characteristics of Single-Family Mortgage Loan Portfolio(1)
Original LTV Ratio Range(2)
December 31,
2003
2004
2002
Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 60% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average original loan-to-value ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated Current LTV Ratio Range(3)
26% 26% 21%
17
17
41
42
9
9
6
5
1
1
100% 100% 100%
15
43
11
8
2
70% 70% 72%
Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 60% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
53% 44% 45%
20
19
23
18
9
7
3
2
1
1
100% 100% 100%
19
22
9
3
2
Weighted average estimated current LTV ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
57% 61% 61%
Credit Score
740 and above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
700 to 739 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
660 to 699 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
620 to 659 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
44% 44% 39%
23
23
17
18
9
9
4
4
3
2
100% 100% 100%
23
18
10
4
6
Weighted average credit scoreÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
723
723
718
Loan Purpose
PurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
28% 25% 34%
26
27
45
49
100% 100% 100%
25
41
Property Type
1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2-4 unitsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy Type
Primary residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
97% 97% 97%
3
100% 100% 100%
3
3
94% 94% 94%
3
3
100% 100% 100%
3
3
3
3
(1) Based on the single-family mortgage portfolio (excluding non-Freddie Mac mortgage-related securities, alternative collateral deals
and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates), which totaled $1,197 billion, $1,151 billion and
$1,084 billion at December 31, 2004, 2003 and 2002, respectively.
(2) Our charter requires that mortgage loans purchased with loan-to-value ratios above 80 percent be covered by mortgage insurance or
other credit enhancements.
(3) Current market values are estimated by adjusting the value of the property at origination based on changes in the market value of
house prices since origination.
Loan-to-Value Ratios. Our principal safeguard against credit losses for mortgage loans in our single-
family, non-credit-enhanced portfolio is provided by the borrowers' equity in the underlying properties. The
weighted average original loan-to-value ratio decreased to 70 percent for the years ended December 31, 2004
121
Freddie Mac
and 2003 from 72 percent for the year ended December 31, 2002. Mortgage loans with higher loan-to-value
ratios (and therefore lower levels of borrower equity) at the time of purchase are also protected by credit
enhancements, since our charter requires that loans with loan-to-value ratios above 80 percent at the time of
purchase be covered by mortgage insurance or certain other credit protections.
The likelihood of single-family mortgage default depends not only on the initial credit quality of the loan,
but also on events that occur after origination. Accordingly, we monitor changes in house prices across the
country and the impact of these house price changes on the underlying loan-to-value ratio of mortgages in our
portfolio.
Figure 1 Ì Annual House Price Appreciation
Growth Rate
(Percent)
12
10
8
6
4
2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
As shown in Figure 1, house prices have risen signiÑcantly over the last ten years, and have grown very
dramatically over the last three years. This house price appreciation has positively inÖuenced the values of
properties underlying the mortgages in our portfolio. The weighted average estimated current loan-to-value
ratio of our single-family non-credit-enhanced portfolio decreased to 57 percent for the year ended
December 31, 2004 from 61 percent for each of the years ended December 31, 2003 and 2002. The decrease is
primarily the result of unusually strong house price appreciation. Despite these positive national trends, we
remain vigilant in identifying possible weaknesses in regional geographic markets, particularly with respect to
new loans originated in an environment of strong house prices, and may seek to reinsure a portion of this risk
should we determine that the possibility of such weaknesses warrants action. Historical experience has shown
that defaults are less likely to occur on mortgages with lower estimated current loan-to-value ratios.
Furthermore, in the event of a default, higher levels of borrower equity in a property reduce the total amount
of loss, thereby mitigating credit losses.
Credit Score. Credit scores are a useful measure for assessing the credit quality of a borrower. Credit
scores are numbers reported by the credit repositories, based on statistical models, that summarize an
individual's credit record and predict the likelihood that a borrower will repay future obligations as expected.
FICO» scores, or FICO, developed by Fair, Isaac and Co., Inc., are the most commonly used credit scores
today.
FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically, consumers with
higher credit scores are more likely to repay their debts as expected than those with lower scores. The
weighted average credit score for the Total mortgage portfolio (based on the credit score at origination)
remained high at 723 at both December 31, 2004 and 2003 and a slight increase from 718 at December 31,
122
Freddie Mac
2002, indicating strong credit quality borrowers. In particular, the percentage of the mortgage loans with an
available FICO score of 740 or greater in the Total mortgage portfolio has remained at 44 percent at
December 31, 2004 and 2003 and increased from 39 percent at December 31, 2002.
Loan Purpose. Mortgage loan purpose indicates how the borrower intends to use the funds from a
mortgage loan. The three general categories are: purchase, cash-out reÑnance, or other reÑnance. In a
purchase transaction, funds are used to acquire a property. In a cash-out reÑnance transaction, in addition to
paying oÅ an existing Ñrst mortgage lien, the borrowers obtain additional funds that may be used for other
purposes, including paying oÅ subordinate mortgage liens and providing unrestricted cash proceeds to the
borrower. In other reÑnance transactions, the funds are used to pay oÅ an existing Ñrst mortgage lien and may
be used in limited amounts for certain speciÑed purposes; such reÑnances are generally referred to as ""no
cash-out'' or ""rate and term'' reÑnances. Other reÑnance transactions also include reÑnance mortgages for
which the delivery data provided was not suÇcient for us to determine whether the mortgage was a cash-out or
a no cash-out reÑnance transaction. From a risk perspective, purchase transactions have the lowest likelihood
of default (all else being equal), followed by no-cash out reÑnances, then cash out reÑnances. As a practical
matter, however, no-cash out reÑnances tend to have lower loan-to-value ratios and higher credit scores than
purchase transactions and as such, have better overall performance than purchase transactions. While a
reduction in interest rates in 2003 increased the proportion of reÑnance mortgage loans in the Total mortgage
portfolio from a total of 66 percent at December 31, 2002 to 75 percent at December 31, 2003, an increase in
interest rates in 2004 slightly decreased the proportion of reÑnance mortgage loans in the Total mortgage
portfolio to a total of 72 percent at December 31, 2004.
Property Type. Single-family mortgage loans are deÑned as mortgages secured by housing with up to
four living units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on multiple-
unit properties. The proportion of one-unit properties in the Total mortgage portfolio remained the same over
the past three years, accounting for 97 percent at December 31, 2004, 2003 and 2002.
Occupancy Type. Borrowers may purchase a home as a primary residence, second/vacation home or
investment property that is typically a rental property. Mortgage loans on properties occupied by the borrower
as a primary or secondary residence tend to have a lower credit risk than mortgages on investment properties.
The proportion of primary and secondary residences in the Total mortgage portfolio remained the same over
the past three years, accounting for 97 percent at December 31, 2004, 2003 and 2002.
Geographic Concentration. Since our business model involves purchasing mortgages from every
geographic region in the U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation
provides protection from changing local and economic conditions. See ""NOTE 17: CONCENTRATION OF
CREDIT AND OTHER RISKS'' to our consolidated Ñnancial statements for more information concerning
the distribution of our Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and
that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic region. Our
Total mortgage portfolio's geographic distribution was relatively stable from 2003 to 2004, and remains
broadly diversiÑed across these regions.
Loss Mitigation Activities. Within our credit portfolio, we expect and price for some mortgage loans to
become non-performing due to changes in general economic conditions, changes in the Ñnancial status of
individual borrowers or other factors.
Table 63 summarizes our non-performing assets. The increase in our non-performing assets from 2000
through 2003 was primarily driven by higher delinquencies associated with our alternative collateral deals.
While these delinquencies result in higher levels of non-performing assets, we have limited loss exposure due
to the credit enhancements associated with these securities. Prior to 2004, alternative collateral deals consisted
only of Structured Securities backed by non-agency securities, which were primarily backed by subprime
mortgage loans; and to a lesser extent, FHA/VA loans and home equity loans. Beginning in 2004, however,
certain alternative collateral deals were backed by prime mortgage loans.
123
Freddie Mac
Table 63 Ì Non-Performing Assets
Troubled debt restructurings, or TDRs(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-accrual loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO, net(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$2,297
6,318
27
8,642
741
$9,383
2003
2001
December 31,
2002
(dollars in millions)
$2,164
6,830
47
9,041
594
$9,635
$1,617
5,070
44
6,731
447
$7,178
$ 2,370
7,470
21
9,861
795
$10,656
2000
$1,389
3,546
9
4,944
358
$5,302
(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the
modiÑed terms. TDRs are considered part of our impaired loan population. Figures presented are based on unpaid principal balances
of mortgage loans. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for additional information
on impaired loans.
(2) Includes single-family loans 90 days or more delinquent. For multifamily loans, the population includes all loans 60 days or more
delinquent, but less than 90 days delinquent. Also included within this population are multifamily loans greater than 90 days past due
but where principal and interest are being paid to us under the terms of a credit enhancement agreement. Also includes seriously
delinquent loans in alternative collateral deals which totaled $2,234 million, $2,793 million, $2,290 million, $1,052 million and
$529 million at December 31, 2004, 2003, 2002, 2001 and 2000, respectively. See the discussion related to alternative collateral deal
delinquencies following ""Table 65 Ì Delinquency Performance.''
(3) Non-accrual mortgage loans are loans for which interest income is recognized only on a cash basis and only includes multifamily
loans that are 90 days or more delinquent. Balance represents 2, 2, 3, 5 and 10 properties at December 31, 2004, 2003, 2002, 2001 and
2000, respectively. No single-family mortgage loans are classiÑed as non-accrual. For single-family mortgages we recognize interest
income on an accrual basis for all such loans, regardless of delinquency. We establish reserves for uncollectible interest that are
estimated using statistical models which quantify accrued but unpaid interest at the consolidated balance sheet date. Mortgage loans
placed on non-accrual status are considered part of our impaired loan population.
(4) For the year ended December 31, 2004, $443 million was included in net interest income and management and guarantee income
related to these mortgage loans (excluding interest income related to alternative collateral deals). The amount of forgone net interest
income and additional management and guarantee income that we would have recorded had these loans been current is $65 million
for the year ended December 31, 2004.
(5) For more information about REO balances, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and
""NOTE 7: REAL ESTATE OWNED'' to the consolidated financial statements.
Loss mitigation activities are a key component of our strategy for managing and resolving troubled assets
and lowering credit losses. Our loss mitigation strategy emphasizes early intervention in delinquent mortgages
and alternatives to foreclosure. Foreclosure alternatives are intended to reduce the number of delinquent
mortgages that proceed to foreclosure and, ultimately, mitigate our total credit losses by eliminating a portion
of the costs related to foreclosed properties. Table 64 summarizes the number of loans involved in diÅerent
types of single-family foreclosure alternatives.
Table 64 Ì Single-Family Foreclosure Alternatives(1)
2004
December 31,
2003
(number of loans)
2002
Foreclosure Alternatives(2)
Repayment plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan modiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forbearance agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pre-foreclosure sales(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreclosure alternatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
37,406
6,789
2,105
2,010
48,310
34,458
8,508
2,226
1,755
46,947
32,672
7,951
2,798
1,531
44,952
(1) Based on the single-family Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities, alternative collateral
deals and that portion of Structured Securities that is backed by non-Freddie Mac mortgage-related securities.
(2) Some mortgage loans may go through a foreclosure alternative more than once or may go through more than one type of foreclosure
alternative. Additionally, the table represents only instances that successfully return the borrower to a current payment status, with
the exception of pre-foreclosure sales, where the relationship with the borrower has concluded.
(3) This amount includes third party sales and other foreclosure alternatives.
The increase in foreclosure alternatives from 2002 through 2004 was primarily driven by an enhanced
eÅort by us and servicers to pursue loss mitigation for homeownership preservation and a favorable interest
rate environment that facilitated the foreclosure alternatives. Repayment plans, the most common type of
foreclosure alternative, mitigate our credit losses because they assist borrowers in returning to compliance with
124
Freddie Mac
the original terms of their mortgages. Loan modiÑcations, the second most common type of foreclosure
alternative, involve changing the terms of a mortgage and therefore are a more favorable alternative to the
borrower during a declining interest-rate environment, such as we experienced during 2002 and the Ñrst half
of 2003. Forbearance agreements, the third most common type of foreclosure alternative, provide a temporary
suspension of the foreclosure process to allow additional time for the borrower to return to compliance with the
original terms of the borrower's mortgage or to implement another foreclosure alternative.
Other single-family loss mitigation activities include providing default management tools designed to help
single-family servicers manage non-performing loans more eÅectively. These tools include Early Indicator», a
system that estimates the probability that delinquent loans will be resolved or advanced through to a loss-
producing state. In addition, we provide the servicers with a suite of self-management tools such as Timeline
Manager, Workout Manager, Expense Manager and REO Manager. We also use Servicer Performance
ProÑle reports to evaluate and manage the performance of our mortgage servicers based on their management
of performing and non-performing loans.
We require multifamily servicers to closely manage mortgage loans they have sold us in order to mitigate
potential losses. At least once a year, for loans over $1 million, servicers must submit an assessment of the
mortgaged property to us based on an inspection of the property and a review of the property's Ñnancial
statements. We also evaluate these assessments internally and may direct the servicer to take speciÑc actions
to reduce the likelihood of delinquency or default. If a loan defaults despite this intervention, we then
determine whether it is in our best interest to oÅer a reasonable foreclosure alternative to the borrower. For
example, we may modify the terms of a multifamily mortgage loan which gives the borrower an opportunity to
bring the loan current and allows the borrower to retain ownership of the property. Since multifamily
seller/servicers are an important part of our loss mitigation process, we rate their performance regularly and
conduct on-site reviews of their servicing operations to conÑrm compliance with our standards.
Other Credit Risk Management Activities. As noted previously, we purchase a broad range of mortgage
products with diÅering degrees of default risk. To compensate us for unusual levels of risk in some mortgage
products we may charge incremental fees above a base guarantee fee calculated on credit risk factors such as
the mortgage product type, loan purpose, loan-to-value ratio, and other loan attributes. In addition, we
occasionally use Ñnancial incentives and credit derivatives, as described below, in situations where we believe
they will beneÑt our credit risk management strategy. These arrangements are intended to reduce our credit-
related expenses and to help us manage purchase quality, thereby improving our overall returns.
In some cases, we also provide Ñnancial incentives in the form of lump sum payments to selected
seller/servicers if they deliver a speciÑed volume or share of mortgage loans meeting speciÑed credit risk
standards over a deÑned period of time. These Ñnancial incentives may also take the form of a fee payable to
us by the seller if the mortgages delivered to us do not meet certain credit standards.
We have also entered into risk-sharing agreements that are accounted for as derivatives in accordance
with GAAP. In part because the agreements may result in us making payments to the seller/servicer
(depending upon actual default experience over the lives of the mortgages), they are considered credit
derivatives, rather than Ñnancial guarantees under GAAP. Under these agreements, default losses on speciÑc
mortgage loans delivered by sellers are compared to default losses on reference pools of mortgage loans with
similar characteristics. Based upon the results of that comparison, we remit or receive payments based upon
the default performance of the speciÑed mortgage loans. These payments are recorded in Management and
guarantee income on the consolidated statements of income. The total notional amount of mortgage loans
subject to these agreements was approximately $10.9 billion and $15.5 billion at December 31, 2004 and 2003,
respectively. These risk-sharing agreements are classiÑed as no hedge designation for purposes of applying
SFAS 133, with changes in fair value recorded as Derivative gains (losses) on the consolidated statements of
income. The fair value of these risk-sharing agreements is recorded in the Derivative assets, at fair value and
Derivative liabilities, at fair value on the consolidated balance sheets, with net amounts of $(2) million and
$5 million at December 31, 2004 and 2003, respectively.
Although these arrangements are part of our overall credit risk management strategy, we have not treated
them as credit enhancements for purposes of describing our Total mortgage portfolio characteristics because
125
Freddie Mac
the Ñnancial incentive and credit derivative agreements may result in us making payments to the
seller/servicer.
Credit Performance. The eÅectiveness of our credit risk management activities is reÖected, in part, in
the level of credit losses relative to our Total mortgage portfolio (excluding non-Freddie Mac mortgage-
related securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates). To the
extent we take on riskier assets, such as A- mortgages, and charge higher guarantee fees, credit losses may rise
despite eÅective credit risk management activities. Therefore, while credit losses are a useful indicator of
management activities, they must ultimately be considered relative to the revenue received for assuming the
underlying credit risk. Several key statistics associated with potential and actual credit losses are detailed in
the tables below.
Delinquencies. Table 65 summarizes the delinquency performance of our single-family and multifamily
mortgage portfolios. ""Table 66 Ì Single-Family Ì Non-Credit-Enhanced Delinquencies Ì By Region'' and
""Table 67 Ì Composition of Single-Family Mortgages by Year of Origination Ì Mortgage Portfolio and
Non-Credit-Enhanced Delinquencies'' provide a more detailed analysis of single-family delinquencies, by
geographic region and year of origination.
Table 65 Ì Delinquency Performance(1)
Single-family(2)
Non-credit-enhanced portfolio
Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit-enhanced portfolio(4)
Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total portfolio
Multifamily(4)
Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2003
2002
2004
0.24%
0.27%
0.28%
19,691
21,063
20,946
2.75%
2.96%
2.07%
54,913
66,283
58,768
0.73%
0.86%
0.77%
74,604
87,346
79,714
Total portfolio
Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net carrying value of delinquent loans (in millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.06%
35
$
0.05%
24
$
0.13%
49
$
(1) Based on the Total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured
Securities that is backed by Ginnie Mae CertiÑcates.
(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.
(3) Includes alternative collateral deals.
(4) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.
The single-family total portfolio delinquency rate decreased by 13 basis points from December 31, 2003
to 0.73 percent at December 31, 2004. This decrease was driven by the single-family credit-enhanced
delinquency rate, which decreased by 21 basis points from December 31, 2003 to 2.75 percent at
December 31, 2004 and a 3 basis point decline in the single-family non-credit-enhanced portfolio. The
decrease in the credit-enhanced delinquency rate was primarily associated with reduced delinquencies in our
alternative collateral deals, the drop in the unemployment rate and continued house price appreciation. The
multifamily delinquency rate was 0.06 percent at December 31, 2004, up from 0.05 percent at December 31,
2003. Multifamily delinquencies include certain mortgage loans where the borrowers are not paying as agreed,
but principal and interest are being paid to us under the terms of a credit enhancement agreement.
126
Freddie Mac
Table 66 presents delinquency rates for the non-credit-enhanced portion of the single-family loans
underlying our Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that
portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic region.
Table 66 Ì Single-Family Ì Non-Credit-Enhanced Delinquencies Ì By Region(1)(2)
December 31,
2003
2002
2004
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.24% 0.28% 0.30%
0.32
0.31
0.27
0.27
0.28
0.26
0.15
0.19
0.24% 0.27% 0.28%
0.34
0.27
0.28
0.23
(1) Based on the number of mortgages 90 days or more delinquent or in foreclosure.
(2) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a
description of these regions.
Regional delinquency rates generally declined in 2004. Reductions in the Northeast and West regions
were the primary drivers behind the decrease in the overall delinquency rate. These regions' delinquency
improvement is a result of improved economies and increased house price appreciation. The non-credit
enhanced delinquency rate for the North Central region, which has been adversely impacted by declines in the
manufacturing industry, remained unchanged despite the slight increase in the number of delinquent
properties.
Table 67 presents the distribution of the single-family loans underlying our Total mortgage portfolio
(excluding non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is
backed by Ginnie Mae CertiÑcates) and non-credit-enhanced delinquency rates by year of origination.
Table 67 Ì Composition of Single-Family Mortgages By Year of Origination Ì Mortgage Portfolio and
Non-Credit-Enhanced Delinquencies
2004
December 31,
2003
2002
Percent of
Single-
Family
Balance(1)
3%
1
3
2
1
6
16
44
24
100%
Non-Credit-
Enhanced
Delinquency
Rate(2)
0.65%
0.83
0.49
0.78
1.94
0.59
0.26
0.06
0.03
0.24%
Percent of
Single-
Family
Balance(1)
6%
1
4
3
1
10
24
51
Ì
100%
Non-Credit-
Enhanced
Delinquency
Rate(2)
0.68%
0.82
0.45
0.73
1.78
0.48
0.18
0.01
Ì
0.27%
Percent of
Single-
Family
Balance(1)
11%
3
11
8
3
26
38
Ì
Ì
100%
Non-Credit-
Enhanced
Delinquency
Rate(2)
0.54%
0.51
0.26
0.44
0.91
0.19
0.05
Ì
Ì
0.28%
Year of Origination
Pre-1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31ÏÏÏÏÏÏÏÏÏÏ
(1) Single-family Total mortgage portfolio, based on unpaid principal balances, excluding non-Freddie Mac mortgage-related securities
and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.
(2) Based on mortgages 90 days or more delinquent or in foreclosure.
127
Freddie Mac
Our single-family portfolio distribution by origination year was aÅected by heavy reÑnance volumes in
recent years. At December 31, 2004, 84 percent of our single-family mortgage portfolio consisted of mortgage
loans originated in 2002, 2003 or 2004. Mortgage loans originated in 2001 and earlier, which represent
approximately 16 percent of our single-family mortgage portfolio, have delinquency rates that are generally
higher than the overall portfolio delinquency rate due to the natural aging of the loans and, in some instances,
to the weaker credit quality of these loans. For instance, mortgage loans originated in 2000 were generally for
purchase transactions, which, as noted earlier, typically involve more risk resulting in weaker credit quality, as
opposed to reÑnancing transactions. As a result, we have experienced higher than average early defaults and
delinquency rates on these mortgage loans originated in 2000, but they represent only one percent of the
single-family Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that
portion of Structured Securities that is backed by Ginnie Mae CertiÑcates).
128
Freddie Mac
Credit Loss Performance. Some of the loans that are delinquent or in foreclosure result in credit losses.
Table 68 provides detail on our credit loss performance, including REO activity, charge-oÅs and credit losses.
Table 68 Ì Credit Loss Performance
REO
REO balances:
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO activity (number of properties):(1)
Beginning property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average holding period (in days)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO operations income (expense):(3)
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CHARGE-OFFS
Single-family:
Foreclosure alternatives, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreclosure alternatives, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO acquisitions, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO acquisitions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family totals:
Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Charge-oÅs:(3)
Recoveries:
Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Not related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CREDIT GAINS (LOSSES)(5)
Single-family(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
In basis points:(6)
Single-family(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Year Ended December 31,
2003
(dollars in millions)
2002
$
$
740
1
741
$
$
758
37
795
$
$
593
1
594
9,170
18,489
(18,055)
9,604
177
7,222
17,750
(15,802)
9,170
174
5,713
13,520
(12,011)
7,222
185
$
$
$
$
$
$
(1) $
4
3
$
(4) $
(3)
(7) $
(4)
Ì
(4)
(47) $
21
(26)
(253)
139
(114)
(300)
160
(140)
Ì
Ì
Ì
(40) $
17
(23)
(176)
127
(49)
(216)
144
(72)
(8)
1
(7)
(46)
17
(29)
(124)
80
(44)
(170)
97
(73)
(1)
2
1
(300)
(224)
(171)
85
75
160
(140) $
(141) $
4
(137) $
94
51
145
(79) $
(76) $
(10)
(86) $
(1.1)
Ì
(1.1)
(0.7)
(0.1)
(0.8)
61
38
99
(72)
(77)
1
(76)
(0.7)
Ì
(0.7)
(1) Includes single-family and multifamily REO properties.
(2) Represents weighted average holding period for single-family and multifamily based on number of REO properties disposed.
(3) We reclassiÑed income of $30 million and $17 million for 2003 and 2002, respectively, from REO operations income (expense) to (Provision)
beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses related to uncollectible interest on
PCs held by third parties from Management and guarantee income to (Provision) beneÑt for credit losses to conform with the 2004
presentation. As a result of these reclassiÑcations, we decreased charge-oÅs Ì single-family, net by $26 million and $15 million for 2003 and
2002, respectively.
(4) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of default risk
has been assumed by servicers, mortgage insurers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit
enhancements are limited in many instances to amounts less than the full amount of the loss.
(5) Equal to REO operations income (expense) plus Charge-oÅs, net.
(6) Calculated as credit gains (losses) divided by the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities
and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.
129
Freddie Mac
Overall, we continued to demonstrate strong credit performance during 2004, driven by eÅective risk
management and the sustained strength of the single-family housing market. The following discussion
provides additional analysis on key credit loss-related statistics and results.
Net credit losses (REO operations income (expenses) plus charge-oÅs, net) increased in 2004 as a result
of the increase in single-family charge-oÅs. Single-family credit losses totaled $141 million, or 1.1 basis points
of the average Total mortgage portfolio in 2004. This represents an increase from the historically low levels of
single-family credit losses experienced in 2003 ($76 million or 0.7 basis points) and in 2002 ($77 million or
0.7 basis points). Our multifamily portfolio produced a credit gain of $4 million in 2004, compared to a
$10 million loss in 2003, and a $1 million gain in 2002.
When we foreclose on a property, it may become part of our REO inventory. REO operations income
(expense), a component of credit losses, includes the expenses incurred to foreclose, acquire, maintain and sell
a property. REO inventory levels increased in 2004 in terms of number of properties held, although the dollar
amounts decreased. The single-family REO balance was $740 million at December 31, 2004, a change from
$758 million and $593 million at December 31, 2003 and 2002, respectively. Although REO inventories
increased, single-family REO income (expense) improved to expense of $1 million in 2004 from expense of
$4 million in both 2003 and 2002 largely due to house price growth, recoveries from credit enhancements and
reimbursements from seller/servicers. REO income arises when the fair market value of the acquired asset
exceeds the carrying value of the mortgage loan or when we are able to sell the REO at amounts in excess of
its carrying value.
Charge-oÅs, net, another component of credit losses, include losses and recoveries on mortgages that are
transferred to REO or involved in a foreclosure alternative. Single-family charge-oÅs, net of recoveries,
increased to $140 million in 2004 from $72 million in 2003 and $73 million in 2002, largely due to decreases in
the fair value of REO properties and increased REO acquisitions in the North Central region which continues
to hold the largest share of REO inventory. Charge-oÅs, net are reÖected on our consolidated balance sheets
as a reduction in loan loss reserves. See ""Table 71 Ì Loan Loss Reserves Activity'' for more information.
Table 69 and Table 70 provide detail by region for two key credit performance statistics, REO activity
and charge-oÅs. Regional REO acquisition and charge-oÅ trends follow a pattern that is similar to that of
regional delinquency trends.
Table 69 Ì REO Activity Ì By Region(1)
2004
Year Ended December 31,
2003
(number of properties)
2002
REO Inventory
Beginning property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties acquired by region:
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties disposed by region:
9,170
7,222
5,713
1,500
5,499
5,787
3,926
1,777
18,489
1,600
5,378
4,643
3,503
2,626
17,750
1,683
3,533
3,180
2,435
2,689
13,520
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total properties disposedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending property inventoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,562)
(5,596)
(5,111)
(3,605)
(2,181)
(18,055)
9,604
(1,674)
(4,476)
(3,908)
(3,018)
(2,726)
(15,802)
9,170
(1,798)
(3,012)
(2,420)
(2,019)
(2,762)
(12,011)
7,222
(1) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a
description of these regions.
130
Freddie Mac
Table 70 Ì Single-Family Charge-oÅs and Recoveries By Region(1)(2)
Year Ended December 31,
2003(3)
2004
(dollars in millions)
2002(3)
Northeast
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Southeast
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
24
(10)
14
84
(49)
35
92
(49)
43
66
(35)
31
34
(17)
17
$
21
(10)
11
62
(44)
18
54
(35)
19
43
(32)
11
36
(23)
13
$ 27
(13)
14
42
(24)
18
31
(20)
11
28
(17)
11
42
(23)
19
Total
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
300
(160)
$ 140
216
(144)
72
$
170
(97)
$ 73
(1) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a
description of these regions.
(2) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of
default risk has been assumed by servicers, mortgage insurers, or other third parties through credit enhancements. Recoveries of
charge-oÅs through credit enhancements are limited in many instances to amounts less than the full amount of the loss.
(3) We reclassiÑed certain income for the years ended December 31, 2003 and 2002 from REO operations income (expense) to
(Provision) beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses related to
uncollectible interest on PCs held by third parties from Management and guarantee income to (Provision) beneÑt for credit losses to
conform with the 2004 presentation. As a result of these reclassiÑcations, we decreased charge-oÅs, net by $26 million and
$15 million for the years ended December 31, 2003 and 2002, respectively.
131
Freddie Mac
Table 71 summarizes our loan loss reserves activity.
Table 71 Ì Loan Loss Reserves Activity
Total loan loss reserves(1):
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision (beneÑt) for credit losses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in accounting(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers-out during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other transfers, net during the period(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net to Total mortgage portfolio(7)ÏÏÏÏÏÏÏÏÏÏÏ
Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$ 299
143
(300)
160
(140)
Ì
(20)
(18)
$ 264
2003
Year Ended December 31,
2002
(dollars in millions)
2001
$ 265
(5)
(224)
145
(79)
110
(11)
19
$ 299
$ 224
122
(171)
99
(72)
Ì
(9)
Ì
$ 265
$ 229
33
(129)
101
(28)
Ì
(10)
Ì
$ 224
2000
$ 217
82
(124)
62
(62)
Ì
(8)
Ì
$ 229
1.1bp
1.9
0.7bp
3.8
0.7bp
3.7
0.3bp
8.0
0.7bp
3.7
(1) Includes Reserves for loans held-for-investment in the Retained portfolio and Reserves for guarantee losses on Participation
CertiÑcates. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more details.
(2) We reclassiÑed certain income for the full years ended December 31, 2003, 2002, 2001 and 2000 from REO operations income
(expense) to (Provision) beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses
related to uncollectible interest on PCs held by third parties from Management and guarantee income to (Provision) beneÑt for
credit losses to conform with the 2004 presentation. This resulted in a $15 million decrease, $6 million decrease, $1 million increase
and $3 million increase in (Provision) beneÑt for credit losses during 2003, 2002, 2001 and 2000, respectively. As a result of these
reclassiÑcations, we increased recoveries by $26 million, $15 million, $9 million and $5 million for the full years 2003, 2002, 2001 and
2000, respectively.
(3) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of
default risk has been assumed by servicers, mortgage insurers or third parties through credit enhancements. Recoveries of charge-oÅs
through credit enhancements are limited in many instances to amounts less than the full amount of the loss.
(4) On January 1, 2003, $110 million of recognized guarantee obligations that was attributable to estimated incurred losses on
outstanding PCs or Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(5) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured
Securities, which is included as an oÅset to the related receivable balance within Accounts and other receivables, net on the
consolidated balance sheets.
(6) Represents the reclassiÑcation of the portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that
corresponds to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition
of a guarantee obligation. In addition, the 2004 amount includes a reduction of loan loss reserves of $31 million related to prior period
adjustments for which the related income was recorded in Other income.
(7) Calculated using the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of
Structured Securities that is backed by Ginnie Mae CertiÑcates.
We maintain two loan loss reserves Ì Reserve for losses on mortgage loans held-for-investment and
Reserve for guarantee losses on Participation CertiÑcates Ì at levels we deem adequate to absorb probable
incurred losses on mortgage loans held-for-investment in the Retained portfolio and certain mortgages
underlying PCs held by third parties. In certain circumstances, incurred losses related to PCs we hold are
captured as part of mark-to-market adjustments that are recognized in connection with PC residuals, which
represent the portion of the fair value of the PCs related to guarantee asset and guarantee obligation. See
""CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Credit Losses'' and ""NOTE 1: SUM-
MARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for
further information.
Loan loss reserves are increased through periodic charges to the provision for credit losses and decreased
by charges-oÅs, net of recoveries. We record charge-oÅs to the loan loss reserves when the loss is speciÑcally
identiÑable and virtually certain. For mortgages that are transferred to REO or involved in a pre-foreclosure
sale, we record losses at the time of transfer or sale. For loans that have been modiÑed, losses are recorded at
the time of modiÑcation if the modiÑcation is a troubled debt restructuring.
As shown in ""Table 71 Ì Loan Loss Reserves Activity,'' total loan loss reserves decreased in 2004. This
decrease was primarily due to transfers out from the reserves related to uncollectible interest and a reduction
of reserves related to prior period adjustments for which the related income was recorded in Other income.
Credit Risk Sensitivity. As a part of our voluntary disclosure commitments made in October 2000, we
provide public disclosure of credit risk sensitivity results on a quarterly basis on our website. The credit risk
132
Freddie Mac
sensitivity analysis assesses the assumed increase in the present value of expected single-family mortgage
portfolio losses over ten years as the result of an estimated instantaneous Ñve percent decline in house prices
nationwide, followed by a return to more normal growth in house prices based on historical experience. An
internally developed Monte Carlo simulation-based model is used to generate our credit risk sensitivity
analyses. The Monte Carlo model uses an interest rate simulation program to generate numerous interest rate
paths that, in conjunction with a prepayment model, are used to estimate mortgage cash Öows along each path.
We use this same model to calculate the expected default cost component of the Guarantee obligation for
Participation CertiÑcates and to estimate expected future default costs of mortgage loans and mortgage-
related securities. In the credit rate sensitivity analysis, we adjust the house-price assumption used in the base
case to estimate the level and sensitivity of potential credit costs resulting from a sudden decline in house
prices. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' to the consolidated Ñnancial statements for more information.
The credit risk sensitivity results at December 31, 2004 and 2003 are shown in Table 72. Credit risk
sensitivity results as of the end of each quarter in 2004 and the Ñrst quarter of 2005 are presented in
""VOLUNTARY COMMITMENTS.''
Table 72 Ì Credit Risk Sensitivity Ì Estimated Net Present Value (NPV) of Increase in Credit Losses(1)
At:
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Before Receipt of Credit
Enhancements(2)
After Receipt of Credit
Enhancements(3)
NPV
$794
$926
NPV Ratio(4)
(dollars in millions, except ratios)
NPV
NPV Ratio(4)
6.5bps
7.9bps
$463
$533
3.8bps
4.6bps
(1) Based on single-family Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of
Structured Securities that is backed by Ginnie Mae CertiÑcates.
(2) Assumes that none of the credit enhancements currently covering our mortgages has any mitigating impact on our credit losses.
(3) Assumes we collect amounts due from credit enhancement providers after giving eÅect to certain assumptions about counterparty
default rates.
(4) Calculated as the ratio of net present value of increase in credit losses to the single-family Total mortgage portfolio, excluding non-
Freddie Mac mortgage-related securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.
Institutional Credit Risk
We are subject to credit risk from institutional counterparties to the extent they do not fulÑll their
obligations to us under the terms of speciÑc contracts or agreements. Our primary institutional credit risk
exposure, other than counterparty credit risk exposure relating to derivatives (which is discussed in ""Interest-
Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit Risk''),
arises from agreements with the following entities:
‚ mortgage seller/servicers;
‚ mortgage loan insurers;
‚ issuers, guarantors or third party providers of credit enhancements on non-Freddie Mac mortgage-
related securities held in our Retained portfolio;
‚ mortgage investors and originators; and
‚ issuers, guarantors and insurers of investments held in our Cash and investments portfolio.
Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of
mortgage seller/servicers that remit to us monthly principal and interest payments on mortgages, provide
credit enhancements such as recourse or collateral and represent and warrant that mortgages were originated
in compliance with our standards. The servicing fee charged by mortgage servicers varies by mortgage product.
We require our single-family servicers to retain a minimum percentage fee for mortgages serviced on our
behalf, typically 0.25 percent of the unpaid principal balance of the mortgage loans. However, we do on an
exception basis allow lower minimum servicing amounts. The credit risk associated with servicing fees relates
133
Freddie Mac
to whether we could transfer the servicing to an alternate servicer without a loss in the event the current
servicer is unable to fulÑll its responsibilities.
To protect us against these risks, we require seller/servicers to meet minimum Ñnancial capacity
standards, insurance and other eligibility requirements. We institute remedial actions against mortgage
seller/servicers that fail to comply with our standards. These actions may include transferring mortgage
servicing to other qualiÑed servicers or terminating our relationship with the mortgage seller/servicer.
We manage the credit quality of our multifamily seller/servicers by establishing institutional eligibility
requirements for participation in our multifamily programs. These seller/servicers must also meet our
standards for originating and servicing multifamily loans. We conduct regular quality control reviews of our
multifamily mortgage seller/servicers to determine whether they remain in compliance with our standards.
Mortgage Loan Insurers. We bear institutional credit risk relating to the non-performance of mortgage
insurers that insure purchased or guaranteed mortgages (see ""Mortgage Credit Risk Ì Mortgage Credit Risk
Management Strategies Ì Credit Enhancements'' for more information). We manage this risk by establishing
eligibility standards for mortgage insurers and by regularly monitoring our exposure to individual mortgage
insurers. We also monitor the mortgage insurers' credit ratings, as provided by nationally recognized credit
rating agencies. In addition, we periodically review the methods used by the credit rating agencies. We also
perform periodic on-site reviews of mortgage insurers to conÑrm compliance with our eligibility requirements
and to evaluate their management and control practices. In addition, state insurance authorities regulate
mortgage insurers. Substantially all mortgage insurers providing primary mortgage insurance and pool
insurance coverage on single-family mortgages purchased during 2004 were rated ""AA'' or better by S&P. At
December 31, 2004, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance
Corporation) that each provided more than Ñve percent of our Total mortgage insurance coverage (including
primary mortgage insurance and pool insurance) and together accounted for approximately 99 percent of our
overall coverage.
Non-Freddie Mac Mortgage-Related Securities.
Investments for our Retained portfolio expose us to
institutional credit risk on non-Freddie Mac mortgage-related securities to the extent that issuers, guarantors,
or third parties providing credit enhancements, become insolvent. See ""Table 33 Ì Credit Characteristics of
Mortgages and Mortgage-Related Securities in the Retained Portfolio'' for more information concerning our
Retained portfolio.
Our non-Freddie Mac mortgage-related securities portfolio consists of both agency and non-agency
mortgage securities. Agency mortgage-related securities, which are securities issued or guaranteed by Fannie
Mae or Ginnie Mae, present minimal institutional credit risk exposure to us due to the high credit quality of
the issuers and guarantors. Agency mortgage-related securities are generally not separately rated by credit
rating agencies, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage
securities rated AAA (based on the S&P rating scale or an equivalent rating from other nationally recognized
rating agencies). At December 31, 2004, we held approximately $60 billion of agency securities, representing
approximately four percent of our Total mortgage portfolio (see ""Table 8 Ì Freddie Mac's Total Mortgage
Portfolio Based on Unpaid Principal Balances'' for more information about our Total mortgage portfolio).
Non-agency mortgage securities may expose us to some institutional credit risk, if the nature of the credit
enhancement relies on a third party to cover potential losses. However, most of our non-agency mortgage
securities rely primarily on subordinated tranches to provide credit loss protection and therefore expose us to
very limited counterparty risk. In those instances where we desire further protection, we may choose to
mitigate our exposure with bond insurance or by purchasing additional subordination. Bond insurance exposes
us to the claims paying ability of the bond insurer. Substantially all of the bond insurers providing coverage for
non-agency mortgage securities held by us were rated AAA or equivalent by at least one nationally recognized
credit rating agency. At December 31, 2004, we held approximately $175 billion of non-agency mortgage-
related securities. Of this amount, 97 percent were rated AAA or equivalent.
We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing
securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthi-
ness of the issuers and servicers of these securities and the bond insurers that guarantee them. To assess the
134
Freddie Mac
creditworthiness of non-agency securities, we may perform additional analysis, including on-site visits,
veriÑcation of loan documentation, review of underwriting or servicing processes and similar due diligence
measures. In addition, management regularly evaluates these investments to determine if any impairment in
fair value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination of
both. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated
Ñnancial statements for more information on impairments.
Mortgage Investors and Originators. We are exposed to pre-settlement risk through the purchase, sale
and Ñnancing of mortgage loans and mortgage-related securities with mortgage investors and originators. This
exposure primarily arose in connection with our Securities Sales & Trading Group business unit prior to its
cessation of activities in the fourth quarter of 2004. Pre-settlement risk is the risk that a counterparty will not
perform under the terms of a transaction due to adverse changes in market value between trade date and
settlement date. The probability of such a default is generally remote over the short time horizon between the
trade and settlement date. We manage this risk by evaluating the creditworthiness of our counterparties and
monitoring and managing our exposures. In some instances, we may require these counterparties to post
collateral.
Cash and Investments Portfolio.
Institutional credit risk also arises from the insolvency of issuers or
guarantors of investments held in our Cash and investments portfolio. This portfolio is generally used to meet
both anticipated and unanticipated liquidity and working capital requirements (See ""LIQUIDITY AND
CAPITAL RESOURCES Ì Liquidity'' for more information). Instruments in this portfolio are investment
grade at the time of purchase and primarily short-term in nature, thereby signiÑcantly mitigating institutional
credit risk in this portfolio. We regularly evaluate these investments to determine if any impairment in fair
value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination of
both.
135
Freddie Mac
QUARTERLY SELECTED FINANCIAL DATA
1Q
2Q
4Q
Full-Year
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax (expense) beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏÏ
Diluted earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏ
$2,126
(26)
(503)
(285)
$1,312
$ 1.83
$ 1.82
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax (expense) beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏ
$2,421
1,247
(410)
(991)
$2,267
$ 3.22
$ 3.21
2004
3Q
(dollars in millions)
$ 2,321
(3,691)
(603)
467
$(1,506)
$2,625
1,532
(548)
(855)
$2,754
$2,065
(854)
(717)
(117)
$ 377
$ 3.92
$ 3.91
$ (2.26)
$ (2.26)
$ 0.47
$ 0.47
2003
3Q
(dollars in millions)
$2,442
(2,294)
(562)
126
$ (288)
$2,185
1,830
(613)
(1,096)
$2,306
$2,450
(1,027)
(651)
(241)
$ 531
$ 3.28
$ 3.27
$(0.49)
$(0.49)
$ 0.70
$ 0.69
$ 9,137
(3,039)
(2,371)
(790)
$ 2,937
$
$
3.96
3.94
$ 9,498
(244)
(2,236)
(2,202)
$ 4,816
$
$
6.69
6.68
1Q
2Q
4Q
Full-Year
(1) Earnings per share is computed independently for each of the quarters presented. Due to the use of weighted-average common shares
outstanding when calculating earnings per share, the sum of the four quarters may not equal the full-year amount. Earnings per share
amounts may not recalculate using the amounts in this table due to rounding.
(2) Certain expenses related to uncollectible interest on PCs held by third parties were reclassiÑed to (Provision) beneÑt for credit losses
from Management and guarantee income to conform with the 2004 presentation. This resulted in a reclassiÑcation of $4 million,
$3 million, $5 million and $3 million for 1Q 2003, 2Q 2003, 3Q 2003 and 4Q 2003, respectively, totaling a $15 million reduction in
the loss reported in Non-interest income (loss) with a corresponding increase in expenses reported in Non-interest expense
during 2003.
SUBSEQUENT ACCOUNTING REVISIONS
As we announced on May 12, 2005, we entered into a closing agreement with the IRS that resolves issues
relating to the tax treatment of dividends paid on step-down preferred stock that our two REIT subsidiaries
previously issued. The closing agreement resulted in changes to our 2004 Ñnancial results previously released
in our Information Statement Supplement dated March 31, 2005. SpeciÑcally, we recorded a reduction in tax
reserves, which are a component of Other assets, and a corresponding reduction in Income tax expense,
totaling $110 million. Of that amount, Income tax expense was reduced by $94 million, which was the balance
of the tax reserve related to this issue at January 1, 2004, and by a reversal of $16 million of additional tax
reserve recorded in 2004. The impact by quarter was an increase (reduction) to Net income of $101 million,
$16 million, ($9) million, and $2 million, aÅecting the Ñrst, second, third and fourth quarters of 2004,
respectively. In 2005 and thereafter, we will record tax beneÑts related to REIT preferred stock dividend
payments in the consolidated Ñnancial statements consistent with the closing agreement. See
""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements for additional information.
136
Freddie Mac
The following tables provide additional information about select captions on our consolidated balance
ADDITIONAL INFORMATION
sheets at December 31, 2004, 2003 and 2002.
Table 73 Ì Fair Value of Securities
Available-for-sale securities
Retained portfolio
Mortgage-related securities issued by:
2004
December 31,
2003
(dollars in millions)
2002
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$352,102
59,519
1,762
168,058
9,020
590,461
$384,426
76,844
2,918
109,409
7,729
581,326
$327,995
81,930
5,175
73,498
7,667
496,265
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by the U.S. Treasury and other U.S.
government corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,733
16,596
34,694
Ì
Ì
8,097
Ì
Ì
29,830
$620,291
Ì
4,924
9,494
150
64
31,228
$612,554
12,493
10,102
6,641
2,240
249
66,419
$562,684
Trading securities
Retained portfolio
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments portfolio(1)
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-mortgage-related securities:
Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by the U.S. Treasury and other U.S.
government corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mutual funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 11,398
385
59
11,842
$ 17,590
586
24
18,200
$ 28,535
519
50
29,104
Ì
Ì
Ì
Ì
Ì
Ì
17,266
15,052
490
9
32,817
20,244
11,029
1,062
31
32,366
52
96
Ì
Ì
Ì
Ì
Ì
Ì
Ì
$ 11,842
479
Ì
341
437
5
Ì
1,314
$ 52,331
1,004
540
479
229
4
57
2,409
$ 63,879
(1) The reduction of trading securities within the Cash and investments portfolio in 2004 was attributable to us ceasing the operations of
our PC market-making and support activities accomplished through our Securities Sales & Trading Group business unit and external
Money Manager program during the fourth quarter of 2004.
For additional information about the securities we hold, see ""NOTE 5: RETAINED PORTFOLIO
AND CASH AND INVESTMENTS PORTFOLIO'' to the consolidated Ñnancial statements.
137
Freddie Mac
Table 74 Ì Senior Debt, Due Within One Year
At December 31,
Weighted
Average
Balance, Net EÅective Rate(1)
Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchase and Federal funds purchased
Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ
$180,198
162
Ì
16,279
196,639
85,664
$282,303
2.04%
2.51
Ì
2.24
2004
Average Outstanding
During the Year
Weighted
Average
EÅective Rate(3)
Maximum
Balance, Net
Outstanding at Any
Month End
Balance, Net(2)
(dollars in millions)
$184,834
4,289
801
13,549
1.40%
1.31
1.37
1.36
$212,715
5,320
3,046
16,279
2003
Average Outstanding
During the Year
At December 31,
Weighted
Average
Balance, Net EÅective Rate(1)
$188,309
5,300
1.12%
1.18
Balance, Net(2)
(dollars in millions)
$207,374
1,243
Weighted
Average
EÅective Rate(3)
Maximum
Balance, Net
Outstanding at Any
Month End
1.21%
1.32
$264,370
5,300
0.96
1.02
2,283
11,694
0.94
1.13
8,296
16,082
1,611
16,082
733
212,035
83,227
$295,262
Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchase and Federal funds
purchased(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap collateral obligations(6) ÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ
At December 31,
Weighted
Average
Balance, Net EÅective Rate(1)
Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchase and Federal funds purchased
Swap collateral obligations(6)(7) ÏÏÏÏÏÏÏÏÏÏ
Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ
$163,202
1,015
15,262
8,209
6,356
194,044
50,385
$244,429
1.61%
2.07
1.08
1.39
2002
Average Outstanding
During the Year
Weighted
Average
EÅective Rate(3)
Maximum
Balance, Net
Outstanding at Any
Month End
Balance, Net(2)
(dollars in millions)
$180,889
5,528
13,882
3,278
2.02%
2.39
1.39
1.65
$211,393
8,163
21,472
8,209
(1) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums
and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
(2) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on the
consolidated balance sheets.
(3) Represents the approximate weighted average eÅective rate during the period, which includes the amortization of discounts or
premiums and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
(4) Maximum Balance, Net Outstanding at Any Month End for 2003 and 2002 has been revised to conform with the 2004 presentation.
(5) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2003 have been revised for
Securities sold under agreements to repurchase and Federal funds purchased to conform with the 2004 presentation.
(6) Weighted Average EÅective Rate at December 31, 2003 and 2002 have been revised to conform with the 2004 presentation.
(7) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2002 have been revised to conform
with the 2004 presentation.
For additional information about our debt securities, see ""NOTE 8: DEBT SECURITIES AND
SUBORDINATED BORROWINGS'' to the consolidated Ñnancial statements.
138
Freddie Mac
The following provides updated information on the Voluntary Commitments we made in October 2000.
is available on our website
information about our Voluntary Commitments
Additional
(www.FreddieMac.com/investors).
VOLUNTARY COMMITMENTS
Description
Comments
Status
1. Periodic Issuance of Subordinated Debt:
‚ We will issue publicly traded and externally
rated Freddie SUBS» on a semi-annual
basis.
‚ Freddie SUBS» will be issued in an amount
such that ""Voluntary Commitments' capital''
less 0.45 percent of Outstanding PCs and
Structured Securities will equal or exceed
four percent of on-balance sheet assets by
October 2003. Voluntary Commitments'
capital is deÑned as the sum of Core capital
(eÅectively equal to Stockholders' equity
less AOCI, net of taxes), loan loss reserves
and Freddie SUBS» outstanding.
2. Liquidity Management and Contingency
Planning:
‚ We will comply with principles of sound
liquidity management set forth by the Basel
Committee on Banking Supervision and will
maintain more than three months' worth of
liquidity (based on internal forecasts)
assuming we have no access to new issue
public debt markets.
‚ In implementing this commitment, we will
maintain at least Ñve percent of on-balance
sheet assets in liquid, marketable, non-
mortgage securities. We will also maintain
additional, liquid mortgage securities for use
as collateral in short-term borrowings from
dealer counterparties.
‚ At December 31, 2004, the ratio of
Voluntary Commitments' capital
less
0.45 percent of Outstanding PCs and
Structured Securities to total assets was
4.6 percent.
‚ We did not issue any Freddie SUBS» in
2004. As a result of not having current
consolidated Ñnancial statements, our ability
to issue subordinated debt may be limited.
‚ As of December 31, 2004, we met this
commitment.
‚ We cannot determine this ratio as of the end
of any period in 2005 with speciÑcity until we
release the consolidated Ñnancial statements
for the relevant period.
‚ We plan to update our disclosure for this
commitment following the release of our
2005 consolidated Ñnancial statements for
the relevant period.
‚ For purposes of this commitment, we will
maintain liquidity needed to meet our
obligations to pay principal and interest
related to our outstanding debt maturities, to
pay PC investors the amounts due to them,
to purchase mortgage loans and mortgage-
related securities that we have committed to
purchase as well as to fund operating
expenditures. To fund these obligations in
the event of market disruption, we could sell
some securities from our Retained portfolio
and liquidate non-mortgage investments
from our Cash and investments portfolio. In
addition, we could borrow against mortgage-
related securities that are a component of our
Retained portfolio by executing transactions
in the repurchase agreement market. (Our
ability to execute these and other strategies
may be adversely aÅected by market
conditions, operational constraints and other
factors.)
‚ Assets that meet this deÑnition include Cash
and cash equivalents (excluding operating
cash accounts, cash posted as collateral by
derivative counterparties and certain other
balances), various non-mortgage investments
such as municipal bonds, asset-backed
securities, commercial paper and certain
securities purchased under agreements to
resell (reverse repos). This commitment no
longer considers investments held by our
Securities Sales & Trading Group business
unit or as part of our external Money
Manager program as these operations ceased
activity during the fourth quarter of 2004.
‚ We cannot determine the percentage of on-
balance sheet assets in liquid, marketable,
non-mortgage securities as of the end of any
period in 2005 with speciÑcity until we
release the consolidated Ñnancial statements
for the relevant period.
‚ As of December 31, 2004, we met this
commitment.
‚ As of December 31, 2004, we met this
commitment.
‚ We plan to update our disclosure for this
commitment following the release of our
2005 consolidated Ñnancial statements for
the relevant period.
139
Freddie Mac
VOLUNTARY COMMITMENTS (continued)
Description
Comments
Status
3. Interest-Rate Risk Disclosures
We will provide public disclosure of interest-
rate risk sensitivity results on a monthly basis.
SpeciÑcally, we will disclose the PMVS-L,
which shows the expected impact on our
portfolio market value from an immediate,
adverse 50 basis point parallel shift in the yield
curve. We will also disclose the PMVS-YC,
which shows the same impact from an
immediate, adverse 25 basis point change in the
slope of the yield curve.
4. Credit Risk Disclosures:
We will provide public disclosure of credit risk
sensitivity results on a quarterly basis.
Compared to a base case in which house prices
on average rise at rates consistent with long-
term trends, these disclosures show the increase
in the present value of expected single-family
credit losses to us over a ten-year period
assuming an immediate Ñve percent decline in
house prices followed by a resumption of the
same
in house-price
trend
appreciation as in the base case.
long-term
An
internally developed Monte Carlo
simulation-based model is used to generate our
credit risk sensitivity analyses. We use this
same model to calculate the expected default
cost component of the Guarantee obligation on
Participation CertiÑcates and to estimate
expected future default costs of mortgage loans
and mortgage-related securities. In this
analysis, we adjust the house-price assumption
used in the base case to estimate the level and
sensitivity of potential credit costs associated
with our existing single-family mortgage
portfolio. See ""NOTE 2: TRANSFERS OF
SECURITIZED
IN
MORTGAGE-RELATED ASSETS'' to the
consolidated Ñnancial statements for more
information.
INTERESTS
5. Public Disclosure of Annual Rating:
We will obtain an annual credit rating assessing
risk to the government or independent Ñnancial
strength from a nationally recognized statistical
rating organization and will disclose this rating
to the public.
We have a ""risk-to-the-government'' credit rat-
ing of ""AA¿'' from S&P. Moody's has as-
signed us a Bank Financial Strength Rating of
""A¿.'' Both of these ratings are maintained on
a surveillance basis, which means that the rat-
ing agencies are committed to notify the public
if the rating is ever aÅected by a change in our
Ñnancial condition.
The full-year average PMVS-L and PMVS-
YC for 2004 was 2 and 0 percent, respectively.
2005's monthly average PMVS results and
related disclosures are provided in our Monthly
Volume Summary, or MVS, which is available
on our website, www.FreddieMac.com/investor.
Our quarterly credit risk sensitivity estimates
are as follows:
Before Receipt
of Credit
Enhancements(1)
NPV
Ratio(4)
NPV(3)
(dollars in
millions)
After Receipt
of Credit
Enhancements(2)
NPV
Ratio(4)
NPV(3)
(dollars in
millions)
As of:
03/31/05 $756
794
12/31/04
879
09/30/04
873
06/30/04
872
03/31/04
926
12/31/03
6.2 bps
6.5 bps
7.3 bps
7.3 bps
7.4 bps
7.9 bps
$447
463
512
522
503
533
3.6 bps
3.8 bps
4.2 bps
4.4 bps
4.3 bps
4.6 bps
(1) Assumes that none of the credit enhancements
currently covering our mortgages has any miti-
gating impact on our credit losses.
(2) Assumes we collect amounts due from credit
enhancement providers after giving eÅect to
certain assumptions about counterparty default
rates.
(3) Based on single-family Total mortgage portfolio,
excluding Structured Securities backed by non-
Freddie Mac mortgage-related securities and
Structured Securities backed by Ginnie Mae
CertiÑcates.
(4) Calculated as the ratio of net present value of
increase in credit losses to the total single-
family mortgage portfolio, which excludes
multi-family mortgages and Structured Securi-
ties backed by Ginnie Mae CertiÑcates.
As of May 23, 2005, S&P's risk-to-the-govern-
ment rating us was ""AA-'' and Moody's Bank
Financial Strength Rating for us was ""A-.''
140
Freddie Mac
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
141
Freddie Mac
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Freddie Mac:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
income, of cash Öows, and of stockholders' equity present fairly, in all material respects, the Ñnancial position
of Freddie Mac, a stockholder-owned government-sponsored enterprise (the ""company''), and its subsidiaries
at December 31, 2004 and 2003, and the results of their operations and their cash Öows for each of the three
years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in
the United States of America. These Ñnancial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these Ñnancial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Ñnancial statements, assessing the accounting
principles used and signiÑcant estimates made by management, and evaluating the overall Ñnancial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
We have also audited in accordance with auditing standards generally accepted in the United States of
America the supplemental consolidated fair value balance sheets of the company as of December 31, 2004 and
2003. As described in ""NOTE 16: FAIR VALUE DISCLOSURES,'' the supplemental consolidated fair
value balance sheets have been prepared by management to present relevant Ñnancial information that is not
provided by the historical-cost consolidated balance sheets and is not intended to be a presentation in
conformity with generally accepted accounting principles. In addition, the supplemental consolidated fair
value balance sheets do not purport to present the net realizable, liquidation, or market value of the company
as a whole. Furthermore, amounts ultimately realized by the company from the disposal of assets or amounts
required to settle obligations may vary signiÑcantly from the fair values presented. In our opinion, the
supplemental consolidated fair value balance sheets referred to above present fairly, in all material respects,
the information set forth therein as described in ""NOTE 16: FAIR VALUE DISCLOSURES.''
As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' the
company adopted the provisions of FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others'' and FASB StaÅ
Position 45-2 ""Whether FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' Provides Support for Subsequently
Accounting for a Guarantor's Liability at Fair Value,'' as of January 1, 2003.
McLean, Virginia
June 1, 2005
142
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2004
2002
2003
(dollars in millions, except share-
related amounts)
Interest income
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
4,007
28,460
3,136
35,603
$
4,251
29,051
3,796
37,098
$
4,290
30,039
4,147
38,476
Interest expense
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense on debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)
Management and guarantee income (includes interest on Guarantee asset
for Participation CertiÑcates of $257, $244 and $242) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair
value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏ
Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Provision) beneÑt for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends and issuance costs on redeemed preferred stock
(including $0, $0 and $5 of issuance costs on redeemed preferred stock)
Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average common shares outstanding (thousands)
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(2,908)
(22,950)
(25,858)
(708)
(26,566)
100
9,137
(2,785)
(22,083)
(24,868)
(1,641)
(26,509)
(1,091)
9,498
(4,303)
(21,337)
(25,640)
(1,236)
(26,876)
(2,075)
9,525
1,382
1,653
1,527
(1,135)
732
(4,475)
743
(348)
(327)
159
230
(3,039)
(758)
(588)
(60)
(144)
(1,550)
(143)
3
(281)
(129)
(271)
(2,371)
3,727
(790)
2,937
(210)
2,727
3.96
3.94
$
$
$
$
(1,461)
925
39
644
(1,114)
(1,775)
352
493
(244)
(624)
(311)
(52)
(194)
(1,181)
5
(7)
(200)
(157)
(696)
(2,236)
7,018
(2,202)
4,816
(2,176)
592
5,302
187
1,799
(674)
276
321
7,154
(593)
(155)
(42)
(184)
(974)
(122)
(4)
(160)
(184)
(432)
(1,876)
14,803
(4,713)
$ 10,090
(216)
4,600
6.69
6.68
$
$
$
(239)
9,851
14.22
14.17
$
$
$
$
689,282
691,521
1.20
$
687,094
688,675
1.04
$
692,727
695,116
0.88
$
The accompanying notes are an integral part of these Ñnancial statements.
143
Freddie Mac
FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
December 31,
2004
December 31,
2003
(dollars in millions)
Assets
Retained portfolio
Mortgage loans:
Held-for-investment, at amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Held-for-sale, at lower of cost or market value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans, net of reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 58,852
(114)
2,582
61,320
$ 57,804
(174)
2,530
60,160
Mortgage-related securities:
Available-for-sale, at fair value (includes $194 and $282 pledged as collateral that may be
repledged) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading, at fair value (includes $0 and $32 pledged as collateral that may be repledged) ÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments:
Mortgage-related securities:
590,461
11,842
845
603,148
664,468
581,326
18,200
671
600,197
660,357
35,253
23,142
Trading, at fair value (includes $0 and $6 pledged as collateral that may be repledged) ÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
32,817
(5)
Non-mortgage-related securities:
Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading, at fair value (includes $0 and $23 pledged as collateral that may be repledged) ÏÏÏÏÏÏ
Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related and non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate owned, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities and stockholders' equity
Debt securities, net
Senior debt:
Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments and contingencies (Notes 1, 3, 4 and 13)
Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity
Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and
690,606,185 shares and 688,573,911 shares outstanding, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss), (AOCI) net of taxes, related to:
Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total accumulated other comprehensive income (loss), net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 35,276,095 shares and 37,308,369 shares, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
29,830
Ì
29,830
29,830
32,197
97,280
7,286
15,257
4,516
741
5,736
$795,284
$282,303
443,772
5,622
731,697
13,654
7,329
4,065
226
150
5,238
762,359
1,509
4,609
152
873
30,728
4,339
(7,924)
(8)
(3,593)
(1,353)
31,416
$795,284
31,228
1,314
32,542
65,354
20,582
109,078
8,067
16,180
3,686
795
5,286
$803,449
$295,262
438,738
5,613
739,613
13,205
7,345
2,904
357
125
6,484
770,033
1,929
4,609
152
814
28,837
6,349
(7,837)
(10)
(1,498)
(1,427)
31,487
$803,449
The accompanying notes are an integral part of these Ñnancial statements.
144
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred stock, at redemption value
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock redemptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, par value
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation, before tax eÅect of $20, $23
and $23 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt from employee stock option exercises ÏÏ
Preferred stock issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AOCI, net of taxes
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in unrealized gains (losses) related to available-
for-sale securities, net of reclassiÑcation adjustmentsÏÏÏÏ
Changes in unrealized gains (losses) related to cash Öow
hedge relationships, net of reclassiÑcation adjustments ÏÏ
Change in minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AOCI, net of taxes, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost
Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock repurchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Comprehensive income
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in AOCI, net of taxes, net of reclassiÑcation
adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2004
2003
2002
Shares
Amount
Shares
Amount
Shares
Amount
(dollars and shares in millions)
92
Ì
Ì
92
726
726
39
(2)
Ì
37
92
Ì
Ì
92
726
726
37
(2)
Ì
35
$ 4,609
Ì
Ì
4,609
152
152
814
56
20
Ì
(17)
873
28,837
2,937
(210)
(836)
30,728
(1,498)
(2,010)
(87)
2
(3,593)
(1,427)
74
Ì
(1,353)
$31,416
$ 2,937
(2,095)
842
$
$ 4,609
Ì
Ì
4,609
92
6
(6)
92
$ 4,596
300
(287)
4,609
152
152
744
64
16
Ì
(10)
814
24,955
4,816
(216)
(718)
28,837
2,340
(5,868)
2,040
(10)
(1,498)
(1,470)
43
Ì
(1,427)
$31,487
$ 4,816
(3,838)
978
$
726
726
152
152
671
65
16
(2)
(6)
744
15,710
10,090
(234)
(611)
24,955
(557)
8,017
(5,120)
Ì
2,340
31
(1)
9
39
(948)
33
(555)
(1,470)
$31,330
$10,090
2,897
$12,987
The accompanying notes are an integral part of these Ñnancial statements.
145
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Öows from operating activities
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by operating activities:
Hedge accounting (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized (gains) losses on derivatives not in hedge accounting relationships, net ÏÏÏÏÏÏ
Asset related amortization Ì premiums, discounts and hedging basis adjustmentsÏÏÏÏÏÏÏ
Debt related amortization Ì premiums and discounts on certain debt securities and
hedging basis adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on debt retirementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) losses on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from purchases and sales of trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in accounts and other receivables, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in amounts due to Participation CertiÑcate investors, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Guarantee asset for Participation CertiÑcates, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öows from investing activities
Purchases of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturities of available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net (increase) decrease in securities purchased under agreements to resell and Federal
funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative premiums and terminations, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öows from Ñnancing activities
Proceeds from issuance of short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of minority interest in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of preferred stock, net of issuance costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Redemption of preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repurchases of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payment of cash dividends on preferred stock and common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of housing tax credit partnerships notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used for) provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Supplemental cash Öow information
Cash paid for:
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative interest carry ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash investing and Ñnancing activities:
Securitized and retained available-for-sale securities formed from prior period purchases
of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers from mortgage loans to REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in housing tax credit partnerships Ñnanced by notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers from held-for-sale mortgages to held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Year Ended December 31,
2003
(dollars in millions)
2002
$
2,937
$
4,816
$
10,090
(743)
2,758
1,329
3,318
327
143
738
(31,698)
30,965
162
38,672
2,149
529
(513)
756
(830)
1,173
(170)
(346)
196
51,852
(276,573)
85,583
178,148
(14,241)
11,511
1,552
(11,615)
(193)
(69)
(25,897)
826,020
(841,638)
187,878
(184,295)
(405)
Ì
Ì
57
Ì
(1,046)
(415)
(13,844)
12,111
23,142
35,253
23,257
325
363
272
1,546
1,184
198
$
$
(644)
(1,079)
995
2,318
1,775
(5)
2,625
(82,074)
84,329
390
8,935
4,394
(22,369)
(217)
(1,090)
(1,362)
1,606
(389)
737
219
3,910
(446,036)
143,513
242,044
(17,570)
15,283
1,327
2,461
3,333
(32)
(55,677)
900,073
(881,860)
258,371
(210,841)
(376)
Ì
Ì
33
Ì
(934)
(349)
(187)
(5,941)
(404)
374
674
122
(1,784)
(55,275)
49,035
1,097
7,170
3,238
7,705
(1,207)
(484)
711
272
326
2,690
2,559
20,781
(451,510)
176,928
178,991
(13,197)
12,999
980
10,457
(4,062)
(65)
(88,479)
2,048,131
(2,099,206)
269,386
(141,257)
(350)
298
(287)
27
(555)
(845)
(316)
$
$
$
$
64,117
12,350
10,792
23,142
25,562
578
2,538
1,681
1,570
702
179
75,026
7,328
3,464
10,792
26,590
3,239
2,491
2,910
1,127
896
209
The accompanying notes are an integral part of these Ñnancial statements.
146
Freddie Mac
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac (the ""company'') is a stockholder-owned, government-sponsored enterprise (""GSE'')
established by Congress in 1970 to provide a continuous Öow of funds for residential mortgages. Freddie Mac's
obligations are the company's alone and not insured or guaranteed by the United States of America (""U.S.'')
or any other agency or instrumentality of the U.S.
Freddie Mac plays a fundamental role in the American housing Ñnance system, linking the domestic
mortgage market and the global capital markets. Freddie Mac's participation in the secondary mortgage
market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and
investing in mortgage loans and mortgage-related securities held in Freddie Mac's Retained portfolio.
Through its credit guarantee activities, Freddie Mac securitizes mortgage loans by issuing Mortgage
Participation CertiÑcates (""PCs'') to third-party investors. Freddie Mac also resecuritizes mortgage-related
securities that are issued by Freddie Mac or the Government National Mortgage Association (""Ginnie
Mae''), as well as non-agency entities. Securities issued through Freddie Mac's resecuritization activities are
referred to as Structured Securities. Freddie Mac also guarantees multifamily mortgage loans that support
housing revenue bonds issued by third parties and it guarantees other mortgage loans held by third parties,
which are included in the deÑnition of PCs and Structured Securities. In each case, under U.S. generally
accepted accounting principles (""GAAP''), securitized mortgage-related assets that back PCs and Structured
Securities that are held by third parties are not reÖected as assets of Freddie Mac. However, Freddie Mac does
retain an obligation to guarantee the payment of principal and interest on issued PCs and Structured
Securities, which usually results in the recognition of a guarantee asset and guarantee obligation on the
company's consolidated balance sheets.
Freddie Mac's Ñnancial reporting and accounting policies conform to GAAP. Certain amounts in prior
periods have been reclassiÑed to conform with the current presentation.
Estimates
The preparation of Ñnancial statements in conformity with GAAP requires management to make
estimates and assumptions that aÅect (a) the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Ñnancial statements and (b) the reported amounts of
revenues and expenses during the reporting period. Actual results could diÅer from those estimates. The use of
certain estimates in preparation of the Ñnancial statements is described below.
A signiÑcant estimate that is prevalent in the company's Ñnancial statements is the estimation of fair
value for Ñnancial instruments, including derivative instruments, required to be recorded at fair value under
GAAP. The measurement of fair value is fundamental to the presentation of Freddie Mac's Ñnancial condition
and results of operations and, in many instances, requires management to make complex judgments. In
general, Freddie Mac records Ñnancial instruments at an estimate of the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Fair value is generally based on (i) quoted prices, (ii) market parameters obtained from third-party dealers,
pricing services or based on direct market observations in active markets or (iii) derived from such prices or
parameters, where available. If quoted prices or market parameters are not available, fair value is based on
internal valuation models using market data inputs or internally developed assumptions, where appropriate.
The use of diÅerent pricing models and assumptions could produce materially diÅerent estimates of fair value.
See ""NOTE 16: FAIR VALUE DISCLOSURES'' for further discussion of fair value estimates.
Freddie Mac also makes other signiÑcant estimates and judgments in:
‚ determining the expected future cash Öows (including the timing and amounts of prepayments) of
mortgage-related assets in the Retained portfolio;
‚ assessing when securities are other-than-temporarily impaired;
‚ assessing the reserves for credit losses on mortgage loans and guarantee losses on PCs;
‚ assessing Freddie Mac's legal and tax contingencies;
147
Freddie Mac
‚ estimating the expected timing and amounts of future issuances of non-callable debt and
redemptions of callable debt; and
‚ determining other matters that aÅect the reported amounts and disclosure of contingencies in the
Ñnancial statements.
In accordance with Statement of Financial Accounting Standards (""SFAS'') No. 5, ""Accounting for
Contingencies'' (""SFAS 5''), contingencies that might result in gains are not recorded prior to realization;
whereas, contingencies that might result in losses are accrued currently if it is probable a liability has been
incurred and the amount is reasonably estimable. Loss contingencies that are considered reasonably possible
are not accrued, but are required to be disclosed. Loss contingencies that are considered to have a remote
probability of occurrence are not required to be accrued or disclosed in accordance with SFAS 5.
Consolidation and Equity Method of Accounting
The consolidated Ñnancial statements include the accounts of the company and its subsidiaries. All
material intercompany transactions have been eliminated in consolidation. For each entity with which Freddie
Mac is involved, the company makes a determination as to whether the entity should be considered a
subsidiary of the company and included in the company's consolidated Ñnancial statements. Freddie Mac
consolidates all subsidiaries in which it holds more than 50 percent of the voting rights and has the ability to
exercise control over the entity. Based on its exercise of control over them, the company consolidates its two
majority-owned Real Estate Investment Trusts (""REITs''), Home Ownership Funding Corporation I and
Home Ownership Funding Corporation II. The company also consolidates the accounts of wholly-owned
JB 8000, Inc. (previously Ignition Mortgage Technology Solutions, Inc.). The equity and net earnings
attributable to the minority shareholder interests which relate to the company's consolidated subsidiaries are
reported separately in the consolidated balance sheets as Minority interests in consolidated subsidiaries and in
the consolidated statements of income as Minority interests in earnings of consolidated subsidiaries,
respectively.
In addition to voting interests in an entity, a controlling Ñnancial interest may also exist in entities through
arrangements that do not involve voting interests. Beginning in 2003, the company evaluated entities deemed
to be variable interest entities under the revision to Financial Accounting Standards Board (""FASB'')
Interpretation No. 46, ""Consolidation of Variable Interest Entities'' (""FIN 46-R''). FIN 46-R provides
guidance for determining when a company must consolidate the assets, liabilities and activities of a variable
interest entity. A variable interest entity is an entity (a) that has a total equity investment at risk that is not
suÇcient to Ñnance its activities without additional subordinated Ñnancial support from other entities or
(b) where the group of equity holders does not have the ability to make signiÑcant decisions about the entity's
activities, or the obligation to absorb the entity's expected losses or the right to receive the entity's expected
residual returns, or both. If an entity is a variable interest entity, the company must determine if its variable
interest is signiÑcant and whether the company is the ""primary beneÑciary.'' Under FIN 46-R, a company is
considered the primary beneÑciary and must consolidate a variable interest entity when it absorbs a majority of
expected losses or expected residual returns, or both. See ""NOTE 3: VARIABLE INTEREST ENTITIES''
for additional discussion and information regarding the consolidation of variable interest entities.
The company uses the equity method of accounting for companies over which it has the ability to exercise
signiÑcant inÖuence, but not control. Under the equity method of accounting, Freddie Mac reports its
recorded investment as part of Other assets on the consolidated balance sheets and recognizes its share of the
entity's net income or losses in the consolidated statements of income with an oÅset to the recorded
investment on the consolidated balance sheets. Losses are recognized up to the amount of investment
recorded.
The company regularly invests as a limited partner in qualiÑed low-income housing tax
credit (""LIHTC'') partnerships that are eligible for federal tax credits. These tax credits are reported as
reductions in the company's provision for income taxes pursuant to Emerging Issues Task Force (""EITF'')
Issue 94-1, ""Accounting for Tax BeneÑts Resulting from Investments in AÅordable Housing Projects''
(""EITF 94-1''). Freddie Mac accounts for the investments which are not consolidated using the equity
method of accounting, in accordance with Statement of Position (""SOP'') No. 78-9, ""Accounting for
Investments in Real Estate Ventures'' (""SOP 78-9''). For partnerships accounted for under the equity
method, Freddie Mac's recorded investment is reported as part of Other assets on the consolidated balance
148
Freddie Mac
sheets and its share of partnership income or loss is reported in the consolidated statements of income as Non-
interest expense Ì Housing tax credit partnerships. The company's obligations to make delayed equity
contributions that are unconditional and legally binding are recorded at their present value in Other liabilities
on the consolidated balance sheets. To the extent that the company's cost basis in qualiÑed low-income
housing tax credit partnerships is diÅerent than the book basis reÖected at the partnership level, the basis
diÅerence is amortized over the life of the tax credits and included in the company's share of earnings
(losses) from housing tax credit partnerships. Freddie Mac periodically reviews these investments for
impairment and adjusts them to fair value when a decline in market value below the recorded investment is
deemed to be ""other than temporary'' under GAAP. Impairment losses are included in the consolidated
statements of income as part of Non-interest expense Ì Housing tax credit partnerships.
Cash and Cash Equivalents and Statements of Cash Flows
Freddie Mac accounts for highly liquid investment securities with an original maturity of three months or
less and used for cash management purposes as cash equivalents. Cash collateral obtained from counterparties
to derivative contracts where Freddie Mac is in an unrealized gain position is recorded as Cash and cash
equivalents.
In the consolidated statements of cash Öows, cash Öows related to the acquisition and termination of
derivatives other than forward commitments are generally classiÑed in investing activities, without regard to
whether they are designated as a hedge of another item. Cash Öows from commitments accounted for as
derivatives under SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities''
(""SFAS 133'') that result in the acquisition or sale of mortgage securities or mortgage loans are classiÑed in
either: (a) investing activities for available-for-sale securities or mortgage loans classiÑed as held-for-
investment or (b) operating activities for trading securities or mortgage loans classiÑed as held-for-sale. Cash
Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in operating activities unless the loans
have been securitized and retained as available-for-sale PCs within the same reporting period, in which case
they are classiÑed as investing activities. The periodic cash Öows on certain derivatives, which are recorded in
the consolidated statements of income on an accrual basis either in Income (expense) related to derivatives or
in Derivative gains (losses), are reported in operating activities. Cash Öows related to guarantee fees, including
buy-up and buy-down payments (""Buy-Ups'' and ""Buy-Downs,'' respectively), are classiÑed as operating
activities, along with the cash Öows related to the collection and distribution of payments on the mortgage
loans underlying PCs. Buy-Ups and Buy-Downs are discussed further below in ""Guarantor Swap Transactions
Executed Prior to January 1, 2003.'' Cash Öows related to the repayment of the original issue discount on
short-term, zero-coupon debt are reported as operating activities.
Freddie Mac reclassiÑed certain amounts from those previously reported on the consolidated statements
of cash Öows for the years ended December 31, 2003 and 2002. SpeciÑcally, for the years ended December 31,
2003 and 2002, Net cash provided by operating activities decreased by $572 million and $983 million,
respectively, while Net cash used for investing activities decreased by $432 million and $86 million,
respectively, and Net cash (used for) provided by Ñnancing activities increased by $140 million and
$897 million, respectively. These adjustments are corrections primarily related to certain timing diÅerences on
cash paid for interest related to short-term Discount notes and certain accruals related to the acquisition of
loans underlying Freddie Mac mortgage-related securities. In addition, Freddie Mac revised previously
reported supplemental cash Öow disclosures related to Cash paid for Interest for the years ended Decem-
ber 31, 2003 and 2002. This adjustment was made to include cash paid related to original issue discounts on
short-term Discount notes in conformity with the current period presentation and resulted in increasing
previously reported amounts by $2,710 million and $4,596 million for the years ended December 31, 2003 and
2002, respectively.
Freddie Mac often retains Structured Securities created through resecuritizations of mortgage-related
securities held by the company. The new Structured Securities the company acquires in these transactions are
classiÑed as available-for-sale or trading based upon the predominant classiÑcation of the mortgage-related
security collateral the company contributed. There were $428 million and $322 million of non-cash net
transfers to the available-for-sale classiÑcation from the trading classiÑcation related to resecuritization
transactions in 2004 and 2003, respectively.
149
Freddie Mac
Transfers of Financial Assets that Qualify as Purchases or Sales
Freddie Mac accounts for transfers of Ñnancial assets pursuant to the requirements of SFAS No. 140,
""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities''
(""SFAS 140''), and, prior to April 1, 2001, SFAS No. 125, ""Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities'' (""SFAS 125''), collectively referred to as
""SFAS 125/140.'' If Freddie Mac determines that it surrenders control over assets that it transfers to a third
party, Freddie Mac accounts for such transfers as sales to the extent its counterparty provides consideration
other than beneÑcial interests in the transferred assets (e.g., cash). Likewise, if Freddie Mac determines that
it obtains control over assets that were transferred to it, it accounts for such transfers as purchases to the extent
Freddie Mac provides consideration other than beneÑcial interests in exchange for the transferred assets.
Freddie Mac accounts for cash-based transfers of Ñnancial assets that do not qualify as sales as secured
borrowings.
If a transfer of Ñnancial assets qualiÑes as a sale, Freddie Mac continues to carry on its consolidated
balance sheets any retained interests in securitized Ñnancial assets. Such retained interests generally take one
of two forms. First, in connection with its right to receive guarantee payments (as further discussed below),
Freddie Mac recognizes a retained interest that is classiÑed on its consolidated balance sheets as Guarantee
asset for Participation CertiÑcates, at fair value. (This retained interest is referred to below as a ""GA''.)
Second, Freddie Mac recognizes PCs (or Structured Securities issued by the company using PCs held in its
portfolio) that are not transferred to third parties upon the completion of a securitization of mortgage loans
(or, in the case of Structured Securities, upon the resecuritization of PCs or Structured Securities held in
portfolio). PCs and Structured Securities that are held in portfolio are accounted for pursuant to the
requirements of SFAS No. 115, ""Accounting for Certain Investments in Debt and Equity Securities''
(""SFAS 115''). The carrying amounts of all of such retained interests are determined by allocating the
previous carrying amount of the transferred assets between assets sold and the retained interests based upon
their relative fair values at the date of transfer.
Upon completion of a transfer of Ñnancial assets that qualiÑes as a sale, Freddie Mac also de-recognizes
all assets sold and recognizes all assets obtained and liabilities incurred. In this regard, Freddie Mac recognizes
the fair value of its recourse obligation to guarantee the payment of principal and interest of PCs and
Structured Securities transferred in sale transactions. The initial fair value of such recourse obligations is
intended to reÖect the estimated amount that Freddie Mac would be required to pay to a third party of similar
credit standing to be relieved of Freddie Mac's obligations under the guarantee contract. The portion of such
recourse obligations that relates to Freddie Mac's non-contingent obligation to stand ready to perform under
its guarantee is recognized as Guarantee obligation for Participation CertiÑcates (or as a ""GO''), while the
portion of such recourse obligations that relates to incurred losses on securitized assets is recognized for
consolidated balance sheet purposes as Reserve for guarantee losses on Participation CertiÑcates. Such
recourse obligations serve as a reduction of proceeds in the calculation of the corresponding gain (loss) on the
sale of transferred PCs and Structured Securities. The fair value of a recognized recourse obligation is
estimated using an expected cash Öow approach consistent with Statement of Financial Accounting Concepts
No. 7, ""Using Cash Flow Information and Present Value in Accounting Measurements'' (""CON 7''). These
recourse obligations are valued independently of corresponding GAs. The resulting gain (loss) on sale of
transferred PCs and Structured Securities is reÖected in Freddie Mac's consolidated statements of income as a
component of Gains (losses) on investment activity.
Subsequent Measurement of Recognized GAs Ì Freddie Mac generally views recognized GAs as
Ñnancial assets that can be prepaid or otherwise settled in a manner that may prevent Freddie Mac from
recovering substantially all of its recorded investment. As a result, Freddie Mac generally accounts for GAs
like debt instruments classiÑed as trading under SFAS 115. All changes in the fair value of recognized GAs
are reÖected in earnings as a component of Gains (losses) on ""Guarantee asset for Participation CertiÑcates,
at fair value.'' All guarantee-related compensation that is received over the life of the loan in cash is reÖected
in earnings as a component of Management and guarantee income. See ""NOTE 2: TRANSFERS OF
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' for a discussion of the attribution
of GA-related cash Öows.
150
Freddie Mac
Subsequent Measurement of Recognized GOs Ì With respect to the subsequent measurement of
recognized GOs for the year ended December 31, 2002, Freddie Mac accounts for recognized GOs at fair
value. All changes in fair value are reÖected in Freddie Mac's consolidated statements of income as a
component of Income on ""Guarantee obligation for Participation CertiÑcates.''
With respect to the subsequent measurement of recognized GOs for the years ended December 31, 2004
and 2003, Freddie Mac subsequently measures such liabilities using a systematic and rational method of
amortization. More speciÑcally, Freddie Mac amortizes recognized GOs into earnings in proportion to the rate
of unpaid principal balance decline of securitized mortgage loans. Periodic amortization of recognized GOs is
reÖected in earnings as a component of Income on ""Guarantee obligation for Participation CertiÑcates.''
Freddie Mac subsequently measures its contingent obligation to make guarantee payments pursuant to the
provisions of SFAS 5, which requires that credit losses be recognized in earnings when assessed as both
probable and estimable. See discussion below in ""Recently Adopted Accounting Standards and Accounting
Changes'' for further discussion concerning the change in methods used by Freddie Mac to subsequently
measure recognized GOs.
Guarantor Swap Transactions Executed Prior to January 1, 2003
Guarantor Swaps represent transactions in which third-party institutions transfer mortgage loans to
Freddie Mac in exchange for issued PCs that are backed by such mortgage loans. In return for providing its
guarantee on such issued PCs, and similar to PCs described above in ""Transfers of Financial Assets that
Qualify as Purchases or Sales,'' Freddie Mac earns a management and guarantee fee (""G-Fee'') that is paid
to Freddie Mac over the life of an issued PC. It is also common for Buy-Ups or Buy-Downs to be exchanged
between Freddie Mac and its counterparties upon the issuance of a PC. Buy-Ups represent upfront payments
that are made by Freddie Mac, which increase the G-Fee that Freddie Mac will receive over the life of the PC
in connection with its guarantee. Buy-Downs represent upfront payments that are made to Freddie Mac,
which decrease (i.e., partially prepay) the G-Fee that Freddie Mac will receive over the life of the PC in
connection with its guarantee. Moreover, Freddie Mac may receive upfront, cash-based payments as
additional compensation for its guarantee of mortgage loans with certain credit risk related characteristics
(""Credit Fees''). Finally, and as additional consideration received on such exchanges, Freddie Mac may
receive various types of seller-provided credit enhancements that correspond to securitized mortgage loans.
The accounting for the primary components of Guarantor Swaps executed prior to January 1, 2003 follows.
Accounting For Guarantee Fees, Buy-Up, Buy Down and Credit Fees Ì G-Fees (as adjusted for Buy-
Downs received) are recognized as Management and guarantee income on an accrual basis over the
corresponding guarantee period in accordance with the provisions of EITF Issue No. 85-20, ""Recognition of
Fees for Guaranteeing a Loan.''
Buy-Up amounts paid at PC issuance are recognized on the consolidated balance sheets as a GA if the
corresponding PCs are held by third parties and are accounted for like a debt security that is classiÑed as
trading under SFAS 115. If a Buy-Up was paid in connection with PCs that Freddie Mac holds, the Buy-Up is
recognized on the company's consolidated balance sheets as a component of Participation CertiÑcate
residuals, at fair value (""PC residuals''), which is discussed further below.
Buy-Down and Credit Fee amounts that were received at PC issuance prior to January 1, 2003 are
deferred on Freddie Mac's consolidated balance sheets as an adjustment of Other liabilities. These amounts
are amortized into Management and guarantee income pursuant to the requirements of SFAS No. 91,
""Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases'' (""SFAS 91'').
If Freddie Mac were to purchase, and then subsequently sell for GAAP purposes, a PC that was issued
prior to January 1, 2003 as part of a Guarantor Swap (and for which a GA and GO were never previously
recognized), it would recognize, as a GA, the fair value of its contractual right to receive guarantee fees, and
would also recognize, as a GO, the fair value of its obligation to guarantee the payment of principal and
interest on such securities. Such assets and liabilities would be subsequently measured in a manner that is
consistent with principles described above in ""Transfers of Financial Assets that Qualify as Purchases or
Sales.''
151
Freddie Mac
Accounting For Incurred Credit Losses Ì Freddie Mac measures its contingent obligation to make
guarantee payments pursuant to the provisions of SFAS 5, which requires that credit losses be recognized in
earnings when assessed as both probable and estimable.
Accounting For Credit Enhancements Ì Premium payments on purchased pool insurance are recognized
as Other Assets, which are amortized into Non-interest expense (a) on a straight-line basis over three-month
periods to the extent that premiums paid were quarterly-based or (b) on a level yield basis to the extent that
Freddie Mac paid related pool insurance premiums upfront and in full. Otherwise, credit enhancements do not
receive recognition at the inception of executed Guarantor Swap transactions.
To the extent that related PCs that correspond to received credit enhancements (and for which a GA and
GO were never previously recognized) are purchased and then subsequently sold for GAAP purposes by
Freddie Mac, the fair value of received pool insurance or recourse is recognized as a component of GAs, while
the fair value of primary mortgage insurance (""PMI'') is recognized as a component of GOs. Such amounts
are subsequently measured in a manner that is consistent with principles described above in ""Transfers of
Financial Assets that Qualify as Purchases or Sales.''
Guarantor Swap Transactions Executed on or after January 1, 2003
Freddie Mac accounts for Guarantor Swaps that were executed on or after January 1, 2003 pursuant to
the requirements of FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others'' (""FIN 45''). As exchange transac-
tions, executed Guarantor Swap transactions are recognized by Freddie Mac at the inception of such
transactions on a fair value basis. The accounting for each of the components of Guarantor Swap transactions
executed on or after January 1, 2003 follows.
Accounting For Guarantee Fees Ì As consideration received in connection with a guarantee-related
exchange transaction, Freddie Mac recognizes the fair value of its contractual right to receive guarantee fees
as a GA at the inception of an executed guarantee. Consistent with principles described above, such assets,
which are classiÑed as Guarantee asset for Participation CertiÑcates, at fair value, are subsequently measured
on a fair value basis. All changes in the fair value of recognized GAs are reÖected in earnings as a component
of Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair value.'' All guarantee-related
compensation that is received over the life of the loan in cash is reÖected in earnings as a component of
Management and guarantee income.
Accounting For Guarantee Obligations Ì GOs are initially measured as the greater of (a) fair value or
(b) the contingent liability amount required by SFAS 5 to be recognized at inception of an executed
guarantee. The fair value of a recognized GO is estimated using an expected cash Öow approach consistent
with CON 7. Such liabilities are valued independently of corresponding GAs that are recognized in
connection with such transactions. That portion of Freddie Mac's estimated guarantee liability that relates to
its non-contingent obligation to stand ready to perform under a PC guarantee is recognized as Guarantee
obligation for Participation CertiÑcates, while that portion of its estimated guarantee liability that relates to its
contingent obligation to make payments under its guarantee is recognized for consolidated balance sheet
purposes as Reserve for guarantee losses on Participation CertiÑcates.
Freddie Mac subsequently measures recognized GOs by amortizing such liabilities into earnings in
proportion to the rate of the unpaid principal balance decline of securitized mortgage loans. Periodic
amortization of recognized GOs is reÖected in earnings as a component of Income on ""Guarantee obligation
for Participation CertiÑcates.'' Freddie Mac subsequently measures its contingent obligation to make
guarantee payments pursuant to the provisions of SFAS 5, which requires that credit losses be recognized in
earnings when assessed as both probable and estimable.
Accounting For Credit Enhancements Ì With respect to those credit enhancements that are received in
connection with Guarantor Swaps and other similar exchange transactions of PCs:
‚ pool insurance is recognized as an Other asset at its fair value;
‚ recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap transac-
tions are recognized at fair value as Other assets; and
‚ PMI is recognized at inception at fair value as a component of recognized GOs.
152
Freddie Mac
Credit enhancements that are separately recognized as Other assets are amortized into earnings as Non-
interest expense. Such assets are speciÑcally amortized over related contract terms at the greater of results
calculated by amortizing recognized credit enhancements (a) in proportion to the rate of unpaid principal
balance decline of covered mortgage loans or (b) on a straight-line basis over a credit enhancement's contract
term.
Accounting For Inception DiÅerences Between Consideration Received and Guarantee Obligations
Incurred Ì Because GAs, GOs and credit enhancement-related assets that are recognized at the inception of
an executed Guarantor Swap are valued independently of each other, net diÅerences between such recognized
assets and liabilities may exist at inception. Net positive diÅerences between such amounts are deferred on
Freddie Mac's consolidated balance sheet as a component of Guarantee obligation for Participation
CertiÑcates and are hereinafter referred to as ""Deferred Guarantee Income''. Net negative diÅerences
between GAs, GOs and credit enhancement-related assets that are recognized at the inception of executed
Ñnancial guarantees are expensed immediately to earnings as a component of Non-interest expense Ì Other
expenses.
Deferred Guarantee Income is amortized into earnings at a rate that is commensurate with the observed
decline in the unpaid principal balance of securitized mortgage loans. Periodic amortization of recognized
Deferred Guarantee Income is reÖected in earnings as a component of Income on ""Guarantee obligation for
Participation CertiÑcates.''
Accounting For Buy-Ups, Buy-Downs and Credit Fees Ì Cash payments that are made or received in
connection with Buy-Ups and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee
Income. Likewise, Credit Fees that Freddie Mac received at inception are also recognized as adjustments of
recognized Deferred Guarantee Income.
MultiLender Swap-Based Issuances of PCs
Freddie Mac issues PCs through its MultiLender Program that are backed by mortgage loans delivered to
Freddie Mac by more than one third party. Freddie Mac may itself contribute mortgage loans to MultiLender
pools from which PCs are then issued and delivered to third parties (and to Freddie Mac, to the extent that
Freddie Mac contributed mortgage loans to a MultiLender pool). Freddie Mac accounts for its contributions
of mortgage loans to a MultiLender pool as partial sales of those assets, the sold portion of which is dependent
upon the contribution of collateral made by Freddie Mac relative to third parties. The portion of a
MultiLender Swap transaction that qualiÑes as a sale is accounted for in the same manner as transfers
described above that are accounted for as sales. The remaining portion of such PC issuances and transfers are
accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Program (as
described above).
PC-for-Structured Security Swap Transactions
Freddie Mac issues and transfers Structured Securities to third parties in exchange for PCs and non-
Freddie Mac mortgage-related securities. Freddie Mac cannot freely pledge or exchange the securities that are
delivered to it by third parties in these exchanges. As a result, Freddie Mac does not view such exchanges as
triggering sale accounting recognition under SFAS 125/140. Additionally, Freddie Mac does not account for
such exchanges pursuant to the requirements of FIN 45 given that the guarantees on newly-issued Structured
Securities constitute guarantees of Freddie Mac's own performance associated with guarantees on PCs or
Structured Securities that underlie the newly-issued Structured Securities (guarantees of one's own perform-
ance are exempt from the requirements of FIN 45). As a result, Freddie Mac does not recognize any
incremental GAs or GOs on such transactions. Rather, Freddie Mac defers and amortizes into income on a
straight-line basis that portion of the transaction fee that Freddie Mac receives on such transactions that
relates to the estimated fair value of the company's future administrative responsibilities for issued Structured
Securities. In cases where Freddie Mac retains portions of the Structured Securities, a portion of this fee is
deferred under the requirements of SFAS 91. The balance of transaction fees received, which relates to
compensation earned in connection with structuring-related services rendered by Freddie Mac to third parties,
is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.
153
Freddie Mac
Purchases of PCs or Structured Securities for Which Recognized GAs and GOs Exist
The purchase of a PC or Structured Security prompts the extinguishment of a corresponding, recognized
GO. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the
unamortized balance of Deferred Guarantee Income, Buy Downs and Credit Fees.
Freddie Mac records the de-recognition of an extinguished GO against earnings as a component of Gains
(losses) on investment activity. Correspondingly, recognized GAs are reduced by an amount equal to the-then
fair value of an extinguished GO, an adjustment of which is also reÖected in earnings as a component of Gains
(losses) on investment activity. All recognized GAs in this case are then reclassiÑed on Freddie Mac's
consolidated balance sheets as a component of ""Participation CertiÑcate residuals, at fair value'' (""PC
Residuals'').
The unamortized balance of Deferred Guarantee Income, Buy-Downs and Credit Fees received are
extinguished as a basis adjustment to the recognized value of purchased PCs. Like purchase discounts, such
basis adjustments are subsequently amortized into earnings as Interest income pursuant to the requirements of
SFAS 91 using the eÅective interest method.
PC Residuals
PC residuals relate to certain PCs or Structured Securities held by Freddie Mac and represent the fair
value of the expected future cash Öows associated with the guarantee contracts that are inherent within such
securities.
A PC residual is recognized by Freddie Mac in connection with PCs or Structured Securities held by
Freddie Mac that (a) were previously transferred to third parties as part of transactions that were accounted
for either as sales pursuant to the provisions of SFAS 125/140 sale or as guarantee transactions that are
subject to the provisions of FIN 45 (such that a GA and GO was previously-established for held PCs or
Structured Securities), (b) were formed from mortgage loans purchased through Freddie Mac's Cash
Window (""Cash Window Purchases'') and that were never transferred to third parties, (c) were purchased by
Freddie Mac from third parties in contemplation of the related issuance of such PCs through the Guarantor
Program or (d) relate to Buy-Ups paid in connection with purchased PCs that had not previously been
included as part of a transfer that was accounted for as a sale under SFAS 125/140 or as part of a guarantee
transaction that was subject to the provisions of FIN 45.
Like a recognized GA, a PC residual is accounted for like a debt security and is classiÑed as either
available-for-sale or trading under SFAS 115. PC residuals relating to PCs or Structured Securities that
previously went through either a SFAS 125/140 sale or were accounted for pursuant to FIN 45 are classiÑed
as trading under SFAS 115. PC residuals relating to PCs held in portfolio that were formed from Cash
Window Purchases and that were never transferred to third parties are generally classiÑed as available-for-sale
under SFAS 115. The same treatment applies to PC residuals that correspond to PCs purchased by Freddie
Mac from third parties in contemplation of their issuance through the Guarantor Program, except that any
portions of these PC residuals that relate to Buy-Ups paid by Freddie Mac are accounted for as trading
investments.
All changes in the fair value of PC residuals that are designated as trading are reÖected in earnings as a
component of Gains (losses) on investment activity. All changes in the fair value of PC residuals that are
accounted for as available-for-sale are reÖected as a component of Accumulated other comprehensive income
(loss), net of taxes (""AOCI''), a component of Stockholders' equity.
Recognized PC residuals consist of a variety of cash Öows that are primarily recorded through interest
income. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' for a discussion of the attribution of GA and PC Residual-related cash Öows.
Due to Participation CertiÑcate Investors
Timing diÅerences between Freddie Mac's receipt of scheduled and unscheduled principal and interest
payments from seller/servicers on mortgages underlying PCs and the subsequent pass through of those
payments on PCs owned by third-party investors results in the liability Due to Participation CertiÑcate
investors. In those cases, payments from seller/servicers are generally received in a given month, yet the PC
154
Freddie Mac
balance is not reduced for payments of principal until the Ñrst day of the next month and Freddie Mac releases
the cash (principal and interest) to the PC investor on the Ñfteenth day of that next month. The company
generally invests these principal and interest amounts received in short-term investments from the time
Freddie Mac receives the amounts until the time Freddie Mac pays the PC investor. Interest income resulting
from investment of principal and interest payments from seller/servicers is reported in interest income over
the period earned.
For unscheduled principal prepayment amounts, these timing diÅerences result in an expense accrual
upon prepayment of the mortgage as the related PCs continue to bear interest to the PC investor at the PC
coupon rate from the date of prepayment until the date the PC security balance is reduced, while generally no
interest is received from the mortgage on that prepayment amount during that same time period. The expense
recognized upon prepayment is reported in Interest expense Ì Due to Participation CertiÑcate investors.
Freddie Mac reports PC coupon interest amounts relating to its investment in PCs consistent with the
accounting practices generally applied by third party investors in PCs. Accordingly, the PC coupon interest on
prepayments of a mortgage pending remittance on PCs held by Freddie Mac is reported as both Interest
Income Ì Mortgage-related securities in the Retained portfolio and Interest expense Ì Due to Participation
CertiÑcate investors. Scheduled and unscheduled principal payments received by Freddie Mac that relate to
its investment in PCs are reported as a reduction to its investment in PCs on the consolidated balance sheets.
Mortgage Loans
Mortgage loans that management may sell are classiÑed as held-for-sale. If a decision is made to retain
the loan, the loans are transferred to the held-for-investment portfolio. Loans transferred to the held-for-
investment portfolio are transferred at lower of cost or market value. Lower-of-cost-or-market value
adjustments, in this case, are treated as basis adjustments of such mortgage loans and are subsequently
amortized into interest income over the period held.
Held-for-sale mortgages are included in the Retained portfolio and reported at lower of cost or market
value, on a portfolio basis, with losses reported in Gains (losses) on investment activity. Consistent with
SFAS No. 65, ""Accounting for Certain Mortgage Banking Activities'' (""SFAS 65''), premiums and discounts
on loans classiÑed as held-for-sale are not amortized as interest revenue during the period that such loans are
classiÑed as held-for-sale.
For a description of how Freddie Mac determines the fair value of its held-for-sale mortgage loans, see
""NOTE 16: FAIR VALUE DISCLOSURES.''
Mortgage loans that management has the ability and intent to hold for the foreseeable future or to
maturity are classiÑed as held-for-investment. These mortgage loans are reported at their outstanding principal
balances, net of deferred fees and costs (including premiums and discounts). These deferred items are
amortized into interest income over the estimated lives of the mortgages using the eÅective interest method.
The company uses actual prepayment experience and estimates of future prepayments to determine the
constant yield needed to apply the eÅective interest method. For purposes of estimating future prepayments,
the mortgages are aggregated by similar characteristics such as origination date, coupon and maturity.
The company recognizes interest income on mortgage loans on an accrual basis, except when manage-
ment believes the collection of principal or interest is doubtful.
Reserves for Losses on Mortgage Loans Held-for-Investment and Losses on PCs
Freddie Mac maintains a Reserve for losses on mortgage loans held-for-investment to provide for credit
losses inherent in that portfolio. The Reserve for losses on mortgage loans held-for-investment is determined
pursuant to the provisions of SFAS 5 and SFAS No. 114, ""Accounting by Creditors for Impairment of a
Loan Ì an Amendment of FASB Statements No. 5 and 15'' (""SFAS 114'') as more fully described below.
Freddie Mac also maintains a Reserve for guarantee losses on Participation CertiÑcates to provide for losses
incurred on mortgages underlying PCs or Structured Securities held by third parties. The Reserve for
guarantee losses on Participation CertiÑcates is determined pursuant to the provisions of SFAS 5 and
SFAS 114. The Reserve for losses on mortgage loans held-for-investment and Reserve for guarantee losses on
Participation CertiÑcates are collectively referred to as ""loan loss reserves.'' Increases in loan loss reserves are
reÖected in earnings as a component of the (Provision) beneÑt for credit losses. Decreases in loan loss reserves
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Freddie Mac
are reÖected through either (a) charging-oÅ such balances (net of recoveries) where realized losses are
recorded or (b) a reduction in the (Provision) beneÑt for credit losses.
Loan loss reserves are also increased upon the sale of PCs and Structured Securities for which Freddie
Mac incurred losses on the underlying mortgage loans while such securities were held by Freddie Mac. From
an earnings perspective, such incurred losses are recognized as a component of Gains (losses) on investment
activity through, where applicable (a) the subsequent measurement of corresponding PC residuals that are
classiÑed as trading (and to which such PCs or Structured Securities relate), (b) the recognition of
impairment-related losses on such securities (i.e., to the extent that such securities do not have recognized PC
residual balances associated with them that are classiÑed as trading) or (c) as a component of gain (loss) on
sale of such securities. Upon the sale of such PCs or Structured Securities, incurred losses are classiÑed on the
consolidated balance sheets as Reserve for guarantee losses on Participation CertiÑcates.
Single-family loan portfolio
In accordance with SFAS 5, Freddie Mac estimates incurred credit losses on homogeneous pools of
single-family loans using statistically-based models that evaluate a variety of factors, resulting in a range of
probable losses related to impaired single-family mortgage loans at the balance sheet date. The homogeneous
pools of single-family mortgage loans are determined based on common underlying characteristics including
year of origination, loan-to-value ratio and geographic region. In determining the loan loss reserves for single-
family loans, Freddie Mac determines the point within the range of probable losses that represents the best
estimate of incurred losses.
The factors used to estimate incurred losses at period-end include:
‚ actual and estimated loss severity trends for similar loans;
‚ actual and estimated default experience;
‚ actual and estimated proceeds from PMI and other credit enhancements;
‚ actual and estimated pre-foreclosure real estate taxes and insurance;
‚ the year of the loan origination;
‚ geographic location; and
‚ estimated selling costs should the underlying property ultimately be foreclosed upon and sold.
Freddie Mac frequently validates and updates the models and factors to capture changes in actual loss
experience, as well as changes in underwriting practices and in its loss mitigation strategies. Freddie Mac also
considers macroeconomic and other factors including:
‚ regional housing trends;
‚ applicable home price indices;
‚ unemployment and employment dislocation trends;
‚ consumer credit statistics;
‚ recent changes in credit underwriting practices;
‚ extent of third party insurance; and
‚ other measurable factors that inÖuence the quality of the portfolio at the balance sheet date.
Favorable trends in these macroeconomic and other factors produce a reserve requirement toward the
lower end of the range; adverse trends in these factors produce a reserve requirement toward the higher end of
the range. Management then adjusts the level of loan loss reserves to the level required based on its best
assessment of these factors.
Multifamily loan portfolio
Freddie Mac also estimates a range of incurred credit losses on the multifamily loan portfolio.
Management considers all available evidence in determining this range including: adequacy of third-party
credit enhancements and an evaluation of the repayment prospects of, and fair value of collateral underlying
the individual loans. The review of the repayment prospects and value of collateral underlying individual loans
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Freddie Mac
occurs within the context of property-speciÑc and market-level risk characteristics including apartment
vacancy rates, apartment rental rates, and property sales information, under several scenarios. Management
reviews the range of probable losses and selects the point within the range that represents the best estimate of
incurred losses. Loans individually evaluated for impairment include loans that become 60 days past due for
principal and interest, certain loans with observable collateral deÑciencies and loans whose contractual terms
were modiÑed due to credit concerns. When loan loss reserves for individual loans are established,
consideration is given to all available evidence such as present value of discounted expected future cash Öows,
fair value of collateral and credit enhancements.
Non-performing Loans
Non-performing loans consist of (a) loans that were previously delinquent whose terms have been
modiÑed and, therefore, are now considered part of Freddie Mac's impaired loan population (""troubled debt
restructurings'' or ""TDRs''), (b) serious delinquencies and (c) nonaccrual loans. Serious delinquencies are
those single-family loans that are 90 days or more past due, and multifamily loans that are more than 60 days
but less than 90 days past due. Also included in this category are multifamily loans greater than 90 days past
due but where principal and interest are being paid to Freddie Mac under the terms of a credit enhancement
agreement. Non-performing loans generally accrue interest in accordance with their contractual terms unless
they are in nonaccrual status. Nonaccrual loans are loans where interest income is recognized on a cash basis,
and only include multifamily loans greater than 90 days past due. For nonaccrual loans, any existing accruals
are reversed against interest income unless they are both well secured and in the process of collection. For
single-family loans greater than 90 days past due, interest income is accrued; however, reserves for
uncollectible interest on single-family loans are estimated using statistical models, which quantify accrued but
uncollectible interest. Freddie Mac reports this reserve as a reduction to the accrued loan interest balance in
Accounts and other receivables, net.
Impaired loans include single-family loans, both performing and non-performing, that are TDRs.
Multifamily impaired loans are deÑned as performing and non-performing TDRs, loans 60 days or more past
due (except for certain credit-enhanced loans) and certain mortgage loans with real estate collateral values
less than the outstanding unpaid principal balances. See ""Table 6.2 Ì Impaired Loans'' in ""NOTE 6: LOAN
LOSS RESERVES'' for further discussion.
Freddie Mac has the option to purchase mortgage loans out of PC pools under certain circumstances,
such as to resolve an existing or impending delinquency or default. Freddie Mac's general practice is to
purchase the mortgage loans out of pools when the loans are 120 days delinquent. These repurchased loans are
recorded on Freddie Mac's consolidated balance sheets at their purchase price (i.e., the mortgage loan's
unpaid principal balance), as adjusted for the eÅects of (a) the related amount of recognized GAs, PC
residuals and security premiums and discounts (where applicable) and (b) the extinguishment of a
proportionally related amount of recognized Buy-Downs, Credit Fees, GOs and Day One DiÅerences (where
applicable). Additionally, that portion of amounts classiÑed in Reserve for guarantee losses on Participation
CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-for-
investment.
Charge-OÅs
The loan loss reserves are reduced for charge-oÅs when a loss is speciÑcally identiÑed and is virtually
certain of occurring. For both single-family and multifamily mortgages where the original terms of the
mortgage loan agreement are modiÑed for economic or legal reasons related to the borrower's Ñnancial
diÇculties, losses are recorded at the time of modiÑcation in accordance with SFAS 114 and the loans are
accounted for as TDRs. For mortgages that are foreclosed upon and thus transferred to Real estate owned, net
or involved in a pre-foreclosure sale, losses at the time of transfer or pre-foreclosure sale are charged-oÅ
against Reserve for losses on mortgage loans held-for-investment. In the case of real estate owned (""REO'')
transfers, losses arise when the carrying basis of the loan (including accrued interest) exceeds the fair value of
the foreclosed property (after deduction for estimated selling costs and consideration of third-party insurance
or other credit enhancements). REO gains arise and are recognized immediately in earnings when the fair
market value of the acquired asset (after deduction for estimated disposition costs) exceeds the carrying value
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Freddie Mac
of the mortgage (including accrued interest). REO gains and losses (subsequent to foreclosure) are included
in REO operations income (expense).
Investments in Securities
The company classiÑes mortgage-related securities and non-mortgage-related securities as available-for-
sale or trading, as deÑned in SFAS 115. Freddie Mac currently does not classify any securities as held to
maturity although the company may elect to do so in the future. Securities classiÑed as available-for-sale and
trading are reported at fair value with changes in fair value included in AOCI and Gains (losses) on
investment activity, respectively. See ""NOTE 16: FAIR VALUE DISCLOSURES'' for more information on
how Freddie Mac determines the fair value of securities.
The company records forward purchases and sales of securities that are speciÑcally exempt from the
requirements of SFAS 133 on a trade date basis. Securities underlying forward purchases and sales contracts
that are not exempt from the requirements of SFAS 133 are recorded on contractual settlement date.
For most of the company's investments in securities, interest income is recognized using the retrospective
eÅective interest method in accordance with SFAS 91. Deferred items, including premiums, discounts and
other basis adjustments, are amortized into interest income over the estimated lives of the securities. The
company uses actual prepayment experience and estimates of future prepayments to determine the constant
yield needed to apply the eÅective interest method. The company recalculates the constant eÅective yield
based on changes in estimated prepayments as a result of changes in interest rates and other factors. When the
constant eÅective yield changes, an adjustment to interest income is made for the amount of amortization that
would have been recorded if the new eÅective yield had been applied since the mortgage assets were acquired.
For certain of the company's investments in securities, interest income is recognized using the prospective
eÅective interest method in accordance with EITF No. 99-20 ""Recognition of Interest Income and
Impairment on Purchased and Retained BeneÑcial Interests in Securitized Financial Assets''
(""EITF 99-20''). The company speciÑcally applies such guidance to beneÑcial interests (including undivided
interests which are similar to beneÑcial interests) in securitized Ñnancial assets that (a) can contractually be
prepaid or otherwise settled in such a way that the company may not recover substantially all of its recorded
investment (such as interest-only strips) or (b) are not of high credit quality at the acquisition date.
EITF 99-20 requires that the company recognize as interest income (throughout the life of a retained
interest) the excess of all estimated cash Öows attributable to these interests over its principal amount using
the eÅective yield method. The company updates its estimates of expected cash Öows periodically and
recognizes changes in calculated eÅective yield on a prospective basis.
Freddie Mac reviews securities for other-than-temporary impairment whenever the security's fair value is
less than its amortized cost. Impairment is evaluated considering a number of indicators which include the
severity of the decline in fair value, credit ratings and the length of time the investment has been in an
unrealized loss position. In addition to these indicators, Freddie Mac recognizes impairment when qualitative
factors indicate that the company may not recover the unrealized loss. When evaluating the impairment
indicators and qualitative factors, Freddie Mac considers its intent and ability to hold the investment until a
point in time at which recovery can be reasonably expected to occur. Impairment losses on manufactured
housing securities exclude the eÅects of separate Ñnancial guarantee contracts that are not embedded in the
securities since the beneÑts of such contracts are not recognized until claims become probable of recovery
under the contracts. When a security is deemed to be impaired, the cost basis of the security is written down to
fair value, with the loss recorded to Gains (losses) on investment activity. The security cost basis is not
changed for subsequent recoveries in fair value. For securities within the scope of EITF 99-20, as described
above, other-than-temporary impairments are deÑned as occurring whenever there is an adverse change in
estimated cash Öows coupled with a decline in fair value below the amortized cost basis.
Gains and losses on the sale of securities are included in Gains (losses) on investment activity, including
those gains (losses) reclassiÑed into earnings from AOCI. The company uses the speciÑc identiÑcation
method for determining the cost of a security in computing the gain or loss.
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Freddie Mac
Repurchase and Resale Agreements
Freddie Mac enters into repurchase and resale agreements primarily as an investor or to Ñnance its
security positions. Freddie Mac also enters into (a) ""dollar roll'' transactions, which consist of simultaneous
agreements with the same counterparty to sell a security and purchase similar securities at a future date at an
agreed-upon price and (b) ""reverse dollar roll'' transactions, which consist of simultaneous agreements with
the same counterparty to purchase a security and sell similar securities at a future date at an agreed-upon
price. These transactions are accounted for pursuant to SFAS 125/140. In this regard, such transactions are
accounted for as purchases and sales when the transferor relinquishes control over transferred securities. These
transactions are accounted for as secured Ñnancings when the transferor does not relinquish control over
transferred securities. Freddie Mac's policy is to take possession of securities purchased under agreements to
resell and reverse dollar roll transactions. The amount of mortgage-related and non-mortgage-related
securities pledged and that may be repledged under repurchase agreements and dollar roll transactions is
presented parenthetically in the relevant securities captions in the consolidated balance sheets.
Debt Securities Issued
Debt securities issued by Freddie Mac are classiÑed as either Due within one year or Due after one year
based on their remaining contractual maturity. The classiÑcation of interest expense on debt securities as
either short-term or long-term is based on the original contractual maturity of the debt security. Deferred
items, including premiums, discounts, issuance costs and hedging-related basis adjustments, are amortized
and reported through interest expense using the eÅective interest method over the period during which the
related indebtedness is outstanding or, for callable debt, over the period during which the related indebtedness
is expected to be outstanding. For callable debt, changes in the expected call date are reÖected prospectively as
an adjustment to the eÅective yield on the debt. Amortization of hedging-related basis adjustments is initiated
upon the termination of the related hedge relationship, whereas amortization of premiums, discounts and
issuance costs begins at the time of debt issuance. Deferred items, including premiums, discounts and
hedging-related basis adjustments are reported as a component of Debt securities, net whereas issuance costs
are reported as a component of Other assets. Debt securities denominated in a foreign currency are translated
into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any gains/losses are reported
in Non-interest income (loss) Ì Other income.
Contemporaneous exchanges of cash between the company and a creditor in connection with the issuance
of a new debt obligation and satisfaction of an existing debt obligation are accounted for as extinguishments
with recognition of gains or losses in earnings if the debt instruments have substantially diÅerent terms. If the
debt instruments do not have substantially diÅerent terms, the transaction is accounted for as an exchange
rather than an extinguishment. In this case, the fees associated with the new debt obligation, along with the
existing unamortized premium, discount or other basis adjustments on the existing debt obligation, are
considered a basis adjustment on the new debt obligation and are amortized as an adjustment of interest
expense over the remaining term of the new debt obligation.
Derivatives
Generally, derivatives are Ñnancial instruments with little or no initial net investment in comparison to
their notional amount and whose value is based upon an underlying asset, index, reference rate or other
variable. They may be privately negotiated contractual agreements that can be customized to meet speciÑc
needs, including certain commitments to purchase and sell mortgage loans, mortgage-related securities and
debt securities, or they may be standardized contracts executed through organized exchanges. All derivatives
are reported at their fair value on the consolidated balance sheets. The fair value of derivatives is generally
reported net by counterparty, provided that a legally enforceable master netting agreement exists. Derivatives
in a net asset position are reported as Derivative assets, at fair value. Similarly, derivatives in a net liability
position are reported as Derivative liabilities, at fair value.
Currently, the majority of the company's derivatives are not designated in hedge accounting relationships.
For those derivatives not designated as an accounting hedge, fair value gains and losses are reported as
Derivative gains (losses) in the consolidated statements of income. For purchase and sale commitments of
securities classiÑed as trading under SFAS 115, fair value gains and losses are reported as Gains (losses) on
investment activity in the consolidated statements of income.
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Freddie Mac
Subject to certain qualifying conditions, Freddie Mac may designate a derivative as either a hedge of the
cash Öows of a variable-rate instrument or forecasted transaction (""cash Öow hedge''), a hedge of the fair
value of a Ñxed-rate instrument (""fair value hedge'') or a foreign-currency fair value or cash Öow hedge
(""foreign currency hedge''). In order to be designated as an accounting hedge, the derivative must initially be
expected to be highly eÅective in oÅsetting the changes in cash Öows or fair value of the hedged item resulting
from the hedged risk. In addition, the documentation of the hedging designation must include identiÑcation of
the hedged item, the hedging instrument, the risk exposure and corresponding risk management objective,
how eÅectiveness will be assessed and how ineÅectiveness will be measured.
For a derivative qualifying as a cash Öow hedge, Freddie Mac reports changes in the fair value of these
instruments in AOCI to the extent the hedge is eÅective. The remaining ineÅective portion, calculated using
the hypothetical derivative method, is reported as Hedge accounting gains (losses). This method requires the
company to develop a hypothetical derivative whose terms match those of the hedged item and compare
estimated changes in the fair value of the hypothetical derivative to changes in the fair value of the hedging
derivative. In general, Freddie Mac recognizes the associated amounts reported in AOCI as Income
(expense) related to derivatives during the period or periods in which the hedged item aÅects earnings. If the
hedged item relates to a forecasted issuance of debt, Freddie Mac reclassiÑes the associated amount reported
in AOCI into earnings as Net interest income over the periods when the debt is issued and aÅects earnings.
Amounts reported in AOCI related to changes in the fair value of commitments to purchase or sell securities
that are designated as cash Öow hedges are recognized as interest income for assets held and Gains (losses) on
investment activity for assets sold.
If the hedged item in a cash Öow hedge is the forecasted issuance of debt, and the occurrence of the
forecasted transaction becomes probable of not occurring, the amount in AOCI is reclassiÑed to earnings
immediately. If Freddie Mac expects at any time that continued reporting of a net loss in AOCI would lead to
recognizing a net loss on the combination of a hedging instrument and the hedged transaction (and related
asset acquired or liability incurred) in one or more future periods, the loss is reclassiÑed immediately into
earnings for the amount that is not expected to be recovered.
For a derivative qualifying as a fair value hedge, Freddie Mac reports changes in the fair value of the
derivative as Hedge accounting gains (losses) along with the changes in the fair value of the hedged item
attributable to the risk being hedged. When the hedge is terminated or redesignated, the fair value adjustment
to the carrying amount of the hedged asset or liability is amortized to earnings as a component of the hedged
item's interest income or expense over the remaining life of the hedged item using the eÅective yield method.
If a derivative no longer qualiÑes as a cash Öow or fair value hedge, the company discontinues hedge
accounting prospectively. Freddie Mac continues to carry the derivative on the consolidated balance sheets at
fair value and records further fair value gains and losses in the consolidated statements of income as Derivative
gains (losses) until the derivative is terminated or redesignated.
The periodic interest cash Öows related to derivative contracts currently accrued, which are derived
primarily from interest-rate swap contracts, are classiÑed as Income (expense) related to derivatives for
derivatives in hedge relationships and as Derivative gains (losses) for derivatives not in hedge accounting
relationships.
Inception gains or losses associated with commitments to purchase mortgage loans are deferred. With
respect to those purchase commitments that have been designated as cash Öow hedges, inception gains or
losses are considered together with that portion of the cumulative change in fair value of such derivative
instruments that are recognized in AOCI for the purpose of determining whether a net deferred loss exists
that, as described above, should be reclassiÑed to earnings. Additionally, and similar to derivative-related gains
that are recognized as a component of AOCI, deferred inception-based gains on mortgage purchase
commitments will be reclassiÑed into earnings in the same period or periods during which acquired mortgage
loans aÅect earnings. SpeciÑcally, inception gains or losses are:
‚ Recognized as a component of the gain or loss on sale of corresponding mortgage loans (either in
whole loan or securitized form); or
‚ Recognized as interest income over the life of the corresponding mortgage loans at the point that,
where applicable, such mortgage loans are reclassiÑed as held-for-investment.
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Freddie Mac
Real Estate Owned
REO is carried at the lower of cost or fair value (after deduction for estimated disposition costs).
Amounts expected to be received from third-party insurance or other credit enhancements are reported when
the claim is Ñled and are recorded as a component of Accounts and other receivables, net in the consolidated
balance sheets. Material development and improvement costs relating to REO are capitalized. Operating
expenses on the properties, net of any rental or other income, are included in REO operations income
(expense). Estimated declines in REO fair value that result from ongoing valuation of the properties are
provided for and charged to REO operations income (expense) when identiÑed. The resulting valuation
allowance is treated as a lower of cost or fair value adjustment to the basis of the properties. Any gains and
losses on REO dispositions are included in REO operations income (expense).
Income Taxes
Freddie Mac uses the asset and liability method of accounting for income taxes pursuant to
SFAS No. 109, ""Accounting for Income Taxes'' (""SFAS 109''). Under the asset and liability method,
deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing
temporary diÅerences between the Ñnancial reporting and the tax reporting basis of assets and liabilities using
enacted statutory tax rates. To the extent tax laws change, deferred tax assets and liabilities are adjusted, when
necessary, in the period that the tax change is enacted. Valuation allowances are recorded to reduce deferred
tax assets when it is more likely than not that a tax beneÑt will not be realized. For all periods presented, no
such valuation allowance was deemed necessary by management. Reserves are recorded for income tax and
contingent interest where the potential for loss is probable and reasonably estimable in accordance with
SFAS 5.
Income tax expense includes (a) deferred tax expense, which represents the net change in the deferred
tax asset or liability balance during the year plus any change in a valuation allowance and (b) current tax
expense, which represents the amount of tax currently payable to or receivable from a tax authority plus
amounts accrued for expected tax deÑciencies (including both tax and interest). Income tax expense excludes
the tax eÅects related to adjustments recorded to AOCI.
Stock-Based Compensation
In December 2002, FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation Ì
Transition and Disclosure Ì An Amendment of FASB Statement No. 123'' (""SFAS 148''). This statement
provides alternative methods of transition for a voluntary change to the fair value expense recognition method
of accounting for stock-based employee compensation under SFAS No. 123, ""Accounting for Stock-Based
Compensation'' (""SFAS 123''). The annual disclosure provisions of SFAS 148 are eÅective for Ñscal years
ending after December 15, 2002, and the interim disclosure provisions are eÅective for interim periods
beginning after December 15, 2002.
Freddie Mac initially adopted the fair value compensation expense provisions of SFAS 123 prospectively
for awards granted, modiÑed or settled on or after January 1, 2002, in accordance with SFAS 123's original
transition provision. However, as permitted by SFAS 148, Freddie Mac elected to adopt SFAS 123
retroactively to January 1, 1995. Accordingly, Freddie Mac records compensation expense equal to the
estimated fair value of the stock-based compensation on the grant date, amortized on a straight-line basis over
the vesting period, which is generally three to Ñve years for options, restricted stock and restricted stock units
and, starting in 2003, three months for the Employee Stock Purchase Plan (""ESPP''). The oÅset to the
recorded compensation expense is an adjustment to Additional paid-in capital in Freddie Mac's consolidated
balance sheets.
The fair value of options to purchase shares of Freddie Mac common stock, including options issued
pursuant to the ESPP, is estimated using a Black-Scholes option pricing model, taking into account the
exercise price and expected life of the option, the market value of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option.
The fair value of restricted stock and restricted stock unit awards is based on the grant-date fair value of
Freddie Mac's common stock.
As discussed in ""NOTE 11: STOCK-BASED COMPENSATION,'' awards under the company's stock
compensation plans, including employee stock options, restricted stock units (""RSUs'') and restricted stock,
generally provide for dividend-equivalent rights. For employee stock options, the dividend-equivalent feature is
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Freddie Mac
contemplated in the fair value estimate by using a dividend yield of zero as a Black-Scholes model input.
Accordingly, compensation expense for these dividend-equivalents is recognized through amortization expense
recognition. For restricted stock and RSUs, the value of the dividend-equivalents is reÖected in the market
price of a share of common stock. The fair value of restricted stock and RSUs on the grant date is recognized
as compensation expense over the vesting period.
Incremental compensation expense related to modiÑcation of awards is based on a comparison of the fair
value of the modiÑed award with the fair value of the original award before modiÑcation (measured using the
shorter of the remaining or revised term). Furthermore, the company generally expects to settle its stock-
based compensation awards in shares. In the limited cases in which an award may be cash-settled only in the
event of a contingency such as involuntary termination, Freddie Mac accounts for the award as an equity
award until the contingency becomes probable, when liability accounting is triggered. Under SFAS 123,
liabilities are initially measured at intrinsic value with changes in intrinsic value recognized as earnings.
For stock-based compensation granted prior to 1995, Freddie Mac continues to apply the provisions of
Accounting Principles Board Opinion (""APB'') No. 25, ""Accounting for Stock Issued to Employees''
(""APB 25''). Under APB 25, typically no compensation expense is recorded if the option exercise price is
equal to the market price of the stock on the date of grant. Freddie Mac recognized compensation expense for
restricted stock grants and dividend-equivalent rights associated with stock options. Furthermore, no
compensation expense was recognized for the ESPP since it is a qualifying plan under tax regulations.
Earnings Per Common Share
Basic earnings per common share is computed as net income available to common stockholders divided
by the weighted average common shares outstanding for the period. Diluted earnings per common share is
determined using the weighted average number of common shares during the period, adjusted for the dilutive
eÅect of common stock equivalents. Dilutive common stock equivalents reÖect the assumed issuance of
additional common shares pursuant to certain of the company's stock-based compensation plans that could
potentially reduce or ""dilute'' earnings per share, based on the treasury stock method as deÑned in
SFAS No. 128, ""Earnings per Share'' (""SFAS 128'').
Comprehensive Income
Comprehensive income, as deÑned in SFAS No. 130, ""Reporting Comprehensive Income''
(""SFAS 130''), is the change in equity, on a net of tax basis, resulting from transactions and other events and
circumstances from non-owner sources during a period. It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners. For Freddie Mac, comprehen-
sive income is composed of net income plus changes in the unrealized gains and losses on available-for-sale
securities, the eÅective portion of derivatives accounted for as cash Öow hedge relationships, and changes in
the minimum pension liability.
Reportable Segments
Freddie Mac has one business segment for Ñnancial reporting purposes because the company did not
meet the criteria for reporting business segments that are prescribed in SFAS No. 131, ""Disclosures About
Segments of an Enterprise and Related Information'' (""SFAS 131''), for any period presented in the
consolidated Ñnancial statements.
Recently Adopted Accounting Standards and Accounting Changes
Consolidation of Variable Interest Entities Ì In January 2003, the FASB issued FIN 46. FIN 46
provides guidance for determining when a company must consolidate the assets, liabilities and activities of a
variable interest entity. In addition, various disclosures are required about variable interest entities when an
entity is not the primary beneÑciary but holds a ""signiÑcant variable interest'' in a variable interest entity.
In December 2003, the FASB released FIN 46-R. The revision captured much of the guidance to date
that had been provided by the FASB for implementation of FIN 46, clariÑed FIN 46 and revised certain
eÅective dates for implementation. Freddie Mac adopted FIN 46-R for 2003. The implementation had no
eÅect on the company's consolidated Ñnancial statements in 2004 or 2003. In 2004, the company determined
that Ñve low-income housing tax credit partnerships, West*Mac Associates Limited Partnership
(""West*Mac''), the owner and developer of the company's headquarters, and a reinsurance company should
be consolidated pursuant to the requirements of FIN 46-R. Prior to 2004, Freddie Mac consolidated these
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Freddie Mac
entities in accordance with other applicable requirements under GAAP. Finally, the company also has
signiÑcant variable interests in certain variable interest entities that are not consolidated because the company
is not the primary beneÑciary. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' for more information
concerning variable interest entities.
Accounting For Financial Guarantees Ì EÅective January 1, 2003, Freddie Mac adopted FIN 45 and
FASB StaÅ Position FIN 45-2, ""Whether FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' Provides
Support for Subsequently Accounting for a Guarantor's Liability at Fair Value'' (""FSP FIN 45-2''). FIN 45
requires that Freddie Mac recognize the fair value of the company's obligation to guarantee the payment of
principal and interest on PCs and other mortgage pass-through certiÑcates that are issued by the company that
are transferred to third parties. Such guidance also requires that the company recognizes the fair value of any
consideration received in connection with the execution of such guarantees, which primarily includes the
company's contractual right to receive guarantee fees. In consideration of FSP FIN 45-2, eÅective January 1,
2003, Freddie Mac subsequently measures that portion of recognized guarantee obligations that relates to the
company's non-contingent obligation to stand ready to perform using a systematic and rational method of
amortization, while the company's contingent obligation to make payments under executed guarantees is
accounted for pursuant to the requirements of SFAS 5. The implementation of FIN 45 and other such
accounting changes in 2003 had a signiÑcant impact on Freddie Mac's accounting for PC guarantees.
Additionally, on January 1, 2003, Freddie Mac reclassiÑed $110 million to Reserve for guarantee losses on
Participation CertiÑcates representing that portion of recognized guarantee obligations that was attributable to
estimated incurred losses on outstanding PCs or Structured Securities on that date.
Accounting For Credit Enhancements Ì EÅective January 1, 2003, Freddie Mac no longer measures
recognized credit enhancements on a fair value basis subsequent to the initial recognition of the credit
enhancement. This change was made in conjunction with the change in the method by which recognized
guarantee obligations are subsequently measured for consolidated Ñnancial statement purposes. This change
necessitated a corresponding modiÑcation in the balance sheet classiÑcation of those credit enhancements that
were previously recognized as a component of GAs and PC residuals since recognized GAs and PC residuals
are subsequently measured on a fair value basis. In this regard, eÅective January 1, 2003, $189 million related
to credit enhancements was reclassiÑed to Other assets ($128 million from the GA and $61 million from PC
residuals) and, correspondingly, is amortized into earnings as a component of Other expenses at the greater of
amounts calculated by amortizing recognized credit enhancements (a) in proportion to the rate of unpaid
principal balance decline of covered mortgage loans or (b) on a straight-line basis over a credit enhancement
contract term. The implementation of FIN 45 also resulted in a change in when credit enhancements were
recognized for consolidated Ñnancial statement purposes. Based upon the view expressed in FIN 45 that
guarantee transactions constitute exchange transactions, Freddie Mac now recognizes the fair value of credit
enhancements as consideration received in connection with Guarantor and MultiLender Swap transactions
(and other, similar transactions) as of the issuance date of those PCs that were issued on or after January 1,
2003. Prior to January 1, 2003, Freddie Mac did not recognize credit enhancements for consolidated balance
sheet purposes until a PC or Structured Security to which such credit enhancements related was included in a
transfer that qualiÑed as a sale under SFAS 125/140.
Derivative Instruments and Hedging Activities Ì On July 1, 2003, Freddie Mac adopted SFAS No. 149
""Amendment of Statement 133 on Derivative Instruments and Hedging Activities'' (""SFAS 149'').
SFAS 149 amended and clariÑed the Ñnancial accounting and reporting for derivatives to incorporate
decisions made by the FASB and the FASB's Derivative Implementation Group subsequent to the original
issuance of SFAS 133 and in connection with other FASB projects. Under SFAS 149, purchase commitments
for certain loans to be classiÑed as held-for-investment must be accounted for as derivatives. The implementa-
tion of SFAS 149 did not have a material eÅect on the consolidated Ñnancial statements.
In September 2003, the OÇce of the Chief Accountant of the Securities and Exchange Commission
(""SEC'') published interpretive guidance on SFAS 133. To be consistent with the SEC guidance published at
that time, Freddie Mac is reporting the income statement eÅects of derivatives not currently designated in
hedge accounting relationships under SFAS 133 in a single line item on the company's consolidated
statements of income, Derivative gains (losses) for all periods presented. Prior to 2003, the accrual for
periodic cash settlements in accordance with the contractual terms of derivatives not in hedge accounting
163
Freddie Mac
relationships was recorded in Net interest income as a component of Income (expense) related to derivatives.
Therefore, for periods prior to 2003, the impact of the accrual for these periodic derivative cash settlements
has been reclassiÑed from Income (expense) related to derivatives to Derivative gains (losses). The eÅect of
this reclassiÑcation on the company's consolidated statements of income was to increase Net interest income
by $639 million for 2002 and decrease Non-interest income by the same amounts. These reclassiÑcations had
no eÅect on net income.
Recently Issued Accounting Standards
Certain Loans or Debt Securities Acquired in a Transfer Ì In December 2003, the Accounting Standards
Executive Committee of the American Institute of CertiÑed Public Accountants, (""AICPA''), issued
SOP No. 03-3, ""Accounting for Certain Loans or Debt Securities Acquired in a Transfer'' (""SOP 03-3'').
SOP 03-3 addresses the accounting for diÅerences between the contractual cash Öows and the cash Öows
expected to be collected from purchased loans or debt securities if those diÅerences are attributable, in part, to
credit quality. The scope of SOP 03-3 is limited to purchased loans or debt securities with evidence of
deterioration of credit quality since origination acquired by completion of a transfer for which it is probable, at
acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3
requires purchased loans and debt securities to be recorded initially at acquisition cost (typically fair value in
an arms-length purchase). SOP 03-3 is eÅective for certain loans and debt securities acquired after
December 31, 2004. The adoption of SOP 03-3 is not expected to be material to the company's Ñnancial
position or results of operations.
Other-than-Temporary Impairment Ì In September 2004, the FASB voted unanimously to delay certain
portions of EITF 03-1, ""The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments'' (""EITF 03-1''), subject to further consideration. Subsequently, the FASB deferred this
consideration pending resolution of other related matters. The deferral applies to both debt and equity
securities and speciÑcally applies to impairments caused by interest rate and sector spreads. In addition, the
provisions of EITF 03-1 that have been deferred relate to the requirements that a company declare its intent to
hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-
temporary impairment charge through earnings. The FASB may address other-than-temporary impairments
further in a future project. The FASB's actions to defer the impairment measurement consensus did not
change the separate disclosure consensus in EITF 03-1, which remains eÅective. The incremental disclosures
required by EITF 03-1 are included in ""NOTE 5: RETAINED PORTFOLIO AND CASH AND
INVESTMENTS PORTFOLIO.''
Stock-Based Compensation Ì In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
""Share-Based Payment'' (""SFAS 123-R''), which replaces the existing SFAS 123 and supercedes APB 25.
Also, in March 2005, the SEC issued StaÅ Accounting Bulletin No. 107 (""SAB 107'') which provides
additional guidance on the application of SFAS 123-R. SFAS 123-R requires companies to measure and
record compensation expense for stock options and other share-based payments based on the instruments' fair
values. SFAS 123-R is eÅective for interim and annual reporting periods beginning after June 15, 2005. As
noted above in ""Stock-Based Compensation,'' the company has applied the fair value compensation expense
provisions of SFAS 123 retroactively to January 1, 1995. The impact of the adoption of SFAS 123-R is not
expected to be material to the company's Ñnancial position or results of operations.
Implicit Variable Interests Ì In March 2005, the FASB issued FASB StaÅ Position No. FIN 46(R)-5,
""Implicit Variable Interests Under FASB Interpretation No. 46 (Revised December 2003)''
(""FSP FIN 46(R)-5''). FSP FIN 46(R)-5 provides guidance on when an indirect relationship could be
deemed an implicit variable interest that should be considered in assessing whether or not to consolidate
certain entities. Determination as to whether an implicit variable interest exists should be based on whether
the company, through its relationship with the related party, will absorb the variability of the variable interest
entity. FSP FIN 46(R)-5 is eÅective for the company beginning April 1, 2005. The impact of adoption is not
expected to be material to the company's Ñnancial position or results of operations.
164
Freddie Mac
NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS
Types of Securitization Transactions Executed By Freddie Mac
Freddie Mac issues two types of mortgage-related securities: Mortgage Participation CertiÑcates
(""PCs'') and Structured Securities. PCs represent undivided interests in pools of mortgage loans that are
secured by either single-family or multifamily loans. Similarly, Structured Securities represent undivided
interests in PCs or other mortgage-related securities that are issued by either Ginnie Mae or non-agency
issuers. Freddie Mac guarantees the payment of principal and interest on all issued PCs and Structured
Securities.
Freddie Mac issues PCs in several diÅerent ways:
‚ Single-family mortgage loans that are purchased by Freddie Mac through its Cash Window are
either retained by Freddie Mac in its Retained portfolio or are sold through auction in the form of
issued PCs. Some single-family mortgage loans in the Retained portfolio are securitized and,
therefore, are held as investments in the form of PCs. Mortgage loans that are purchased through
the Cash Window and not retained by Freddie Mac are pooled together with other single-family
mortgage loans that are received in connection with PC swap-based transactions that it executes
with various lenders (and which Freddie Mac refers to as ""MultiLender Swaps''). In this case,
issued PCs that are not delivered to third party lenders in connection with MultiLender Swap
transactions are sold by Freddie Mac for cash consideration through an auction.
‚ Freddie Mac commonly issues PCs to third parties through PC-swap-based transactions where
either single-family or multifamily mortgage loans are delivered to Freddie Mac in exchange for
PCs backed by such pools of mortgage loans. In this regard, and unlike MultiLender Swap
transactions, the pools of mortgage loans formed in this case relate exclusively to mortgage loans
that are delivered to Freddie Mac by a single lender.
Freddie Mac sells PCs that are held in its Retained portfolio in resecuritized form as Structured
Securities. More speciÑcally, Freddie Mac issues single and multi-class Structured Securities that are backed
by PCs and other mortgage-related securities held in portfolio and subsequently transfers such Structured
Securities to third parties in exchange for cash consideration. Freddie Mac also commonly issues Structured
Securities in exchange for PCs and other mortgage-related securities that are delivered to it by third party
dealers who, in turn, sell such Structured Securities to retail and institutional investors.
Retained Interests Created Through The Securitization Process
Freddie Mac's retained interests in securitized and resecuritized mortgage-related assets include the
following:
‚ PCs retained by Freddie Mac that are backed by conforming single-family mortgage loans and
multifamily mortgage loans for which Freddie Mac paid cash consideration.
‚ Structured Securities retained by Freddie Mac in connection with the resecuritization of PCs and
mortgage-related securities that are issued by Ginnie Mae and non-agency entities.
‚ Freddie Mac's contractual right to receive a negotiated fraction of the interest-related cash Öows
of securitized mortgage loans which relates to compensation due Freddie Mac in connection with
its guarantee and administration of payments of principal and interest on issued PCs. This
retained, undivided interest is referred to as a GA.
‚ PC residuals, which relate to certain PCs and Structured Securities held by Freddie Mac and
represent the fair value of the expected net future cash Öows of guarantee and bond administration
cash Öows that are contractually distinct from that of such corresponding PCs or Structured
Securities.
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Freddie Mac
Unpaid Principal Balances of Issued PCs and Structured Securities
Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities as of
December 31, 2004 and 2003.
Table 2.1 Ì Issued PCs and Structured Securities Based on Unpaid Principal Balances(1)(2)
December 31,
2004
2003
(dollars in millions)
PCs and Structured Securities:
Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Held by Freddie Mac in the:
Retained portfolio(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments portfolio(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total issued PCs and Structured Securities(5)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 852,270
$ 752,164
356,698
Ì
$1,208,968
393,135
16,769
$1,162,068
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Due to the nature of security program remittance cycles of issued PCs and Structured Securities, the unpaid principal balances of the
underlying mortgage loans do not equal the unpaid principal balances of issued PCs and Structured Securities. See
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors'' for more
information.
(3) With respect to mortgage loans purchased through Freddie Mac's Cash Window that were internally securitized as PCs and held as
available-for-sale investments in the Retained portfolio, the company recognized losses of $1 million and $178 million for the years
ended December 31, 2004 and 2003, respectively, that correspond to permanent lower-of-cost-or-market value adjustments that were
recognized in connection with such mortgage loans. Such lower-of-cost-or-market value adjustments were treated as basis
adjustments to such issued PCs and, as such, are amortized into interest income over the holding period of such securities.
(4) Represents PCs and Structured Securities held by Freddie Mac in connection with PC market-making and support activities, which
are reÖected in Investments on the consolidated balance sheets. In the fourth quarter of 2004, Freddie Mac ceased its PC market-
making and support activities accomplished through its Securities Sales & Trading Group business unit and its external Money
Manager program.
(5) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' these amounts include:
‚ $3,015 million and $4,729 million of Structured Securities backed by Ginnie Mae CertiÑcates at December 31, 2004 and 2003,
respectively.
‚ $5,432 million and $5,044 million at December 31, 2004 and 2003, respectively, that pertain to Freddie Mac's guarantee of (a) the
payment of principal and interest on (i) tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates
issued by third parties; and (ii) multifamily mortgage loans that are originated and held by state and municipal housing Ñnance
agencies to support tax-exempt multifamily housing revenue bonds; and (b) Freddie Mac pass-through certiÑcates which are
backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans together with scheduled
principal payments on such bonds and/or loans.
‚ $1,806 million and $2,278 million at December 31, 2004 and 2003, respectively, of single-family mortgage loans held by third
parties for which Freddie Mac provided a credit guarantee.
(6) PCs and Structured Securities exclude $723,429 million and $637,491 million at December 31, 2004 and 2003, respectively, of
Structured Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured
Securities do not increase Freddie Mac's credit related exposure and consist of single-class Structured Securities backed by PCs,
Real Estate Mortgage Investment Conduits, or REMICs and principal-only strips. The notional balance of interest-only strips of
$105,703 million and $91,192 million at December 31, 2004 and 2003, respectively, is excluded because this table is based on unpaid
principal balances. Also excluded are modiÑable and combinable REMIC tranches and interest and principal classes, which
collectively total $1,097,336 million and $988,600 million at December 31, 2004 and 2003, respectively, where the holder has the
option to exchange the security tranches for other pre-deÑned security tranches.
At December 31, 2004 and 2003, approximately 86 percent and 78 percent, respectively, of issued PCs
and Structured Securities (excluding securities issued by Freddie Mac and backed by Ginnie Mae CertiÑcates
or non-agency mortgage-related securities and other securities guaranteed by Freddie Mac) had correspond-
ing GAs, GOs or PC residuals recognized on Freddie Mac's consolidated balance sheets. The percentage of
these PCs and Structured Securities that had corresponding GAs, GOs or PC residuals due to the adoption of
FIN 45 accounting on January 1, 2003 was 39 percent and 30 percent, at December 31, 2004 and 2003,
respectively. As of December 31, 2004 and 2003, 87 percent and 81 percent, respectively, of PCs and
Structured Securities held by third parties had a related GA and GO established.
Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales
Freddie Mac recognized pre-tax gains of approximately $356 million, $711 million and $874 million for
the years ended December 31, 2004, 2003 and 2002, respectively, on transfers of PCs and Structured
166
Freddie Mac
Securities that were accounted for as sales under SFAS 125/140. In connection with the derivation of such
gains (losses), Freddie Mac has:
‚ developed and consistently applied a methodology for determining the order in which to record
extinguishments of GOs and the recognition of retained interests because PCs within an individual
CUSIP are fungible in nature;
‚ de-recognized for Ñnancial statement purposes the carrying value of the sold portion of securitized
assets as of the end of the month in which a sale has occurred; and
‚ recorded extinguishments of GOs as of the beginning of the month in which the purchase of
corresponding PCs or Structured Securities has occurred.
Key Valuation Assumptions Associated with Recognized GAs, GOs, Credit Enhancements and PC
Residuals that Correspond to PCs or Structured Securities Backed by Single-Family Mortgages
Freddie Mac recognizes GAs and GOs for PCs backed by residential mortgage loans and multifamily
mortgage loans in conjunction with transfers accounted for as sales under SFAS 125/140 as well as, beginning
on January 1, 2003, transactions that do not qualify as sales, but are accounted for as guarantees pursuant to
the requirements of FIN 45. At December 31, 2004 and 2003, GAs totaled $4,516 million and $3,686 million
on Freddie Mac's consolidated balance sheets and of these amounts, approximately $88 million (or
approximately 2 percent) and $24 million (or less than 1 percent), respectively, related to guarantees of
multifamily mortgage loans. Consequently, the following discussion of key valuation assumptions and
corresponding sensitivity analysis of recognized GAs, GOs, credit enhancements and PC residuals focuses
solely on PCs and Structured Securities backed by single-family mortgage loans.
Recognized GAs
Fair values of recognized GAs were calculated using an expected cash Öow approach. SpeciÑcally, Monte
Carlo simulations were used to project monthly prepayment and default rates across 300 house price and
interest rate scenarios. Through December 31, 2002, Monte Carlo simulations were also used to project
monthly loss severity rates because recognized GAs for those periods included the fair value of pool insurance,
recourse and indemniÑcations. As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNT-
ING POLICIES,'' Freddie Mac discontinued the inclusion of these credit enhancements as components of
recognized GAs eÅective January 1, 2003 and monthly loss severity rates are no longer included as part of
Monte Carlo simulations used to project future cash Öows associated with GAs. Monte Carlo projections were
used to forecast GA-related future cash Öows associated with approximately 360,000, 330,000 and 210,000
groups of mortgage loans for 2004, 2003 and 2002, respectively, that are distinguished based upon diÅering
combinations of various loan attributes (these groups of loans are referred to as ""Loan Group''). Freddie Mac
then discounted their forecasted cash Öows using factors that were derived from modeled forward interest rates
(for each scenario path) to which Freddie Mac then applied a trailing average option-adjusted spread of up to
24 months that was based on spot interest-only security prices. The trailing average option-adjusted spreads
ranged between 127 and 313 basis points from January 1, 2004 to December 31, 2004, and between 313 and
766 basis points from January 1, 2003 to December 31, 2003.
Based upon the foregoing, Freddie Mac recognized as GAs the average of the present value of the GA-
related cash Öows generated for each Loan Group for each of the referenced scenarios. EÅective January 1,
2003, Freddie Mac modiÑed the composition of GA-related cash Öows used to derive fair value as a result of
changes to its accounting policies (which are further described in ""NOTE 1: SUMMARY OF SIGNIFI-
CANT ACCOUNTING POLICIES'').
Recognized GOs
GOs are recognized at fair value at the inception of an executed guarantee. The fair value of a GO
constitutes a component of the valuation of a PC residual (where a recognized PC residual is eÅectively
equivalent to the net fair value of the underlying GA and GO). Like the cash Öows associated with recognized
GAs, GO-related future cash Öows associated with each referenced Loan Group are estimated using Monte
167
Freddie Mac
Carlo simulation. The components of estimated future cash Öows associated with GOs include: (a) estimates
of expected future credit losses using statistically based models that evaluate a variety of factors (such as
default experience and loss severity trends), as well as an estimated risk premium for the uncertainty in
expected credit losses that would be required to be paid to a third party with a credit standing similar to
Freddie Mac; (b) estimates of the costs to administer the collection and distribution of payments on the
mortgage loans underlying a PC; and (c) expected net cash Öows due to security program cycles. When
deriving the present value of GO-related cash Öows for each scenario for each Loan Group, Freddie Mac uses
a convention that is similar to the methodology described above to discount GA-related future cash Öows,
except that a London Interbank OÅered Rate (""LIBOR'') rate is generally used to discount such cash Öows.
Additionally, projected credit related costs that are factored into the GO-related cash Öows are benchmarked
periodically to the non-conforming loan securitization market.
Like recognized GAs, Freddie Mac recognized as GOs the average of the present value of the GO-
related cash Öows generated for each Loan Group for each of the scenarios.
Recognized PC residuals
PC residuals relate to certain PCs and Structured Securities held by Freddie Mac in its Retained
portfolio and Cash and investments portfolio and represent the fair value of the future cash Öows of guarantee
contracts that speciÑcally correspond to such PCs. By the end of 2004, the company had ceased certain PC
market-making and support activities and the Cash and investments portfolio no longer held mortgage-related
securities. Since the future cash Öows associated with such guarantee contracts are represented by those that
deÑne a PC's corresponding GA and GO, the fair value of a recognized PC residual is eÅectively equivalent to
the fair value of a GA less that of a corresponding GO. Accordingly, the fair value of recognized PC residuals
is determined in a manner that is reÖective of the methodologies described above for recognized GAs and
GOs.
Recognized Credit Enhancements
Many of the credit enhancements that Freddie Mac employs in connection with securitized mortgage
loans are recognized at fair value at the inception of each contract. Future credit enhancement-related cash
Öows associated with each referenced Loan Group are estimated using a Monte Carlo simulation. More
speciÑcally, based upon the terms of a credit-enhancement contract, the portion of the total GO-related future
cash Öows estimated for each Loan Group that would be reimbursed to Freddie Mac by a third party (e.g., a
mortgage insurer) are identiÑed as the estimated future cash inÖows due Freddie Mac on each of such
contracts. These projected cash inÖows are then discounted using a LIBOR rate.
Freddie Mac recognizes as an Other asset the average of the present value of the credit enhancement-
related cash Öows generated for each Loan Group for each of the scenarios related to pool insurance, recourse
and indemniÑcations. The average of the present value of the credit enhancements-related cash Öows
generated for each Loan Group for each of the scenarios related to primary mortgage insurance is recognized
at inception at fair value as a reduction of recognized GOs.
Credit enhancements that were recognized as Other assets had a carrying value of approximately
$232 million and $200 million at December 31, 2004 and 2003, respectively.
Other Retained Interests
Other Retained Interests (as deÑned in footnote 3 to ""Table 2.3 Ì Sensitivity Analysis'') are valued
based upon observed market or matrix-based prices (for the latter, prices for comparable securities, as
adjusted for product-speciÑc attributes, are used as a basis to value such interests). Because these interests are
not model-valued, the corresponding valuation assumptions are not provided in Table 2.2 below. Sensitivity
analysis of these interests (as shown in ""Table 2.3 Ì Sensitivity Analysis'') is estimated using a company
model that is not the source of the actual valuation used to determine their carrying value.
168
Freddie Mac
Table 2.2 summarizes the key assumptions Freddie Mac used in fair value measurements of recognized
GAs, GOs and PC residuals.
Table 2.2 Ì Key Assumptions Utilized in Fair Value Measurements(1)
2003
GA, GO and PC residual
2004
GA, GO and PC residual
2002
GA, GO and PC residual
Assumptions
Internal rates of return(2)
GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PC residual ÏÏÏÏÏÏÏÏÏÏÏ
Prepayment rates(3)ÏÏÏÏÏÏÏ
Default rates(4) ÏÏÏÏÏÏÏÏÏÏ
Loss severity rates(5) ÏÏÏÏÏÏ
Range(6)
Mean(7)
Range(6)
Mean(7)
Range(6)
Mean(7)
(1.4)% - 13.6%
1.3% - 9.4%
0.0% - 11.9%
6.8% - 58.6%
0.1% - 8.5%
4.0% - 46.0%
6.7% 4.5% - 15.1%
5.3% 1.9% - 9.5%
6.1% 4.0% - 12.2%
18.8% 7.5% - 62.9%
1.1% 0.1% - 8.5%
23.9% 4.0% - 46.0%
9.4% 5.9% - 15.7%
5.6% 3.8% - 8.2%
7.6% 5.1% - 11.8%
22.6% 8.8% - 54.6%
1.2% 0.1% - 8.1%
24.6% 3.6% - 48.4%
9.4%
6.0%
7.4%
22.5%
1.2%
22.9%
(1) The assumptions included in this table relate to those used to measure the fair value of single-family GAs, GOs and PC residuals at
the time of securitization and the subsequent fair value measurements, which occurred throughout each of the years presented.
Additionally, the range of assumptions used to facilitate the valuation of recognized credit enhancements was consistent with those
provided above for recognized GOs.
(2) The internal rates of return (""IRR'') reported above represent a duration weighted average of the discount rates used to value
recognized GAs and GOs. Such rates were derived by determining a single rate that equated (a) the simple average of future cash
Öows (for all 300 scenario paths described above) of the GA and GO for each Loan Group with that of (b) the calculated fair value
of the GA and GO for each Loan Group. With respect to PC residuals, IRRs reported above represent the weighted average of the
derived IRR values for corresponding GAs and GOs (where weightings are based upon the fair values of corresponding GAs and
GOs). Negative IRRs can occur when suÇciently large negative option adjusted spreads are applied to LIBOR. When Freddie Mac
calibrates its modeled discounted cash Öows to the traded price of an interest-only security, a negative option-adjusted spread can
result when the traded price exceeds the implied market value of the modeled discounted cash Öows. A negative option-adjusted
spread is necessary to calibrate the implied market value of the modeled discounted cash Öows to the traded price.
(3) Scenario average Prepayment rates are simulated on a monthly frequency, although rates reported above represent an unpaid
principal balance weighted average of annualized values of such Prepayment rates.
(4) Default rates are simulated on a monthly frequency, although Default rates reported above represent simple averages of cumulative
default rates determined for each of the 300 scenarios for each Loan Group.
(5) Loss severity rates reported above represent the ratio of (a) the simple average of cumulative credit losses generated for each
scenario to (b) defaulted unpaid principal balance for each Loan Group.
(6) The lowest value in each presented range represents the Ñrst percentile IRRs, prepayment rates, default rates and loss severity rates
throughout 2004, 2003 and 2002. Likewise, the highest value in each range represents the 99th percentile IRRs, prepayment rates,
default rates and loss severity rates throughout 2004, 2003 and 2002.
(7) Reported values represent the weighted average value of all IRRs, prepayment rates, default rates and loss severity rates throughout
the 2004, 2003 and 2002 periods.
Weighted average lives of GAs and PC residuals during 2004, 2003 and 2002 ranged between 1.2 Ó
8.7 years, 1.0 Ó 8.6 years and 1.5 Ó 7.8 years, respectively, while the average derived weighted average lives of
GAs and PC residuals for the same periods were 5.2, 4.8 and 5.0 years, respectively. Such derived weighted
average lives are reÖective of prepayment speed assumptions cited in Table 2.2 above.
The sensitivity analysis in Table 2.3 below illustrates estimated changes in the fair value at December 31,
2004 of recognized GAs, PC residuals and other retained interests (which are further described below) based
upon:
‚ 100 basis point and 200 basis point increases and decreases in discount rate assumptions;
‚ 10% and 20 increases and decreases in prepayment rate assumptions;
‚ 10% and 20% increases in default rate assumptions; and
‚ 10% and 20% increases in loss severity rate assumptions.
GOs are not included in the sensitivity analysis in Table 2.3 since such items are not subsequently
measured on a fair value basis in the consolidated balance sheets.
169
Freddie Mac
Table 2.3 Ì Sensitivity Analysis
At December 31, 2004
Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average IRR assumptions:ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 100 bps downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 200 bps downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average prepayment rate assumptions:ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average default rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average loss severity rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PC residual(1)
GA(2)
(dollars in millions)
$4,516
$ 845
5.8%
$ (28)
$ (54)
29
$
59
$
19.0%
$ (16)
$ (32)
17
$
36
$
1.0%
$ (65)
$(130)
24.0%
$ (86)
$(174)
6.1%
$ (161)
$ (312)
$ 172
$ 348
19.5%
$ (207)
$ (393)
$ 231
$ 490
$
$
1.0%
(3)
(7)
N/A(6)
N/A(6)
N/A(6)
Other
retained
interests(3)
$ 713(4)
10.8%
$ (23)
$ (44)
25
$
52
$
14.3%
$ (28)
$ (53)
$
$
32
68
N/A(5)
N/A(5)
N/A(5)
N/A(5)
N/A(5)
N/A(5)
(1) At December 31, 2004 and 2003, approximately $107 million and $47 million, respectively, of recognized PC residuals were classiÑed
as available-for-sale representing, as a function of the unpaid principal balances of related PCs or Structured Securities,
approximately 17 percent of recognized PC residuals. Therefore, approximately 83 percent of the future changes in fair value of
recognized PC residuals would be recognized in earnings, while the balance of such future changes in fair value would be reÖected in
AOCI, net of taxes.
(2) At December 31, 2004, GAs totaled $4,516 million on Freddie Mac's consolidated balance sheet and of that amount, approximately
$88 million (or approximately 2 percent), relates to PCs backed by multifamily mortgage loans. The sensitivity analysis presented in
Table 2.3 relates solely to GAs associated with PCs backed by single-family mortgage loans.
(3) Includes interest-only securities that were issued by Freddie Mac as part of a resecuritization transaction for which sale accounting
treatment was applied, and Freddie Mac securities that were (a) purchased at a premium (to par) of 10 percent or greater and
(b) associated with either a securitization or resecuritization transaction for which sale accounting treatment was applied. Also
included are Freddie Mac securities held by the company for which securitized / resecuritized mortgage-related assets were (a) not
of high credit quality and (b) associated with either a securitization or resecuritization transaction for which sale accounting
treatment was applied.
(4) Includes accrued interest.
(5) Sensitivities of reported fair value to changes in default and loss severity rates associated with Other retained interests for which a
recognized PC residual exists are captured in the corresponding column entitled PC residual. Otherwise, with respect to Other
retained interests for which a PC residual was not recognized, such securities are valued for consolidated Ñnancial statement purposes
at the observed market price for such securities, which reÖect inherent credit protection provided by Freddie Mac. In this case,
changes in the reported fair value of such securities would not be aÅected by variations in default and loss severity assumptions and,
as a result, a corresponding sensitivity analysis was not prepared.
(6) Severity of loss has no impact on the underlying cash Öows of the guarantee asset or the resultant fair values.
The sensitivity analysis in the preceding table is hypothetical. Each of the calculated eÅects summarized
above was determined by adjusting only one assumption at a time, as opposed to having determined a
hypothetical eÅect on fair value based upon assumed, correlating changes in more than one assumption
(where, in reality, a change in one assumption would generally result in changes to one or more of the other
speciÑed assumptions). Additionally, any corresponding hedge transactions executed by Freddie Mac were not
considered in determining the hypothetical eÅects summarized above. Results provided above should not be
extrapolated to either (a) other sensitivity analyses in which changes in other assumptions are made or (b) to
other securities held by Freddie Mac.
170
Freddie Mac
Periodic Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests
Table 2.4 below summarizes:
‚ cash Öows received by Freddie Mac in connection with transfers of PCs and Structured Securities
to third parties that were accounted for as sales and where retained interests related to guarantee
activities were initially recognized or resulted from a resecuritization transaction;
‚ contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized
GAs (as further discussed below);
‚ contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized
PC residuals (as further discussed below);
‚ receipts of payments of principal and interest on Other retained interests; and
‚ amounts paid by Freddie Mac to repurchase delinquent mortgage loans that back PCs and
Structured Securities.
Table 2.4 Ì Details of Cash Flows
2004
Year Ended December 31,
2003(1)
(dollars in millions)
2002
Cash Öows from:
Transfers of Freddie Mac securities that were accounted for as sales
Cash Öows received on retained interests:
GAs(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PC residuals(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Retained Interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of delinquent or foreclosed loans(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$152,662
$347,874
$241,214
1,086
524
491
(4,931)
891
449
810
(5,822)
771
325
654
(5,039)
(1) Certain cash Öow amounts previously reported for the year ended December 31, 2003 have been revised to reÖect current year
quantiÑcation methods.
(2) Amounts speciÑcally correspond to guarantee fee-related cash Öows of recognized GAs and PC residuals, and do not reÖect cash
Öows received in connection with certain credit enhancements whose fair value in 2002 was also reported as GAs or PC residuals or
certain GO-related cash Öows whose value was reported as a component of recognized PC residuals. Total cash Öows received on
recognized GAs during 2004, 2003 and 2002 were $1,086 million, $891 million and $820 million, respectively. Total net cash Öows
received on recognized PC residuals during 2004, 2003 and 2002 were $227 million, $140 million and $169 million, respectively.
Total GA cash Öows and total net cash Öows received on PC residuals in 2004 are exclusive of proceeds received in connection with
credit enhancements.
(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.
(4) Subsequent to the release of Freddie Mac's Information Statement dated September 24, 2004, the company revised the methodology
for disclosing the Purchases of delinquent or foreclosed loans. The eÅect of this was a $473 million decrease and an $87 million
decrease in the balances for the years ended December 31, 2003 and 2002, respectively.
Attribution of GA- and PC Residual-Related Cash Flows
As previously discussed, GAs and PC residuals are Ñnancial assets accounted for on a fair value basis.
Similar to other Ñnancial assets, cash Öows received in connection with GAs and PC residuals represent both a
return on such assets (i.e., imputed interest) as well as a return of such assets (i.e., return of principal).
Freddie Mac receives cash Öows on these assets related to contractual guarantee fees. Additionally, Freddie
Mac receives or pays other cash Öows associated with PC residuals that relate to the PC guarantee contract,
such as credit-related expenses and administrative expenses.
Rather than recording a portion of the cash Öows associated with GAs and PC residuals as a reduction of
their respective recorded amounts, similar to a return of principal, the related income and expense amounts
are recorded directly on the consolidated statements of income based on the nature of such cash Öows. For
example, guarantee-related cash inÖows are recorded as Management and guarantee income. As these cash
Öows are received, the remaining cash Öows (and the related GA and PC residual fair values) decrease. These
decreases related to the GA and PC residuals are reÖected in the Gains (losses) on Guarantee asset for
Participation CertiÑcates, at fair value and Gains (losses) on investment activity, respectively.
171
Freddie Mac
Recognized GAs Ì Guarantee Fee-Related Cash Flows
Freddie Mac recorded $1,086 million, $891 million and $771 million of income associated with
guarantee-related cash Öows received during 2004, 2003 and 2002, respectively. These amounts were recorded
as Management and guarantee income. Of such amounts, approximately $257 million, $244 million and
$242 million, respectively, related to imputed interest. The remaining portion related to return of principal,
which totaled $829 million, $647 million and $529 million for 2004, 2003 and 2002, respectively.
Recognized GAs Ì All Cash Flows
As noted above, Freddie Mac discontinued the inclusion of credit enhancements as a component of
recognized GAs eÅective January 1, 2003. As a result, imputed interest amounts reported above for 2004 and
2003 do not consider cash Öows received that relate to credit enhancements that were previously recorded as a
component of recognized GAs. With respect to amounts reported in 2002, Freddie Mac recorded total income
of $820 million associated with recognized GAs. Approximately $259 million of such amounts constitute
imputed interest, while the remaining portion, which totaled $561 million, related to return of principal for
2002.
Recognized PC Residuals
Freddie Mac recorded $524 million, $449 million and $325 million of income associated with guarantee-
related cash Öows received in connection with the GA component of recognized PC residuals during 2004,
2003 and 2002, respectively. These amounts were recorded as interest income. Of these amounts, approxi-
mately $117 million, $109 million and $96 million during 2004, 2003 and 2002, respectively, related to
imputed interest. The remaining portion related to return of principal, which totaled $407 million, $340 million
and $229 million during 2004, 2003 and 2002, respectively.
Considering all cash Öows related to recognized PC residuals (i.e., related to both the GA and GO
components of recognized PC residuals), the amount of imputed interest on PC residuals was approximately
$67 million, $66 million and $73 million during 2004, 2003 and 2002, respectively. Consistent with the
description above, however, cash Öows used to derive the imputed interest for 2004 and 2003 were exclusive of
proceeds received in connection with credit enhancements.
172
Freddie Mac
NOTE 3: VARIABLE INTEREST ENTITIES
The company is a party to numerous entities that are considered to be variable interest entities (""VIEs'')
under FIN 46-R. These VIEs include low-income housing tax credit partnerships, West*Mac, certain asset-
backed investment trusts, certain Structured Securities transactions and a mortgage reinsurance company. In
addition, Freddie Mac buys the highly-rated senior securities in certain mortgage securitization trusts that are
VIEs. Highly-rated senior securities issued by these securitization trusts are not designed to absorb a
signiÑcant portion of the variability created by the assets/collateral in the trusts. Freddie Mac's investments in
these securities do not represent a signiÑcant variable interest in the securitization trusts. Further, Freddie
Mac invests in securitization entities that are qualifying special purpose entities (""QSPEs'') as described in
SFAS 125/140. Interests in these QSPEs are exempt from FIN 46-R because of the company's inability to
unilaterally liquidate or change the QSPE. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNT-
ING POLICIES'' for further information regarding FIN 46-R.
Low-Income Housing Tax Credit Partnerships
Freddie Mac invests as a limited partner in low-income housing tax credit partnerships formed for the
purpose of providing funding for aÅordable multifamily rental properties. These low-income housing tax credit
partnerships invest directly in limited partnerships that develop or rehabilitate multifamily rental properties.
Completed properties are rented to qualiÑed low-income tenants, allowing the properties to be eligible for
federal tax credits. A general partner operates the partnership, identifying investments and obtaining debt
Ñnancing as needed to Ñnance partnership activities. Although these partnerships generate operating losses,
Freddie Mac realizes a return on its investment through reductions in income tax expense that result from tax
credits and the deductibility of the operating losses. The partnership agreements are typically structured to
meet a required 15-year period of occupancy by qualiÑed low-income tenants. These investments were made
between 1989 and 2004. At December 31, 2004, Freddie Mac did not guarantee any obligations of these
partnerships and Freddie Mac's exposure is limited to the amount of its investments.
West*Mac
Freddie Mac is one of two general partners in West*Mac, which was formed in 1986. The purpose of
West*Mac is to acquire, develop and manage certain real property located in McLean, Virginia. This real
property is Freddie Mac's corporate headquarters.
Asset-Backed Investment Trusts
Freddie Mac invests in a variety of non-mortgage-related, asset-backed investment trusts. These
investments represent interests in trusts consisting of a pool of receivables or other Ñnancial assets, typically
credit card receivables, auto loans or student loans. The trusts act as vehicles to allow originators to securitize
assets. The originators of the Ñnancial assets or the underwriters of the deal create the trusts and typically own
the residual interest in the trust assets.
Securities are structured from the underlying pool of assets to provide for varying degrees of risk. Primary
risks include potential loss from the credit risk and interest rate risk of the underlying pool. Freddie Mac
invests in these securities to manage its cash Öows, create a diverse source of liquidity and achieve proÑtable
investment returns. These investments were made between 2000 and 2004.
Structured Securities Ì T-Series Transactions
In T-Series transactions (or alternative collateral deals), a seller or sellers of mortgage loans transfers
mortgage loans to a trust speciÑcally for the purpose of issuing securities collateralized by the mortgage loans.
These T-Series transactions issue various senior and subordinated interests. Freddie Mac guarantees and
purchases certain of the senior interests. Simultaneous with this guarantee and purchase, Freddie Mac issues
and guarantees Structured Securities. These Structured Securities represent an interest in the senior interests
of the T-series transactions. The subordinated interests are generally either held by the seller or other party or
sold in the capital markets.
173
Freddie Mac
Mortgage Reinsurance Company
In May 1998, Freddie Mac transferred credit risk to a consolidated special purpose entity in a reinsurance
transaction.
Consolidated VIEs
As of December 31, 2004, the company had investments in Ñve low-income housing tax credit
partnerships, West*Mac and the mortgage reinsurance company referred to above, of which Freddie Mac was
the primary beneÑciary. These are consolidated pursuant to the requirements of FIN 46-R. Prior to 2004,
Freddie Mac consolidated these in accordance with other applicable requirements under GAAP. Table 3.1
represents the carrying amounts and classiÑcation of consolidated assets that are collateral for the consolidated
VIEs.
Table 3.1 Ì Assets of Consolidated VIEs
Consolidated Balance Sheets Line Item
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets of consolidated VIEs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004
(dollars in millions)
$ 51
170
239
$460
The investors in the obligations of consolidated VIEs have recourse only to the assets of those VIEs and
do not have recourse to the company.
VIEs Not Consolidated
As of December 31, 2004, the company had unconsolidated investments in 149 low-income housing tax
credit partnerships in which Freddie Mac had a signiÑcant variable interest. The size of these partnerships at
December 31, 2004, as measured in total assets, was $7.5 billion. These partnerships are accounted for using
the equity method, as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLI-
CIES.'' As a limited partner, Freddie Mac's maximum exposure to loss equals the book value of its equity
investment. As of December 31, 2004, Freddie Mac's maximum exposure to loss on unconsolidated low-
income housing tax credit partnerships, in which Freddie Mac had a signiÑcant variable interest, was
$2.9 billion.
At December 31, 2004, the company had investments in three trusts related to non-mortgage-related,
asset-backed securities in which Freddie Mac had a signiÑcant variable interest. These trusts had total assets
of $12.8 billion. At December 31, 2003, the company had investments in 15 trusts related to non-mortgage-
related, asset-backed securities in which Freddie Mac had a signiÑcant variable interest. These trusts had total
assets of $7.9 billion. As an investor, Freddie Mac's maximum exposure to loss consisted of the book value of
its investment. As of December 31, 2004, Freddie Mac's maximum exposure to loss on non-mortgage-related,
asset-backed investment trusts in which Freddie Mac had a signiÑcant variable interest was approximately
$3.4 billion. As of December 31, 2003, Freddie Mac's maximum exposure to loss on non-mortgage-related,
asset-backed investment trusts in which Freddie Mac had a signiÑcant variable interest was approximately
$1.8 billion. These investments are typically senior interests rated A1 and P1 by Standard & Poor's and
Moody's, respectively, which is the short-term equivalent to between A and AAA in typical long-term rating
scales.
At both December 31, 2004 and 2003, the company had investments or guarantees related to two
T-Series transactions in which Freddie Mac had a signiÑcant variable interest. Freddie Mac's involvement in
the T-Series transactions began in 1996 and 2002, respectively. The size of these transactions at December 31,
2004 and 2003, as measured in total assets, was $170 million and $367 million, respectively. As of
December 31, 2004 and 2003, Freddie Mac's maximum exposure to loss on T-Series transactions in which
Freddie Mac had a signiÑcant variable interest was $147 million and $339 million, respectively, consisting of
the book value of the company's investments plus incremental guarantees of the senior interests that are held
by third parties.
174
Freddie Mac
NOTE 4: FINANCIAL GUARANTEES
Freddie Mac executes a variety of Ñnancial guarantees. Each of the principal types of such guarantees,
including relevant qualitative and quantitative information associated with such items, is further discussed
below.
Principal and Interest Guarantees of PCs and Structured Securities
As is further discussed in ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORT-
GAGE-RELATED ASSETS,'' Freddie Mac issues two types of mortgage-related securities: PCs and
Structured Securities. PCs represent undivided interests in pools of mortgage loans that are secured by either
single-family or multifamily mortgage loans. Similarly, Structured Securities represent undivided interests in
PCs or other mortgage-related securities that are issued by either Ginnie Mae or non-agency issuers. Freddie
Mac guarantees the payment of principal and interest on all issued PCs and Structured Securities. Freddie
Mac's guarantees related to Structured Securities include its guarantees on PCs or any non-Freddie Mac
mortgage-related securities that underlie these Structured Securities.
Depending upon the manner by which Freddie Mac transferred PCs or Structured Securities to third
parties in 2004 and 2003, all such transfers, which totaled $365,108 million and $713,787 million, respectively,
were accounted for pursuant to the requirements of FIN 45 and SFAS 125/140. Upon completion of the
transfer of PCs or Structured Securities to third parties, Freddie Mac recognizes the fair value of its obligation
to make guarantee payments. The methods by which Freddie Mac accounts for its guarantees of PCs and
Structured Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNT-
ING POLICIES.''
The maximum potential amount of future principal payments Freddie Mac could be required to make in
connection with the unpaid principal balance of all PCs and Structured Securities held by third parties totaled
$852 billion and $752 billion at December 31, 2004 and 2003, respectively. Included in these amounts are
$5.4 billion and $5.0 billion at December 31, 2004 and 2003, respectively, that pertain to guarantees related to
multifamily housing revenue bonds that come in three principal forms. First, Freddie Mac provides a
guarantee of the payment of principal and interest on tax-exempt multifamily housing revenue bonds that
support pass-through certiÑcates issued by third parties. These housing revenue bonds are collateralized by
mortgage loans on low- and moderate-income multifamily housing projects. Second, Freddie Mac issues pass-
through certiÑcates which are backed by tax-exempt multifamily housing revenue bonds and related taxable
bonds and/or loans. Freddie Mac guarantees all scheduled principal on the bonds or loans, and guarantees
interest on the certiÑcates. And third, Freddie Mac guarantees the payment of principal and interest related to
low- and moderate-income multifamily mortgage loans that are originated and held by state and municipal
agencies to support tax-exempt multifamily housing revenue bonds. Additionally, Freddie Mac provided credit
guarantees of $1.8 billion and $2.3 billion at December 31, 2004 and 2003, respectively, of single-family
mortgage loans held by third parties.
As part of these guarantee arrangements, Freddie Mac also provides a commitment to advance funds,
commonly referred to as ""liquidity guarantees,'' totaling $5.0 billion and $4.5 billion, at December 31, 2004
and 2003, respectively, to enable the repurchase by others of tendered tax-exempt pass-through certiÑcates
and housing revenue bonds that are unable to be remarketed. Any repurchased securities would be pledged to
Freddie Mac as collateral for such funding until such time as the securities could be remarketed. There have
been no payments made to date by Freddie Mac under this type of loan commitment.
Generally, the contractual terms of Freddie Mac's guarantees on PCs and Structured Securities are 15 to
30 years. However, the actual term of each guarantee may be signiÑcantly less than the contractual terms due
to the prepayment characteristics of the mortgage-related assets that back PCs and Structured Securities.
Maximum potential interest payments Freddie Mac could be required to make associated with these
guarantees are not expected to signiÑcantly exceed 120 days of interest at the certiÑcate rate, given that
Freddie Mac generally begins a process to purchase the defaulted mortgages when they have been delinquent
for 120 consecutive days.
In connection with PCs or Structured Securities backed by single-family mortgage loans, Freddie Mac
had maximum coverage totaling $27.2 billion and $27.1 billion in primary mortgage insurance at
175
Freddie Mac
December 31, 2004 and 2003, respectively, $3.5 billion and $4.1 billion in pool insurance and other credit
enhancements at December 31, 2004 and 2003, respectively, and $4.1 billion and $4.6 billion in recourse to
lenders at December 31, 2004 and 2003, respectively. In addition, $2.6 billion and $4.1 billion of outstanding
Structured Securities relate to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the
U.S. government, at December 31, 2004 and 2003, respectively. With respect to PCs and Structured
Securities backed by multifamily mortgage loans, Freddie Mac had maximum combined credit enhancements
totaling $9.1 billion and $9.5 billion at December 31, 2004 and 2003, respectively.
At December 31, 2004, Freddie Mac had a recognized Guarantee obligation for Participation CertiÑcates
on the consolidated balance sheets of $4.1 billion, which included $1.3 billion of Deferred Guarantee Income.
At December 31, 2003, the Guarantee obligation for Participation CertiÑcates totaled $2.9 billion, which
included $0.8 billion of Deferred Guarantee Income. In addition, the company had a Reserve for Guarantee
Losses on Participation CertiÑcates that totaled $150 million and $125 million at December 31, 2004 and
2003, respectively, for incurred credit losses that were recognized in conjunction with PCs and Structured
Securities held by third parties.
Guarantees of Stated Final Maturity of Issued Structured Securities
Freddie Mac commonly issues Structured Securities with stated Ñnal maturities that are shorter than the
stated maturity of the underlying mortgage loans. If the assets that back such Structured Securities have not
fully matured as of the stated Ñnal maturity date of such securities, either Freddie Mac will sponsor an auction
of the underlying assets or a third party who holds a par-based call option on such underlying assets will
exercise its option to purchase such underlying assets (an option which, if exercised, would provide cash Öows
that Freddie Mac would pass through to investors in such Structured Securities). If an auction occurs, Freddie
Mac would pass through proceeds received to investors of such Structured Securities. To the extent, however,
that auction proceeds are insuÇcient to cover unpaid principal amounts due to investors in such Structured
Securities, Freddie Mac is obligated to fund such principal. With respect to such guarantees of stated Ñnal
maturity, Freddie Mac eÅectively writes a cash-settled put option to investors in such Structured Securities.
Such guarantees are accounted for as derivative instruments pursuant to the requirements of SFAS 133.
As of December 31, 2004 and 2003, the maximum potential amount of payments Freddie Mac could be
required to make under such guarantees was $9.2 billion and $8.4 billion, respectively, which represents the
outstanding unpaid principal balance of the underlying mortgage loans. At both December 31, 2004 and 2003,
the total fair value of recognized liabilities concerning such guarantees was $1.0 million. The longest
remaining contractual maturity of any outstanding written put option was 15 years and 16 years at
December 31, 2004 and 2003, respectively; however, the actual terms may be signiÑcantly less than the
contractual terms as the amortizing notional balance is linked to prepayable mortgage loans.
IndemniÑcations
In connection with various business transactions, Freddie Mac provides indemniÑcation to counterparties
for breaches of standard representations and warranties in contracts entered into in the normal course of
business. It is diÇcult to estimate Freddie Mac's maximum exposure under these indemniÑcation agreements
since in many cases there are no stated or notional amounts included in the indemniÑcation clauses. However,
the contingencies triggering the obligation to indemnify have not occurred. Freddie Mac's assessment is that
the risk would be remote. Such representations and warranties pertain to hold harmless clauses, adverse
changes in tax laws and potential claims from third parties related to items such as actual or alleged
infringement of intellectual property. At December 31, 2004 and 2003, there were 14 and 13 identiÑed
transactions, respectively, that contain intellectual property related indemniÑcations, as deÑned by FASB StaÅ
Position No. 45-1, ""Accounting for Intellectual Property Infringement IndemniÑcations under FASB
Interpretation No. 45.'' Freddie Mac had not recorded any liabilities related to these indemniÑcations in its
consolidated balance sheets as of December 31, 2004 and 2003 because it was not probable that the company
would be required to make payments under these contractual agreements on those dates.
176
Freddie Mac
Other Guarantees
Freddie Mac has guaranteed the performance of interest-rate swap contracts in two circumstances. First,
as part of a resecuritization transaction, Freddie Mac transferred certain swaps and related assets to a third
party. Freddie Mac guaranteed that interest income generated from the assets would be suÇcient to cover the
required payments under the interest-rate swap contracts. In the other circumstance, Freddie Mac guaranteed
that a customer would perform under an interest-rate swap contract linked to the customer's variable rate
mortgage. The maximum remaining terms of any of these guarantees at December 31, 2004 and 2003 was
29 years and 27 years, respectively; however, the actual terms may be signiÑcantly less than the contractual
terms as the amortizing notional balance of the swaps is linked to prepayable mortgage loans. The maximum
potential amount of future payments under the guarantees was $50 million and $136 million at December 31,
2004 and 2003, respectively. The company has not established a liability on its consolidated balance sheets at
December 31, 2004 and 2003 because it was not probable that it would be required to make payments under
these contractual arrangements on those dates.
Freddie Mac provides guarantees to reimburse servicers for premiums paid to acquire servicing in
situations where Freddie Mac requires the original seller to repurchase the loan and the original seller is
unable to perform under a separate agreement to reimburse the servicer for those servicing premiums. Freddie
Mac's servicing related premium guarantees are payable according to a vesting schedule for up to Ñve years
from the date of purchase of servicing rights. Freddie Mac's servicing-related premium guarantees issued
in 2003 and 2004 extend through 2008 and 2009, respectively. The maximum potential amount of future
payments under the guarantees was $113 million and $151 million at December 31, 2004 and 2003,
respectively. The company has not established a liability on its consolidated balance sheets at December 31,
2004 and 2003 because it was not probable that it would be required to make payments under these
contractual arrangements on those dates.
177
Freddie Mac
NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO
Table 5.1 summarizes amortized cost, estimated fair values and corresponding gross unrealized gains and
gross unrealized losses by major security type for available-for-sale mortgage-related securities held in the
Retained portfolio and available-for-sale non-mortgage-related securities held in the Cash and investments
portfolio at December 31, 2004 and 2003, respectively.
Table 5.1 Ì Available-For-Sale Securities
Retained portfolio
Mortgage-related securities issued by:
Amortized
Cost
December 31, 2004
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(dollars in millions)
Fair Value
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$348,034
58,922
1,677
166,738
8,751
584,122
$5,506
950
86
1,700
301
8,543
$(1,438)
(353)
(1)
(380)
(32)
(2,204)
$352,102
59,519
1,762
168,058
9,020
590,461
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ
21,668
8,098
29,766
120
Ì
120
(55)
(1)
(56)
21,733
8,097
29,830
Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$613,888
$8,663
$(2,260)
$620,291
Amortized
Cost
December 31, 2003
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(dollars in millions)
Fair Value
Retained portfolio
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$378,956
75,705
2,785
107,522
7,449
572,417
$ 7,010
1,524
134
2,152
306
11,126
$(1,540)
(385)
(1)
(265)
(26)
(2,217)
$384,426
76,844
2,918
109,409
7,729
581,326
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ
16,209
4,698
9,494
150
64
30,615
394
230
Ì
Ì
Ì
624
(7)
(4)
Ì
Ì
Ì
(11)
16,596
4,924
9,494
150
64
31,228
Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$603,032
$11,750
$(2,228)
$612,554
In 2004, 2003 and 2002, Freddie Mac received proceeds of $85,583 million, $142,167 million and
$172,964 million, respectively, from the sale of securities from its available-for-sale portfolio. The proceeds
received resulted in gross realized gains of $800 million and gross realized losses of $203 million in 2004, gross
realized gains of $1,903 million and gross realized losses of $1,077 million in 2003 and gross realized gains of
$1,575 million and gross realized losses of $257 million in 2002.
Management has determined that the $2,260 million of gross unrealized losses on the company's
available-for-sale mortgage-related and non-mortgage-related securities at December 31, 2004 are not other
178
Freddie Mac
than temporary in nature. Management conducts periodic reviews to identify and evaluate investments that
have indications of impairment. Impairment losses related to investments are recognized in earnings if fair
value is less than amortized cost and the decline is considered other than temporary. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for additional information about the
company's impairment accounting policies.
Table 5.2 below shows the fair value of available-for-sale securities in a gross unrealized loss position at
December 31, 2004 and how long they have been in that position.
Table 5.2 Ì Available-For-Sale Securities in a Gross Unrealized Loss Position at December 31, 2004
Less than 12 months
Gross
Unrealized
Losses
Fair Value
12 months or Greater
Gross
Unrealized
Losses
(dollars in millions)
Fair Value
Total
Fair Value
Gross
Unrealized
Losses
Retained portfolio
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$103,976
20,727
77
55,398
$ (713)
(134)
Ì
(268)
$34,161
9,913
52
4,323
$ (725)
(219)
(1)
(112)
$138,137
30,640
129
59,721
Obligations of states and political
subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage related-securities ÏÏÏÏÏÏ
1,025
181,203
(17)
(1,132)
591
49,040
(15)
(1,072)
1,616
230,243
$(1,438)
(353)
(1)
(380)
(32)
(2,204)
Cash and investments portfolio
Non-mortgage related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political
9,242
(51)
205
(4)
9,447
(55)
subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage related securitiesÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
582
9,824
$191,027
(1)
(52)
$(1,184)
7
212
$49,252
Ì
(4)
$(1,076)
589
10,036
$240,279
(1)
(56)
$(2,260)
At December 31, 2004, gross unrealized losses on available-for-sale securities were $2,260 million, or
approximately one percent of the fair value of such securities in an unrealized loss position, as noted in
Table 5.1 and Table 5.2. The gross unrealized losses relate to approximately 54 thousand individual lots
representing approximately 10 thousand separate securities. Freddie Mac routinely purchases multiple lots of
individual securities at diÅerent times and at diÅerent costs. The company determines gross unrealized gains
and gross unrealized losses by speciÑcally identifying investment positions at the lot level; therefore, Freddie
Mac often holds several lots of one security including both unrealized gain and unrealized loss positions,
depending upon the amortized cost of the speciÑc lot.
The following is a summary of management's analysis of why available-for-sale securities in an unrealized
loss position are not considered other than temporarily impaired:
‚ Freddie Mac securities. The unrealized losses on Freddie Mac securities are primarily a result of
movements in interest rates. The extent and duration of the decline in fair value relative to the
amortized cost have not met the company's criteria that are used to indicate other-than-temporary
impairment as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES.'' The company reviews the estimated credit exposure of the mortgages underlying
these securities. As a result of this review, management has determined that these securities are
not other than temporarily impaired. See ""NOTE 2: TRANSFERS OF SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS'' for further information on Freddie
Mac's estimates of credit exposure and credit support.
‚ Fannie Mae securities and Obligations of states and political subdivisions. The unrealized
losses on Fannie Mae securities and Obligations of states and political subdivisions are primarily a
result of movements in interest rates. The extent and duration of the decline in fair value relative
to the amortized cost have not met the company's criteria that are used to indicate other-than-
temporary impairment and no other facts or circumstances existed to suggest that the decline was
other than temporary. The issuer guarantees related to these securities have led management to
conclude that any credit risk is minimal.
179
Freddie Mac
‚ Other securities in the Retained portfolio and Asset-backed securities. The unrealized losses on
mortgage-related securities included in Other and Asset-backed securities are principally a result
of movements in interest rates. The extent and duration of the decline in fair value relative to the
amortized cost have not met the company's criteria that are used to indicate other-than-temporary
impairment. These securities are all investment grade (i.e., rated BBBÓ or better on a Standard &
Poor's (""S&P'') equivalent scale).
Table 5.3 summarizes the estimated fair values by major security type for trading securities at
December 31, 2004 and 2003, respectively.
Table 5.3 Ì Trading Securities
December 31,
2004
Fair Value
2003
Fair Value
(dollars in millions)
Retained portfolio
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,398
385
59
11,842
$17,590
586
24
18,200
Cash and investments portfolio
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by the U.S. Treasury and other U.S. government
corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
$11,842
17,266
15,052
490
9
32,817
52
479
341
437
5
1,314
$52,331
In the fourth quarter of 2004, as part of an effort to realign the company's business around its mission and
core business, Freddie Mac decided to cease its PC market making and support activities accomplished through
the company's Securities Sales & Trading Group business unit and its external Money Manager program. In
connection with ceasing these activities, the trading securities held in the Cash and investments portfolio were
disposed of by the end of 2004. During the periods these trading assets were held, they were reported at fair value
with the changes in fair value included in Gains (losses) on investment activity. Interest income on these trading
assets was included in Net interest income. The Net proceeds from purchases and sales of trading securities
reported in the company's consolidated statement of cash flows for 2004 of approximately $39.0 billion was
primarily driven by the disposition of securities classified as trading from the Cash and investments portfolio. In
connection with ceasing these activities, Freddie Mac incurred approximately $18 million of employee severance
and related costs and approximately $5 million of other expenses during the fourth quarter of 2004.
In addition, Freddie Mac's investments in mortgage-related securities held by its Securities Sales &
Trading Group business unit were generally hedged by entering into forward sales of mortgage-related
securities. When determining the fair value of these positions, the held investment was valued at the current
market, or spot, price, while the forward sale commitment was valued at the discounted sales, or forward,
price. The spot-forward diÅerence between the trading security and the forward sale commitment resulted in a
loss in Gains (losses) on investment activities that was oÅset by Net interest income on the held position. This
spot-forward diÅerence was $976 million, $981 million and $938 million in 2004, 2003, and 2002, respectively.
180
Freddie Mac
The portion of Gains (losses) on investment activity that relates to trading securities held in the trading
portfolio at December 31, 2004, 2003 and 2002 is $(240) million, $(402) million and $1,293 million,
respectively.
Issuers Greater than 10 Percent of Stockholders' Equity
At December 31, 2004, Freddie Mac held available-for-sale and trading securities with a fair value of
$59,904 million guaranteed by Fannie Mae that represented 191% of Total stockholders' equity. No other
individual issuer at the individual trust level exceeded 10 percent of Total stockholders' equity at Decem-
ber 31, 2004.
Table 5.4 summarizes, by major security type, the remaining contractual maturities and weighted average
yield of available-for-sale mortgage-related and non-mortgage-related securities at December 31, 2004.
Table 5.4 Ì Maturities and Weighted Average Yield of Available-For-Sale Securities
December 31, 2004
Amortized Cost
Fair Value
Weighted Average Yield(1)
(dollars in millions)
Retained portfolio
Total mortgage-related securities(2)
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
81
5,187
18,362
560,492
584,122
$
81
5,380
19,042
565,958
590,461
Cash and investments portfolio
Non-mortgage-related securities
Asset-backed securities(2)
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total available-for-sale securities
46
14,115
6,679
828
21,668
1,103
36
72
6,887
8,098
1,149
14,151
6,751
7,715
29,766
47
14,166
6,692
828
21,733
1,102
36
72
6,887
8,097
1,149
14,202
6,764
7,715
29,830
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,230
19,338
25,113
568,207
$613,888
1,230
19,582
25,806
573,673
$620,291
3.22%
5.31
5.66
4.54
4.58
2.68
3.27
2.76
2.48
3.08
1.81
1.95
1.94
2.04
2.01
1.84
3.27
2.75
2.09
2.79
1.94
3.82
4.87
4.50
4.49%
(1) The weighted average yield is calculated based on a yield for each individual security held at the balance sheet date. The numerator
for the individual security yield consists of the sum of (a) the year-end interest coupon rate multiplied by the year-end unpaid
principal balance and (b) the annualized amortization income or expense calculated for December 2004 (excluding any adjustments
recorded for changes in the eÅective rate). The denominator for the individual security yield consists of the year-end amortized cost
of the security excluding eÅects of other-than-temporary impairments.
(2) Information provided for mortgage-related securities and asset-backed securities is based on contractual maturities, which may not
represent their expected lives. Obligations underlying these securities may be prepaid at any time without penalty.
181
Freddie Mac
Table 5.5 presents the changes in AOCI, net of taxes, related to available-for-sale securities. The Net
unrealized holding (losses) gains, net of tax (beneÑt) expense line represents the net fair value adjustments
recorded on available-for-sale securities throughout the year after the eÅects of the company's statutory tax
rate of 35 percent. The Net reclassiÑcation adjustment for realized (gains) losses included in net income, net
of tax (expense) represents the amount of those fair value adjustments, after the eÅects of the company's
statutory tax rate of 35 percent, that have been recognized in earnings due to a sale of an available-for-sale
security or the recognition of an impairment loss. See ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES'' for further information regarding the component of AOCI related to available-
for-sale securities.
Table 5.5 Ì AOCI, Net of Taxes, Related to Available-For-Sale Securities
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized holding (losses) gains, net of tax (beneÑt) expense of
2004
Year Ended December 31,
2003
(dollars in millions)
$12,217
$ 6,349
2002
$ 4,200
$(920), $(3,107) and $4,583, respectivelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,709)
(5,770)
8,512
Net reclassiÑcation adjustment for realized (gains) losses included in
net income, net of tax (expense) of $(162), $(53) and $(267),
respectively(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(301)
$ 4,339
(98)
$ 6,349
(495)
$12,217
(1) Includes impairment losses on available-for-sale securities, where the decline in fair value is considered to be other than temporary,
of $72 million, $438 million and $422 million, net of tax for the years ended December 31, 2004, 2003 and 2002, respectively.
182
Freddie Mac
Collateral Pledged
Freddie Mac enters into several types of secured Ñnancing transactions, including interest-rate swap,
repurchase and resale agreements. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES'' for more information regarding secured Ñnancing transactions.
Freddie Mac's counterparties are required to pledge collateral for reverse repurchase transactions and
most interest-rate swap agreements after giving consideration to collateral posting thresholds, which are
generally related to a counterparty's credit rating. Even though it is Freddie Mac's practice not to repledge
assets held as collateral, based on master agreements, a portion of the collateral can be repledged. At
December 31, 2004 and 2003, the fair value amount of collateral held by Freddie Mac under secured lending
transactions and interest-rate swap agreements that was available for repledging was approximately $3 million
and $8,200 million, respectively. This decrease was primarily a result of the company ceasing operations of its
PC market-making and support activities accomplished through its Securities Sales & Trading Group business
unit and external Money Manager program during the fourth quarter of 2004.
Freddie Mac is also required to pledge collateral for margin requirements with some custodians in
connection with secured Ñnancing and daily trade activities. Based on agreements between Freddie Mac and
the custodians, as illustrated in Table 5.6, some collateral may be permitted by contract to be repledged by the
custodian. Freddie Mac has parenthetically disclosed on the consolidated balance sheets the fair value of
assets pledged as collateral with the right to repledge. Table 5.6 summarizes all assets pledged as collateral by
the company including assets that the secured party can repledge and those that cannot be repledged.
Table 5.6 Ì Collateral Pledged
December 31,
2004
(dollars in millions)
2003
Assets pledged with ability for secured party to repledge (parenthetically
disclosed on the consolidated balance sheets)
Available for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets pledged without ability for secured party to repledge
Available for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets pledged ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 194
Ì
194
221
Ì
221
$ 415
$282
61
343
558
28
586
$929
Cash and Cash Equivalents
Table 5.7 summarizes the components of Cash and cash equivalents for the years ended December 31,
2004 and 2003, respectively.
Table 5.7 Ì Cash and Cash Equivalents
Interest-bearing(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest-bearing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2003
2004
(dollars in millions)
$35,199
54
$35,253
$23,100
42
$23,142
(1) Includes collateral that Freddie Mac holds when its exposure to its derivative counterparties exceeds mutually agreed upon limits.
Interest earned on the collateral is paid to the counterparties at the contractual rate, while Freddie Mac retains any interest earned
above the contractual rate.
183
Freddie Mac
NOTE 6: LOAN LOSS RESERVES
Freddie Mac maintains separate loan loss reserves for mortgage loans in the Retained portfolio that it
classiÑes as held-for-investment and for credit-related losses associated with certain mortgage loans that
underlie PCs held by third parties.
Table 6.1 summarizes loan loss reserve activity during 2004, 2003 and 2002.
Table 6.1 Ì Detail of Loan Loss Reserves Balance
2004
December 31,
2003
2002
Reserves related to:
Reserves related to:
Reserves related to:
Retained
Mortgages Outstanding
PCs
Total Loan
Loss
Retained
Reserves Mortgages Outstanding
PCs
Total Loan
Loss
Retained
Reserves Mortgages Outstanding
PCs
Total Loan
Loss
Reserves
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision (beneÑt) for credit
losses(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in
accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers-out during the
period(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other transfers, net, during the
period(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 174
$125
$ 299
$ 177
(dollars in millions)
$ 88
$ 265
$ 103
$121
$ 224
111
(300)
160
Ì
Ì
(31)
$ 114
32
Ì
Ì
Ì
(20)
13
$150
143
(300)
160
Ì
(20)
76
(224)
145
Ì
Ì
(81)
Ì
Ì
110
(11)
(5)
(224)
145
110
(11)
146
(171)
99
Ì
Ì
(24)
Ì
Ì
Ì
(9)
122
(171)
99
Ì
(9)
(18)
$ 264
Ì
$ 174
19
$125
19
$ 299
Ì
$ 177
Ì
$ 88
Ì
$ 265
(1) Freddie Mac reclassiÑed certain income for the full years ended December 31, 2003 and 2002 from REO operations income
(expense) to Provision (beneÑt) for credit losses to conform with the 2004 presentation. In addition, it reclassiÑed certain expenses
related to uncollectible interest on PCs held by third parties from Management and guarantee income to Provision (beneÑt) for
credit losses to conform with the 2004 presentation. This resulted in a $15 million decrease and a $6 million decrease in Provision
(beneÑt) for credit losses during 2003 and 2002, respectively. As a result of these reclassiÑcations, it increased recoveries by
$26 million and $15 million for the full years ended December 31, 2003 and 2002, respectively.
(2) It is Freddie Mac's practice to purchase mortgage loans from the pools that underlie PCs principally at the point the mortgage loan is
identiÑed as being 120 days past due. Upon repurchase, that portion of amounts classiÑed in Reserve for guarantee losses on
Participation CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-for-investment.
since all credit losses related to oÅ-balance sheet PCs are preceded by the purchase of a delinquent mortgage loan from the PC pool,
all charge-oÅs or recoveries are presented in the Retained Mortgages columns above.
(3) On January 1, 2003, $110 million of recognized guarantee obligations that was attributable to estimated incurred losses on
outstanding PCs or Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(4) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured
Securities which is included as an oÅset to the related receivable balance within Accounts and other receivables, net on the
consolidated balance sheets.
(5) Represents the reclassiÑcation of the portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that
corresponds to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition
of a guarantee obligation. In addition, the 2004 amount includes a reduction of loan loss reserves of $31 million related to prior period
adjustments for which the related income was recorded in Other income.
Impaired Loans
Total loan loss reserves, as presented in ""Table 6.1 Ì Detail of Loan Loss Reserves Balance,'' consists of
a speciÑc valuation allowance related to impaired loans, which are presented in Table 6.2, and an additional
reserve for other probable incurred losses which equaled $261 million, $289 million and $240 million at
December 31, 2004, 2003 and 2002, respectively. The company's recorded investment in impaired loans and
the related valuation allowance are summarized in Table 6.2.
184
Freddie Mac
Table 6.2 Ì Impaired Loans(1)
2004
December 31,
2003
2002
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
(dollars in millions)
Impaired loans having:
Related-valuation allowance ÏÏÏÏÏÏÏÏÏÏ
No related-valuation allowance(3)ÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
46
2,261
$2,307
$(3)
Ì
$(3)
$
43
2,261
$2,304
$
60
2,309
$2,369
$(10)
Ì
$(10)
$
50
2,309
$2,359
$ 169
2,077
$2,246
$(25)
Ì
$(25)
$ 144
2,077
$2,221
(1) Single-family impaired loans include performing and non-performing TDRs. Multifamily impaired loans are deÑned as performing
and non-performing TDR loans, loans 60 days or more delinquent except for certain credit enhanced loans and certain mortgage
loans with real estate collateral values less than the outstanding unpaid principal balances. For more details on multifamily impaired
loans, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''
(2) Recorded Investment includes the unpaid principal balance of mortgage loans plus other amortized basis adjustments, which are
modiÑcations to their carrying value.
(3) Impaired loans with no related valuation allowance primarily represent performing single-family TDR loans.
For the years ended December 31, 2004, 2003 and 2002, the average recorded investment in impaired
loans was $2,310 million, $2,330 million and $2,029 million, respectively.
Interest income on multifamily impaired loans is recognized on an accrual basis for loans performing
under the original or restructured terms and on a cash basis for non-performing loans, which collectively
totaled approximately $13 million, $16 million and $22 million for the years ended December 31, 2004, 2003
and 2002, respectively. For single-family performing and non-performing loans, Freddie Mac recognizes
interest income on an accrual basis and establishes reserves for estimated accrued, but uncollectible, interest
for these loans as of the consolidated balance sheet dates. Gross interest income on impaired single-family
loans totaled $157 million, $160 million and $129 million for the years ended December 31, 2004, 2003 and
2002, respectively.
Delinquency Rates
Table 6.3 summarizes the delinquency rates for Freddie Mac's Total mortgage portfolio, excluding
non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is backed by
Ginnie Mae CertiÑcates at December 31, 2004, 2003 and 2002.
Table 6.3 Ì Delinquency Performance(1)
Delinquencies, end of period
Single-family:(2)
Credit-enhanced portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-credit-enhanced portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2003
2002
2004
2.75%
0.24%
0.73%
0.06%
2.96%
0.27%
0.86%
0.05%
2.07%
0.28%
0.77%
0.13%
(1) Based on the Total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured
Securities that is backed by Ginnie Mae CertiÑcates.
(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.
(3) Includes alternative collateral deals.
(4) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.
185
Freddie Mac
Table 7.1 provides a summary of Freddie Mac's REO activity.
NOTE 7: REAL ESTATE OWNED
Freddie Mac obtains REO properties when it is the highest bidder at foreclosure sales of properties that
collateralize non-performing single-family and multifamily mortgage loans owned by the company. Upon
acquiring single-family properties, Freddie Mac establishes a marketing plan to sell the property as soon as
practicable by either listing it with a sales broker or by other means, such as arranging a real estate auction.
Upon acquiring multifamily properties, Freddie Mac may operate them with third-party property-manage-
ment Ñrms for a period to stabilize value and then sell the properties through commercial real estate brokers.
For each of the three years ended December 31, 2004, the weighted average holding period for single-family
disposed REO properties was less than one year and the weighted average holding period for multifamily
disposed REO properties was about two years.
Table 7.1 Ì Real Estate Owned
REO,
Gross
Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
Valuation
Allowance
(dollars in millions)
$
$ (58)
(70)
52
(76)
(93)
53
(116)
(95)
85
$(126)
505
1,197
(1,032)
670
1,663
(1,422)
911
1,641
(1,685)
867
$
REO,
Net
447
1,127
(980)
594
1,570
(1,369)
795
1,546
(1,600)
741
Freddie Mac recognized losses of $67 million, $50 million, and $5 million on REO dispositions for the
years ended December 31, 2004, 2003 and 2002, respectively, which are included in REO operations income
(expense). Valuation allowance includes impairment write-downs on fair value of assets and selling expenses
related to REO property holdings. This allowance is shown as part of REO operations income (expense) on
the consolidated statements of income. Freddie Mac reclassiÑed certain components of REO operations
income (expense) for the years ended December 31, 2003 and 2002 to (Provision) beneÑt for credit losses to
conform with the 2004 presentation.
186
Freddie Mac
NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS
Debt securities are classiÑed as either Due within one year or Due after one year based on their remaining
contractual maturity. Table 8.1 summarizes the balances and eÅective interest rates at December 31, 2004 and
2003 for debt securities, as well as subordinated borrowings.
Table 8.1 Ì Total Debt Securities, Net
Senior debt, due within one year:
Short-term debt securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior and subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Balance,
Net(1)
December 31,
2003
Balance,
EÅective
Rate(2)
Net(1)
(dollars in millions)
EÅective
Rate(2)
$196,639
85,664
282,303
443,772
5,622
449,394
$731,697
2.05% $212,035
83,227
3.33
295,262
2.44
4.36
6.15
4.38
438,738
5,613
444,351
$739,613
1.11%
3.61
1.81
4.34
6.15
4.36
(1) Includes unamortized discounts and premiums. Current portion of long-term debt, and Senior and subordinated debt, due after one
year, also include foreign-currency-related and hedging-related basis adjustments.
(2) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums
and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
(3) EÅective rate previously reported for December 31, 2003 has been revised.
Freddie Mac Ñnances the purchase of mortgage loans and mortgage-related securities primarily through
the issuance of Senior debt and Subordinated debt.
Senior Debt, Due Within One Year
As indicated in Table 8.2, a majority of Senior debt, due within one year (excluding current portion of
long-term debt) consisted of discount notes, paying only principal at maturity. Discount notes and medium-
term notes are unsecured general obligations. Certain medium-term notes that have original maturities of one
year or less are classiÑed as Short-term debt securities. Securities sold under agreements to repurchase are
eÅectively collateralized borrowing transactions where Freddie Mac sells securities with an agreement to
repurchase such securities. These agreements require the underlying securities to be delivered to the dealers
who arranged the transactions. Federal funds purchased are unsecuritized borrowings from commercial banks
that are members of the Federal Reserve System.
187
Freddie Mac
Table 8.2 provides additional information related to Freddie Mac's debt securities due within one year.
Table 8.2 Ì Senior Debt, Due Within One Year
At December 31,
Weighted
Average
Balance, Net EÅective Rate(1)
Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchase and Federal funds purchased
Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ
$180,198
162
Ì
16,279
196,639
85,664
$282,303
2.04%
2.51
Ì
2.24
2004
Average Outstanding
During the Year
Weighted
Average
EÅective Rate(3)
Maximum
Balance, Net
Outstanding at Any
Month End
Balance, Net(2)
(dollars in millions)
$184,834
4,289
801
13,549
1.40%
1.31
1.37
1.36
$212,715
5,320
3,046
16,279
2003
Average Outstanding
During the Year
At December 31,
Weighted
Average
Balance, Net EÅective Rate(1)
$188,309
5,300
1.12%
1.18
Balance, Net(2)
(dollars in millions)
$207,374
1,243
Weighted
Average
EÅective Rate(3)
Maximum
Balance, Net
Outstanding at Any
Month End
1.21%
1.32
$264,370
5,300
0.96
1.02
2,283
11,694
0.94
1.13
8,296
16,082
1,611
16,082
733
212,035
83,227
$295,262
Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchase and Federal funds
purchased(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap collateral obligations(6) ÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ
(1) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums
and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
(2) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on the
consolidated balance sheets.
(3) Represents the approximate weighted average eÅective rate during the period, which includes the amortization of discounts or
premiums and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
(4) Maximum Balance, Net Outstanding at Any Month End for 2003 has been revised to conform with the 2004 presentation.
(5) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2003 have been revised for
Securities sold under agreements to repurchase and Federal funds purchased to conform with the 2004 presentation.
(6) Weighted Average EÅective Rate at December 31, 2003 has been revised to conform with the 2004 presentation.
188
Freddie Mac
Senior and Subordinated Debt, Due After One Year
Table 8.3 summarizes Freddie Mac's Senior and Subordinated debt, due after one year at December 31,
2004 and 2003.
Table 8.3 Ì Senior and Subordinated Debt, Due After One Year
December 31,
2004
2003
Contractual
Maturity(1) Outstanding(2)
Balance
Interest
Rates
Balance
Outstanding(2)
Interest
Rates
(dollars in millions)
Senior debt, due after one year(3):
Fixed-rate:
Medium-term notes Ì Callable(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2029
Medium-term notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2028
U.S. dollar-denominated Reference Notes»
$180,957
8,587
1.63% - 8.05%
1.00% - 7.69%
$159,939
6,460
1.30% - 9.00%
1.00% - 8.12%
securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2032
4Reference Notes» securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2014
Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
N/A
167,622
28,967
Ì
1.88% - 7.00%
3.50% - 5.75%
N/A
181,901
24,954
6
1.50% - 7.00%
3.50% - 5.75%
12.10% - 12.90%
Floating-rate:
Zero-coupon(8):
Medium-term notes Ì Callable(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2030
Medium-term notes Ì Non-callable(5)(7) ÏÏÏÏÏÏÏÏÏÏ 2007 - 2026
Medium-term notes Ì Callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2014 - 2034
Medium-term notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2034
Foreign-currency-related and hedging-related basis
adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total senior debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year:
Fixed-rate(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2011 - 2016
Zero-coupon(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏ
Total senior and subordinated debt, due after one year ÏÏ
2019
33,041
1,207
7,078
1,968
14,345
443,772
5,547
75
5,622
$449,394
Various
Various
0%
0%
5.25% - 8.25%
0%
28,412
16,440
6,608
1,723
12,295
438,738
5,545
68
5,613
$444,351
Various
Various
0%
0%
5.25% - 8.25%
0%
(1) Represents contractual maturities at December 31, 2004.
(2) Represents unpaid principal balance of long-term debt securities and subordinated borrowings, net of associated discounts or
premiums.
(3) For debt denominated in a currency other than the U.S. dollar, the outstanding balance is based on the exchange rate at the date of
the debt issuance. Subsequent changes in exchange rates are reÖected in Foreign-currency-related and hedging-related basis
adjustments.
(4) Includes callable Estate NotesSM and Freddie NotesSM of $11,850 million and $11,041 million at December 31, 2004 and 2003,
respectively. These debt instruments represent medium-term notes that permit persons acting on behalf of deceased beneÑcial
owners to require Freddie Mac to repay principal prior to their contractual maturity date.
(5) Amounts for 2003 have been revised to conform with the 2004 presentation.
(6) Includes callable Estate NotesSM and Freddie NotesSM of $6,142 million and $4,132 million at December 31, 2004 and 2003,
respectively. See related footnote (4) above concerning the nature of these debt instruments.
(7) Includes medium-term notes of $800 million and $700 million at December 31, 2004 and 2003, respectively, which are repayable in
whole or in part at the option of the beneÑcial owner, acting through the holder, on or after November 22, 2002 and prior to
November 20, 2007 at 100% of the principal amount plus accrued interest.
(8) Balance outstanding is net of associated discounts of $32,649 million and $37,870 million as of December 31, 2004 and 2003,
respectively.
(9) Includes callable subordinated debt of $3,491 million and $3,490 million at December 31, 2004 and 2003, respectively.
189
Freddie Mac
A portion of Freddie Mac's long-term debt is callable. Callable debt gives Freddie Mac the option to
redeem the debt security on one or more speciÑed call dates or at any time on or after a speciÑed call date.
Table 8.4 summarizes the maturities, balances and eÅective interest rates at December 31, 2004 for callable
debt (including current portion of callable debt and callable debt due after one year) by estimated call period.
Table 8.4 Ì Callable Debt, Due After One Year (including current portion of callable debt)
Estimated Call Period
Contractual
Maturity
Balance
Outstanding(1)
(dollars in millions)
EÅective
Rate(2)
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 - 2022
2006 - 2021
2007 - 2019
2008 - 2019
2009 - 2019
2010 - 2034
$ 20,255
39,316
37,425
23,953
26,798
91,512
$239,259
2.84%
2.63
3.15
3.46
4.03
5.09
3.91%
(1) Represents unpaid principal balance of callable long-term debt securities and subordinated borrowings. However, callable zero-
coupon debt is reÖected on a net basis (i.e., net of associated discounts of $28,825 million) and its estimated call period is based on
contractual maturity.
(2) Represents the weighted-average eÅective rate at the end of the period, which includes the amortization of discounts or premiums
and issuance costs but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.
Table 8.5 summarizes the contractual maturities of long-term debt securities (including current portion
of long-term debt) and subordinated borrowings outstanding at December 31, 2004, assuming callable debt is
paid at contractual maturity.
Table 8.5 Ì Senior and Subordinated Debt, Due After One Year (including current portion of
long-term debt)
Annual Maturities
2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net premiums, discounts, and foreign-currency-related and hedging-related basis
adjustments(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractual
Maturity(1)(2)
(dollars in millions)
$ 83,625
83,447
64,838
46,092
55,574
218,131
551,707
(16,649)
Senior and subordinated debt, due after one year, including current portion of long-
term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$535,058
(1) Represents unpaid principal balance of long-term debt securities and subordinated borrowings.
(2) For debt denominated in a currency other than the U.S. dollar, the outstanding balance is based on the exchange rate at the date of
the debt issuance. Subsequent changes in exchange rates are reÖected in Net premiums, discounts, and foreign-currency-related and
hedging-related basis adjustments.
Freddie Mac records gains and losses on debt repurchases that are accounted for as extinguishments of
debt based on the diÅerence between the principal amount of the debt securities repurchased (adjusted for
deferred premiums, discounts, and hedging gains and losses) and current market prices, and the write-oÅ of
related deferred debt issuance costs. Freddie Mac incurred pre-tax losses of $327 million, $1,775 million and
$674 million on the repurchase of approximately $14.5 billion, $27.3 billion and $20.3 billion in principal
amount of debt outstanding in 2004, 2003 and 2002, respectively.
190
Freddie Mac
NOTE 9: STOCKHOLDERS' EQUITY
Preferred Stock
During 2004 and 2003, Freddie Mac completed no preferred stock oÅerings (see ""Table 9.1 Ì Preferred
Stock'' for more information). All 17 classes of preferred stock outstanding at December 31, 2004 have a par
value of $1 per share. The company has the option to redeem these shares, on speciÑed dates, at their
redemption price plus dividends accrued through the redemption date. In addition, all 17 classes of preferred
stock are perpetual and non-cumulative, and carry no signiÑcant voting rights or rights to purchase additional
Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged
to Additional paid-in capital.
Table 9.1 provides a summary of Freddie Mac's preferred stock outstanding at December 31, 2004.
Table 9.1 Ì Preferred Stock
Issue Date
Shares
Total
Par
Authorized Outstanding Value
(shares and dollars in millions, except redemption price per share)
Redemption
Price per Outstanding
Balance(1)
Shares
Share
Total
Redeemable(2)
On or After
NYSE
Symbol(3)
1996 Variable-rate(4) ÏÏÏ
April 26, 1996
June 3, 1997
6.14% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
October 27, 1997
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 23, 1998
1998 Variable-rate(6) ÏÏÏ September 23 and 29, 1998
September 23, 1998
5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
October 28, 1998
5.3% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 19, 1999
5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
July 21, 1999
5.79% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1999 Variable-rate(7) ÏÏÏ
November 5, 1999
2001 Variable-rate(8) ÏÏÏ
January 26, 2001
2001 Variable-rate(9) ÏÏÏ
March 23, 2001
March 23, 2001
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
May 30, 2001
6% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 Variable-rate(10)ÏÏÏ
May 30, 2001
October 30, 2001
5.7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
January 29, 2002
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.00
12.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
92.17
5.00
12.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
92.17
$ 5.00
12.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
$92.17
$50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
$ 250
600
150
400
220
400
200
150
250
287
325
230
173
173
201
300
300
$4,609
June 30, 2001 FRE.prB
June 30, 2002 FRE.prD
October 27, 1998
(5)
March 31, 2003 FRE.prF
September 30, 2003 FRE.prG
September 30, 2003 FRE.prH
October 30, 2000
March 31, 2004
(5)
(5)
June 30, 2009 FRE.prK
December 31, 2004 FRE.prL
March 31, 2003 FRE.prM
March 31, 2003 FRE.prN
March 31, 2011 FRE.prO
June 30, 2006 FRE.prP
June 30, 2003 FRE.prQ
December 31, 2006 FRE.prR
March 31, 2007
(5)
(1) Amounts stated at redemption value.
(2) As long as the capital monitoring framework established by the OÇce of Federal Housing Enterprise Oversight (""OFHEO'') in
January 2004 remains in eÅect, any preferred stock redemption will require prior approval by OFHEO. See ""NOTE 10:
REGULATORY CAPITAL'' for more information.
(3) Preferred Stock is listed on the New York Stock Exchange (""NYSE''), unless otherwise noted.
(4) The dividend rate resets quarterly and is equal to the sum of the three-month LIBOR plus one percent divided by 1.377, and is
capped at 9.00 percent.
(5) Not listed on any exchange.
(6) The dividend rate resets quarterly and is equal to the sum of the three-month LIBOR rate plus one percent divided by 1.377, and is
capped at 7.50 percent.
(7) Initial dividend rate is 5.97 percent per annum through December 31, 2004. Dividend rate resets on January 1, 2005 and on
January 1 every Ñve years thereafter based on a Ñve-year constant maturity Treasury (""CMT'') rate which is capped at
11.00 percent. Optional redemption on December 31, 2004 and on December 31 every Ñve years thereafter.
(8) Dividend rate resets on April 1 every two years after April 1, 2003 based on the two-year CMT rate plus 0.10 percent and is capped
at 11.00 percent. Optional redemption on March 31, 2003 and on March 31 every two years thereafter.
(9) Dividend rate resets on April 1 every year based on the 12-month LIBOR rate minus 0.20 percent and is capped at 11.00 percent.
Optional redemption on March 31, 2003 and on March 31 every year thereafter.
(10) Dividend rate resets on July 1 every two years after July 1, 2003 based on the two-year CMT rate plus 0.20 percent and is capped at
11.00 percent. Optional redemption on June 30, 2003 and on June 30 every two years thereafter.
Common Stock Repurchase Program
In September 1997, Freddie Mac's Board of Directors authorized the company to repurchase up to Ñve
percent, or approximately 34 million shares, of its common stock outstanding as of September 5, 1997. Under
this authorization, Freddie Mac repurchased no outstanding shares in 2004 and 2003 and 9.1 million
outstanding shares in 2002. At December 31, 2004, approximately 13 million common shares remained
available for repurchase under this authorization. Common stock repurchases are considered (assuming
current Ñnancial reporting) when Freddie Mac is adequately capitalized and other more attractive investment
opportunities are not available. Under OFHEO's January 29, 2004 framework for monitoring Freddie Mac's
capital, Freddie Mac is currently required to obtain prior written approval from the Director of OFHEO before
engaging in certain capital transactions, including the repurchase of any shares of common stock. See
""NOTE 10: REGULATORY CAPITAL'' for more information.
191
Freddie Mac
NOTE 10: REGULATORY CAPITAL
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (""GSE Act'') established
risk-based, minimum and critical capital standards for Freddie Mac and Fannie Mae.
The risk-based capital standard determines the amount of capital that Freddie Mac must hold to absorb
projected losses resulting from future adverse interest-rate and credit-risk conditions speciÑed by the GSE
Act, plus 30 percent mandated by the GSE Act to cover management and operations risk. The risk-based
capital standard is based on stress test results calculated under two interest-rate scenarios prescribed by the
GSE Act, one in which 10-year Treasury yields rise by as much as 75 percent (up-rate scenario) and one in
which they fall by as much as 50 percent (down-rate scenario). The credit component of the stress tests
simulates the performance of Freddie Mac's mortgage portfolio based on loss rates for the Benchmark Region.
The criteria for the Benchmark Region are set forth by the GSE Act and are intended to capture the region
that experienced the highest historical rates of default and severity of mortgage losses for two consecutive
origination years. The risk-based capital requirement is the amount of Total capital needed to absorb the stress
test losses in the most adverse scenario, plus 30 percent of that amount to cover management and operations
risk. Total capital includes Core capital and general reserves for mortgage and foreclosure losses and any other
amounts available to absorb losses that OFHEO includes by regulation. Core capital consists of the par value
of outstanding common stock (common stock issued less common stock held in treasury), the par value of
outstanding perpetual noncumulative preferred stock, additional paid-in capital and retained earnings, as
determined in accordance with GAAP.
The minimum capital standard requires Freddie Mac to hold an amount of Core capital that is generally
the sum of 2.50 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and
approximately 0.45 percent of outstanding mortgage-related securities guaranteed by Freddie Mac and other
aggregate oÅ-balance sheet obligations. As discussed below, in 2004 OFHEO implemented a framework for
monitoring Freddie Mac's capital adequacy, which includes a targeted capital surplus of 30 percent of its
minimum capital requirement.
The critical capital standard requires Freddie Mac to hold an amount of Core capital that is generally the
sum of 1.25 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and
approximately 0.25 percent of outstanding mortgage-related securities guaranteed by Freddie Mac and other
aggregate oÅ-balance sheet obligations.
OFHEO is required to classify Freddie Mac's capital adequacy not less than quarterly.
To be classiÑed as ""adequately capitalized,'' Freddie Mac must meet both the risk-based and minimum
capital standard. If Freddie Mac fails to meet the risk-based capital standard, it cannot be classiÑed higher
than ""undercapitalized.'' Under OFHEO regulations, the company will be deemed ""signiÑcantly undercapital-
ized'' if it fails to meet the minimum capital requirement but exceeds the critical capital requirement. If
Freddie Mac fails to meet the critical capital standard, Freddie Mac must be classiÑed as ""critically
undercapitalized.'' OFHEO retains discretion to reduce Freddie Mac's capital classiÑcation by one level if
OFHEO determines that Freddie Mac is engaging in conduct not approved by OFHEO that could result in a
rapid depletion of Core capital or that the value of property subject to mortgage loans held or secured by
Freddie Mac has decreased signiÑcantly.
OFHEO has never classiÑed Freddie Mac as other than ""adequately capitalized,'' the highest possible
classiÑcation. When Freddie Mac is classiÑed as adequately capitalized, the company can generally pay a
dividend on its common or preferred stock without prior OFHEO approval so long as the payment would not
decrease Total capital to an amount less than its risk-based capital requirement and would not decrease the
company's Core capital to an amount less than the minimum capital requirement.
If Freddie Mac were classiÑed as undercapitalized, the company would be prohibited from making a
capital distribution (which includes common and preferred dividend payments, common stock repurchases
and preferred stock redemptions) that would decrease its Core capital to an amount less than the minimum
capital requirement. Freddie Mac also would be required to submit a capital restoration plan for OFHEO
approval, which could adversely aÅect its ability to make capital distributions.
192
Freddie Mac
If Freddie Mac were classiÑed as signiÑcantly undercapitalized, the company would be able to make a
capital distribution only if OFHEO determined that the distribution satisÑed certain statutory standards.
Under these circumstances, Freddie Mac would be prohibited from making any capital distribution that would
decrease its Core capital to less than the critical capital level, and OFHEO also could take action to limit
Freddie Mac's growth, require it to acquire new capital or restrict it from activities that create excessive risk.
Freddie Mac also would be required to submit a capital restoration plan for OFHEO approval, which could
adversely aÅect its ability to make capital distributions.
If Freddie Mac were classiÑed as critically undercapitalized, OFHEO would be required to appoint a
conservator for the company unless OFHEO made a written Ñnding that it should not do so and the Secretary
of the Treasury concurred in that determination.
Factors that may adversely aÅect the adequacy of Freddie Mac's regulatory capital include declines in
GAAP income, increases in the company's risk proÑle, and changes in the economic environment, such as
large interest-rate or implied volatility moves or house price declines. In particular, interest-rate levels or
implied volatility can aÅect the amount of Freddie Mac's Core capital, even if Freddie Mac is economically
well hedged against interest-rate changes, because certain gains or losses are recognized through GAAP
earnings while other oÅsetting gains or losses may not be.
Table 10.1 summarizes the company's regulatory capital requirements and surpluses at December 31,
2004 and 2003. Amounts for 2004 are as currently reported to OFHEO.
Table 10.1 Ì Regulatory Capital Requirements
December 31,
2004
2003
(dollars in millions)
Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital surplus(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$24,131
35,009
10,878
12,308
35,009
22,701
11,108
34,691
23,583
$23,774
32,985
9,211
12,097
32,985
20,888
5,426
33,436
28,010
(1) OFHEO is the authoritative source of the capital calculations that underlie the company's capital classiÑcations. For 2004, Freddie
Mac amended the minimum and critical capital requirements, core capital and surplus amounts previously reported to OFHEO to
incorporate adjustments reÖected in Freddie Mac's consolidated Ñnancial statements. The 2004 minimum and critical capital
requirements, core capital and surplus amounts are estimates and have been revised to reÖect changes related to a closing agreement
entered into with the Internal Revenue Service (""IRS'') concerning the company's REIT subsidiaries. See ""NOTE 14: INCOME
TAXES'' for further information.
(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par
value of outstanding perpetual noncumulative preferred stock, additional paid-in capital and retained earnings, as determined in
accordance with GAAP.
(3) Risk-based and Total capital amounts are those calculated by OFHEO prior to the issuance of Freddie Mac's 2004 and 2003
Ñnancial results. OFHEO determined not to recalculate the risk-based capital amounts given that the minimum capital requirement
remained the determining requirement for Freddie Mac's classiÑcation as adequately capitalized.
(4) Total capital includes Core capital and general reserves for mortgage and foreclosure losses.
On January 29, 2004, OFHEO announced the creation of a framework for monitoring Freddie Mac's
capital due to the temporarily higher operational risk arising from the company's current inability to produce
timely Ñnancial statements in accordance with GAAP. The framework includes a target capital surplus of
30 percent of Freddie Mac's minimum capital requirement, subject to certain conditions and variations;
weekly monitoring; and prior approval of certain capital transactions, to verify that appropriate levels of capital
are maintained. At December 31, 2004, Freddie Mac's estimated surplus in excess of the target surplus was
approximately $3.6 billion. Had the target capital surplus been in eÅect at December 31, 2003, Freddie Mac's
estimated surplus in excess of the target surplus would have been approximately $2.1 billion.
193
Freddie Mac
A failure by Freddie Mac to meet the target capital surplus would result in discussions between Freddie
Mac and OFHEO concerning the reason for such failure. If OFHEO were to determine, based on these
discussions and weekly monitoring, that Freddie Mac had unreasonably deviated from the framework
established by OFHEO, the company would be required to submit a remedial plan or take other remedial
steps.
In addition, Freddie Mac is required to obtain prior written approval from the Director of OFHEO before
engaging in certain capital transactions, including the repurchase of any shares of common stock, redemption
of any preferred stock or payment of preferred stock dividends above stated contractual rates. Freddie Mac
also must submit a written report to the Director of OFHEO after the declaration, but before the payment, of
any dividend on its common stock. The report must contain certain information on the amount of the
dividend, the rationale for the payment and the impact on Freddie Mac's capital surplus.
OFHEO indicated that this framework is temporary and will be lifted when the Director of OFHEO
determines that it should expire, based on Freddie Mac's reduction of operational risks, resumption of timely
regulatory reporting that complies with GAAP and certain other factors.
Management believes that this monitoring framework will provide OFHEO with a mechanism to ensure
that the company manages its business with continued prudence and appropriate levels of capital, taking into
account that the company is not currently able to produce timely Ñnancial statements.
194
Freddie Mac
NOTE 11: STOCK-BASED COMPENSATION
Freddie Mac has three stock-based compensation plans under which grants are currently being made: the
ESPP, as amended and restated in 2004, the 2004 Stock Compensation Plan (the ""2004 Employee Plan'')
and the 1995 Directors' Stock Compensation Plan, as amended and restated in 1998 (""Directors' Plan'').
Prior to the stockholder approval of the 2004 Employee Plan on November 4, 2004, employee stock-based
compensation was awarded in accordance with the terms of the stockholder-approved 1995 Stock Compensa-
tion Plan (the ""1995 Employee Plan''). Freddie Mac collectively refers to the 2004 Employee Plan and 1995
Employee Plan as the ""Employee Plans.''
Common stock delivered under these plans may be shares currently held by Freddie Mac as treasury
stock, shares purchased by Freddie Mac in the open market or authorized but previously unissued shares.
ESPP: Freddie Mac has established a stockholder-approved ESPP that is qualiÑed under Internal
Revenue Code (""IRC'') Section 423. Under the ESPP, substantially all full-time and part-time employees
may purchase shares of common stock at a discount. During 2004, 2003 and 2002, the annual maximum
market value of stock available for purchase was $20,000 per employee as determined on the subscription
(grant) date. For grants made through 2004, the purchase price was equal to 85 percent of the average price of
the stock on the subscription (grant) date or the average price of the stock on the purchase (exercise) date,
whichever was lower.
The maximum number of shares of common stock authorized to be granted to employees under the
ESPP prior to the eÅective date of the 2004 amendment and restatement was 12 million shares. At
December 31, 2004, approximately 8.8 million shares had been issued under the ESPP and approximately
3.2 million shares remained available for grant. Grants under the ESPP in eÅect prior to its amendment and
restatement ceased pursuant to its terms on December 31, 2004. On November 4, 2004, stockholders approved
the amendment and restatement of the ESPP eÅective as of January 1, 2005. The restated ESPP authorizes
granting 3.6 million shares in addition to the remaining 3.2 million shares discussed above. The amended and
restated ESPP changes the expiration date to January 1, 2015.
Table 11.1 provides a summary of activity related to the ESPP.
Table 11.1 Ì Summary of ESPP Activity
Year Ended December 31,
2003
2002
2004
Shares pledged(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value on grant date(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares purchased(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase price(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1) Beginning in August 2003, employees pledged to purchase shares every three months with the purchase occurring three months later.
Prior to August 2003, employees pledged to purchase shares on August 1 with purchase occurring on July 31 of the following year.
As such, a portion of the shares purchased in a given year may relate to shares pledged in the previous year.
1,000,370
13.53
351,629
51.74
250,899
11.23
244,625
50.53
145,866
10.72
355,485
41.76
$
$
$
$
$
$
(2) Represents the fair value of ESPP options granted to employees. The 2004 fair value is the weighted average of the fair values on four
separate grant dates. The 2003 fair value is the weighted average of the fair values on two separate grant dates and the 2002 fair value
is the fair value on a single grant date.
(3) The 2004 purchase price is the weighted average of the purchase prices on four separate purchase dates. The 2003 purchase price is
the weighted average of the purchase prices on two separate purchase dates and the 2002 purchase price is the purchase price on a
single purchase date.
Employee Plans: Under the 2004 Employee Plan, Freddie Mac is permitted to grant to employees stock-
based awards, including stock options with dividend equivalent rights, Restricted Stock Units (""RSUs'') with
dividend equivalent rights, restricted stock and Stock Appreciation Rights (""SARs''). Such awards are
generally forfeitable for at least one year after the date of grant, with vesting provisions contingent upon service
requirements. In addition, Freddie Mac has the right to impose performance conditions with respect to any
awards under the 2004 Employee Plan. As of December 31, 2004, no SARs had been granted under the
Employee Plans.
‚ Stock options granted under the Employee Plans allow for the purchase of Freddie Mac's common
stock at an exercise price equal to the fair value of the common stock on the grant date. Options
generally may be exercised for a period of 10 years from the grant date, subject to a vesting schedule
195
Freddie Mac
commencing on the grant date. Dividend equivalent rights provide participants with the right to
receive, at the time stock options are exercised or upon expiration, an amount equal to the accumulated
dividends declared on the stock from the date the options were granted.
‚ Each RSU entitles the participant to receive one share of common stock at a speciÑed future date.
RSUs do not have voting rights, but do have dividend equivalent rights, which are paid to the RSU
holder as and when dividends on common stock are declared.
‚ Restricted stock entitles participants to all the rights of a stockholder, including dividends, except that
the shares awarded are subject to a risk of forfeiture and may not be disposed of by the participant until
the end of the restriction period established by Freddie Mac at the grant of the restricted stock.
The maximum number of shares of common stock authorized to be granted to employees under the 2004
Employee Plan is 12.9 million shares, which includes approximately 2.8 million remaining shares plus any
future forfeited, cancelled or surrendered shares from the 1995 Employee Plan. At December 31, 2004, fewer
than 0.1 million shares had been issued and approximately 12.9 million shares remained available for grant.
Grants under the 2004 Employee Plan will cease upon the earlier of the exhausting of the authorized share
pool or November 4, 2014.
Directors' Plan: Under the stockholder-approved Directors' Plan, Freddie Mac is permitted to grant
stock options with dividend equivalent rights, restricted stock and RSUs with dividend equivalent rights to
non-employee members of the Board of Directors (""Directors'').
Under the Directors' Plan, on the date of the annual meeting, each reelected or reappointed Director is
granted an option to purchase shares of Freddie Mac's common stock with a market value of approximately
$150,000 on the date of the grant. Each such Director also receives restricted stock units relating to common
stock with a market value of approximately $65,000 on the date of the award. The number of restricted stock
units and shares subject to a stock option are calculated by dividing the dollar amount of the award by the
market value of Freddie Mac's common stock on the date of grant. Through 2004, vesting with respect to both
stock options and restricted stock units occurred in even increments over Ñve terms on the Board, with
20 percent vesting at the end of every term of oÇce, unless vesting was accelerated under certain
circumstances including death, disability or retirement from the Board. A term is deÑned as the period
between annual stockholders' meetings. EÅective January 1, 2005 and thereafter, vesting occurs in even
increments over four terms.
Through 2004, on the date of the annual meeting (or for new Directors elected by the Board or appointed
by the President between annual meetings, the Ñrst meeting attended after their election or appointment),
newly elected and newly appointed Directors received an option to purchase shares with a market value of
approximately $300,000 and restricted stock units relating to common stock with a market value on the date of
grant of approximately $130,000. During their second term of service, those Directors were not eligible to
receive any additional grants. Beginning in 2005, newly elected or appointed Directors will receive the same
grants as other Directors and they will be eligible to receive similar grants in their second term.
For Directors, stock options and restricted stock units have dividend equivalent rights that entitle the
grantee to dividend equivalents on each share subject to the grant in the amount of dividends per share payable
on Freddie Mac's outstanding shares of common stock. Dividend equivalents on stock options are accrued and
are payable in cash upon exercise or expiration of the option. Dividend equivalents on restricted stock units are
accrued as additional restricted stock units to be settled at the same time as the underlying restricted stock
units.
The maximum number of shares of common stock authorized for grant to Directors under the Directors'
Plan is 2.4 million shares. At December 31, 2004, a total of approximately 0.8 million shares had been issued
and approximately 1.6 million shares remained available for grant. Grants under the Directors' Plan will cease
upon the earlier of exhaustion of the authorized share pool or Freddie Mac's Annual Meeting of Stockholders
in 2008.
See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' for a description of
the accounting treatment for employee stock-based compensation, including grants under the ESPP and
196
Freddie Mac
Employee Plans. The accounting for stock options with dividend equivalent rights, restricted stock and RSUs
granted under the Directors' Plan is identical to that of the Employee Plans.
Table 11.2 provides a summary of activity related to stock options under the Employee Plans and the
Directors' Plan.
Table 11.2 Ì Employee Plans and Directors' Plan Stock Options Activity
2004
Year Ended December 31,
2003
2002
Stock
Options
Weighted Average
Exercise Price
Stock
Options
Weighted Average
Exercise Price
Stock
Options
Weighted Average
Exercise Price
8,656,340
1,343,554
(1,861,617)
(510,336)
7,627,941
$46.89
61.09
29.06
58.84
$52.94
9,231,105
1,216,442
(1,052,156)
(739,051)
8,656,340
$44.21
53.28
23.12
57.18
$46.89
8,721,962
1,686,285
(997,127)
(180,015)
9,231,105
$37.56
64.12
18.44
51.52
$44.21
Outstanding, beginning
of year ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited or expired ÏÏÏÏ
Outstanding, end of year
Options exercisable at
year-endÏÏÏÏÏÏÏÏÏÏÏÏ
4,018,666
$47.46
4,755,640
$38.23
4,508,095
$29.60
Weighted-average fair
value of options
granted during year ÏÏ
$
25.04
$
21.84
$
28.13
Table 11.3 provides a summary of activity related to restricted stock and RSUs under the Employee Plans
and the Directors' Plan.
Table 11.3 Ì Employee Plans and Directors' Plan Restricted Stock and RSU Activity
2004
Year Ended December 31,
2003
2002
Restricted
Stock
Restricted
Stock Units
Restricted
Stock
Restricted
Stock Units
Restricted
Stock
Restricted
Stock Units
Outstanding,
beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lapse of restrictions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding,
566,635
Ì
(240,514)
(161,340)
1,295,722
698,587
(145,340)
(224,341)
1,089,327
359,227
Ì 1,146,164
(114,240)
(95,429)
(381,103)
(141,589)
1,478,779
Ì
(383,199)
(6,253)
51,632
325,902
(10,457)
(7,850)
end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
164,781
1,624,628
566,635
1,295,722
1,089,327
359,227
Weighted-average fair value of awards
granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
62.97
$
55.01
$
64.22
(1) RSUs granted under the Employee Plans were 673,720, 1,143,810 and 313,740 in 2004, 2003 and 2002, respectively. RSUs granted
under the Directors' Plan were 24,867, 2,354 and 12,162 in 2004, 2003 and 2002, respectively.
197
Freddie Mac
Table 11.4 provides additional information for stock options outstanding under the Employee Plans and
the Directors' Plan at December 31, 2004 by range of exercise prices.
Table 11.4 Ì Employee Plans and Directors' Plan Stock Options Outstanding
Range of Exercise Prices
$9.00 to 14.99 ÏÏÏÏÏÏÏÏÏÏ
15.00 to 24.99 ÏÏÏÏÏÏÏÏÏÏ
25.00 to 34.99 ÏÏÏÏÏÏÏÏÏÏ
35.00 to 44.99 ÏÏÏÏÏÏÏÏÏÏ
45.00 to 54.99 ÏÏÏÏÏÏÏÏÏÏ
55.00 to 64.99 ÏÏÏÏÏÏÏÏÏÏ
65.00 to 68.99 ÏÏÏÏÏÏÏÏÏÏ
Outstanding at
December 31, 2004
Options Outstanding
Weighted Average
Remaining Contract
Life in Years
Options Exercisable
Weighted
Average
Exercisable at
Exercise Price December 31, 2004 Exercise Price
Weighted
Average
7,960
648,812
369,271
919,490
1,610,027
3,102,483
969,898
7,627,941
0.2
1.1
2.4
5.0
6.0
7.1
5.3
5.6
$14.67
19.81
34.22
41.56
50.69
62.13
67.66
$52.94
7,960
648,812
369,271
695,809
679,337
1,057,661
559,816
4,018,666
$14.67
19.81
34.22
41.60
47.54
62.38
67.70
$47.46
Compensation Expense: Compensation expense related to stock-based compensation plans charged to
Salaries and employee beneÑts was $59 million, $65 million and $66 million for the years ended December 31,
2004, 2003 and 2002, respectively. The recognition of compensation expense aÅects Additional paid-in capital
and, for awards that are probable of cash settlement, Other liabilities.
Table 11.5 summarizes the weighted-average assumptions used in determining the fair value of options
granted under Freddie Mac's stock-based compensation plans using a Black-Scholes option pricing model.
Table 11.5 Ì Assumptions Used to Determine the Fair Value of Options
Employee Stock
Purchase Plan
2004
2003
Dividend yield(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.85%
3 months
17.8%
1.33%
2.01%
3 months
35.0%
0.95%
2002
1.56%
1 year
21.0%
1.75%
Employee and Directors' Stock
Compensation Plans
2003
2002
2004
Ì
7 years
31.5%
3.55%
Ì
7 years
32.0%
3.40%
Ì
7 years
32.0%
4.75%
(1) The dividend yield assumption is zero percent for the Employee Plans and Directors' Plan since options granted under these plans
include dividend equivalent rights; thus, the fair value of these options would not be reduced for foregone dividends.
198
Freddie Mac
Freddie Mac principally uses the following types of derivatives:
NOTE 12: DERIVATIVES
‚ LIBOR-Based Interest-Rate Swaps:
Interest-rate swaps are contractual agreements between two
parties for the exchange of periodic payments based on a pre-determined amount (""notional'') and
agreed-upon Ñxed and Öoating interest rates.
‚ LIBOR- and Treasury-Based, Exchange-Traded Futures Contracts: Futures contracts are ex-
change-traded agreements that obligate one party to sell and another party to purchase a speciÑed
amount of a designated Ñnancial instrument at a speciÑed price and date.
‚ LIBOR- and Treasury-Based Options and Swaptions: Options are exchange-traded or over-the-
counter (""OTC'') agreements in which the holder pays a one-time up-front premium to another party
in exchange for the right, but not the obligation, to buy or sell a speciÑed asset or enter into a contract
at a speciÑed price during a speciÑed period of time. Option holders will generally exercise their options
only if there is an economic advantage in doing so. Swaptions are OTC options to execute an interest-
rate swap at a speciÑc date and speciÑc rates.
‚ LIBOR- and Treasury-Based Interest-Rate Caps and Floors:
Interest-rate caps and Öoors are OTC
agreements in which the holder pays a one-time up-front premium to another party in exchange for the
right to receive interest payments based on a particular notional amount and the amount, if any, by
which the agreed-upon index rate exceeds a speciÑed maximum (""cap'') or by which the agreed-upon
index is below a speciÑed minimum (""Öoor'') rate.
‚ Foreign-Currency Swaps: Currency swaps are contractual agreements between two parties for the
exchange of a speciÑed amount of a designated foreign currency for a speciÑed amount of U.S. dollars
at the inception and termination of the contract. Each party will also make periodic interest payments
on the currency it receives in the swap at agreed-upon Ñxed or Öoating interest rates.
‚ Forward Purchase and Sale Commitments: Forward purchase and sale commitments are OTC
agreements that obligate one party to purchase (sell) and another party to sell (purchase) a speciÑed
amount of a designated Ñnancial instrument at a speciÑed price and date.
‚ Other: Certain other agreements entered into are accounted for as derivatives in accordance with
SFAS 133 or SFAS 149. These include (a) a prepayment management agreement in which Freddie
Mac is partially compensated for the adverse impacts caused by disproportionately higher mortgage
prepayments on certain mortgage pools; (b) credit risk-sharing agreements where Freddie Mac remits
or receives payments based upon the default performance of certain mortgage loans; and (c) swap
guarantee derivatives where Freddie Mac guarantees the sponsor's or the borrower's performance as a
counterparty on certain interest-rate swaps.
Hedging Activity
Derivative instruments are reported at their fair value as either Derivative assets, at fair value, or
Derivative liabilities, at fair value, on the consolidated balance sheets.
No hedge designation
At December 31, 2004, most of the company's derivatives portfolio, except for a portion of interest-rate
swaps, foreign-currency swaps and forward purchase and sale commitments, was not designated in hedge
accounting relationships. Freddie Mac reports changes in the fair value of these derivatives as Derivative gains
(losses) on the consolidated statements of income. For interest-rate swaps that are not designated in hedge
accounting relationships, the associated interest received or paid is recognized on an accrual basis and
recorded in Derivative gains (losses) on the consolidated statements of income.
EÅective as of the beginning of the second quarter of 2004, Freddie Mac determined that substantially all
pay-Ñxed interest-rate swaps and other derivatives that previously had been in cash Öow hedge accounting
relationships no longer met the hedged item shared risk exposure requirement and hedge eÅectiveness
199
Freddie Mac
assessment as required by SFAS 133. Consequently, Freddie Mac discontinued hedge accounting treatment
for these relationships for Ñnancial reporting purposes eÅective as of the beginning of the second quarter of
2004, resulting in pay-Ñxed swaps with a notional balance of approximately $108 billion being moved from the
cash Öow hedge designation to no hedge designation.
Freddie Mac voluntarily discontinued hedge accounting treatment for a signiÑcant amount of its receive-
Ñxed interest-rate swaps eÅective November 1, 2004, resulting in receive-Ñxed interest-rate swaps with a
notional balance of approximately $50 billion being moved from a fair value hedge designation to no hedge
designation.
Fair value hedges
Fair value hedges represent hedges of exposure to foreign currency Öuctuations and changes in the fair
value of a recognized liability. Freddie Mac uses interest-rate swaps, futures and foreign-currency swaps to
hedge against the changes in fair value of Ñxed rate debt due to changes in benchmark interest rates, either the
rate on U.S. Treasury obligations or LIBOR, or foreign currency Öuctuations, or a combination of both. These
derivatives may be executed to manage interest-rate risk at an aggregate portfolio level or at an individual debt
instrument level. For accounting purposes, Freddie Mac ultimately links these derivatives to speciÑc debt
positions. Where derivatives were executed to manage interest-rate risk at an aggregate portfolio level, Freddie
Mac frequently reset the amount of Ñxed-rate debt being hedged in order to maintain highly eÅective
accounting hedges in this strategy. To accomplish this, the accounting hedges were typically terminated at the
time of reset and the derivatives were contemporaneously redesignated in new hedge accounting relationships
of Ñxed-rate debt. These derivatives were moved to no hedge designation eÅective November 1, 2004 as part
of the voluntary discontinuance of hedge accounting treatment, as discussed above. Alternatively, when
derivatives are executed for speciÑc debt instruments, redesignation is typically not necessary to maintain
highly eÅective accounting hedges. For 2004 and 2003, no amounts have been excluded from the assessment
of eÅectiveness for derivatives designated as fair value hedges. For 2002, pre-tax losses of $103 million were
excluded from the assessment of eÅectiveness for derivatives designated as fair value hedges. The excluded
component represents the change in fair value related to the diÅerence between the spot price and the forward
price on certain sale commitments used as hedges of existing mortgage-related securities.
For a derivative qualifying as a fair value hedge, Freddie Mac reports changes in the fair value of the
derivative as Hedge accounting gains (losses) on the consolidated statements of income along with the
changes in the fair value of the hedged item attributable to the risk being hedged. Hedge ineÅectiveness arises
when the fair value change of a derivative is not equal to the fair value change of the hedged item. For 2004,
2003 and 2002, hedge ineÅectiveness related to fair value hedges was a net $742 million gain, $697 million
gain and $241 million gain, respectively, on a pre-tax basis, and was reported in Hedge accounting gains
(losses). Hedge accounting gains (losses) will vary from period to period based on the notional amount of
derivatives accounted for in hedge accounting relationships and the extent to which diÅerences in the
characteristics or terms of the derivative and the hedged item result in fair value changes that are not exactly
oÅset. For example, a portion of derivatives in Freddie Mac's fair value hedges are forward starting and valued
using forward rates while the hedged debt is valued using spot rates. Therefore, the diÅerence between the spot
rate and the forward rate generally produces ineÅectiveness in these fair value hedges.
Cash Öow hedges
Cash Öow hedges represent hedges of exposure to the variability in the cash Öows of a forecasted
transaction. Freddie Mac uses interest-rate swaps, futures, foreign-currency swaps and forward purchase and
sale commitments to hedge the changes in cash Öows associated with the forecasted issuances of debt,
forecasted purchase or sale of mortgage-related assets, and foreign currency Öuctuations.
For a derivative qualifying as a cash Öow hedge, changes in fair value are generally reported in AOCI, net
of taxes, on the consolidated balance sheets to the extent the hedge is eÅective. The remaining ineÅective
portion is reported as Hedge accounting gains (losses) on the consolidated statements of income. For 2004,
2003 and 2002, hedge ineÅectiveness related to cash Öow hedges was a net $1 million gain, $53 million loss
200
Freddie Mac
and $54 million loss, respectively. No amounts have been excluded from the assessment of eÅectiveness for
derivatives designated as cash Öow hedges for 2004, 2003 and 2002.
At December 31, 2004, the maximum remaining length of time over which Freddie Mac has hedged the
exposure related to the variability in future cash Öows on forecasted transactions is 29 years. However, over
90 percent of the AOCI, net of taxes, balance at December 31, 2004 relating to cash Öow hedges is
attributable to cash Öow hedges of the exposure related to the variability in future cash Öows on forecasted
transactions occurring in the next 10 years. The occurrence of forecasted transactions may be satisÑed by
either periodic issuances of short-term debt over the required time period or longer term debt, such as
Reference Notes» securities, with maturities covering all or part of the remaining hedge time period.
AOCI amounts are reclassiÑed to earnings as the associated hedged forecasted issuance of debt and
forecasted mortgage purchase transaction aÅects earnings. During 2004, 2003 and 2002, pre-tax amounts
reclassiÑed into earnings also include net gains of $2 million, $29 million and $116 million, respectively,
resulting from the determination that it was probable that forecasted transactions related to certain mortgage
purchases and sales would not occur. At December 31, 2004, the total AOCI, net of taxes, related to cash-Öow
hedge relationships was a loss of $7.9 billion. The $7.9 billion in hedging losses related to cash-Öow hedges was
composed of less than $0.1 billion in net unrealized losses on open cash Öow hedges and approximately
$7.9 billion in deferred net losses on closed cash Öow hedges. The unrealized fair value losses on open cash
Öow hedges can change substantially due to future changes in interest rates. Closed cash Öow hedges involve
derivatives that have been terminated or are no longer designated as cash Öow hedges. Fluctuations in
prevailing market interest rates have no impact on the deferred portion of AOCI relating to losses on closed
cash Öow hedges. The company estimates that approximately $1.6 billion, net of taxes, of the $7.9 billion of
hedging losses in AOCI, net of taxes, at December 31, 2004 will be reclassiÑed into earnings during 2005.
Table 12.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Öow
hedges. The Net change in fair value related to cash Öow hedging activities, net of tax beneÑt line represents
the net changes in the fair value of the derivatives that were designated as cash-Öow hedges throughout the
year, after the eÅects of Freddie Mac's statutory tax rate of 35 percent, to the extent the hedges were eÅective.
The Net reclassiÑcations of losses to earnings, net of tax beneÑt line represents the AOCI amount, after the
eÅects of Freddie Mac's statutory tax rate of 35 percent, that was recognized in earnings as the originally
hedged forecasted transactions aÅected earnings unless it was deemed probable that the forecasted transaction
would not occur. If it is probable that the forecasted transaction will not occur, then the entire deferred gain or
loss associated with the hedge related to the forecasted transaction is reclassiÑed into earnings immediately.
Table 12.1 Ì AOCI, net of taxes, Related to Cash Flow Hedge Relationships
Beginning Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in fair value related to cash Öow hedging activities, net of
tax beneÑt of $(1,089), $(352) and $(4,516), respectively(2)ÏÏÏÏÏÏÏÏÏ
Net reclassiÑcations of losses to earnings, net of tax beneÑt of $1,042,
$1,450 and $1,760, respectively(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Year Ended December 31,
2003
(dollars in millions)
$(7,837) $(9,877) $(4,757)
2002
(2,021)
(653)
(8,388)
1,934
2,693
$(7,924) $(7,837) $(9,877)
3,268
(1) Represents the eÅective portion of the fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred
gains and losses on closed (i.e., terminated or redesignated) cash Öow hedges.
(2) Net reclassiÑcations to earnings, net of tax expense includes the accrual of periodic cash settlements in accordance with the
contractual terms of the derivatives designated in cash Öow hedge relationships for all periods presented above.
201
Freddie Mac
NOTE 13: LEGAL CONTINGENCIES
Freddie Mac is involved as a party to a variety of legal proceedings arising from time to time in the
ordinary course of business including, among other things, contractual disputes, personal injury claims,
employment-related litigation and other legal proceedings incidental to the company's business. Freddie Mac
is frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. Freddie Mac is also
involved in proceedings arising from its termination of a seller/servicer's eligibility to sell mortgages to, and
service mortgages for, the company. In these cases, the former seller/servicer sometimes seeks damages
against Freddie Mac for wrongful termination under a variety of legal theories. In addition, Freddie Mac is
sometimes sued in connection with the origination or servicing of mortgages. These suits generally involve
claims alleging wrongful actions of seller/servicers. Freddie Mac's contracts with its seller/servicers generally
provide for them to indemnify the company against liability arising from their wrongful actions.
Freddie Mac is now subject to various legal proceedings, including regulatory investigations and
administrative and civil litigation, arising from the restatement of its previously issued consolidated Ñnancial
statements for the years 2000 and 2001 and the Ñrst three quarters of 2002 and the revision of fourth quarter
and full-year consolidated Ñnancial statements for 2002 (collectively referred to as the ""restatement'').
Freddie Mac believes that a loss in connection with the proceedings arising from the restatement is probable
and currently estimates the range of minimum loss to be from $75 million to $100 million. Freddie Mac has
established a reserve of $75 million for this loss contingency in the second quarter of 2003, the period in which
many of the legal proceedings were initiated. The ultimate resolution of these proceedings could result in
losses lower than or in excess of the estimated range of minimum loss. Litigation and claims resolution are
subject to many uncertainties and are not susceptible to accurate prediction. It is not possible for the company
to reasonably estimate the upper end of the range of any additional losses that might result from the adverse
resolution of any of these legal proceedings, or their potential eÅect on the company's Ñnancial condition or
results of operations.
Securities Class Action Lawsuits.
In June 2003, and thereafter, securities class action lawsuits were
brought in three separate federal district courts against Freddie Mac and certain former executive oÇcers in
connection with the restatement. While most of the cases were voluntarily dismissed by the plaintiÅs, the two
remaining ones were consolidated and are now pending in the U.S. District Court for the Southern District of
New York.
In essence, the plaintiÅs in the consolidated action, claim that the defendants improperly managed
earnings to create a misleading impression of steady earnings by Freddie Mac. PlaintiÅs further allege that
defendants engaged in a number of improper transactions that violated GAAP and that they made false and
misleading statements regarding Freddie Mac's Ñnancial status. The complaint, which covers the period from
June 15, 1999 through June 6, 2003, seeks unspeciÑed compensatory damages, costs and expenses.
In March 2004, the plaintiÅs in one of the cases, the Ohio Public Employees Retirement System and the
State Teachers Retirement System, were appointed lead plaintiÅs for the consolidated action. Freddie Mac
Ñled a motion to dismiss the action in April, which was denied by the court on July 19, 2004. The case is now
in the discovery phase.
Shareholder Derivative Lawsuits. Two shareholder derivative lawsuits were Ñled during 2003 against
Freddie Mac and certain former and current executives and, in one of the suits, members of Freddie Mac's
Board of Directors alleging breach of Ñduciary duty and seeking indemniÑcation in connection with the
restatement. Both cases were ultimately assigned to the same judge in New York who is handling the
securities class action lawsuits described above. In July 2003, all of the then current Board members were
dismissed from the lawsuits in which they were named with the consent of the plaintiÅ. On January 16, 2004,
Freddie Mac moved to dismiss one of the lawsuits brought by the Ester Sadowsky Testamentary Trust
because of the plaintiÅ's failure to make a pre-suit demand. The court dismissed the case without prejudice on
July 19, 2004. The other lawsuit is still pending, awaiting a response to the plaintiÅ's pre-suit demand notice
by a Special Litigation Committee of Freddie Mac's Board of Directors. Subsequently, the Sadowsky plaintiÅ
sent a demand notice to Freddie Mac and on March 4, 2005, Ñled a new complaint in an action in the same
court.
202
Freddie Mac
The complaint was purportedly brought on Freddie Mac's behalf (as a nominal defendant) as a derivative
action by a purported shareholder to recover damages Freddie Mac allegedly suÅered in connection with
certain events underlying the restatement of its Ñnancial statements. The defendants in the action include
former oÇcers, the current Board of Directors, ten former Directors, and Ñve counterparties to transactions
Freddie Mac executed. The plaintiÅ subsequently has amended its complaint by, among other actions,
dropping Messrs. Syron and McQuade from the list of defendants. The plaintiÅ alleges claims for breach for
Ñduciary duties, indemniÑcation, waste of corporate assets, unjust enrichment, and aiding and abetting breach
of Ñduciary duties. The Special Litigation Committee of Freddie Mac's Board of Directors is considering the
allegations raised by this complaint.
Freddie Mac was also served on February 11, 2005, with an amended derivative complaint Ñled by
shareholder E.L. GreenÑeld against the lead engagement partner of Arthur Andersen, Freddie Mac's former
outside auditor, alleging breach of contract for failing to properly conduct audits of the company's Ñnancial
statements. No ruling is sought against Freddie Mac, which is named as a nominal party to that suit.
ERISA Lawsuits. Two class action lawsuits were Ñled in 2003 in the U.S. District Court for the
Southern District of Ohio against Freddie Mac, certain individuals, and the company's Retirement Committee
alleging violations of the Employee Retirement Income Security Act (""ERISA''). Both actions were
consolidated and transferred to the same judge in New York who is handling the securities and derivative
lawsuits described above. In July 2004, Freddie Mac and the other defendants Ñled a motion to dismiss the
consolidated ERISA lawsuit. That motion was denied on February 7, 2005, and the company along with the
individual defendants have Ñled a motion for interlocutory appeal which is pending.
OFHEO Proceedings.
In June 2003, OFHEO commenced a special investigation of the company in
connection with the restatement. As part of this investigation, OFHEO took the testimony of certain Freddie
Mac employees and directors, external third parties and former employees. OFHEO also requested and
received documents from the company.
On December 9, 2003, Freddie Mac and OFHEO entered into a consent order and settlement which
concluded OFHEO's investigation of the company. Under the terms of the consent order, Freddie Mac agreed
to pay a civil money penalty of $125 million, which was recorded in the second quarter of 2003 (the period in
which OFHEO commenced its special investigation), as well as to undertake certain remedial actions relating
to governance, corporate culture, internal controls, accounting practices, disclosure and oversight. In agreeing
to the consent order, Freddie Mac made no admission regarding any wrongdoing or any asserted or implied
Ñndings.
In December 2003, OFHEO Ñled administrative notices of charges against Freddie Mac and
Messrs. Brendsel and Clarke, two former executive oÇcers of Freddie Mac. In its charge against Freddie Mac,
OFHEO seeks to have Freddie Mac take certain actions in connection with these individuals' salaries and
compensation as well as their termination status with the company. Freddie Mac and Messrs. Brendsel and
Clarke moved, among other things, to dismiss the OFHEO administrative charges. These motions are
pending. On February 18, 2005, OFHEO Ñled an amended notice of charges against Messrs. Brendsel and
Clarke, who opposed the amended notice on several grounds. On April 26, 2005, the Administrative Law
Judge presiding over the OFHEO administrative proceeding ruled that the amended notice of charges against
Messrs. Brendsel and Clarke did not clearly identify the factual and legal issues, and consequently ordered
OFHEO to Ñle a second amended notice of charges that must clearly set forth the factual and legal bases for
the charges and satisfy several other requirements identiÑed by the judge. The parties are also engaged in the
discovery phase of the case.
In a separate action, the U.S. District Court for the District of Columbia issued orders Ñnding that
OFHEO lacked the authority to freeze the compensation and beneÑts provided under Mr. Brendsel's and
Mr. Clarke's employment agreements. Freddie Mac was not a party to these actions. OFHEO has appealed
these orders. Freddie Mac has paid Messrs. Brendsel and Clarke the compensation and beneÑts that were due
them in accordance with the U.S. District Court's orders.
SEC Investigation.
In June 2003, the SEC initiated a formal investigation of Freddie Mac in
connection with the restatement. As part of the investigation, the SEC subpoenaed company documents and
took the sworn testimony of various present and former Freddie Mac employees and directors, as well as third
parties.
203
Freddie Mac
On August 18, 2004, Freddie Mac announced that it had received a ""Wells Notice'' from the staÅ of the
SEC. The Wells Notice advised the company that the SEC staÅ is considering recommending that the SEC
initiate a civil injunctive action against the company for possible violations of federal securities laws, including
Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5, as well as Sec-
tions 17(a)(1), (2) and (3) of the Securities Act of 1933. The Wells Notice also indicated that the SEC staÅ
may seek a permanent injunction and a civil money penalty in connection with the contemplated action.
Freddie Mac continues to cooperate fully with the SEC's investigation as the company evaluates its response
to the Wells Notice.
U.S. Attorney's Investigation.
In June 2003, the U.S. Attorney's OÇce in Alexandria, Virginia
commenced an investigation of Freddie Mac surrounding the restatement. As part of its investigation, the U.S.
Attorney's OÇce requested and received documents and information from Freddie Mac, interviewed certain
Freddie Mac employees and possibly other parties and took testimony before the grand jury. The investigation
is still pending and Freddie Mac will continue to cooperate with the U.S. Attorney's OÇce.
Department of Labor Investigation.
In July 2003, the Department of Labor (""DOL'') began an
investigation of Freddie Mac's Thrift/401(k) Savings Plan in relation to the restatement. In connection with the
investigation, the DOL sought and received documents from the company as well as interviewed certain individuals
who served as members of Freddie Mac's Retirement Committee. The investigation is still pending and Freddie
Mac continues to cooperate fully with the DOL.
FEC Investigation.
In March 2004, Freddie Mac provided certain information to the Federal Election
Commission (the ""FEC'') concerning compliance with federal election laws. The FEC has been conducting
an investigation into this matter and, in November 2004, subpoenaed documents and responses to interrogato-
ries from Freddie Mac, which Freddie Mac subsequently provided. The FEC has also interviewed certain
present and former Freddie Mac employees. The investigation is still pending and Freddie Mac will continue
to cooperate with the FEC.
Antitrust Lawsuits. Since January 18, 2005, Freddie Mac and Fannie Mae have been named in
multiple lawsuits alleging violations of federal and state antitrust laws and state consumer protection laws. All
of the suits essentially allege that the defendants conspired to establish and maintain artiÑcially high guarantee
fees. One suit contains additional allegations of price Ñxing in connection with other mortgage fees, as well as a
claim of illegally maintaining a monopoly in the market for conforming mortgages and the market for
securitization of conforming mortgages. At present, it is not possible for Freddie Mac to predict the probable
outcome of these lawsuits or any potential impact on Freddie Mac's business, Ñnancial condition or results of
operations.
Other Inquiries. Freddie Mac receives inquires from the IRS in connection with its regular audits of
Freddie Mac's tax returns for prior years, some of which relate to matters connected with the restatement.
Freddie Mac continues to respond to these inquiries. See ""NOTE 14: INCOME TAXES'' for more
information. The Committee on Energy and Commerce of the House of Representatives also sent Freddie
Mac an inquiry relating to the restatement. Freddie Mac has responded to the Committee's inquiry.
204
Freddie Mac
Freddie Mac is exempt from state and local income taxes. Table 14.1 presents the components of the
NOTE 14: INCOME TAXES
company's provision for income taxes.
Table 14.1 Ì Provision for Income Taxes
Current tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax provision (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Table 14.2 summarizes Freddie Mac's deferred tax assets and liabilities.
Table 14.2 Ì Deferred Tax Assets/(Liabilities)
2004
2002
Year Ended December 31,
2003
(dollars in millions)
$1,465
737
$2,202
$1,136
(346)
$ 790
$2,023
2,690
$4,713
December 31,
2003
2004
(dollars in millions)
Deferred tax assets:
Deferred fees related to securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee compensation and beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedge deferrals and unrealized (gains) losses related to available-for-
sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,612
Ì
5
166
1,930
3,713
$ 1,550
195
Ì
141
801
2,687
Deferred tax liabilities:
Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis diÅerences related to derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,961)
(502)
(2,478)
Ì
(43)
(4,984)
(1,958)
Ì
(3,468)
(2)
(5)
(5,433)
Net deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(1,271)
$(2,746)
Included in deferred taxes is the tax eÅect on the (a) net unrealized (gain) loss on available-for-sale
securities and (b) net (gain) loss related to derivatives designated in cash Öow hedge relationships, which are
both reported in AOCI, net of taxes.
A valuation allowance has not been established against Freddie Mac's deferred tax assets at Decem-
ber 31, 2004 or 2003, as Freddie Mac has determined that it is more likely than not that all such tax assets will
be realized in the future.
205
Freddie Mac
Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate.
Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate
Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision (beneÑt) related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OFHEO civil money penalty and loss contingency accrual ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2002
2003
2004
35.0% 35.0% 35.0%
(1.2)
(2.1)
(4.7)
(1.1)
(3.0)
(7.3)
(1.0)
0.4
(2.0)
Ì
1.0
Ì
0.1
0.1
0.2
EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21.2% 31.4% 31.8%
Impact of tax issues. The IRS has a policy to examine the income tax returns of large corporate
taxpayers, including Freddie Mac, generally every year. Management believes that an adequate provision in
accordance with SFAS 5 has been made for contingencies related to all income taxes and related interest.
However, the ultimate outcome of these tax contingencies could result in a tax beneÑt or tax provision that
could be material to Freddie Mac's quarterly or annual results of operations. Based on current knowledge and
after consultation with outside counsel, management does not believe that liabilities arising from these
matters, if any, will have a material adverse eÅect on Freddie Mac's consolidated Ñnancial condition.
Tax Years 1985 through 1990.
In 1998, the IRS issued Freddie Mac a Statutory Notice which asserts
income tax deÑciencies for the company's Ñrst two tax years, 1985 and 1986. In the Ñrst quarter of 1999,
Freddie Mac Ñled a petition in the United States Tax Court (the ""Court'') to contest the deÑciencies. In the
third quarter of 1999, the IRS issued a Statutory Notice for Freddie Mac's tax years 1987 through 1990, and
Freddie Mac Ñled a petition in the Court. Subsequently, the Court combined the 1985 through 1990 tax years
into one case. The principal matters in controversy in the case involve questions of tax law as applied to
Freddie Mac's transition from non-taxable to taxable status in 1985 and primarily involve the amortization of
certain intangible assets, the two most signiÑcant of which are:
‚ Favorable Financing. A number of Ñnancing arrangements where the contract rates of interest
were less than the market rates of interest as of January 1, 1985 due to an increase in interest rates
since the date on which Freddie Mac had entered into the respective arrangements; and
‚ Customer Relationships. Freddie Mac's business relationships with a substantial number of
mortgage originating institutions that sold mortgages to Freddie Mac on a regular basis.
Tax Court Rulings. On September 4, 2003 and September 29, 2003, the Court decided favorably for
Freddie Mac on two preliminary motions involving questions of law in the case. On September 4, the Court
ruled favorably for Freddie Mac on the question whether Freddie Mac's intangibles are amortizable using, as
the adjusted basis, the higher of (a) the regular adjusted cost basis or (b) the fair market value on January 1,
1985. On September 29, the Court ruled favorably for Freddie Mac on the question whether, as a matter of
law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this case, Freddie
Mac claimed, and the court agreed, that the economic beneÑt of this below-market Ñnancing as of January 1,
1985 is an intangible asset subject to amortization. In October 2003, the Court ruled unfavorably on two other
less signiÑcant issues in the case.
While signiÑcant, the Court's rulings do not dispose of all of the matters in controversy in the case, which,
upon Ñnal resolution by the Court of all such matters, are subject to appeal by the parties. In addition, Freddie
Mac still must demonstrate that the intangible assets in question have an ascertainable value and have a
limited useful life, the duration of which can be ascertained with reasonable accuracy. A trial on the value and
useful life of Favorable Financing began in early June 2005.
In view of the favorable rulings described above and in accordance with GAAP, Freddie Mac recorded in
the fourth quarter of 2002 a reduction in its tax reserves in the amount of $155 million. If the IRS were to
206
Freddie Mac
appeal the Court decisions and an adverse ruling resulted, Freddie Mac may reconsider its reserves related to
this matter.
If Freddie Mac's tax position on the customer relationship amortization issue described above is upheld
through the administrative and legal process, Freddie Mac will be able to recognize additional tax beneÑts that
could be material in the quarter during which they are recognized. However, Freddie Mac is unable to provide
assurances that any such tax beneÑts will be realized.
Tax Years 1991 through 1993. The IRS examination of Freddie Mac's federal income tax returns for
the years 1991 through 1993 has been completed. In December 2001, the IRS issued a Statutory Notice for
these years. In the Ñrst quarter of 2002, Freddie Mac Ñled a petition in the Court to contest the deÑciencies.
The principal matters in controversy in this case are the same questions at issue in the 1985 through 1990 case
as applied to years 1991 to 1993, plus an additional question of tax law regarding the timing of taxation of
Freddie Mac's management and guarantee fee income.
Tax Years 1994 through 1997.
In the second quarter of 2002, the IRS completed its examination of
Freddie Mac's federal income tax returns for the years 1994 through 1997. Freddie Mac is involved in
discussions with the IRS Appeals Division regarding the company's disagreement with certain aspects of the
examination report. The principal matter in controversy, other than the same questions at issue in the 1985
through 1993 cases, involve the character of losses on dispositions of mortgage-related securities.
Tax Treatment of REITs.
In February 1997, Freddie Mac formed two REIT subsidiaries that issued a
total of $4.0 billion in step-down preferred stock to investors. Under the IRS regulations in eÅect when the
REITs were formed, the company believed that the dividend payments by the REITs to holders of the REITs'
step-down preferred stock were fully tax deductible. In 1997, subsequent to the formation of Freddie Mac's
REIT subsidiaries, the Department of the Treasury announced its intention to propose regulations that would
retroactively limit the tax beneÑts attributable to the REITs, preferred stock and eÅectively eliminate the
potential tax advantages of REITs that issued step-down preferred stock. On January 7, 2000, the Treasury
issued Ñnal regulations that retroactively deny certain tax beneÑts attributable to Freddie Mac's REIT
preferred stock for tax years ending on or after February 27, 1997. Based upon this guidance, the IRS
challenged Freddie Mac's position that the REIT dividends were fully deductible. The company has since
changed its position that the REIT dividends are fully deductible. Freddie Mac announced on May 12, 2005
that it entered into a closing agreement with the IRS that resolves issues related to the tax treatment of
dividends paid on the step-down preferred stock. Freddie Mac and the IRS have agreed that Freddie Mac will
only be entitled to deductions attributable to the step-down preferred stock transactions as if it had borrowed
directly from the REITs' preferred shareholders. As a result of this closing agreement, Freddie Mac recorded
a reduction in tax reserves of $94 million. See ""NOTE 18: MINORITY INTERESTS'' for more information
concerning the REITs.
Tax Years 1998 through 2002. The IRS is currently examining Freddie Mac's tax returns for the years
1998 through 2002. This examination includes the years for which Freddie Mac has restated its Ñnancial
reporting.
Tax Treatment of Linked Swaps.
In August and September of 2001, Freddie Mac entered into a series
of nine sets of paired swap transactions. Freddie Mac has reported and paid tax treating each pair of those
swap transactions as a single integrated transaction for federal income tax purposes. In addition, two additional
swaps were executed in November 2001. Although the facts and circumstances surrounding these swaps were
diÅerent from the earlier swaps, Freddie Mac also reported and paid tax treating these swaps as a single
integrated transaction for federal income tax purposes. There is a risk that the IRS could challenge Freddie
Mac's tax treatment of all of these transactions (""the Linked Swaps'') and make an adverse determination
relating to this tax treatment. If this should occur, the potential aggregate additional tax liability could be as
much as approximately $750 million plus interest.
Freddie Mac has not provided reserves for any tax issues related to these transactions because
management has determined that the potential for loss does not meet the criteria for recognition under
SFAS 5. The IRS is currently examining Freddie Mac's 2001 and 2002 tax returns, including the Linked
Swaps transactions. The company does not know whether the IRS will assert a tax deÑciency related to these
207
Freddie Mac
transactions as part of the current examination and if so, what the Ñnal resolution of those issues will be. If the
IRS were to propose the maximum potential aggregate assessment and that additional tax liability was upheld
through the administrative and legal process, the recognition of such additional liability could have a material
adverse impact on Freddie Mac's results of operations in the quarter in which it was recognized. Based on
current knowledge and after consultation with counsel, management does not currently believe that the Ñnal
resolution of any issues that may arise from the Linked Swaps transactions will result in IRS adjustments that
would have a material adverse impact on Freddie Mac's consolidated Ñnancial condition.
208
Freddie Mac
NOTE 15: EMPLOYEE BENEFITS
DeÑned BeneÑt Plans
Freddie Mac maintains a tax-qualiÑed deÑned beneÑt pension plan (""Pension Plan'') covering substan-
tially all of its employees. Pension Plan beneÑts are based on years of service and the employee's highest
average compensation (up to legal plan limits) over any consecutive 36 months of employment. Freddie Mac's
general practice is to contribute to the Pension Plan an amount equal to at least the minimum required
contribution, if any, but no more than the maximum amount deductible for federal income tax purposes each
year. Based on a preliminary analysis, Freddie Mac currently believes that under applicable law no minimum
contribution will be required and no tax-deductible contribution will be permitted for 2005. Therefore, Freddie
Mac does not currently expect to contribute to its Pension Plan in 2005. Pension Plan assets are held in trust
and investments consist primarily of listed stocks and corporate bonds. In addition to the Pension Plan,
Freddie Mac maintains nonqualiÑed, unfunded deÑned beneÑt pension plans for oÇcers and certain other
employees of the company (the ""non-qualiÑed pension plans''). The related retirement beneÑts for the
nonqualiÑed pension plans are paid from Freddie Mac's general assets. These nonqualiÑed and qualiÑed
deÑned beneÑt pension plans are collectively referred to in this NOTE 15 as ""deÑned beneÑt pension plans.''
Freddie Mac maintains a deÑned beneÑt post-retirement health care plan (""Retiree Health Plan'') that
generally provides post-retirement health care beneÑts on a contributory basis to retired employees age 55 or
older who rendered at least ten years of service (Ñve years of service if retiree is eligible to retire prior to
March 1, 2007) and who, upon separation or termination, immediately elected to commence beneÑts under
the Pension Plan in the form of an annuity. The company's Retiree Health Plan is currently unfunded and the
beneÑts are paid from Freddie Mac's general assets. This plan, along with the deÑned beneÑt pension plans,
are collectively referred to in this NOTE 15 as ""deÑned beneÑt plans.''
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (""Medicare Part D'')
was signed into law on December 8, 2003. Medicare Part D authorizes a federal subsidy for sponsors of retiree
health care plans with prescription drug beneÑts that are at least actuarially equivalent to the prescription drug
beneÑts available under Medicare Part D. In May 2004, the FASB issued FASB StaÅ Position
(""FSP'') 106-2, ""Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003,'' which supersedes FSP 106-1 of the same title. FSP 106-2
clariÑed the accounting for beneÑts provided by the new government subsidies. Freddie Mac, in consultation
with its actuaries, has determined that the prescription drug beneÑts provided to participants by the Retiree
Health Plan are at least actuarially equivalent to those available under Medicare Part D. Therefore, in
accordance with the FSP 106-2 transition provisions, the eÅects of the future Medicare Part D subsidies are
reÖected as an actuarial gain, included in Net actuarial loss (gain) in Table 15.1, that reduces the year-end
accumulated post-retirement beneÑt obligation for 2004 by $12 million. No determination has yet been made
with respect to actuarially equivalent beneÑts provided to participants' spouses and dependents. The ongoing
eÅect of the subsidy under Medicare Part D is to reduce the current service cost.
For Ñnancial reporting purposes, Freddie Mac uses a September 30 valuation measurement date for all of
its deÑned beneÑt plans. The company is required to accrue the estimated cost of retiree beneÑts as employees
render the services necessary to earn their pension and post-retirement health beneÑts. Freddie Mac's pension
and post-retirement health care costs related to these deÑned beneÑt plans for 2004, 2003 and 2002 presented
in the following tables were calculated using assumptions as of September 30, 2003, 2002 and 2001,
respectively. The funded status of Freddie Mac's pension and post-retirement health care deÑned beneÑt plans
for 2004, 2003 and 2002 presented in the following tables was calculated using assumptions as of
September 30, 2004, 2003 and 2002, respectively.
209
Freddie Mac
Table 15.1 sets forth the changes in the beneÑt obligations and plan assets for the twelve months ended
September 30, 2004 and 2003, the funded status at September 30, 2004 and 2003 and the amounts recognized
in the consolidated balance sheets for the deÑned beneÑt plans at December 31, 2004 and 2003.
Table 15.1 Ì DeÑned BeneÑt Plan Obligations and Funded Status
Pension
BeneÑts(1)
Post-
Retirement
Health
BeneÑts
2004
2003
2004
2003
(dollars in millions)
Change in BeneÑt Obligation:
BeneÑt obligation at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt obligation at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Plan Assets:
Fair value of plan assets at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funded Status:
Funded status at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Initial unrecognized net transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amounts Recognized in the Consolidated Balance Sheets:
Other assets:
$102
10
6
(15)
$ 54
6
3
39
(1) Ì
$102
$102
$339
24
20
6
(4)
$230
16
16
80
(3)
$385
$339
229
22
13
(4)
160
26
46
(3)
$260
$229
112
1
1
(125) (110) (102) (102)
60
(6)
Ì
120
2
1
$(11) $ 13
$(68) $(48)
40
(6)
Ì
Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $ 29
1
6
$ Ì $ Ì
Ì
Ì
Other liabilities:
Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(25)
(27)
(68)
(48)
AOCI:
Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8
10
$(11) $ 13
Ì
Ì
$(68) $(48)
(1) The beneÑt obligations refer to projected beneÑt obligations (""PBO''). The measurement of the PBO includes assumptions about the
rate of future compensation increases.
The accumulated beneÑt obligation (""ABO'') for all deÑned beneÑt pension plans was $282 million and
$248 million at September 30, 2004 and 2003, respectively. The ABO represents the actuarial present value of
future expected beneÑts, assuming current salary levels remain in eÅect.
The change in the minimum pension liability recognized in AOCI, net of taxes, was a $2 million decrease
for the year ended December 31, 2004 and a $10 million increase for year ended December 31, 2003.
210
Freddie Mac
Table 15.2 provides additional information for deÑned beneÑt pension plans.
Table 15.2 Ì Additional Information for DeÑned BeneÑt Pension Plans
2004
2003
Pension
Plan
Non-qualiÑed
Pension Plans
Pension
Plan
Non-qualiÑed
Pension Plans
PBOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$356
ABO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ABO over (under) fair value of plan assets ÏÏÏÏ
$262
260
2
$
(dollars in millions)
$29
$301
$20
Ì
$20
$221
229
$ (8)
$38
$27
Ì
$27
Table 15.3 presents the components of the net periodic beneÑt costs with respect to pensions and post-
retirement health beneÑts for the years ended December 31, 2004, 2003 and 2002. Net periodic beneÑt costs
are included in the line Salaries and employee beneÑts on the company's consolidated statements of income.
Table 15.3 Ì Net Periodic BeneÑt Cost Detail
Pension BeneÑts
Year Ended
December 31,
2003
2004
2002
2004
Post-Retirement
Health BeneÑts
Year Ended
December 31,
2003
2002
Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost on beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recognized net actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net periodic beneÑt costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 24
20
(16)
7
Ì
$ 35
$ 16
16
(12)
3
Ì
$ 23
$10
6
$ 6
3
$ 4
$ 12
3
14
(13) Ì Ì Ì
1
Ì
(1)
Ì (1)
$ 7
$20
2
(1)
$10
$ 13
5
(dollars in millions)
Tables 15.4 and 15.5 summarize the weighted average assumptions used to determine the beneÑt
obligations at September 30, 2004 and 2003 and net periodic beneÑt costs recognized for the years ended
December 31, 2004, 2003 and 2002, respectively.
Table 15.4 Ì Weighted Average Assumptions Used to Determine Projected and Accumulated BeneÑt
Obligations
Pension
BeneÑts
September 30,
2003
2004
Post-
Retirement
Health BeneÑts
September 30,
2003
2004
Major Assumptions:
Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75% 6.00% 5.75% 6.00%
4.50% 4.50% Ì
Ì
Table 15.5 Ì Weighted Average Assumptions Used to Determine Net Periodic BeneÑt Cost
Pension BeneÑts
Year Ended
December 31,
2003
2004
2002
2004
Post-Retirement
Health BeneÑts
Year Ended
December 31,
2003
2002
Major Assumptions:
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.00% 7.00% 7.50% 6.00% 7.00% 7.50%
4.50% 4.50% 4.50% Ì Ì Ì
7.00% 7.25% 9.00% Ì Ì Ì
211
Freddie Mac
For the 2004 and 2003 beneÑt obligations, Freddie Mac used the Moody's Aa Corporate Bond Rate
Index as a basis for selecting the discount rate shown in Table 15.4. The expected long-term rate of return on
plan assets for 2004 and 2003 is estimated using a portfolio return calculator model. The model considers the
historical returns and the future expectations for returns for each asset class in the company's deÑned beneÑt
plans in conjunction with Freddie Mac's target investment allocation to arrive at the expected rate of return.
The assumed health care cost trend rates used in measuring the accumulated post-retirement beneÑt
obligation as of September 30, 2004 are 13 percent in 2005, gradually declining to an ultimate rate of
Ñve percent in 2011 and remaining at that level thereafter.
Table 15.6 sets forth the eÅect on the accumulated post-retirement health beneÑt obligation as of
September 30, 2004, and the sum of the service-cost and interest-cost components of the net periodic post-
retirement health beneÑt costs that would result from a one percent increase or decrease in the assumed health
care cost trend rate.
Table 15.6 Ì Selected Data Regarding the Retiree Health Plan
One
Percent
Increase
(dollars in millions)
One
Percent
Decrease
EÅect on the accumulated post-retirement beneÑt obligation for health
care beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect on the net periodic post-retirement health beneÑt cost components
$24
4
$(19)
(3)
Plan Assets
Table 15.7 sets forth Freddie Mac's Pension Plan weighted average asset allocations, based on fair value,
at September 30, 2004 and 2003, and target allocation by asset category.
Table 15.7 Ì Pension Plan Assets by Category
Asset Category
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Target
Allocation
2003 - 2004
65.0%
35.0%
Ì
Plan Assets at
September 30,
2003
2004
61.2% 51.7%
34.0% 28.0%
4.8% 20.3%
100.0%
100.0% 100.0%
(1) Consists of cash contributions made in the third quarter of 2004 and 2003 that were not fully invested by September 30th of that
year.
Freddie Mac's Retirement Committee has Ñduciary responsibility for establishing and overseeing the
Pension Plan's investment policies and objectives. The Retirement Committee reviews the appropriateness of
the Pension Plan's investment strategy on an ongoing basis. Freddie Mac's Pension Plan employs a total return
investment approach whereby a diversiÑed blend of equities and Ñxed income investments are used to
maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and corporate Ñnancial condition. Furthermore,
equity investments are diversiÑed across U.S. and non-U.S. listed companies with small and large capitaliza-
tions. Derivatives may be used to gain market exposure in an eÇcient and timely manner; however, derivatives
may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment
risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual
liability measurements and periodic asset/liability studies.
The Pension Plan assets did not include any direct ownership of Freddie Mac securities at September 30,
2004 and 2003.
Contributions
As discussed above, Freddie Mac does not currently expect to contribute to its Pension Plan in 2005. Any
contributions to the company's Retiree Health Plan will be in the form of beneÑt payments since it is an
unfunded plan.
212
Freddie Mac
Estimated Future BeneÑt Payments
Table 15.8 sets forth estimated future beneÑt payments expected to be paid for the deÑned beneÑt plans.
The expected beneÑts are based on the same assumptions used to measure Freddie Mac's beneÑt obligation at
September 30, 2004.
Table 15.8 Ì Estimated Future BeneÑt Payments
Pension BeneÑts
Post-Retirement
Health BeneÑts
(dollars in millions)
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Years 2010-2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3.7
4.3
5.2
6.1
7.5
70.9
$0.9
1.2
1.6
1.9
2.4
20.4
DeÑned Contribution Plans
Freddie Mac's Thrift/401(k) Savings Plan, a tax-qualiÑed deÑned contribution pension plan (the
""Savings Plan''), is oÅered to all eligible employees. Employees were permitted to contribute from 1 percent
to 15 percent of their annual salaries to the Savings Plan, subject to limits set by the IRC. The company also
maintains a non-qualiÑed deÑned contribution plan for oÇcers of the company designed to make up for
beneÑts lost due to limitations on eligible compensation imposed by the IRC. Freddie Mac matches
employees' contributions up to 6 percent of their salaries per pay period; the percentage matched depends
upon the length of service. Employee contributions and Freddie Mac's matching contributions are immedi-
ately vested. In addition, Freddie Mac has discretionary authority to make additional contributions to the
Savings Plan that are allocated uniformly on behalf of each eligible employee, based on salary level.
Employees become vested in Freddie Mac's discretionary contributions after 5 years. Freddie Mac incurred
costs of $29 million, $28 million and $22 million for the years ended December 31, 2004, 2003 and 2002,
respectively, related to these plans. These expenses were included in Salaries and employee beneÑts on the
consolidated statements of income.
See ""NOTE 13: LEGAL CONTINGENCIES'' for more information regarding civil litigation and a
DOL investigation of Freddie Mac's Thrift/401(k) Savings Plan in relation to the restatement.
Executive Deferred Compensation Plan
The Executive Deferred Compensation Plan is an unfunded, non-qualiÑed plan that allows certain key
employees to elect to defer a portion of their annual salary and cash bonus, and certain key management
employees to defer the settlement of restricted stock units received from Freddie Mac, as well as a portion of
their annual salary and cash bonus, for any number of years speciÑed by the employee, but under no
circumstances may the period elected exceed his or her life expectancy. Deferred salary, cash bonus and stock
units are credited to an employee's account as of the date such amounts or units would have otherwise been
paid or settled by delivery of shares to the employee. Subject to provisions for hardship withdrawals and
certain terminations of employment, deferred distributions are payable at the end of the deferral period in
lump sums or installments over Ñve, ten or Ñfteen years. Distributions are paid from Freddie Mac's general
assets. Freddie Mac records a liability equal to the accumulated deferred salary, cash bonus and accrued
interest as set forth in the plan, net of any related distributions made to plan participants. Freddie Mac
recognizes expense equal to the interest accrued on deferred salary and bonus throughout the year. Expense
associated with unvested deferred restricted stock units is recognized as part of stock-based compensation.
213
Freddie Mac
NOTE 16: FAIR VALUE DISCLOSURES
The consolidated fair value balance sheets in Table 16.1 present Freddie Mac's estimates of the fair value
of the company's recorded assets and liabilities and oÅ-balance sheet Ñnancial instruments as of December 31,
2004 and 2003. The fair value information on the consolidated fair value balance sheets includes the fair
values of all items recorded in the consolidated balance sheets prepared in accordance with GAAP, as well as
all oÅ-balance sheet Ñnancial instruments that represent assets or liabilities of Freddie Mac that are not
recorded in the GAAP consolidated balance sheets. These oÅ-balance sheet items predominantly consist of
the unrecognized guarantee assets and obligations associated with a portion of Freddie Mac PCs issued
through the Guarantor Program as well as commitments to purchase multifamily and single-family mortgage
loans that will be classiÑed as held-for-investment in the GAAP Ñnancial statements and insurance contracts
on manufactured housing investments. The valuations of Ñnancial instruments on the consolidated fair value
balance sheets are in accordance with GAAP fair value guidelines prescribed by SFAS No. 107, ""Disclosures
about Fair Value of Financial Instruments'' (""SFAS 107'') and other relevant pronouncements.
Table 16.1 Ì Consolidated Fair Value Balance Sheets(1)
December 31,
2004
2003
Carrying
Amount(2)
Fair
Value(3)
Carrying
Amount(2)
Fair
Value
(dollars in billions)
Assets
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal
funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities and minority interest
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏ
Other liabilities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets attributable to stockholders
Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 61.3
603.2
664.5
35.3
29.8
32.2
15.3
4.5
13.7
$795.3
$731.7
4.1
0.2
0.2
26.2
1.5
763.9
4.6
26.8
31.4
$795.3
$ 63.3
603.4
666.7
35.3
29.8
32.2
15.3
5.0
13.3
$797.6
$737.0
2.1
0.2
Ì
25.7
1.7
766.7
4.1
26.8
30.9
$797.6
$ 60.2
600.2
660.4
23.1
65.4
20.6
16.2
3.7
14.0
$803.4
$739.6
2.9
0.4
0.1
27.0
1.9
771.9
4.6
26.9
31.5
$803.4
$ 62.5
600.4
662.9
23.1
65.4
20.6
16.2
4.5
13.2
$805.9
$749.8
2.4
0.4
Ì
23.9
2.1
778.6
4.4
22.9
27.3
$805.9
(1) The consolidated fair value balance sheets do not purport to present the net realizable, liquidation or market value of Freddie Mac as
a whole. Furthermore, amounts Freddie Mac ultimately realizes from the disposition of the assets or settlement of liabilities may vary
signiÑcantly from the fair values presented.
(2) Carrying amounts equal the amounts reported on Freddie Mac's GAAP consolidated balance sheets.
(3) Methodologies employed to calculate fair values are periodically changed on a prospective basis to reÖect improvements in the
underlying estimation processes. The estimated impact of these improvements resulted in net after-tax changes to Total net assets of
approximately $0.6 billion at December 31, 2004. The most signiÑcant of these changes occurred in the fourth quarter when Freddie
Mac began using newly available market prices received from broker/dealers and reliable third-party pricing providers for the
valuation of a greater portion of its debt instruments.
(4) The fair value of Mortgage-related securities reported in this table exceeds the carrying value because the fair value includes PC
residuals related to Participation CertiÑcates held in the Retained portfolio that are not recognized under GAAP because such PCs
were issued prior to the implementation of FIN 45 in 2003.
(5) Fair values include estimated income taxes on the diÅerence between the consolidated fair value balance sheets pre-tax net assets
and the consolidated GAAP balance sheets pre-tax net assets.
214
Freddie Mac
Limitations
The consolidated fair value balance sheets do not capture all elements of value that are implicit in
Freddie Mac's operations as a going concern since the consolidated fair value balance sheets only capture the
values of the current investment and securitization portfolios. For example, the consolidated fair value balance
sheets do not capture the value of new investment and securitization business that would likely replace
prepayments as they occur. In addition, the consolidated fair value balance sheets do not capture the value
associated with future growth opportunities in Freddie Mac's investment and securitization portfolios. Thus,
the fair value of net assets attributable to stockholders presented in the consolidated fair value balance sheets
does not represent an estimate of the net realizable, liquidation or market value of Freddie Mac as a whole.
Freddie Mac reports assets and liabilities that are not Ñnancial instruments (such as property, plant and
equipment and deferred taxes), as well as certain Ñnancial instruments that are not covered by the SFAS 107
disclosure requirements (such as pension liabilities) at their GAAP carrying amounts in the consolidated fair
value balance sheets. Management believes these items do not have a signiÑcant impact on Freddie Mac's
overall Ñnancial condition or fair value results.
Valuation Methods and Assumptions
Fair value is generally based on independent price quotations obtained from third-party pricing services,
dealer marks or direct market observations, where available. However, certain Ñnancial instruments are less
actively traded and, therefore, are not always able to be valued based on prices obtained from third parties. If
quoted prices or market data are not available, fair value is based on internal valuation models using market
data inputs or internally developed assumptions, where appropriate.
The following methods and assumptions were used to estimate the fair value of assets and liabilities at
December 31, 2004 and 2003.
Mortgage loans
Mortgage loans represent single-family and multifamily whole loans held in Freddie Mac's Retained
portfolio. For GAAP purposes, management must determine the fair value of these mortgage loans to
calculate lower-of-cost-or-market value adjustments for mortgages classiÑed as held-for-sale. Management
uses this same approach when determining the fair value of all whole loans, including those held for
investment, for fair value balance sheet purposes.
Freddie Mac determines the fair value of mortgage loans based on comparisons to actively traded
mortgage-related securities with similar characteristics, with adjustments for yield, credit and liquidity
diÅerences. SpeciÑcally, Freddie Mac aggregates mortgage loans into pools by product type, coupon and
maturity and then converts the pools into notional mortgage-related securities based on their speciÑc
characteristics. Freddie Mac then calculates fair values for these notional mortgage-related securities using
the process that is described in the ""Mortgage-related securities'' section, below.
As described above, the fair value of these mortgage loans also includes adjustments for yield, credit and
liquidity diÅerences. To accomplish this, the fair value of the single-family whole loans includes an adjustment
representing the estimated present value of the additional cash Öows on the mortgage coupon of the whole loan
in excess of the coupon expected on the notional mortgage-related securities. For multifamily whole loans, the
fair value adjustment is estimated by calculating the net present value of guarantee fees expected to be
retained by Freddie Mac. This retained guarantee fee is estimated by subtracting the expected cost of funding
and securitizing a multifamily whole loan of a comparable maturity and credit rating from the coupon on the
whole loan at the time of purchase.
The implied guarantee fee is also net of the related credit and other components inherent in the
company's guarantee obligation. For single-family whole loans, the process for estimating the related credit
and other guarantee obligation components is described in the ""Guarantee obligation for Participation
CertiÑcates'' section. For multifamily whole loans, the process for estimating the related credit and other
guarantee obligation components employs a market-based approach to estimate the potential credit obligation.
This obligation is estimated by extracting the credit risk premium that multifamily whole loan investors
require from market prices on similar securities. This credit risk premium is net of expected funding, liquidity
and other risk premiums that are embedded in the market price of the reference securities.
215
Freddie Mac
Mortgage-related securities
Mortgage-related securities represent passthroughs and other mortgage-related securities classiÑed as
available-for-sale and trading, which are already reÖected at fair value on the GAAP consolidated balance
sheets. Mortgage-related securities consist of securities issued by Freddie Mac, Fannie Mae and Ginnie Mae
as well as non-agency mortgage-related securities.
The fair value of securities with readily available third-party market prices is generally based on market
prices obtained from broker/dealers or reliable third-party pricing service providers. Fair value may be
estimated by using third-party quotes for similar instruments, adjusted for diÅerences in contractual terms.
For other securities, a market option-adjusted spread approach based on observable market parameters is used
to estimate fair value. Option-adjusted spreads for certain securities are estimated by deriving the option-
adjusted spread for the most closely comparable security with an available market price, using proprietary
interest-rate and prepayment models. If necessary, management judgment is applied to estimate the impact of
diÅerences in prepayment uncertainty or other unique cash Öow characteristics related to that particular
security. Fair values for these securities are then estimated by using the estimated option-adjusted spread as
an input to the interest-rate and prepayment models, and estimating the net present value of the projected
cash Öows. The remaining instruments are priced using other modeling techniques or by using other securities
as proxies.
Mortgage-related securities also include PC residuals related to PCs held by Freddie Mac and reported in
the mortgage-related securities line item. PC residuals are reported at fair value on Freddie Mac's
consolidated balance sheets. Fair value for PC residuals is estimated in the same manner as described for
guarantee assets and guarantee obligations for PCs below.
Cash and cash equivalents
Cash and cash equivalents largely consist of highly liquid investment securities with an original maturity
of three months or less used for cash management purposes, as well as cash collateral posted by Freddie Mac's
derivative counterparties. Given that these assets are short-term in nature with limited market value volatility,
the carrying amount on the GAAP consolidated balance sheets is presumed to be a reasonable approximation
of fair value.
Investments
At December 31, 2004, Investments consists solely of non-mortgage-related securities, which are
reported at fair value on Freddie Mac's consolidated balance sheets. At December 31, 2003, Investments
included non-mortgage-related securities and mortgage-related securities held in connection with PC market
making and support activities, which were reported at fair value on Freddie Mac's consolidated balance sheets.
Freddie Mac ceased its PC market making and support activities accomplished through the Securities Sales &
Trading Group business unit and the external Money Manager program during the fourth quarter of 2004. The
fair values of Investments are estimated using the methods described above in ""Mortgage-related securities.''
Securities purchased under agreements to resell and Federal funds sold
Securities purchased under agreements to resell and Federal funds sold principally consists of short-term
contractual agreements such as reverse repurchase agreements involving Treasury and agency securities,
Federal funds sold and Eurodollar time deposits. Given that these assets are short-term in nature, the carrying
amount on the GAAP consolidated balance sheets is presumed to be a reasonable approximation of fair value.
Guarantee assets for Participation CertiÑcates
At December 31, 2004 and 2003, Freddie Mac established guarantee assets for approximately 87 percent
and 81 percent, respectively, of PCs and Structured Securities held by third parties. For more information
regarding the accounting for guarantee assets related to PCs and Structured Securities, see ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''
For fair value balance sheet purposes, guarantee assets are reÖected for all PCs and Structured Securities
held by third parties and are valued using the same method as used for GAAP fair value purposes. For a
description of how Freddie Mac determines the fair value of its guarantee assets, see ""NOTE 2: TRANS-
FERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.''
216
Freddie Mac
Derivative assets
Derivative assets, at fair value largely consists of interest-rate swaps, option-based derivatives, futures,
and forward purchase and sale commitments that Freddie Mac accounts for as derivatives, which are reÖected
at fair value on the GAAP consolidated balance sheets. The fair values of interest-rate swaps are determined
by using the appropriate yield curves to calculate and discount the expected cash Öows for both the Ñxed-rate
and Öoating-rate components of the swap contracts. Option-based derivatives, which principally include call
and put swaptions, are valued using an option-pricing model. This model uses market interest rates and
market-implied option volatilities, where available, to calculate the option's fair value. Market-implied option
volatilities are based on information obtained from broker/dealers. The fair value of exchange-traded futures
is based on end-of-day closing prices obtained from third-party pricing services. Derivative forward purchase
and sale commitments are valued using the methods described for mortgage-related securities valuation,
above.
The fair value of derivative assets considers the impact of institutional credit risk in the event that the
counterparty does not honor its payment obligation. Freddie Mac's fair value of derivatives is not adjusted for
expected credit losses because management obtains collateral from most counterparties typically within one to
three business days of the daily market value calculation and substantially all of Freddie Mac's credit risk
arises from counterparties with investment-grade credit ratings of A- or above.
Other assets
Other assets consists of accrued interest and other receivables, investments in qualiÑed LIHTC limited
partnerships that are eligible for federal tax credits, Ñnancial guarantee contracts for additional credit
protection on certain manufactured housing asset-backed securities, real estate owned, property, plant and
equipment, and other miscellaneous assets.
The receivables are Ñnancial instruments and are required to be measured at fair value for disclosure
purposes pursuant to SFAS 107. Because these receivables are short-term in nature, management believes the
carrying amount on the GAAP consolidated balance sheets is a reasonable approximation of their fair values.
For the LIHTC partnerships, the fair value of expected tax beneÑts is estimated using expected cash Öows
discounted at a market-based yield. For the credit enhancements on manufactured housing asset-backed
securities, the fair value is based on the diÅerence between the market price of non-credit impaired
manufactured housing securities and credit-impaired manufactured housing securities that are likely to
produce future credit losses, as adjusted for management's estimate of a risk premium attributable to the
Ñnancial guarantee contracts. The value of the contracts, over time, will be determined by the actual credit-
related losses incurred and, therefore, may have a value that is higher or lower than management's market-
based estimate.
The other categories of assets that comprise Other assets are not Ñnancial instruments required to be
valued at fair value under SFAS 107, such as REO properties. The fair market value of REO properties is
calculated using a model-based approach, incorporating market sales data, that estimates a discount to full fair
market value for a comparable property that has not been subject to foreclosure proceedings. This adjustment
is intended to capture the sale price discount generally evidenced in the market for properties that have been
subject to a foreclosure sale.
Other non-Ñnancial assets included in Other assets represent an insigniÑcant portion of the GAAP
consolidated balance sheets. Because any change in their fair value would not be a meaningful part of Freddie
Mac's fair value of net assets business results, Freddie Mac has not adjusted the carrying amount on the
GAAP consolidated balance sheets for estimates of the fair value of these non-Ñnancial assets.
Total debt securities, net
Total debt securities, net represents short-term and long-term debt used to Ñnance Freddie Mac's assets
and, for GAAP presentation, is net of deferred items, including premiums, discounts and hedging-related basis
adjustments. It includes both non-callable and callable debt as well as short-term zero coupon discount notes.
The fair value of the short-term zero coupon discount notes is based on a discounted cash Öow model with
market inputs. The valuation of other debt securities is generally based on market prices obtained from
broker/dealers, reliable third-party pricing service providers, or direct market observations. In the fourth
quarter of 2004, Freddie Mac began using newly available market prices received from broker/dealers and
217
Freddie Mac
reliable third-party pricing services for the valuation of a greater portion of its debt instruments. Previously the
calculation of the fair value of these instruments was based primarily on an internal model using available
market inputs.
Guarantee obligation for Participation CertiÑcates
Freddie Mac does not establish guarantee obligations for all PCs and Structured Securities held by third
parties for GAAP purposes. In addition, guarantee obligations are not carried at fair value for GAAP
purposes. For fair value balance sheet purposes, guarantee obligations reÖect the fair value of Freddie Mac's
guarantee obligation on all PCs held by third parties. Additionally, for fair value balance sheet purposes,
guarantee obligations are valued using the same method as used for GAAP to determine the guarantee
obligation's initial fair value. For information concerning the company's valuation methodologies and
accounting policies related to guarantee-related credit losses, see ""NOTE 1: SUMMARY OF SIGNIFI-
CANT ACCOUNTING POLICIES,'' and ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS
IN MORTGAGE-RELATED ASSETS.''
Reserve for guarantee losses on Participation CertiÑcates
The carrying amount of the Reserve for guarantee losses on Participation CertiÑcates on the GAAP
consolidated balance sheets represents GAAP loan loss reserves for oÅ-balance sheet PCs that are not already
accounted for under SFAS 125/140. This line item has no basis in the consolidated fair value balance sheets,
because the estimated fair value of all expected default losses is included in the guarantee obligation reported
on the consolidated fair value balance sheets, as discussed above.
Derivative liabilities
See discussion under ""Derivative assets'' above.
Other liabilities
Other liabilities principally consists of amounts due to PC investors (i.e., principal and interest), funding
liabilities associated with investments in LIHTC partnerships, accrued interest payable on debt securities and
other miscellaneous obligations of less than one year. Management believes the carrying amount of these
liabilities is a reasonable approximation of their fair value, except for funding liabilities associated with
investments in LIHTC partnerships, for which fair value is estimated using expected cash Öows discounted at
a market-based yield. Also, management adjusts the GAAP-basis deferred taxes for consolidated fair value
balance sheets purposes. Fair values include estimated income taxes on the diÅerence between the
consolidated fair value balance sheets pre-tax net assets and the consolidated GAAP balance sheets pre-tax
net assets.
Minority interests in consolidated subsidiaries
Minority interests in consolidated subsidiaries primarily represent preferred stock interests that third
parties hold in Freddie Mac's two majority-owned REIT subsidiaries. In accordance with GAAP, Freddie
Mac consolidated the REITs. The fair value of the third-party minority interests in these REITs was based on
the estimated value of the underlying REIT preferred stock determined by management based on a valuation
model adjusted to consider the impact of embedded call options, using market-based information to the extent
available.
Net assets attributable to preferred stockholders
To determine the preferred stock fair value, Freddie Mac uses a market-based approach incorporating
quoted dealer prices.
Net assets attributable to common stockholders
Net assets attributable to common stockholders is equal to the fair value of net assets (the diÅerence
between the fair value of Freddie Mac's assets and the fair value of liabilities and minority interest), less the
fair value of net assets attributable to preferred stockholders.
218
Freddie Mac
NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS
Mortgages and Mortgage-Related Securities
Table 17.1 summarizes the geographical concentration of mortgages and mortgage-related securities that
are held by Freddie Mac or that are collateral for PCs and Structured Securities excluding:
‚ $3,015 million and $4,729 million of mortgage-related securities issued by Ginnie Mae that back
Structured Securities at December 31, 2004 and 2003, respectively, because these securities do
not expose Freddie Mac to meaningful amounts of credit risk;
‚ $59,715 million and $77,289 million of agency mortgage-related securities at December 31, 2004
and 2003, respectively, because these securities do not expose Freddie Mac to meaningful
amounts of credit risk;
‚ $175,163 million and $114,772 million of non-agency mortgage-related securities held in the
Retained portfolio at December 31, 2004 and 2003, respectively, because geographic information
regarding these securities is not available. With respect to these securities, Freddie Mac looks to
third party credit enhancements (e.g., bond insurance) or other credit enhancements resulting
from the securitization structure (e.g., subordination levels) supporting such securities as a
primary means of managing credit risk; and
‚ $29,830 million and $48,585 million of non-Freddie Mac mortgage-related securities and
mortgage-related securities held in its Cash and investments portfolio that are important to
Freddie Mac's Ñnancial management and the company's ability to provide liquidity and stability to
the mortgage market at December 31, 2004 and 2003, respectively. These securities are excluded
because Freddie Mac tends to hold them for a short time period and the geographic information
regarding these securities is not available. In fourth quarter 2004, Freddie Mac ceased its PC
market-making and support activities accomplished through its Securities Sales & Trading Group
business unit and its external Money Manager program, which was a component of the $48,585
million balance at December 31, 2003.
See ""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for more
information about the securities Freddie Mac holds.
219
Freddie Mac
Table 17.1 Ì Concentration of Credit Risk
By Region(2)
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
By State
CaliforniaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Illinois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
New York ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2004
2003
Amount(1)
Percentage
Amount(1)
Percentage
(dollars in millions)
$ 309,344
296,390
280,618
220,858
160,249
$1,267,459
$ 171,209
75,879
65,750
65,344
889,277
$1,267,459
24%
23
22
18
13
100%
14%
6
5
5
70
100%
$ 288,865
295,349
271,339
210,570
151,486
$1,217,609
$ 175,030
70,970
63,497
56,013
852,099
$1,217,609
24%
24
22
17
13
100%
14%
6
5
5
70
100%
(1) Calculated as Total mortgage portfolio less mortgage-related securities issued by Ginnie Mae that back PCs and Structured
Securities as well as agency and non-agency mortgage-related securities held in the Retained portfolio.
(2) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH,
NJ, NY, PR, PA, RI, VI, VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY,
MS, NC, SC, TN); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
Mortgage Lenders
A signiÑcant portion of Freddie Mac's single-family mortgage purchase volume is generated from several
key mortgage lenders that have entered into special business arrangements with Freddie Mac. These
individually negotiated arrangements characteristically involve a lender's commitment to sell a high proportion
of its conforming mortgage origination volume to Freddie Mac. During 2004, the four most signiÑcant of these
arrangements together accounted for almost 63 percent of Freddie Mac's volume. Wells Fargo Home
Mortgage, Inc. was the largest source and accounted for approximately 33 percent of the company's mortgage
purchase volume in 2004 while Chase Home Finance LLC, the second largest source, accounted for
approximately 14 percent of the company's mortgage purchase volume. Freddie Mac is exposed to the risk
that it could lose purchase volume to the extent these agreements are terminated or modiÑed without
replacement from other lenders.
Derivative Portfolio
On an ongoing basis, Freddie Mac reviews the credit fundamentals of all of its derivative counterparties to
conÑrm that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are
assigned to each counterparty based on quantitative and qualitative analysis, and are updated and monitored
on a regular basis. Additional reviews are completed when market conditions or events aÅecting an individual
counterparty occur.
Derivative Counterparties. Freddie Mac's use of derivatives exposes the company to counterparty credit
risk. Exchange-traded derivatives, such as futures contracts, do not measurably increase the company's
counterparty credit risk because changes in the value of open exchange-traded contracts are settled daily
through a Ñnancial clearinghouse established by each exchange. OTC derivatives, however, expose the
company to counterparty credit risk because transactions are executed and settled between Freddie Mac and
the counterparty. Freddie Mac's standards for entering into OTC derivative agreements for interest-rate
swaps, option-based derivatives and foreign-currency swaps include rigorous internal credit and legal reviews.
Freddie Mac's derivative counterparties carry external credit ratings among the highest available from major
rating agencies. All of these counterparties are major Ñnancial institutions and are experienced participants in
the OTC derivatives market.
220
Freddie Mac
Master Netting and Collateral Agreements. Freddie Mac uses master netting and collateral agreements
to reduce its credit risk exposure to its active OTC derivative counterparties for interest-rate swaps, option-
based derivatives and foreign-currency swaps. Master netting agreements provide for the netting of amounts
receivable and payable from an individual counterparty, which reduces Freddie Mac's exposure to a single
counterparty in the event of default. For example, if Freddie Mac has a gain position on one derivative and a
loss position on another derivative with the same counterparty, then the gain can be netted with the loss to
determine the amount of the company's net exposure to the counterparty. On a daily basis, the market value of
each counterparty's derivatives outstanding is calculated to determine the amount of the company's net credit
exposure, which is equal to derivatives in a net gain position by counterparty after giving consideration to
collateral posted. Freddie Mac's collateral agreements require most counterparties to post collateral for the
amount of the company's net exposure to them above the applicable threshold. Collateral posting thresholds
are generally tied to a counterparty's credit rating. Derivative exposures and collateral amounts are monitored
on a daily basis using both internal pricing models and dealer price quotes. Freddie Mac's derivative
counterparties typically transfer collateral within one to three business days based on the values of the related
derivatives. This time lag in posting collateral can aÅect Freddie Mac's net uncollateralized exposure to
derivative counterparties.
The collateral posted by counterparties serves to protect Freddie Mac against the risk of counterparty
credit losses. Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury
securities, agency securities or other mortgage-related securities. In the event a counterparty defaults on its
obligations under the derivatives agreement and the default is not remedied in the manner prescribed in the
agreement, Freddie Mac has the right under the agreement to direct the custodian bank to transfer the
collateral to the company or, in the case of non-cash collateral, to sell the collateral and transfer the proceeds
to the company.
Freddie Mac's uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based
derivatives and foreign-currency swaps, after applying netting agreements and collateral, was $601 million and
$796 million at December 31, 2004 and 2003, respectively. In the extremely unlikely event that all of Freddie
Mac's counterparties for these derivatives were to have defaulted simultaneously on December 31, 2004, the
maximum loss to Freddie Mac for accounting purposes would have been approximately $601 million.
Freddie Mac's exposure to counterparties for OTC forward purchase and sale commitments treated as
derivatives was $40 million and $101 million as of December 31, 2004 and 2003, respectively. Since the typical
maturity for OTC commitments is less than one year, Freddie Mac does not require master netting and
collateral agreements for the counterparties of these commitments. Therefore, Freddie Mac's exposure to its
OTC commitments counterparties is uncollateralized. Similar to counterparties for its OTC interest-rate
swaps, option-based derivatives and foreign-currency swaps, Freddie Mac monitors the credit fundamentals of
its OTC commitments counterparties on an ongoing basis to ensure that they continue to meet internal risk-
management standards.
221
Freddie Mac
NOTE 18: MINORITY INTERESTS
The equity and net earnings attributable to the minority stockholder interests in consolidated subsidiaries
are reported in the consolidated balance sheets as Minority interests in consolidated subsidiaries and in the
consolidated statements of income as Minority interests in earnings of consolidated subsidiaries, respectively.
The majority of the balances in these accounts relate to the company's two majority-owned REITs.
In February 1997, Freddie Mac formed two majority-owned REIT subsidiaries funded through the
issuance of common stock (99.9 percent of which is held by Freddie Mac) and a total of $4.0 billion of
perpetual, step-down preferred stock issued to outside investors. The dividend rate on the step-down preferred
stock is 13.3 percent from initial issuance through 2006 (the ""initial term''). Beginning in 2007, the dividend
rate will step-down to 1.0 percent. Dividends on this preferred stock accrue in arrears. The balance of the two
step-down preferred stock issuances as recorded within Minority interests in consolidated subsidiaries on the
consolidated balance sheets totaled $1.5 billion and $1.9 billion at December 31, 2004 and 2003, respectively.
The preferred stock is redeemable by the REITs under certain circumstances described in the preferred stock
oÅering documents as a ""tax event redemption.'' Additionally, after an initial period ending December 31,
2006, the REITs may be able to retire the preferred stock under favorable Ñnancing terms in accordance with
the terms of the preferred stock. The REITs may decide to redeem the preferred stock in the future depending
on market conditions and other factors. See ""NOTE 14: INCOME TAXES'' for more information
concerning the REITs.
222
Freddie Mac
NOTE 19: EARNINGS PER COMMON SHARE
Basic earnings per common share are computed as Net income available to common stockholders divided
by the weighted average common shares outstanding (Weighted average common shares outstanding-basic)
for the period. Diluted earnings per common share are computed as Net income available to common
stockholders divided by the weighted average common shares outstanding considering the eÅect of dilutive
common equivalent shares outstanding (Weighted average common shares outstanding-diluted) for the
period. Dilutive common equivalent shares reÖect the assumed issuance of additional common shares
pursuant to certain of the company's stock-based compensation plans (see ""NOTE 11: STOCK-BASED
COMPENSATION'') that could potentially reduce or ""dilute'' earnings per share, based on the treasury
stock method.
Table 19.1 provides computations of Freddie Mac's basic and diluted earnings per common share.
Table 19.1 Ì Earnings Per Common Share Ì Basic and Diluted
2004
Year Ended December 31,
2003
(dollars in millions
and shares in thousands)
2002
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends and issuance costs on redeemed preferred
stock (including $0, $0 and $5 of issuance costs on redeemed
preferred stock) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income available to common stockholders(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
2,937
$
4,816
$ 10,090
(210)
(216)
(239)
$
2,727
$
4,600
$ 9,851
Weighted average common shares outstanding Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive potential common shares(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average common shares outstanding Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏ
689,282
2,239
691,521
687,094
1,581
688,675
692,727
2,389
695,116
Basic earnings per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
3.96
3.94
$
$
6.69
6.68
$
$
14.22
14.17
(1) Net income available to common stockholders is not aÅected by dilutive potential common shares for the years ended December 31,
2004, 2003 and 2002.
(2) The eÅect of dilutive common equivalent shares outstanding includes: (a) the weighted average shares related to stock options
(including the ESPP) that have an exercise price lower than the average market price during the period; (b) the weighted average of
non-vested restricted shares; and (c) all restricted stock units. Such items are excluded from weighted average common shares
outstanding Ì basic.
Options to purchase 2.4 million, 3.4 million and 2.5 million shares of common stock were excluded from
the computation of Diluted earnings per common share at December 31, 2004, 2003 and 2002, respectively,
because the options' exercise price exceeded the average market price of the common stock for the years
ended December 31, 2004, 2003 and 2002, respectively.
223
Freddie Mac
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Information on our Directors is set forth under ""Proposal 1: Election of Directors Ì Nominees for
Election'' of our Proxy Statement for our annual meeting to be held on July 15, 2005, and is incorporated
herein by reference.
Executive OÇcers
As of June 1, 2005, our executive oÇcers are as follows:
Name
Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏ
Eugene M. McQuade ÏÏÏÏÏÏÏ
Martin F. Baumann ÏÏÏÏÏÏÏÏÏ
Ralph F. Boyd, Jr. ÏÏÏÏÏÏÏÏÏÏ
Patricia L. CookÏÏÏÏÏÏÏÏÏÏÏÏ
Joseph A. Smialowski ÏÏÏÏÏÏÏ
David A. AndrukonisÏÏÏÏÏÏÏÏ
Margaret A. ColonÏÏÏÏÏÏÏÏÏÏ
Adrian B. CorbiereÏÏÏÏÏÏÏÏÏÏ
Joan E. Donoghue ÏÏÏÏÏÏÏÏÏÏ
Stanley J.D. Martin ÏÏÏÏÏÏÏÏÏ
Timothy J. McBride ÏÏÏÏÏÏÏÏ
Hollis S. McLoughlin ÏÏÏÏÏÏÏ
Robert Y. Tsien ÏÏÏÏÏÏÏÏÏÏÏÏ
Jerry Weiss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
John F. Woods ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Age
Year of
AÇliation
Position
61
56
57
48
52
56
47
47
60
48
58
46
54
52
47
40
2003
2004
2003
2004
2004
2004
1980
1983
1999
2001
2004
2005
2004
2000
2003
2002
Chairman and Chief Executive OÇcer
President and Chief Operating OÇcer
Executive Vice President, Finance and Chief Financial
OÇcer
Executive Vice President, Community Relations
Executive Vice President, Investments
Executive Vice President, Operations and Technology
Senior Vice President and Chief Enterprise Risk OÇcer*
Senior Vice President and Chief Administrative OÇcer
Senior Vice President, Multifamily Sourcing
Senior Vice President, General Counsel and Corporate
Secretary
Senior Vice President and General Auditor
Senior Vice President, Government and Industry Relations
Senior Vice President and Chief of StaÅ
Senior Vice President, Mission Oversight and Development
Senior Vice President and Chief Compliance OÇcer
Senior Vice President, Corporate Controller and Principal
Accounting OÇcer
* Mr. Andrukonis announced his intention to leave Freddie Mac eÅective at the end of June 2005.
The following is a brief biographical description of each of our executive oÇcers.
Richard F. Syron was appointed Chairman and Chief Executive OÇcer in December 2003. Prior to
joining us, Mr. Syron was Executive Chairman of Thermo Electron Corporation, a position he assumed in
November 2002. He joined Thermo Electron in June 1999 as its Chief Executive OÇcer and became its
Chairman of the Board in January 2000. Prior to that, he was Chairman and Chief Executive OÇcer of the
American Stock Exchange for Ñve years, President of the Federal Reserve Bank of Boston for Ñve years and
President of the Federal Home Loan Bank of Boston for three years.
Eugene M. McQuade was appointed President and Chief Operating OÇcer eÅective September 1, 2004.
Before joining us, Mr. McQuade was President of Bank of America Corporation. He also served as President
and Chief Operating OÇcer of FleetBoston Financial Corp., which merged with Bank of America on April 1,
2004. Mr. McQuade joined Fleet in 1992 and became Chief Financial OÇcer in 1993, Vice Chairman in
1997, and President and Chief Operating OÇcer in 2002. Prior to joining Fleet, Mr. McQuade was Executive
Vice President and Controller of Manufacturers Hanover Corp.
Martin F. Baumann was appointed Executive Vice President, Finance in April 2003 and Chief Financial
OÇcer in June 2003. Prior to joining us, Mr. Baumann worked at PricewaterhouseCoopers since 1969, where
he was a partner from 1980. At PricewaterhouseCoopers, he performed a variety of functions, including
serving as the Deputy Chairman Ì World Financial Services Practice and as the Global Banking Leader. He
also served on PricewaterhouseCoopers U.S. and World Financial Services Executive Committees.
224
Freddie Mac
Ralph F. Boyd, Jr. was appointed Executive Vice President, Community Relations in February 2005.
Prior to holding his current position, he served as our Executive Vice President, General Counsel and
Corporate Secretary. Prior to joining us, Mr. Boyd was a senior partner with the law Ñrm Alston & Bird LLP
since August 2003 and was U.S. assistant attorney general and head of the Justice Department's Civil Rights
Division from July 2001 through July 2003. From 1997 to 2001, Mr. Boyd was a trial partner with Goodwin
Procter LLP, and before that, he served for six years as an Assistant U.S. Attorney in Boston. He also was an
associate at the law Ñrm of Ropes & Gray in Boston from 1987 to 1991.
Patricia L. Cook was appointed Executive Vice President, Investments, eÅective August 2, 2004. Prior to
joining us, Ms. Cook was Managing Director and Chief Investment OÇcer, Global Fixed Income at
JPMorgan Fleming Asset Management (""JP Morgan Fleming'') since May 2003. Prior to joining JP Morgan
Fleming, she was Managing Director and Chief Investment OÇcer, Fixed Income at Prudential Investment
Management. From June 1991 to July 2001, Ms. Cook was Managing Director at Fisher Francis Trees and
Watts. Prior to that, she worked in various management positions at Salomon Brothers, Inc. from January
1979 to June 1991.
Joseph A. Smialowski was named Freddie Mac's Executive Vice President of Operations and Technology
in December 2004. Before joining Freddie Mac, Mr. Smialowski was Executive Vice President at Fleet Boston
Financial from December 1998. Prior to that, he was Chief Information OÇcer at Sears, Roebuck and Co.
from September 1993. Early in his career, Mr. Smialowski held increasingly responsible management,
technology and operations positions at Dennison Manufacturing, Xerox and The Hartford.
David A. Andrukonis was appointed Senior Vice President and Chief Enterprise Risk OÇcer in
October 2003. Prior to that he served as Senior Vice President of Single-Family Capital Deployment from
September 2001 through October 2003. He also served as Senior Vice President and Chief Credit OÇcer from
August 1998 through September 2001. Prior to that, he held various positions at our company since joining us
in 1980, including Senior Vice President and General Manager of the Seller Division, Vice President of
Mortgage Finance, Manager of Product Development and Pricing and Senior Economist.
Margaret A. Colon was named Senior Vice President and Chief Administrative OÇcer in October 2003.
Prior to that, Ms. Colon served as Senior Vice President of Infrastructure Initiatives Program Management
from July 2002 to October 2003 and as Senior Vice President and Single-Family Chief Operating OÇcer from
June 2000 through June 2002. Prior to June 2000, she also has served in various other positions at our
company, including Senior Vice President Ì Servicer, Vice President of Corporate Finance Operations, Vice
President and Assistant to the President, Vice President and Multifamily Controller. Prior to joining us in
1983, Ms. Colon was a senior auditor with Deloitte Haskins and Sells.
Adrian B. Corbiere was named Senior Vice President, Multifamily Sourcing in August 1999. Before
joining Freddie Mac, Mr. Corbiere was a managing director at Allstate Insurance Corp., responsible for all
real estate, mortgage and CMBS investments. Prior to his position at Allstate, he was Senior Vice President of
Ñxed-income investments, including mortgages and private placement bonds, at New England Mutual Life
Insurance Company and held various real estate Ñnance positions at both Cigna and Phoenix Mutual
Insurance Companies.
Joan E. Donoghue was named Freddie Mac's Senior Vice President, General Counsel and Corporate
Secretary in February 2005. Ms. Donoghue had previously served as Senior Vice President and Principal
Deputy General Counsel since April 2004. She joined Freddie Mac in 2001 as Associate General Counsel and
later served as Vice President and Acting General Counsel. Prior to joining Freddie Mac, Ms. Donoghue held
positions of increasing importance with the U.S. Department of State including Deputy Legal Adviser. She
also served as deputy general counsel at the U.S. Department of the Treasury. She also served as visiting
professor at Boalt Hall School of Law, University of California at Berkeley, where she was a Council on
Foreign Relations International AÅairs Fellow. She began her legal career as an associate attorney with
Covington and Burling.
Stanley J.D. Martin was appointed Senior Vice President and General Auditor in June 2004. Immedi-
ately prior to his appointment, Mr. Martin had served as interim General Auditor since February 2004. Before
that, Mr. Martin served as Executive Vice President and then as a consultant to HSBC Bank USA from 2000
225
Freddie Mac
to April 2003. From 1998 to 2000, he was Chief Financial OÇcer and Executive Vice President of Republic
New York Corporation. Prior to that, Mr. Martin was a Partner at KPMG LLP from 1982 to 1998.
Timothy J. McBride was appointed Freddie Mac's Senior Vice President, Government and Industry
Relations in January 2005. Prior to Freddie Mac, Mr. McBride served as Vice President, External AÅairs/
Public Policy for Daimler Chrysler Corporation, where he was responsible for directing Chrysler's federal
lobbying and formulating public policy on a variety of issues. Before that, he worked at Sun Company,
Incorporated as director of communications. Mr. McBride also held key positions with the Administration of
former president George H.W. Bush where he served as Assistant to the President and Director of White
House Management and Administration. During his tenure, he also held the positions of Assistant Secretary
of Commerce for Trade Development and Special Assistant to the President. He also worked for a number of
years in the OÇce of the Vice President of the United States for George H. W. Bush.
Hollis S. McLoughlin was named Senior Vice President and Chief of StaÅ in April 2004. Since 1998,
Mr. McLoughlin has been Chief Operating OÇcer of two private equity-backed operating companies. Before
that, he was one of the founding partners of Darby Overseas, a private equity partner based in Washington,
D.C. He has also been a senior executive at Purolator Courier, the overnight delivery company and a privately
held transportation company. From 1989 through 1992, Mr. McLoughlin served as Assistant Secretary of the
Treasury under former president George H. W. Bush. He served as Chief of StaÅ to Sen. Nicholas Brady, R-
N.J., in 1982 and to Rep. Millicent Fenwick, R-N.J., from 1975 to 1979.
Robert Y. Tsien was appointed Senior Vice President, Mission Oversight and Development in April 2004.
Prior to that, he served as Senior Vice President, Production in the Multifamily Division from October 2003,
and as our Chief Credit OÇcer from September 2001 to October 2003. Mr. Tsien joined us as Vice President
of Multifamily Risk Management in April 2000. Prior to joining us, Mr. Tsien was director of risk
management and securitization pricing at Titanium Investment Company.
Jerry Weiss was appointed Senior Vice President and Chief Compliance OÇcer in October 2003. Prior to
joining us, Mr. Weiss worked from 1990 at Merrill Lynch Investment Managers, most recently as First Vice
President and Global Head of Compliance. From 1982 to 1990, Mr. Weiss was with a national law practice in
Washington, D.C., where he specialized in securities regulation and corporate Ñnance matters.
John F. Woods was named Senior Vice President and Principal Accounting OÇcer in October 2003 and
Corporate Controller in February 2005. Prior to that, Mr. Woods served as Senior Vice President, Control and
Accounting in Funding and Investments from April 2002 to October 2003. Prior to joining us, Mr. Woods was
a consulting partner at Arthur Andersen.
226
Freddie Mac
EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the section titled ""Executive Compensa-
tion'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15, 2005 and is
incorporated by reference into this Information Statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Management
Information regarding the beneÑcial ownership of our common stock by each of our directors, certain
executive oÇcers and by all directors and executive oÇcers as a group is set forth under the section titled
""Corporate Governance Ì Stock Ownership by Directors and OÇcers'' of our Proxy Statement for our annual
meeting of stockholders to be held on July 15, 2005 and is incorporated by reference into this Information
Statement.
Security Ownership of Certain BeneÑcial Owners
Information regarding the beneÑcial ownership of our common stock by each director nominee and
certain beneÑcial owners is set forth under the section titled ""Corporate Governance Ì Stock Ownership by
Directors and OÇcers'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15,
2005 and is incorporated by reference into this Information Statement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set forth under the section titled
""Proposal 1: Election of Directors Ì Transactions with Institutions Related to Directors'' of our Proxy
Statement for our annual meeting of stockholders to be held on July 15, 2005 and is incorporated by reference
into this Information Statement.
INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS,
OFFICERS AND EMPLOYEES
Information concerning indemniÑcation and reimbursement arrangements is set forth under the section
titled ""Proposal 1: Election of Directors Ì IndemniÑcation and Other Reimbursements of Directors, OÇcers
and Employees'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15, 2005
and is incorporated by reference into this Information Statement.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is set forth under the section titled
""Proposal 2: RatiÑcation of Appointment of Independent Auditors'' of our Proxy Statement for our annual
meeting of stockholders to be held on July 15, 2005 and is incorporated by reference into this Information
Statement.
227
Freddie Mac
CERTIFICATION*
I, Richard F. Syron, certify that:
1. I have reviewed this Information Statement of Freddie Mac;
2. Based on my knowledge, this Information Statement does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered
by this Information Statement; and
3. Based on my knowledge, the consolidated Ñnancial statements, and other Ñnancial information
included in this Information Statement, fairly present in all material respects the Ñnancial condition,
results of operations and cash Öows of Freddie Mac as of, and for, the periods presented in this
Information Statement.
Date: June 14, 2005
/s/ RICHARD F. SYRON
Richard F. Syron
Chairman and Chief Executive OÇcer
CERTIFICATION*
I, Martin F. Baumann, certify that:
1. I have reviewed this Information Statement of Freddie Mac;
2. Based on my knowledge, this Information Statement does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered
by this Information Statement; and
3. Based on my knowledge, the consolidated Ñnancial statements, and other Ñnancial information
included in this Information Statement, fairly present in all material respects the Ñnancial condition,
results of operations and cash Öows of Freddie Mac as of, and for, the periods presented in this
Information Statement.
Date: June 14, 2005
/s/ MARTIN F. BAUMANN
Martin F. Baumann
Executive Vice President and Chief Financial OÇcer
* These certiÑcations do not address our internal control over Ñnancial reporting or disclosure controls and procedures because a
comprehensive evaluation of the eÅectiveness of these controls and procedures was not performed as of December 31, 2004.
228
Freddie Mac
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
2004
2003
2002
2001
2000
(dollars in millions)
Income before cumulative eÅect of change in
accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,937
$ 4,816
$10,090
$ 3,115
$ 3,666
Add:
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed charges:
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Ñxed charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratio of earnings to Ñxed charges(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
790
2,202
4,713
1,339
1,504
129
26,566
6
1
$30,429
157
26,509
5
Ì
$33,689
184
26,876
5
1
$41,869
$26,566
6
1
$26,573
$26,509
5
Ì
$26,514
$26,876
5
1
$26,882
208
27,577
5
1
$32,245
$27,577
5
1
$27,583
231
25,483
5
1
$30,890
$25,483
5
1
$25,489
1.15
1.27
1.56
1.17
1.21
(1) Subsequent to the issuance of our Information Statement dated September 24, 2004, we revised the capitalized interest to conform to
2004 presentation for 2003, 2002, 2001 and 2000. This resulted in a $2 million, $2 million and $1 million decrease in capitalized
interest for 2003, 2002 and 2001, respectively.
(2) Ratio of earnings to Ñxed charges is computed by dividing Earnings, as adjusted by Total Ñxed charges.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Year Ended December 31,
2004
2003
2002
2001
2000
(dollars in millions)
Income before cumulative eÅect of change in
accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,937
$ 4,816
$10,090
$ 3,115
$ 3,666
Add:
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed charges:
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Ñxed charges including preferred stock dividends
Ratio of earnings to combined Ñxed charges and
preferred stock dividends(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
790
2,202
4,713
1,339
1,504
129
26,566
6
1
$30,429
$26,566
6
1
266
$26,839
157
26,509
5
Ì
$33,689
$26,509
5
Ì
315
$26,829
184
26,876
5
1
$41,869
$26,876
5
1
351
$27,233
208
27,577
5
1
$32,245
$27,577
5
1
310
$27,893
231
25,483
5
1
$30,890
$25,483
5
1
252
$25,741
1.13
1.26
1.54
1.16
1.20
(1) Subsequent to the issuance of our Information Statement dated September 24, 2004, we revised the capitalized interest to conform to
2004 presentation for 2003, 2002, 2001 and 2000. This resulted in a $2 million, $2 million and $1 million decrease in capitalized
interest for 2003, 2002 and 2001, respectively.
(2) Preferred stock dividends represent pre-tax earnings required to cover any preferred stock dividend requirements using our eÅective
tax rate for the relevant periods.
(3) Ratio of earnings to combined Ñxed charges and preferred stock dividends is computed by dividing Earnings, as adjusted by Total
Ñxed charges including preferred stock dividends.
229
Freddie Mac
CORPORATE HEADQUARTERS
8200 Jones Branch Drive
McLean, Virginia 22102-3110
(703) 903-2000
NEW YORK CITY OFFICE
575 Lexington Avenue, Suite 1800
New York, New York 10022-6102
(212) 418-8900
NORTH CENTRAL REGION
333 West Wacker Drive, Suite 2500
Chicago, Illinois 60606-1287
(312) 407-7400
NORTHEAST REGION
1410 Spring Hill Road, Suite 600
Post OÇce Box 50122
McLean, Virginia 22102-8922
(703) 902-7700
SOUTHEAST REGION
North Tower, Suite 200
2300 Windy Ridge Parkway SE
Atlanta, Georgia 30339-5665
(770) 857-8800
SOUTHWEST REGION
5000 Plano Parkway
Carrollton, Texas 75010-4902
(972) 395-4000
WESTERN REGION
21700 Oxnard Street, Suite 1900
Woodland Hills, California 91367-3642
(818) 710-3000
ADDITIONAL FINANCIAL INFORMATION
For more information about Freddie Mac stock contact:
Freddie Mac
Mailstop D4O
1551 Park Run Drive
McLean, Virginia 22102-3110
Investor Relations: (571) 382-4732
Toll Free: (800) FREDDIE
On the Internet: http://www.FreddieMac.com/investors
ANNUAL MEETING
The annual meeting of Freddie Mac's stockholders will be
held:
July 15, 2005
9:00 a.m. eastern time
8000 Jones Branch Drive
McLean, Virginia 22102
Proxy material will be mailed to stockholders of record by
the company's transfer agent in accordance with Freddie
Mac's bylaws and New York Stock Exchange
requirements.
DIVIDEND PAYMENT
Approved by Freddie Mac's Board of Directors, dividends
on the company's common stock and non-cumulative
preferred stock in 2004 and the Ñrst Ñve months of 2005
were paid on:
March 31, 2004
June 30, 2004
September 30, 2004
December 31, 2004
March 31, 2005
Subject to approval by Freddie Mac's Board of Directors,
dividends on the company's common stock and non-
cumulative preferred stock in the last seven months of 2005
are expected to be paid on:
June 30, 2005
September 30, 2005
December 31, 2005
230
Freddie Mac
We are providing this index of acronyms used in this Information Statement for the convenience of the
reader. All of the acronyms listed below are deÑned at their Ñrst use in this document.
INDEX OF ACRONYMS
ABO
AICPA
AOCI
APB
ARM
CMT
CON
DOL
EITF
ERISA
ESPP
Fannie Mae
FASB
FHA
FICO
FIN
Freddie SUBS
FSP
GA
GAAP
Ginnie Mae
GO
GSE
GSE ACT
HUD
IRC
IRR
IRS
LIBOR
LIHTC
LTV
MD&A
NPV
NYSE
OFHEO
OTC
PBO
PC
PMI
PMVS
PMVS-L
PMVS-YC
PwC
REIT
REMIC
REO
RHS
RSU
QFA
Accumulated beneÑt obligation
American Institute of CertiÑed Public Accountants
Accumulated other comprehensive income (loss), net of taxes
Accounting Principles Board
Adjustable-Rate Mortgage
Constant Maturity Treasury
Statements of Financial Accounting Concepts
Department of Labor
Emerging Issues Task Force
Employee Retirement Income Security Act
Employee Stock Purchase Plan
Federal National Mortgage Association
Financial Accounting Standards Board
Federal Housing Administration
Credit scores initially developed by Fair, Issac and Co., Inc.
Financial Accounting Standards Board Interpretation
Subordinated debt securities issued by Freddie Mac
Financial Accounting Standards Board StaÅ Position
Guarantee Asset
Generally Accepted Accounting Principles
Government National Mortgage Association
Guarantee Obligation
Government-Sponsored Enterprise
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992
Department of Housing and Urban Development
Internal Revenue Code
Internal Rates of Return
Internal Revenue Service
London Interbank OÅered Rate
Low-Income Housing Tax Credit
Loan-to-Value
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Present Value
New York Stock Exchange
OÇce of Federal Housing Enterprise Oversight
Over-the-Counter
Projected beneÑt obligation
Mortgage Participation CertiÑcate
Primary Mortgage Insurance
Portfolio Market Value Sensitivity
Portfolio Market Value Sensitivity Level
Portfolio Market Value Sensitivity Yield Curve
PricewaterhouseCoopers LLP
Real Estate Investment Trust
Real Estate Mortgage Investment Conduit
Real Estate Owned
Rural Housing Service
Restricted Stock Units
Quarterly Funding Announcement
231
Freddie Mac
QSPE
S&P
SAR
SEC
SFAS
SOP
TBA
TDR
U.S.
VA
VIE
Qualifying Special Purpose Entities
Standard & Poor's
Stock Appreciation Rights
Securities and Exchange Commission
Statement of Financial Accounting Standards
The AICPA's Statement of Position
To Be Announced
Troubled Debt Restructuring
United States
Department of Veterans AÅairs
Variable Interest Entity
232
Freddie Mac
DESIGN HC Creative Communications LLC | www.hccreative.com
CORPORATE HEADQUARTERS
8200 Jones Branch Drive | McLean, VA 22102-3110
703-903-2000 | 800-424-5401 | www.FreddieMac.com