2005 Annual Report
CONTINUING
Progress
A MESSAGE FROM THE CHAIRMAN
2005 was a year of continuing progress for Freddie Mac.
Overall, our business performed well. We were successful in improving
our position with customers, meeting extraordinary mission demands,
and strengthening our capital position and balance sheet. We grew
our mortgage portfolio and our share of the market. At the same time,
we kept our interest-rate and credit risks exceptionally low. These
were all major accomplishments, given rising interest rates and diverse
challenges that included increased competition, diminished housing
affordability, and widespread storm devastation along the Gulf Coast.
No less important, we provided more support for affordable housing
than ever before. And we made this key aspect of our broad mission
part of the everyday flow of our business.
When the Gulf hurricanes struck, Freddie Mac demonstrated the kind of leadership and
market influence that sets us apart as a government-sponsored enterprise, or GSE. By
moving quickly to provide relief to affected homeowners and mortgage servicers — and
taking the lead by investing in state and local mortgage revenue bonds — we helped
bring stability and hope to the affected region. Although we are a large, national company,
our actions in the Gulf region made a real difference, at the local level, for thousands of
struggling families and individuals.
A MESSAGE FROM THE CHAIRMAN
These and other steps underscore our capacity and commitment to help protect
homeowners, the housing sector and the economy from the shock of unexpected events.
They demonstrate once again how we serve our congressional charter both in good times
and in times of crisis.
While the year brought reason for pride, it also brought some disappointment. None of us
was satisfied with the company’s progress in financial reporting, where we met some of our
targets, but fell short of others. This is an area in which we are accelerating our efforts this
year, as we focus on a number of internal controls and infrastructure upgrades.
In this and many other ways, Freddie Mac’s transformation continues. Let me detail some of
the progress we have made:
Strong Business Performance
Even in the face of a challenging financial environment and a competitive secondary market,
our business remained strong in 2005.
Freddie Mac’s portfolio of issued mortgage securities grew by 10.5 percent and our
retained portfolio grew by 8.7 percent. In a robust mortgage market, these were both
significant improvements over 2004. Together, they brought our growth almost in line with
that of the overall mortgage market. We achieved this healthy growth by executing on our
underlying franchise strengths of excellent credit and interest-rate risk management and low
debt funding costs.
We met the market’s changing needs by improving our ability to purchase non-traditional
mortgage products and making core improvements in our business operations. We also
took major steps forward in such areas as customer satisfaction and market share.
Our focus on the customer continued to bear fruit. For instance, we cut in half the time
it took to get a customer contract. We also expanded our mortgage product line and
launched new types of securities (such as the Reference REMIC and whole-loan REMICs).
Foreign investors were particularly attracted to these securities — thus continuing our
“insourcing” of low-cost global funds to support the U.S. housing market.
Not only did we gain substantial GSE market share, but in the face of stiff competition from
the banking sector, we also grew overall market share. And we diversified our customer
base by reaching beyond our usual largest customers.
Building Shareholder Value
Increasing market share and customer satisfaction is only part of our strategy to build
shareholder value. A strong balance sheet and expert risk management are also essential.
In 2005, we built on these enduring strengths.
Turning to our balance sheet, Freddie Mac’s regulatory core capital grew to over $35 billion
— well above the capital requirements set by our safety and soundness regulator.
As a result of our strong capital position and confidence in our profitability, we increased
our quarterly common stock dividend twice last year. In fact, since December 2003, we
have raised this dividend by 81 percent.
Regarding our credit and interest-rate risk management record, it remains a hallmark
of the industry. Our ready access to callable debt and specialized mortgage risk
expertise are key competitive advantages. The company’s interest-rate and credit risks
are near historic lows. Our delinquency rates remain low as well. Our key measures
of interest-rate risk are disclosed monthly — transparent to all — demonstrating that
we continue to manage risk prudently and consistently in a world of rapidly changing
rate conditions.
In May we reported 2005 earnings in excess of $2 billion in GAAP net income. These results
reflect a cyclical narrowing of spreads as well as costs associated with the settlement of
litigation stemming from the events of 2003, charges related to Hurricane Katrina, and the
cumulative impact of a number of accounting changes. Fair value, another very important
measure of our performance, grew before capital transactions, but at a rate well below our
long-term expectations and continuing guidance.
Creating value for shareholders depends in part on our ability to hold down expenses, and in
2005 we were successful in this area. But I want to be clear: we also have an absolute duty
A MESSAGE FROM THE CHAIRMAN
to make the necessary investments to ensure that Freddie Mac has world-class controls,
reporting and accounting systems. Our goal is to reduce our expense ratio over time, so
that as the company grows, expenses become a diminishing share of our overall business.
Serving Our Mission
Freddie Mac’s statutory mission is a broad one: to provide stability, liquidity and affordability
to the nation’s housing finance markets. Our response to the Gulf Coast hurricanes was just
one example of our commitment to this mission.
Though the U.S. Secretary of Housing and Urban Development makes the final
determination, we reported that we met the toughest set of affordable housing goals in
the company’s history. Our affordable performance was strong — with well over half the
units financed by our mortgage purchases being affordable to low- and moderate-income
families. In addition, Single Family’s purchase of mortgages from underserved areas
increased, and our goal-rich Multifamily business set a new record for annual volume.
The next generation of homeowners will need trillions of dollars in mortgage capital,
and minorities and immigrants will be the source of most household growth. To meet
these growing needs, Freddie Mac has a central role to play. That’s why we are focused
on our mission. And why, more than ever, what’s good for our mission is good for
our business.
Focusing on the Future
Freddie Mac is better positioned to compete than it has been in years. We achieved
good growth in line with the overall market, increased our penetration of the secondary
conforming market that we serve and maintained a very strong balance sheet. We also
streamlined our business operations; reinforced corporate governance, ethics and
compliance; and added real strength and depth to our management team. These and
other developments — including trends in the market — give me confidence in Freddie
Mac’s long-term business prospects.
Clearly, much more needs to be done. Our most urgent task is to do everything it takes
to ensure that our internal controls and accounting systems are of the same high caliber
as our financial risk management and reporting. There is no higher priority for Freddie
Mac’s senior management than completing this work and becoming timely in our financial
reporting. This company must become the standard of excellence not only for managing
mortgage risk, but for the accounting and internal controls associated with it.
Over the past year, Congress has worked to overhaul regulatory oversight of the housing
GSEs, and we have supported this effort in a constructive way. Last fall, acting on a broad
bipartisan basis, the U.S. House of Representatives passed tough legislation to enhance
GSE oversight. This tough bill goes well beyond current banking law in a number of areas.
Going forward, we will continue to support federal legislation that strengthens regulatory
oversight and allows us to fulfill our mission.
As part of the ongoing policy discussion, we made good progress last year in publicly
articulating the value and vital role of the GSEs. That includes how we insulate households
from interest-rate risk and transfer it out to the capital markets; how we provide stability,
liquidity and affordability in good times and bad; and how we harness market means —
and private capital — to achieve a public mission.
As Freddie Mac stockholders, you share a vital role in making home possible for millions of
families. So when I pledge to you that I will finish the job of making a strong franchise run
better than ever, that is not a diversion from my mission responsibilities. It is an expression
of those responsibilities.
And it is a promise I intend to keep. n
Sincerely,
Richard F. Syron
Chairman and Chief Executive Officer
CONTINUING
Commitment
Freddie Mac brings stability, liquidity and affordability to the
nation’s housing finance system during good times and tough times.
That’s our reason for being. And our continuing commitment.
Stability. When a trio of hurricanes battered the Gulf Coast in the fall of 2005, Freddie
Mac responded decisively — putting both our balance sheet and our expertise to work.
We helped jumpstart home rebuilding and community renewal by providing relief to
borrowers, originators and servicers. We also brought stability to the market, using our
retained portfolio, by committing to buy up to $1 billion of mortgage revenue bonds issued
by state and local housing authorities. With well over half of Freddie Mac’s purchases
already completed, housing officials are using these low-cost funds to provide affordable
housing for thousands of affected families. In these and other ways, we are fulfilling our
mission as a government-sponsored enterprise (GSE) to protect homeowners, the housing
sector and the economy from the shock of unexpected events. And our leadership has
been widely recognized by public officials and lenders alike.
Liquidity. Through Freddie Mac’s investment and securitization activities, we ensure a
ready supply of money for lenders. We excel at tapping global financial markets to support
housing in America — and at transferring interest-rate risk from households to these
markets, which are much better equipped to handle it. In 2005, we made home possible for
millions of families by providing the residential secondary mortgage market with more than
Building hope in the wake
of the 2005 hurricanes,
more than 800 Freddie
Mac employees joined
Habitat for Humanity’s
America Builds on the
National Mall. Fifty-one
homes were shipped
to waiting families in the
Gulf Coast region.
$580 billion in liquidity. Our dependable presence in the market lowers rates for consumers
of conforming mortgages. And it helps make mortgage-backed securities (MBS) the most
widely traded non-sovereign instruments in the world.
Affordability. In 2005, Freddie Mac financed homes for more than 4 million borrowers.
Our affordable performance was among our strongest on record — with more than
54 percent of the units financed through our mortgage purchases being affordable to
low- and moderate-income families. We created new affordable housing opportunities
Every 10 seconds
Freddie Mac makes it
possible for another
family to own a home.
45
1
30
by launching a product line with special benefits for police officers,
firefighters, teachers and health care workers who want to live in
the communities they serve. And while the Secretary of HUD
15
makes the final determination, thanks in part to our expanding
multifamily business, we reported to HUD that we exceeded the
2005 affordable housing goals — the toughest ever set for us by
the federal government.
Freddie Mac also maintains a strong philanthropic commitment to America’s communities,
opening the doors of hope and opportunity to children and their families. Through our
Corporate Giving program and the Freddie Mac Foundation, we awarded almost $35 million
to nonprofit organizations in 2005. In fact — with our DC-area grants providing almost a
fifth of the top 50 companies’ combined giving — the Washington Business Journal ranked
us first among local corporations in contributions to the community.
Meeting our mission and serving our communities. That’s Freddie Mac’s continuing
commitment. n
CONTINUING
Stren th
Stren th
Freddie Mac continues to build on its strengths.
In 2005, we buttressed a rock-solid capital position and balance sheet.
Throughout the year, we exceeded all regulatory capital requirements.
In fact, by year end, Freddie Mac’s regulatory core capital grew to more
than $35 billion — well above the capital requirements set by our safety
and soundness regulator. And we expect to be able to maintain our
strong position across a wide range of market conditions.
Our credit risks remained low, as measured both by single-family delinquency rates
and total credit losses. Indeed, despite the effects of the Gulf Coast hurricanes, 90-day
delinquencies at the end of 2005 were lower than they were on December 31, 2004.
Prudent and consistent risk management amid a changing interest-rate environment
kept our interest-rate risks low as well. Portfolio Market Value Sensitivity Level (PMVS-L),
which measures our sensitivity to a 50-basis point parallel shift in the level of interest rates,
averaged 1 percent throughout 2005. Our duration gap also remained steady at near zero
months. All of which means that Freddie Mac is well positioned to deal with interest-rate
swings that would place great stress on many financial institutions.
Freddie Mac’s solid
business strength grows
from its company-
wide commitment to
shareholders, customers
and homebuyers.
To put it simply, Freddie Mac’s financial strength is beyond question.
Reflecting our strong capital position and confidence in Freddie Mac’s long-term business
prospects, we raised the amount of capital returned to shareholders twice in 2005, through
dividend increases in March and December. Our senior management is acutely aware that
putting shareholder capital to work is a major priority. Since year-end 2003, our quarterly
common stock dividend has grown by 81 percent.
And our business is growing, too — with 2005 bringing
expansion in key areas. Growth in our share of the market.
$1.52
$1.20
$1.04
Growth in our mortgage portfolio. Growth in our product line and
ability to serve lender needs. Growth in customer satisfaction.
Freddie Mac has
benefited shareholders
by increasing its common
stock dividend significantly
over the past three years.
(Dividends per common share)
2003
2004
2005
Results like these from across the company reflect Freddie
Mac’s business strengths in 2005, as we continued to build
long-term shareholder value and deliver on our charter mission
as a leader in the secondary mortgage market.
Much of Freddie Mac’s progress is the result of a new, integrated focus on customers.
We improved customer service, diversified our lender base and increased our share with
key business partners. And we enhanced our value proposition for customers by expanding
the types of mortgages we guarantee and launching new products to meet evolving needs.
Abundant capital. Disciplined risk management. Strong customer relationships.
An established franchise in a defined and growing market. These are Freddie Mac’s
continuing strengths. n
CONTINUING
Transformation
A transformation is underway at Freddie Mac.
We’re rebuilding ourselves from the inside out. Strengthening our
infrastructure and controls. Designing financial products that meet
customer and market needs. Deploying innovative technologies.
Developing new strategies and initiatives.
Our goal? To make Freddie Mac a top financial services firm of enduring strength, increased
transparency and the highest integrity. A company that leads the industry, delivers first-class
financial reporting, provides new levels of customer service and makes both single-family
and rental housing more accessible and more affordable for more Americans.
That means optimizing our capital structure and further improving our mortgage security
performance. It means revamping our systems, processes and financing tools to better
match the market. And it means enhancing our capability to structure and trade credit risk,
for both single-family and multifamily loans.
In other words, taking a strong franchise and making it better.
That’s our challenge. And while our transformation is not nearly complete, we’re making
solid progress. Including the essential next step: upgrading Freddie Mac’s financial
reporting systems and strengthening our internal controls environment, so we can meet all
Freddie Mac’s
transformation into
an even stronger
franchise begins at
its headquarters in
McLean, Virginia.
our regulatory and financial reporting commitments. We’re taking every step necessary to
get this done and to do it right. And we will not rest until the job is complete.
We have continued to build a strong management team by filling key senior positions.
Since our 2004 Annual Report, for example, we’ve brought in Tim Bitsberger, a widely
respected former Treasury Department official and Wall Street veteran, as Treasurer; Paul
Mullings, a customer-oriented mortgage industry executive from JP Morgan Chase, as
Senior Vice President for Single Family Mortgage Sourcing; Anurag Saksena, a seasoned
risk management professional from GMAC, to be our new Chief Enterprise Risk Officer; and
Bob Bostrom, a recognized expert on corporate governance and
financial institutions compliance matters, as General Counsel.
45%
41%
37%
Freddie Mac has
continued to grow
its share of the GSE
securitization market.
We’ve made progress in adapting the company culture to a
more competitive market environment that requires us to be
agile, aggressive and responsive. And we’ve strengthened our
2003
2004
2005
corporate governance.
magazine agrees. It named Freddie Mac to its 2006 list of “Top 100 Corporate Citizens” for
This is a company doing good things — and Business Ethics
best practices in the area of corporate social responsibility.
Today, we have the right team, the right plan and a strong, well-capitalized franchise that’s
focused on serving our vital housing mission and generating value for shareholders.
Continuing transformation today, to generate new growth and new opportunities tomorrow.
That’s our aim and our vision. That’s Freddie Mac. n
Freddie Mac
2005 Annual Report to Stockholders
INFORMATION STATEMENT
AND
ANNUAL REPORT TO STOCKHOLDERS
For the Ñscal year ended December 31, 2005
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 28, 2006
TABLE OF CONTENTS
BUSINESSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REGULATION AND SUPERVISION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RISK FACTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FORWARD-LOOKING STATEMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SELECTED FINANCIAL DATAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXECUTIVE SUMMARY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LIQUIDITY AND CAPITAL RESOURCES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RISK MANAGEMENT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OFF-BALANCE SHEET ARRANGEMENTSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PORTFOLIO BALANCES AND ACTIVITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
QUARTERLY SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CONTROLS AND PROCEDURES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DIRECTORS AND EXECUTIVE OFFICERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BOARD OF DIRECTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PRINCIPAL ACCOUNTING FEES AND SERVICES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INDEX OF ACRONYMS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
1
6
9
15
16
16
16
18
19
20
20
23
36
45
48
53
53
56
63
77
78
84
89
90
92
148
148
148
149
150
150
150
150
151
152
154
i
Freddie Mac
This Information Statement and Annual Report includes forward-looking statements, which may include expectations
and objectives for our operating results, Ñnancial condition, business, and trends and other matters that could aÅect our
business. You should not unduly rely on our forward-looking statements. Actual results might diÅer signiÑcantly from our
forecasts and expectations due to several factors that involve risks and uncertainties, including those described in
""BUSINESS,'' ""RISK FACTORS'' and ""FORWARD-LOOKING STATEMENTS.'' These forward-looking 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.
Overview
BUSINESS
Freddie Mac is a stockholder-owned company chartered by Congress in 1970 to stabilize the nation's residential
mortgage markets and expand opportunities for homeownership and aÅordable rental housing. We are one of the largest
purchasers of mortgage loans in the U.S. We bring innovation and eÇciency to the mortgage lending process.
Our mission is to provide liquidity, stability and aÅordability to the U.S. housing market. We fulÑll our mission by
purchasing residential mortgages and mortgage-related securities in the secondary mortgage market. We purchase mortgages
that meet our underwriting and product standards, then bundle them into mortgage-related securities that can be sold to
investors. We can use the proceeds to purchase additional mortgages from primary market mortgage lenders, thus
providing them with a continuous Öow of funds. We also purchase mortgage loans and mortgage-related securities for our
investment portfolio, which we Ñnance primarily by issuing a variety of debt instruments in the capital markets.
Though we are chartered by Congress, our business is funded completely with private capital. We are responsible for
making payments on our securities. Neither the U.S. government nor any other agency or instrumentality of the U.S.
government is obligated to fund our mortgage purchase or Ñnancing activities or to guarantee our securities and other
obligations.
Our Charter and Mission
The Federal Home Loan Mortgage Corporation Act, which we refer to as our charter, forms the framework for our
business activities, shapes the products we bring to market, and drives the services we provide to the nation's residential
housing and mortgage industries. Our charter also prescribes the terms and principal amounts of mortgage loans that we
are permitted to purchase, as described in ""Business Activities Ì Types of Mortgages We Purchase.''
Our statutory purposes, as stated in our charter, 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 activities relating to
mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less
than the return earned 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.
To facilitate our statutory purposes, our charter provides us with special attributes including:
‚ exemption from the registration and reporting requirements of the Securities Act and the Exchange Act (we are
subject to the general antifraud provisions of the federal securities laws and have committed to the voluntary
registration of our common stock with the Securities and Exchange Commission under the Exchange Act);
‚ favorable treatment of our securities under various investment laws and other regulations;
‚ discretionary authority of the Secretary of the Treasury to purchase up to $2.25 billion of our securities; and
‚ exemption from state and local taxes, except for taxes on real property that we own.
Our activities in the secondary mortgage market beneÑt consumers by providing lenders a steady Öow of low-cost
mortgage funding. This Öow of funds helps moderate cyclical swings in the housing market, equalizes the Öow of mortgage
funds regionally throughout the U.S. and provides for the availability of mortgage funds in a variety of economic conditions.
In addition, the supply of cash made available to lenders through this process drives down mortgage rates on loans within
the dollar limits set under our charter. These lower rates help make homeownership aÅordable for more families and
individuals than would be possible without our participation in the secondary mortgage market.
1
Freddie Mac
Residential Mortgage Debt Market
We compete in the large and growing U.S. residential mortgage debt market. This market consists of a primary
mortgage market that links homebuyers and lenders, and a secondary mortgage market that links lenders and investors. At
December 31, 2005, our Total mortgage portfolio was $1.7 trillion, while the total U.S. residential mortgage debt
outstanding was estimated to be approximately $9.9 trillion.
The residential mortgage market has grown substantially in recent years, as low interest rates and a strong housing
market have resulted in record levels of mortgage loan originations, including reÑnancings of existing residential mortgage
debt. As interest rates have increased, reÑnancings have declined. Throughout 2005, short-term interest rates increased
signiÑcantly as a result of the actions of the Board of Governors of the Federal Reserve System, or the Federal Reserve,
which regulates the supply of money and credit in the U.S.; however, the Federal Reserve's actions had less of an impact on
long-term interest rates. Consequently, the slope of the ""yield curve'' Ì or the spread between short-term and long-term
interest rates Ì continued to Öatten throughout the year. Despite the rise in interest rates, mortgage rates remained low by
historical standards and continued to contribute to demand in the residential mortgage market.
As indicated in Table 1, house prices appreciated nationwide at a rate of approximately 13 percent in 2005 with some
regional variation. However, this appreciation rate is expected to moderate. Total residential mortgage debt outstanding in
the U.S. grew at an estimated annual rate of 14 percent in both 2005 and 2004. We expect the amount of total residential
mortgage debt outstanding will continue to rise in 2006, though at a slower rate than in the past few years.
Table 1 Ì Mortgage Market Indicators
Year-Ended December 31,
2004
2005
2003
Home sale units (in thousands)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
House price appreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family mortgage originations (in billions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,828
ARM share of single-family mortgage originations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ReÑnancing share of single-family mortgage originations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. residential mortgage debt outstanding (in billions)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,851
7,462
31%
44%
13%
7,162
12%
6,529
8%
$2,911
$3,860
34%
46%
$8,642
19%
65%
$7,581
(1) Includes sales of new and existing detached single-family homes in the U.S. and excludes condos/co-ops. Source: National Association of Realtors
news release dated May 25, 2006 (sales of existing homes) and U.S. Census Bureau news release dated May 24, 2006 (sales of new homes).
(2) Debt outstanding at year-end, not seasonally-adjusted. Source: Federal Reserve Flow of Funds Accounts of the United States dated June 8, 2006.
Growth in the U.S. residential mortgage debt market is aÅected by several factors, including changes in interest rates,
employment rates in various regions of the country, home ownership rates, house price appreciation, and borrower
preferences concerning the portion of his or her home's value to Ñnance with mortgage debt. The amount of residential
mortgage debt available for us to purchase and the mix of available loan products are also aÅected by several factors,
including the volume of single-family mortgages within the loan limits imposed under our charter and the purchase and
securitization activity of other Ñnancial institutions. See ""RISK FACTORS.''
Primary Mortgage Market Ì Our Customers
Our customers are predominantly lenders in the primary mortgage market that originate mortgages for homebuyers.
These lenders include mortgage banking companies, commercial banks, savings banks, community banks, credit unions, state
and local housing Ñnance agencies, and savings and loan associations. A lender that originates a mortgage can either hold
the mortgage in its own portfolio, securitize the mortgage or sell the mortgage to a secondary mortgage market investor, such
as Freddie Mac.
We buy a signiÑcant portion of our mortgages from several large mortgage lenders. During 2005, three mortgage lenders
each accounted for 10 percent or more of our mortgage purchase volume and in the aggregate they accounted for
approximately 47 percent of this volume. These three lenders are among the largest mortgage loan originators in the United
States. We have contracts with a number of mortgage lenders, including some large lenders, that include a commitment by
the lender to sell us a minimum percentage or dollar amount of its mortgage origination volume. These contracts typically
last for one year. If a mortgage lender fails to meet its contractual commitment, we have a variety of contractual remedies,
including the right to assess certain fees. As the mortgage industry has been consolidating, we, as well as our competitors,
have been seeking business from a decreasing number of key lenders. See ""RISK FACTORS Ì Competitive and Market
Risks.'' We are working to diversify our customer base and thus reduce the risk of losing a key customer.
Secondary Mortgage Market
We participate in the secondary mortgage market generally by buying whole loans (i.e., mortgage loans that have not
been securitized) and mortgage-related securities for our Retained portfolio and by issuing guaranteed mortgage-related
securities. We do not lend money directly to homebuyers. Our principal competitors are the Federal National Mortgage
Association, or Fannie Mae, a similarly chartered government-sponsored enterprise, or GSE, the Federal Home Loan Banks,
2
Freddie Mac
and other Ñnancial institutions that retain or securitize mortgages, such as banks, dealers and thrift institutions. We compete
primarily on the basis of price, products, structure and service.
The dramatic increases in housing prices over the last few years have resulted in the origination of a greater proportion
of alternative mortgage products, including initial interest-only loans and option adjustable-rate mortgage loans, or Option
ARMs. We have historically purchased limited amounts of these alternative products through our securitization programs.
However, recently we have increased our purchases of these products consistent with the increase in their prevalence in the
market. We are continuing to explore ways in which we can become more involved with these products and we expect our
participation in these products to grow over the coming years. See ""MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, or MD&A Ì RISK MANAGE-
MENT Ì Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies.'' In addition, we believe
the recent rise in short-term interest rates relative to long-term interest rates will increase the proportion of 30-year Ñxed-
rate mortgages originated.
Business Activities
We generate income primarily through two business activities Ì portfolio investment activities and credit guarantee
activities Ì operating in one business segment. For a summary and description of our Ñnancial performance and Ñnancial
condition, see ""MD&A'' and ""CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA''
and the accompanying notes to our consolidated Ñnancial statements. At December 31, 2005, we had total assets of
$806.2 billion, and total stockholders' equity of $27.2 billion, and for the year ended December 31, 2005, we reported net
income of $2.1 billion. At June 1, 2006, we had 4,905 full-time and 133 part-time employees. Our principal oÇces are
located in McLean, Virginia.
Types of Mortgages We Purchase
Our charter establishes general parameters for the terms and principal amounts of the mortgages we may purchase, as
described below. We also purchase mortgage-related securities that are backed by single-family or multifamily mortgages.
Within our charter parameters, the residential mortgage loans we purchase or that underlie mortgage-related securities we
purchase generally fall into one of two categories:
‚ Single-Family Mortgages. Single-family mortgages are secured by one- to four-family properties. The types of
single-family mortgages we purchase include 30-year, 20-year, 15-year and 10-year Ñxed-rate mortgages, interest-
only mortgages, ARMs, and balloon/reset mortgages.
‚ Multifamily Mortgages. Multifamily mortgages are secured by structures with Ñve or more residential rental units.
These mortgages have terms generally ranging from Ñve to thirty years. Our multifamily mortgage products, services
and initiatives are designed primarily to Ñnance aÅordable rental housing for low- and moderate-income families.
Conforming Loan Limits. Our charter places a dollar amount cap, called the ""conforming loan limit,'' on the size of
the original principal balance of single-family mortgage loans we purchase. This limit is established annually pursuant to a
methodology prescribed by our safety and soundness regulator, the OÇce of Federal Housing Enterprise Oversight, or
OFHEO, based on year-to-year changes in the national average price of a one-family residence, as surveyed by the Federal
Housing Finance Board each October. For 2006, 2005 and 2004, the conforming loan limits for a one-family residence were
set at $417,000, $359,650 and $333,700, respectively. Higher limits apply to two- to four-family residences. The
conforming loan limits are also 50 percent higher for mortgages secured by properties in Alaska, Guam, Hawaii and the U.S.
Virgin Islands. No comparable limits apply to our purchases of multifamily mortgages.
Loan-to-Value Ratios and Mortgage Insurance. Under our charter, mortgages that are not guaranteed or insured by
any agency or instrumentality of the U.S. government are referred to as ""conventional mortgages.'' Our charter requires that
we have additional credit protection if the unpaid principal balance of a conventional single-family mortgage that we
purchase exceeds 80 percent of the value of the property securing the mortgage. See ""MD&A Ì RISK MANAGE-
MENT Ì Credit Risks Ì Mortgage Credit Risks Ì Mortgage Credit Risk Management Strategies Ì Credit Enhance-
ments'' for more information regarding the credit enhancements and other credit protections we obtain.
Loan Quality. Under our charter, our mortgage purchases are limited, so far as practicable, to mortgages we deem to
be of a quality, type and class that generally meet the purchase standards of private institutional mortgage investors.
To manage credit risks with respect to our mortgage purchases, we have developed internal credit policies and appraisal,
underwriting and other purchase policies and guidelines set forth in our Single-family Seller/Servicer Guide and our
Multifamily Seller/Servicer Guide. We design 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 in
an eÅort to ensure their eÅectiveness and to address the needs of the changing marketplace Ì including the needs of
minorities, low- and moderate-income borrowers and other borrowers who are underserved by the traditional housing Ñnance
3
Freddie Mac
system. See ""MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risks Ì Mortgage Credit Risk
Management Strategies Ì Underwriting Requirements and Quality Control Standards'' for additional information.
Investment and Funding Activities
We purchase mortgage loans and mortgage-related securities and hold them in our Retained portfolio for investment
purposes. We invest in mortgage-related securities issued by GSEs or government agencies, referred to as agency securities.
We also invest in non-agency mortgage-related securities. Our portfolio purchases replenish the capital available for
mortgage lending. We face competition from other Ñnancial institutions that are aggressively buying mortgage-related
securities backed by both GSE and non-agency issuers.
We manage our Retained portfolio through a strategy of long-term capital deployment. We apply our expertise in
mortgage markets and mortgage assets to support attractive and timely asset selection while managing our interest-rate risk.
We issue short-, medium- and long-term debt securities, subordinated debt securities and equity securities to Ñnance
purchases of mortgages and mortgage-related securities and other business activities. Our debt funding program is designed
to oÅer liquid securities to the global capital markets in a transparent and predictable manner. By diversifying our investor
base and the types of debt securities we oÅer, we believe we enhance our ability to maintain continuous access to the debt
markets under a variety of conditions. We manage our debt funding costs by issuing debt of various maturities that is either
callable (i.e., redeemable at our option at one or more times before its scheduled maturity) or non-callable. Recently, our
funding costs compared to the London Interbank OÅered Rate, or LIBOR, have improved. Our funding mix also helps us
manage our interest-rate risk by closely matching the interest obligations on our debt with the expected cash inÖows from
our mortgage-related investments. To further manage interest-rate risks, we use a variety of derivatives. We also use
Structured Securities, described below, to restructure cash Öows from mortgage-related securities, retaining a portion of
these restructured cash Öows. See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''
for more information.
Because of our GSE status and the special attributes granted to us under our charter, noted above in ""Our Charter and
Mission,'' our debt securities and those of other GSE issuers trade in the so-called ""agency sector'' of the debt markets. This
highly liquid market segment exhibits its own yield curve reÖecting our ability to borrow at lower rates than many other
corporate debt issuers. As a result, we mainly compete for funds in the debt issuance markets with Fannie Mae and the
Federal Home Loan Banks, who issue debt securities of comparable quality and ratings. The demand for, and liquidity of,
our debt securities, and those of other GSEs, also beneÑt from their status as permitted investments for banks, investment
companies and other Ñnancial institutions under their regulatory framework. Other investors also Ñnance portfolio
investments in mortgage assets. Competition for funding with these entities can vary with economic, Ñnancial market and
regulatory environments.
For additional information about our debt securities, see ""MD&A Ì LIQUIDITY AND CAPITAL RE-
SOURCES Ì Liquidity Ì Debt Securities.''
Credit Guarantee Activities
We guarantee the payment of principal and interest on mortgage-related securities in exchange for a fee, which we refer
to as a guarantee fee. The types of mortgage-related securities we guarantee include the following:
‚ mortgage Participation CertiÑcates, or PCs, we issue;
‚ single-class and multi-class Structured Securities we issue; and
‚ securities related to tax-exempt multifamily housing revenue bonds.
We have recently increased our share of the GSE securitization market by improving our customer service, diversifying
our customer base, tailoring securities to a broader group of global investors, expanding the types of mortgages that we
guarantee and introducing program enhancements, new forms of Structured Securities, such as the Reference REMICSM
securities, and through other initiatives.
We support our credit guarantee business volume by adjusting our guarantee fee or other transaction fees. For example,
if the price performance of, and demand for, our PCs is not comparable to Fannie Mae's securities on future mortgage
deliveries by sellers, we may use market-adjusted pricing where we provide guarantee fee or other transaction fee price
adjustments to partially oÅset weaknesses in prevailing security prices. We believe these price-adjustment features 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.
Guarantees of PCs. We issue single-class mortgage-related securities that represent undivided interests in pools of
mortgages we have purchased. We refer to these mortgage-related securities as PCs. We guarantee the payment of principal
and interest on all of our PCs. We issue most of our PCs in transactions in which our customers sell us mortgage loans in
4
Freddie Mac
exchange for PCs. Investors in PCs may include the lenders that sold us the underlying mortgages, as well as pension funds,
insurance companies, securities dealers and other Ñxed-income investors. Investors may choose to hold these PCs in their
portfolios or sell them to others. Our guarantee increases the marketability of our PCs, providing additional liquidity to the
mortgage market.
Guarantees of Structured Securities. We also issue securities representing beneÑcial interests in pools of PCs and
certain other types of mortgage-related assets. We refer to these mortgage-related securities as Structured Securities. We
guarantee the payment of principal and interest on most of the Structured Securities we issue. By issuing Structured
Securities, we seek to provide liquidity to alternative segments of the mortgage market. We issue many of our Structured
Securities in transactions in which securities dealers or investors sell us the mortgage-related assets underlying the
Structured Securities in exchange for the Structured Securities. We also sell Structured Securities to securities dealers or
investors in exchange for cash.
We issue single-class Structured Securities and multi-class Structured Securities. Single-class Structured Securities
pass through the cash Öows on the underlying mortgage-related assets. Multi-class Structured Securities divide the cash
Öows of the underlying mortgage-related assets into two or more classes that meet the investment criteria and portfolio needs
of diÅerent investors. Our principal multi-class Structured Securities qualify for tax treatment as Real Estate Mortgage
Investment Conduits, or REMICs. For purposes of this Information Statement, multi-class Structured Securities include
Structured Securities backed by non-agency mortgage-related securities.
Guarantees Related to Tax-Exempt Multifamily Housing Revenue Bonds. We guarantee 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 underlying tax-exempt multifamily housing revenue bonds.
PC and Structured Securities Support Activities. We support the liquidity and depth of the market for PCs through a
variety of activities, including educating dealers and investors about the merits of trading and investing in PCs, and
introducing new mortgage-related securities products and initiatives. We support the price performance of our PCs through
a variety of strategies, including the issuance of Structured Securities and the purchase and sale by our Retained portfolio of
PCs and other agency securities, including Fannie Mae securities. While some purchases of PCs may result in a return on
equity substantially below our normal thresholds, this strategy is not expected to have a material eÅect on the long-term
value of the company. Depending upon market conditions, including the relative prices, 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. 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.
In the fourth quarter of 2004, as part of our eÅort to realign our activities around our mission and core business, we
ceased our PC market making and support activities accomplished through our Securities Sales & Trading Group, or
SS&TG, and our external Money Manager program. For more information, see ""MD&A Ì CONSOLIDATED RE-
SULTS OF OPERATIONS Ì Net Interest Income.''
The To Be Announced Market.
In connection with our credit guarantee activities, we issue PCs that represent pools of
mortgages with similar characteristics. Because these PCs are homogeneous and are issued in high volume, they are highly
liquid and trade with similar securities on a ""generic'' basis, also referred to as trading in the To Be Announced, or TBA,
market. A TBA trade in Freddie Mac securities 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 thus the speciÑc
characteristics of the mortgages underlying those PCs, are not known (i.e., ""announced'') at the time of the trade, but only
shortly before the trade is settled. During 2005, we issued approximately $282.0 billion of PCs backed by single-family
mortgage loans that were eligible to be delivered to settle TBA trades, representing approximately 71 percent of our total
guaranteed PC and Structured Security issuances. 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.
Available Information
Our Information Statements, Supplements and other Ñnancial disclosure documents are available free of charge on our
website at www.FreddieMac.com. (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 (the Audit; Finance and Capital Deployment; Mission and Sourcing; Governance, Nominating and
5
Freddie Mac
Risk Oversight; and Compensation and Human Resources Committees) are also available on our website. Printed copies of
these documents may be obtained upon request from our Investor Relations department.
Department of Housing and Urban Development
REGULATION AND SUPERVISION
The U.S. Department of Housing and Urban Development, or HUD, has general regulatory power over Freddie Mac,
including power over new programs, aÅordable housing goals and fair lending.
Housing Goals
We are subject to aÅordable housing goals set by HUD. The goals, which are set as a percentage of the total number of
dwelling units underlying our total mortgage purchases, have risen steadily since they became permanent in 1995. The goals
are intended to expand housing opportunities for low- and moderate-income families, low-income families living in low-
income areas and very low-income families, and families living in HUD-deÑned underserved areas. The goal relating to low-
income families living in low-income areas and very low-income families is referred to as the ""special aÅordable'' housing
goal. This special aÅordable housing goal also includes a multifamily subgoal that sets an annual minimum dollar volume
of qualifying multifamily mortgage purchases.
EÅective January 1, 2005, HUD:
‚ established new and increasing aÅordable housing goal levels for the years 2005 through 2008;
‚ established three new subgoals for mortgages that count towards the goals and that Ñnance purchases of single-family,
owner-occupied properties located in metropolitan areas;
‚ increased the multifamily special aÅordable volume target to $3.92 billion, based on HUD's established formula; and
‚ required the certiÑcation of information provided in Freddie Mac's Annual Mortgage Report and Annual Housing
Activities Report submitted to HUD.
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 special aÅordable volume target, as summarized in Table 2 below.
Table 2 Ì Housing Goals and Home Purchase Subgoals for 2005 through 2008(1)
2008
Housing Goals
2006
2007
2005
Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily special aÅordable volume target (dollars in billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
56%
39
27
$3.92
55%
38
25
$3.92
53%
38
23
$3.92
52%
37
22
$3.92
Home Purchase Subgoals(2)
2008
2007
2006
2005
Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47%
34
18
47%
33
18
46%
33
17
45%
32
17
(1) An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal percentages will be determined
independently and cannot be aggregated to determine a percentage of total purchases that qualiÑes for these goals or subgoals.
(2) These home purchase subgoals are expressed as percentages of the total number of mortgages we purchased that Ñnance the purchase of single-family,
owner-occupied properties located in metropolitan areas.
Meeting these goals and subgoals in future years will be challenging and there can be no assurance that we will do so.
See ""RISK FACTORS Ì Legal and Regulatory Risks.'' However, we view the purchase of mortgage loans beneÑting low-
and moderate-income families and neighborhoods as a principal part of our mission and business, and we are committed to
fulÑlling the needs of these borrowers and markets.
We have reported to HUD that we achieved each of the aÅordable housing goals and subgoals as applicable to 2005,
2004 and 2003. HUD has determined that we met the goals for 2004 and 2003, and is evaluating our performance with
6
Freddie Mac
respect to the goals and subgoals for 2005. Our performance with respect to the goals and subgoals, as reported to HUD, is
set forth in Table 3 below.
Table 3 Ì Housing Goals and Home Purchase Subgoals and Reported Results(1)
Housing Goals and Reported Results
2005
Year Ended December 31,
2004
2003
Goal
Result
Goal
Result(2)
Goal
Result(2)
Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas goalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily special aÅordable volume target (dollars in billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52% 54.1%
37
22
42.2
24.5
$3.92 $11.41
50% 51.6%
31
20
$2.11
32.3
22.7
$7.77
50% 51.2%
31
20
$2.11
32.7
21.4
$8.79
Home Purchase Subgoals and Reported Results
Year Ended
December 31, 2005
Subgoal
Result
Low- and moderate-income subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underserved areas subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special aÅordable subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45%
32
17
46.9%
35.4
17.8
(1) An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal 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 or subgoals.
(2) The 2004 and 2003 results reÖected in this table have been revised from the numbers reÖected in our Information Statement dated June 14, 2005 to
reÖect adjustments and corrections to the information we originally reported to HUD for those years.
We are engaged in ongoing discussions with HUD regarding interpretive issues relating to the purchase and counting of
mortgages for purposes of housing goals performance for 2005. If the Secretary of HUD were to Ñnd that we failed, or that
there was a substantial probability that we would fail, to meet a housing goal and that achievement of the housing goal was
feasible, the Secretary could require us to submit a housing plan. The housing plan would describe the actions we would take
to achieve the goal in the future. HUD also has the authority to take enforcement actions against us, including issuing a
cease and desist order or assessing civil money penalties, if we: (a) fail to submit a required housing plan or fail to make a
good faith eÅort to comply with a plan approved by HUD; or (b) fail to submit certain data relating to our mortgage
purchases, information or reports required by law.
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, prohibits discriminatory practices in our mortgage
purchase activities, requires us to submit data to HUD to assist it in its fair lending investigations of primary market lenders,
and requires us to undertake remedial actions against lenders found to have engaged in discriminatory lending practices. In
addition, HUD periodically reviews and comments on our underwriting and appraisal guidelines for consistency with the Fair
Housing Act and the GSE Act.
Predatory Lending
A core component of our mission is to facilitate the Ñnancing of aÅordable housing for low- and moderate-income
families. Predatory lending is in direct opposition to our mission, our goals and our practices. Since 2000, we have taken a
number of voluntary steps to combat predatory lending and support responsible lending. We have instituted anti-predatory
lending policies intended to prevent the purchase or assignment of mortgage loans with unacceptable terms or conditions or
resulting from unacceptable practices. In accordance with these policies, we will not 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
‚ subprime mortgages originated on or after August 1, 2004 with mandatory arbitration clauses.
In addition to the purchase policies we have instituted, we promote consumer education and Ñnancial literacy eÅorts to help
borrowers avoid abusive lending practices and we provide competitive mortgage products to reputable mortgage originators
so that borrowers have a greater choice of Ñnancing options.
We also require our servicers to report all borrower credit information, including monthly mortgage payments. Several
states have enacted laws aimed at curbing predatory lending practices, generally with regard to loans exceeding thresholds
based on annual percentage rates or Ñnancing costs. These loans are typically referred to as ""high-cost home loans.'' The
high-cost home loan thresholds trigger state law liabilities for subsequent purchasers or assignees of such loans that may be
7
Freddie Mac
broader than liabilities imposed upon such purchasers or assignees under the Home Ownership and Equity Protection Act.
Currently, we do not purchase high-cost home loans in Arkansas, Georgia, Illinois, Indiana, Kentucky, Maine, Massachu-
setts, 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.
New Program Approval
We are required under our charter and the GSE Act to 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 have been approved by HUD or that were approved or engaged in before the
date the GSE Act was enacted; or that represents an expansion of programs above limits expressly contained in any prior
approval regarding the dollar volume or number of mortgages or securities involved. HUD must approve any new program
unless the Secretary determines that the new program is not authorized under our charter or that the program is not in the
public interest. Recently, HUD announced that it will soon initiate a review of certain of our investments and other assets
and liabilities to ensure conformity with our charter and investment guidelines.
OÇce of Federal Housing Enterprise Oversight
OFHEO is the safety and soundness regulator for Freddie Mac and Fannie Mae. The GSE Act established OFHEO as
a separate oÇce within HUD, substantially independent of the HUD Secretary. OFHEO is headed by a Director who is
appointed by the President. The OFHEO Director is responsible for ensuring that Freddie Mac and Fannie Mae are
adequately capitalized and operating safely in accordance with the GSE Act.
OFHEO's authority with regard to Freddie Mac and Fannie Mae includes authority to:
‚ issue regulations to carry out its responsibilities;
‚ conduct examinations;
‚ require reports of Ñnancial condition and operation;
‚ develop and apply critical, minimum and risk-based capital standards, including classifying the capital levels not less
than quarterly;
‚ prohibit excessive executive compensation under prescribed standards; and
‚ impose temporary and Ñnal cease-and-desist orders and civil money penalties, provided certain conditions are met.
OFHEO also has exclusive administrative enforcement authority that is generally similar to that of other federal
Ñnancial regulators. That authority can be triggered by a failure to meet regulatory capital requirements; a violation of our
charter, the GSE Act, OFHEO regulations or a written agreement with OFHEO; or conduct or conditions that signiÑcantly
threaten our core capital.
In June 2003, OFHEO commenced a special investigation of the company in connection with the revision and
restatement of our Ñnancial results for 2002, 2001 and 2000. On December 9, 2003, we entered into a consent order and
settlement with OFHEO that concluded OFHEO's investigation of the company. Under the terms of the consent order, we
agreed to pay a civil money penalty as well as to undertake certain remedial actions relating to governance, corporate
culture, internal controls, accounting practices, disclosure and oversight. We have taken actions to comply with the terms of
the consent order and OFHEO continues to monitor our progress. For additional information concerning OFHEO's
enforcement actions and regulatory proceedings in which we have been involved, see ""NOTE 13: LEGAL CONTINGEN-
CIES'' to our consolidated Ñnancial statements. OFHEO is considering whether additional remedial actions may be
appropriately applied to us, and has asked us to consider agreeing to limitations on our portfolio activities for some period of
time.
Capital Standards
OFHEO's oversight of our safety and soundness includes the implementation, monitoring and enforcement of capital
standards. OFHEO's regulatory capital requirements include ratio-based minimum and critical capital requirements 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 always
classiÑed us as ""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, if a dividend payment on our common or preferred stock would cause us to fail to meet our minimum
capital or risk-based capital requirements, we would not be able to make the payment without prior written approval from
OFHEO. For additional information about our regulatory capital requirements, see ""NOTE 10: REGULATORY
CAPITAL'' to our consolidated Ñnancial statements.
8
Freddie Mac
In a letter dated January 28, 2004, OFHEO created a framework for monitoring our capital due to our higher
operational risk, including our inability to produce timely Ñnancial statements in accordance with GAAP. The letter directed
that we maintain a mandatory target capital surplus of 30 percent over our minimum capital requirement, subject to certain
conditions and variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of
certain capital transactions. We do not expect the current OFHEO framework to adversely aÅect our ability to grow in most
market scenarios. However, our portfolio activities may be aÅected by OFHEO's assertion of further regulatory authority.
For additional information about the OFHEO mandatory target capital surplus framework, see ""NOTE 10: REGULA-
TORY CAPITAL'' to our consolidated Ñnancial statements. Also, see ""RISK FACTORS Ì Legal and Regulatory
Risks Ì Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or
competitive position,'' for more information.
Department of the Treasury
Under our charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures and
substantially identical types of unsecured debt obligations (including the interest rates and maturities of 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 performed this debt securities approval function
by coordinating GSE debt oÅerings with Treasury funding activities. Recently, Treasury announced that it will conduct a
review of its process for approving our debt oÅerings.
Securities and Exchange Commission
While we are exempt from the Securities Act and Exchange Act registration and reporting 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 the
requirement to Ñle with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K. After we resume regular quarterly reporting, we will begin the process of registering our common stock with the
SEC.
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
will 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 considered in Congress. On
October 26, 2005, the House of Representatives passed a bill concerning GSE regulatory oversight. The Senate Committee
on Banking, Housing, and Urban AÅairs passed a bill concerning GSE regulatory oversight on July 28, 2005. The bills that
have been passed by the full House of Representatives and by the Senate Committee on Banking, Housing, and Urban
AÅairs diÅer in various respects, although each in its current form would result in signiÑcant changes in the existing GSE
regulatory oversight structure.
We currently generate a signiÑcant portion of our net income through our portfolio investment activities. Current
legislative proposals would give our regulator substantial authority to regulate the amount and composition of our portfolio
investments and 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.
We believe the enactment into law of these provisions, depending on their Ñnal terms and on how they would be applied
by our regulator, could have a material adverse eÅect on our ability to fulÑll our mission, our future earnings, stock price and
stockholder returns, the rate of growth in our fair value, and our ability to recruit qualiÑed oÇcers and directors. See
""RISK FACTORS Ì Legal and Regulatory Risks Ì Developments aÅecting our legislative and regulatory environment
could materially harm our business prospects or competitive position.''
We believe appropriate GSE regulatory oversight legislation would strengthen market conÑdence and promote our
mission. While we continue to work toward enactment of appropriate regulatory oversight legislation, we cannot predict the
prospects for the enactment, timing or content of any Ñnal legislation or its impact on our Ñnancial prospects.
Before you invest in our securities, you should know that making such an investment involves risks, including the risks
described below and in ""BUSINESS,'' ""FORWARD-LOOKING STATEMENTS,'' ""MD&A'' and elsewhere in this
RISK FACTORS
9
Freddie Mac
Information Statement. The risks that we have highlighted here are not the only ones that we face. If any of the risks
actually occur, our business, Ñnancial condition and/or results of operations could be adversely aÅected. In that case, the
trading price of our securities could decline, and you may lose all or part of your investment. Some of these risks are
managed under the risk management framework, as described in ""MD&A Ì RISK MANAGEMENT.'' We may also
encounter risks of which we are currently not aware or that we currently deem immaterial. These risks also may impair our
business operations, Ñnancial results, or your investment in our securities.
Business and Operational Risks
Material weaknesses and other control deÑciencies related to Ñnancial reporting could result in errors and a loss of
market conÑdence in our reported results.
EÅective internal controls are an important component of the process for producing timely, reliable Ñnancial reports,
preventing fraud and operating successfully as a publicly traded company. If we cannot provide reliable Ñnancial reports or
prevent fraud, our reputation and operating results could be adversely aÅected. We have discovered, and may in the future
discover, material weaknesses and signiÑcant deÑciencies in our internal controls that require remediation. Due to these
weaknesses and deÑciencies, management determined that, as of December 31, 2005, our internal control over Ñnancial
reporting was not eÅective. Although we are not an SEC registrant, our classiÑcation of internal control deÑciencies is
consistent with the deÑnitions established under standards adopted by the Public Company Accounting Oversight Board, or
PCAOB. Under the PCAOB standards, a ""material weakness'' is a signiÑcant deÑciency or combination of signiÑcant
deÑciencies that results in a more than remote likelihood that a material misstatement of the annual or interim Ñnancial
statements will not be prevented or detected. A ""signiÑcant deÑciency'' is a control deÑciency or combination of control
deÑciencies that adversely aÅects a company's ability to initiate, authorize, record, process, or report external Ñnancial data
reliably in accordance with GAAP such that there is a more than remote likelihood that a misstatement of our annual or
interim Ñnancial statements that is more than inconsequential will not be prevented or detected. For a description of our
existing material weaknesses and certain of our signiÑcant deÑciencies and our eÅorts to mitigate and remediate them, see
""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''
We have not completed our evaluation of our internal control over Ñnancial reporting. Accordingly, we are unable to
determine whether additional weaknesses or deÑciencies that require remediation exist. We face continuing challenges
because of the deÑciencies in our accounting infrastructure and the operational complexities caused by the volume of
revised and new accounting policies that we have adopted in recent years. Our ability to identify, manage, mitigate and/or
remedy internal control weaknesses and deÑciencies and other risks may continue to delay our return to regular, timely
reporting.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Furthermore, we cannot be certain that our eÅorts to improve our control
environment will be successful or that we will be able to maintain adequate controls over our Ñnancial processes and
reporting in the future. A failure to establish and maintain an adequate control environment could result in a material error in
our reported Ñnancial results and additional delay in our Ñnancial reporting timeline, and could have a material adverse
aÅect on our business depending on the nature of the failure and any required remediation. An ineÅective control
environment, including our disclosure controls and procedures, could also cause investors to lose conÑdence in our reported
Ñnancial information, which would likely have an adverse eÅect on the trading price of our securities. If we fail to meet our
reporting obligations, this could aÅect our ability to maintain the listing of our securities on the New York Stock Exchange,
or the NYSE. Further, OFHEO could seek to require us to implement a remediation plan, hold additional capital, limit the
growth of our Retained portfolio or take other actions. In addition, a failure to eÅectively and timely implement the
remediation plan undertaken as a result of the prior restatement of our consolidated Ñnancial statements and the consent
order entered into with OFHEO, including particular initiatives relating to technical infrastructure and internal control over
Ñnancial reporting, could similarly adversely aÅect our business.
We rely on internal models for Ñnancial accounting and reporting purposes, to make business decisions, and to manage
risks, and our business could be adversely aÅected if those models fail to produce reliable results.
We make signiÑcant use of business and Ñnancial models for Ñnancial accounting and reporting purposes and to manage
risk. For example, we use models in determining the fair value of Ñnancial instruments for which independent price
quotations are not available or reliable or to extrapolate third-party values to our portfolio. We also use models to measure
and monitor our exposures to interest-rate and other market risks and credit risk. The information provided by these models
is also used in making business decisions relating to strategies, initiatives, transactions and products.
Models are inherently imperfect predictors of actual results because they are based on assumptions about future
performance. Our models could produce unreliable results for a number of reasons, including invalid or incorrect
assumptions underlying the models during periods of market stress and economic change or in general. The valuations, risk
10
Freddie Mac
metrics, amortization results and loan loss reserve estimations produced by our internal models may be very diÅerent from
actual results, which could adversely aÅect our business results, cash Öows, fair value of net assets, business prospects and
future earnings. Changes in any of our models or in any of the assumptions, judgments or estimates used in the models may
cause the results generated by the model to be materially diÅerent. The diÅerent results could cause a revision or
restatement of previously reported Ñnancial results or condition, depending on how and when the change to the model,
judgment or assumption is implemented. Changes may also cause diÇculties in comparisons of the Ñnancial results or
condition of prior or future periods. If our models are not reliable we could also make poor business decisions, including loan
purchase decisions, guarantee fee pricing decisions or other decisions, which could result in an adverse Ñnancial impact.
Furthermore, any strategies we employ to attempt to manage the risks associated with our use of models may not be
eÅective. See ""MD&A Ì CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Fair Value Measurement''
and ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more information on our use of models.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
business, damage our reputation and cause losses.
Shortcomings or failures in our internal processes, people or systems could lead to impairment of our liquidity, Ñnancial
loss, disruption of our business, liability to customers, legislative or regulatory intervention or reputational damage. For
example, our business is highly dependent on our ability to process a large number of transactions on a daily basis. The
transactions we process have become increasingly complex and are subject to various legal and regulatory standards. Our
Ñnancial, accounting, data processing or other operating systems and facilities may fail to operate properly or become
disabled, adversely aÅecting our ability to process these transactions. The inability of our systems to accommodate an
increasing volume of transactions or new types of transactions or products could constrain our ability to pursue new business
initiatives. In addition, as a result of our existing material weaknesses, we have delayed implementation of some pending
systems initiatives.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or
other Ñnancial intermediaries we use to facilitate our securities and derivatives transactions. Any such failure or termination
could adversely aÅect our ability to eÅect transactions, service our customers and manage our exposure to risk.
Despite the contingency plans and facilities we have in place, our ability to conduct business may be adversely impacted
by a disruption in the infrastructure that supports our business and the communities in which we are located. Potential
disruptions may include those involving electrical, communications, transportation or other services we use or that are
provided to us. If a disruption occurs and our employees are unable to occupy our oÇces or communicate with or travel to
other locations, our ability to service and interact with our customers may suÅer and we may not be able to successfully
implement contingency plans that depend on communication or travel.
Our operations rely on the secure processing, storage and transmission of conÑdential and other information in our
computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances
warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other
malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could
jeopardize conÑdential and other information processed and stored in, and transmitted through, our computer systems and
networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or
counterparties, which could result in signiÑcant losses or reputational damage. We may be required to expend signiÑcant
additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and
we may be subject to litigation and Ñnancial losses that are not fully insured. For a discussion of our material weaknesses
related to our information technology and systems and our plans to remediate such weaknesses, see ""MD&A Ì RISK
MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''
We rely on third parties for certain functions that are critical to Ñnancial reporting, our Retained portfolio activity and
mortgage loan underwriting. Any failures by those vendors could disrupt our business operations.
We outsource certain key functions to external parties, including processing functions for trade capture, market risk
management analytics, and asset valuation (Blackrock Financial Management, Inc.), and processing functions for mortgage
loan underwriting (Electronic Data Systems Corporation). We may enter into other key outsourcing relationships 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, our business operations could be disrupted or otherwise negatively impacted. Our use of vendors
also exposes us to the risk of a loss of intellectual property or of conÑdential information or other harm. Financial or
operational diÇculties of an outside vendor could also hurt our operations if those diÇculties interfere with the vendor's
ability to provide services to us. In addition, because of a material weakness in our systems integration, including those that
connect us with external service providers, we are exposed to an increased risk of errors in our Ñnancial reporting. See
""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting'' for a description
11
Freddie Mac
of this material weakness. Also, we use a process of delegated underwriting for the single-family mortgages we purchase or
securitize. In this process, we provide originators with a series of mortgage underwriting guidelines and they represent and
warrant to us that the mortgages sold to us meet these guidelines. See ""MD&A Ì RISK MANAGEMENT Ì Credit
Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Underwriting Requirements and Quality
Control Standards'' and ""Ì Institutional Credit Risk Ì Mortgage Seller/Servicers'' for information about how we mitigate
the risks associated with delegated underwriting.
Our risk management eÅorts may prove to be ineÅective at mitigating the risks we seek to manage.
We must eÅectively identify, manage, monitor and mitigate operational risks, interest-rate and other market risks and
credit risks related to our business. Although we have devoted signiÑcant resources to develop our risk management policies
and procedures and expect to continue to do so in the future, our risk management policies, procedures and techniques may
not be suÇcient to mitigate the risks we have identiÑed or to appropriately identify additional risks to which we are subject.
In the area of operational risk, we have identiÑed a number of material weaknesses and signiÑcant deÑciencies in our
internal control over Ñnancial reporting. We may identify additional weaknesses and deÑciencies. In addition, there are a
number of risk factors that may impede our eÅorts to remediate our internal control weaknesses and deÑciencies, including:
the complexity associated with the interdependent nature of the remediation activities; uncertainty regarding the quality
and sustainability of newly established controls; potentially ineÅective compensating controls; the number of simplifying
assumptions; and controls remediation work that is focused on controls related to Ñnancial reporting and not on other non-
Ñnancial statement related controls. See ""MD&A Ì RISK MANAGEMENT'' for a discussion of our approach to
managing the risks we face. Furthermore, there is a risk that we may not have suÇcient personnel or personnel with
suÇcient training in these key roles.
Our inability to hire, train and retain qualiÑed employees could impair our business and operations.
Our continued success depends, in large part, on our ability to hire and retain highly qualiÑed people. Our business is
complex and many of our positions require speciÑc skills. Our turnover rates have been high in recent periods and have
strained our existing resources. If we continue to experience high turnover rates or are unable to attract, train and retain
talented people, our business and operations could be impaired or disrupted. Competition for highly qualiÑed personnel is
intense and there can be no assurances that we will retain our key personnel or that we will be successful in attracting,
training or retaining other highly qualiÑed personnel in the future. See ""MD&A Ì RISK MANAGEMENT Ì Opera-
tional Risks'' for a description of deÑciencies and weaknesses related to our staÇng and turnover.
Legal and Regulatory Risks
Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or
competitive position.
Developments aÅecting our applicable legislative or regulatory environment, including our charter, aÅordable housing
goals, or regulatory capital requirements (including the 30 percent mandatory target capital surplus OFHEO imposed on us
in January 2004), the interpretation of these requirements by our regulators, the adequacy of internal systems, controls and
processes related to these requirements, the exercise or assertion of regulatory or administrative authority beyond current
practice, or the enactment of proposed legislation (in whole or in part) as discussed in ""BUSINESS Ì REGULATION
AND SUPERVISION Ì GSE Regulatory Oversight Legislation'' could adversely aÅect: our ability to fulÑll our mission;
our ability to meet our aÅordable housing goals; our ability or intent to retain investments; the size and growth of our
mortgage portfolios; our future earnings, stock price and stockholder returns; the value of our assets; the rate of growth of the
fair value of our assets; and our ability to recruit qualiÑed oÇcers and directors. OFHEO is considering whether additional
remedial actions may be appropriately applied to us, and has asked us to consider agreeing to limitations on our portfolio
activities for some period of time. See ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì Gains
(Losses) on Investment Activity Ì Total security impairments'' for a description of OFHEO's directive to divest certain
mortgage-backed securities. HUD has also indicated that it will soon initiate a review of certain of our investments and other
assets and liabilities to ensure conformity with our charter and investment guidelines. In addition, Treasury announced that
it will conduct a review of its process for approving our debt oÅerings.
We are also exposed to the risk that weaknesses in our internal systems, controls and processes could aÅect the accuracy
of the data we provide to HUD or OFHEO or our compliance with legal requirements, and could ultimately lead to
regulatory actions (by HUD, OFHEO or both) or other adverse impacts on our business (including our ability or intent to
retain investments).
Furthermore, we could be required, or may Ñnd it advisable, to change the nature or extent of our business activities if
our various exemptions and special attributes were modiÑed or eliminated, new or additional fees or substantive regulation of
our business activities were imposed, our relationship to the federal government were altered or eliminated, or our charter,
12
Freddie Mac
the GSE Act, or other federal legislation aÅecting us were signiÑcantly amended. Any of these changes could have a
material adverse eÅect on the scope of our activities, Ñnancial condition and results of operations. For example, such changes
could (a) reduce the supply of mortgages available to us, (b) limit a signiÑcant revenue source by restricting the size of our
Retained portfolio or (c) make us less competitive by otherwise limiting our business activities or our ability to create new
products. We cannot predict when or whether any potential legislation will be enacted or regulation will be promulgated or
the eÅect that any such legislation or regulation would have on our Ñnancial condition or results of operations.
We are making certain changes to our business to meet HUD's new housing goals and subgoals, which may adversely
aÅect our proÑtability.
We are making signiÑcant adjustments to our mortgage sourcing and purchase strategies in an eÅort to meet the
housing goals and subgoals made eÅective in 2005, including changes to our underwriting guidelines and the expanded use of
targeted initiatives to reach underserved populations. For example, we may have to purchase loans that oÅer lower expected
returns on our investment and increase our exposure to credit losses. In addition, our purchases of goal-eligible loans will
need to increase as a percentage of total new mortgage purchases, which may cause 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. See ""REGULATION AND SUPERVISION Ì
Department of Housing and Urban Development'' for additional information about HUD's regulation of our business.
We are involved in legal proceedings that could result in the payment of substantial damages or otherwise harm our
business.
We are a party to various legal actions. In addition, former directors, oÇcers and employees are involved in legal
proceedings for which they may be entitled to reimbursement for the costs and expenses of the proceedings. The defense of
these or any future claims or proceedings could divert management's attention and resources from the needs of the business.
We may be required to make substantial payments in the event of adverse judgments or settlements of any such claims,
investigations or proceedings. Any legal proceeding, even if resolved in our favor, could result in negative publicity or cause
us to incur signiÑcant legal and other expenses. Furthermore, developments in, outcomes of, impacts of, and costs, expenses,
settlements and judgments related to these legal proceedings may diÅer from our expectations and exceed any amounts for
which we have reserved or require adjustments to such reserves. See ""NOTE 13: LEGAL CONTINGENCIES'' to our
consolidated Ñnancial statements for information about our ongoing legal proceedings and related reserves.
Legislation or regulation aÅecting the Ñnancial services industry generally may adversely aÅect our business activities.
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 representatives 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 adverse eÅect on our business results. In addition, our business could also
be adversely aÅected by any modiÑcation, reduction or repeal of the federal income tax deductibility of mortgage interest
payments.
Competitive and Market Risks
Changes in general business and economic conditions may adversely aÅect our business and earnings.
Our business and earnings may be adversely aÅected by changes in general business and economic conditions. These
conditions include employment rates, Öuctuations in both debt and equity capital markets, the value of the U.S. dollar as
compared to foreign currencies, and the strength of the U.S. economy and the local economies in which we conduct
business. An economic downturn or increase in the unemployment rate could result in an increase in mortgage delinquencies
or defaults and a higher level of credit-related losses than we estimated, which could reduce our earnings. Various factors
could cause the economy to slow down or even recede, including higher energy costs, higher interest rates, pressure on
housing prices, reduced consumer or corporate spending, natural disasters such as hurricanes, terrorist activities, military
conÖicts, and the normal cyclical nature of the economy.
13
Freddie Mac
A general decline in U.S. housing prices or in activity in the U.S. housing market could negatively impact our earnings.
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 increased the values of properties underlying the mortgages in our portfolio. A reversal of
this strong house price appreciation in any of the geographic markets we serve could result in an increase in delinquencies
or defaults and a higher level of credit-related losses, which could reduce our earnings. For more information, see
""MD&A Ì RISK MANAGEMENT Ì Credit Risks.''
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. If the rate of growth in total outstanding U.S. residential mortgage debt were
to decline, there could be fewer mortgage loans available for us to purchase. This decline could reduce our earnings and
margins, as we could face more competition to purchase a smaller number of loans.
Competition from banking and non-banking companies may harm our business.
We operate in a highly competitive environment and we expect competition to increase as Ñnancial services companies
combine to produce larger companies that are able to oÅer similar mortgage-related products at competitive prices. Our
principal competitors in the secondary mortgage market are Fannie Mae, the Federal Home Loan Banks and other Ñnancial
institutions that retain or securitize mortgages, such as banks, dealers and thrift institutions. Increased competition in the
secondary mortgage market may make it more diÇcult for us to purchase mortgages to meet our mission objectives while
providing favorable returns for our business. Furthermore, competitive pricing pressures may make our products less
attractive in the market and negatively impact our proÑtability.
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 changes in economic, Ñnancial market and
regulatory environments. Increased competition for low-cost debt funding may result in a higher cost to Ñnance our business,
which could decrease our net income.
We may face limited availability of Ñnancing, variation in our funding costs and uncertainty in our securitization
Ñnancing.
The amount, type and cost of our funding, including Ñnancing from other Ñnancial institutions and the capital markets,
directly impacts our interest expense and results of operations and can therefore aÅect our ability to grow our assets. A
number of factors could make such Ñnancing more diÇcult to obtain, more expensive or unavailable on any terms, both
domestically and internationally (where funding transactions may be on terms more or less favorable than in the U.S.),
including adverse Ñnancial results, speciÑc events that adversely impact our reputation, changes in the activities of our
business partners, disruptions in the capital markets, speciÑc events that adversely impact the Ñnancial services industry,
counterparty availability, changes in the preferences of the holders of our securities, changes aÅecting our assets, our
corporate and regulatory structure, interest-rate Öuctuations, ratings agencies actions, and the legal, regulatory, accounting
and tax environments governing our funding transactions, the general state of the U.S., Asian and other world economies,
and factors aÅecting those economies.
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. There is a risk that our PC and Structured Securities support activities may not be suÇcient to support the
liquidity and depth of the market for PCs.
A reduction in our credit ratings could adversely aÅect our liquidity.
Ratings agencies play an important role in determining, by means of the ratings they assign to issuers and their debt, the
availability and cost of debt funding. We currently receive ratings from several ratings agencies for our unsecured
borrowings. Our credit ratings are important to our liquidity. Actions by governmental entities or others could adversely
aÅect our credit ratings. A reduction in our credit ratings could adversely aÅect our liquidity, competitive position, or the
supply or cost of equity capital or debt Ñnancing available to us. A signiÑcant increase in our borrowing costs could cause us
to sustain losses and impair our liquidity by requiring us to Ñnd other sources of Ñnancing.
Fluctuations in interest rates could negatively impact our reported net interest income, earnings and fair value of net
assets.
Our portfolio investment activities and credit guarantee activities expose us to interest rate and other market risks.
Changes in interest rates Ì up or down Ì could adversely aÅect our net interest yield. Although the yield we earn on our
assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall
faster than the other, causing our net interest yield to expand or compress. For example, when interest rates rise, our
funding costs may rise faster than the yield we earn on our assets, causing our net interest yield to compress until the eÅect of
the increase is fully reÖected in asset yields. Changes in the slope of the yield curve could also reduce our net interest yield.
14
Freddie Mac
Changes in interest rates could reduce our earnings in material amounts, especially if actual conditions turn out to be
materially diÅerent than our expectations. For example, if interest rates rise or fall faster than we expect or the slope of the
yield curve changes in ways diÅerent than we anticipated, we may incur signiÑcant losses. Changes in interest rates can also
aÅect prepayment assumptions and the fair value of our assets, including investments in our Retained portfolio, our
derivative portfolio and our Guarantee asset. When interest rates fall, borrowers are more likely to prepay their mortgage
loans by reÑnancing them at a lower rate. An increased likelihood of prepayment on the mortgages underlying our mortgage-
related securities may adversely impact the performance of these securities. An increased likelihood of prepayment on the
mortgages we hold may also negatively impact the performance of our Retained portfolio and the fair value of our Guarantee
asset. Interest rates can Öuctuate for a number of reasons, including changes in the Ñscal and monetary policies of the
federal government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly inÖuence
the yield on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative Ñnancial
instruments (such as options and interest-rate and foreign-currency swaps) from acceptable counterparties of the types and
in the quantities needed could also aÅect our ability to eÅectively manage the risks related to our investment funding.
Our strategies and eÅorts to manage our exposures to these risks may not be as eÅective as they have been in the past.
See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for a description of the types of
market risks to which we are exposed and how we manage those risks.
Higher credit losses could require us to increase our allowance for credit losses through a charge to earnings.
We face primarily two types of credit risk Ì mortgage credit risk and institutional credit risk. As described in
""MD&A Ì RISK MANAGEMENT Ì Credit Risks,'' we employ a number of credit risk management strategies.
However, there can be no assurances that our risk management strategies will be eÅective to manage our credit risks or that
our credit losses will not be higher than expected. Higher credit losses on our guarantees could require us to increase our
allowance for credit losses through a charge to earnings and other credit exposures could result in Ñnancial losses. Although
we regularly review credit exposures to speciÑc customers and counterparties, default risk may arise from events or
circumstances that are diÇcult to detect or foresee. In addition, concerns about, or default by, one institution could lead to
signiÑcant liquidity problems, losses or defaults by other institutions. This risk may also adversely aÅect Ñnancial
intermediaries, such as clearing agencies, clearinghouses, banks, securities Ñrms and exchanges with which we interact.
These potential risks could ultimately cause liquidity problems or losses for us as well.
The loss of business volume from one or more key lenders could result in a decline in market share and revenues.
Our business depends on our ability to acquire a steady Öow of mortgage loans from the originators of those loans. We
purchase a signiÑcant percentage of our single-family mortgages from several large mortgage lenders. The mortgage
industry has been consolidating and a decreasing number of large lenders originate most single-family mortgages. We could
lose signiÑcant business volume and may be unable to replace it if one or more of our key lenders signiÑcantly reduces the
volume of mortgages it delivers to us or is acquired or otherwise ceases to exist. 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.
Negative publicity causing damage to our reputation could adversely aÅect our business prospects, earnings or capital.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.
Negative public opinion could adversely aÅect our ability to keep and attract customers or otherwise impair our customer
relationships; adversely aÅect our ability to obtain Ñnancing or hinder our business prospects. Perceptions regarding the
practices of our competitors or our industry as a whole may also adversely impact our reputation. Adverse reputation impacts
on third parties with whom we have important relationships may impair market conÑdence or investor conÑdence in our
business operations as well. In addition, negative publicity could expose us to adverse legal and regulatory consequences.
Negative public opinion could result from our actual or alleged action or failure to act in any number of activities, including
corporate governance, regulatory compliance, Ñnancial reporting and disclosure, or from actions taken by government
regulators and community organizations in response to our actual or alleged conduct. Adverse impacts on our reputation, or
the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny or adverse regulatory or
legislative changes.
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 this headquarters complex under a
long-term lease from the partnership.
PROPERTIES
15
Freddie Mac
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 foreclosures. 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 of our 2002 and prior consolidated Ñnancial statements. In addition, 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 our legal proceedings, see ""NOTE 13: LEGAL CONTINGENCIES'' and ""NOTE 14:
INCOME TAXES'' to our consolidated Ñnancial statements.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were presented for stockholder vote at the July 15, 2005 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; and (b) ratiÑcation of the appointment of PricewaterhouseCoopers LLP as our independent auditors for 2005.
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 Election of Directors
Votes For
Votes Withheld
Barbara T. Alexander ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 609,767,531
GeoÅrey T. Boisi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611,270,805
Joan E. Donoghue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 605,739,672
Michelle Engler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611,030,851
Richard Karl Goeltz ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 612,664,614
Thomas S. Johnson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 583,989,898
William M. Lewis, Jr.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 612,128,085
Eugene M. McQuade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,518,568
Shaun F. O'Malley ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582,111,156
Ronald F. Poe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,396,192
Stephen A. Ross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582,191,897
Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,489,912
William J. Turner ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 577,712,718
7,869,236
6,365,962
11,897,095
6,605,916
4,972,153
33,646,869
5,508,682
10,118,199
35,525,611
10,240,575
35,444,870
10,146,855
39,924,049
The appointment of PricewaterhouseCoopers LLP was ratiÑed at the meeting by the following votes:
Votes for
613,265,113
Votes Against
874,878
Abstentions
3,496,775
MARKET 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 NYSE and the PaciÑc 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. At December 31, 2005, there
were 692,717,422 shares outstanding of our common stock.
16
Freddie Mac
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
2006 Quarter Ended
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 Quarter Ended
December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 Quarter Ended
December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1) The principal market is the NYSE, and prices are based on the Composite Tape.
At June 1, 2006, the closing price for our common stock was $60.66 per share.
Issuer Purchases of Equity Securities
Sale Prices(1)
High
Low
$68.75
$60.64
$67.49
66.91
67.87
73.91
$74.20
69.50
64.62
65.15
$54.85
54.50
58.51
59.74
$64.15
61.73
56.45
57.60
On October 5, 2005, our board of directors authorized us to repurchase up to $2 billion of outstanding shares of our
common stock and to issue up to $2 billion of non-cumulative, perpetual preferred stock, in each case, from time to time
depending on market conditions and other factors. We do not expect the completion of the authorized capital transactions to
have a material impact on our regulatory minimum capital surplus, including the 30 percent mandatory target set in
January 2004 by OFHEO. In accordance with the existing capital monitoring framework established by OFHEO in January
2004, we obtained OFHEO's approval for this common stock repurchase. This repurchase authorization replaces all unused
repurchase authority remaining under the common stock repurchase plan approved by the board of directors in September
1997. We did not repurchase any common stock during 2005.
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
2006 Quarter Ended
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 Quarter Ended
December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 Quarter Ended
December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.47
$0.47
$0.47
$0.35
$0.35
$0.35
$0.30
$0.30
$0.30
$0.30
We have historically paid dividends to our stockholders in each quarter. Our board of directors will determine the
amount of dividends, if any, declared and paid in any quarter after considering our capital position and earnings and growth
prospects, among other factors. See ""NOTE 10: REGULATORY CAPITAL'' to the consolidated Ñnancial statements for
additional information regarding dividend payments and potential restrictions on such payments and ""NOTE 9:
STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements for additional information regarding our preferred
stock dividend rates.
Holders
As of June 1, 2006, we had 2,343 common stockholders of record.
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Telephone: 781-575-2879
http://www.computershare.com
17
Freddie Mac
NYSE Corporate Governance Listing Standards
On August 4, 2005, 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 and 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,'' ""promote,'' ""consider,'' ""enables,'' ""currently,'' ""priorities,'' ""remain,'' ""anticipate,'' ""initiative,''
""preliminary,'' ""ongoing,'' ""believes,'' ""expects,'' ""intend,'' ""plan,'' ""future,'' ""seek,'' ""potential,'' ""objectives,'' ""long-term,''
""ultimately,'' ""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 and should also consider all risks, uncertainties and other factors described in this
Information Statement in considering any forward-looking statements. Actual results may diÅer materially from those
discussed as a result of various factors, including those factors described in the ""RISK FACTORS'' section of this
Information Statement. 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:
‚ 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 eÅectively implement our business strategies and manage the risks in our business;
‚ changes in our assumptions regarding rates of growth in our business, spreads we expect to earn, required capital levels, the
timing and impact of capital transactions;
‚ our ability to eÅectively manage and implement changes; developments or impacts of accounting standards and
interpretations;
‚ 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;
‚ changes in pricing or valuation methodologies, models, assumptions and/or estimates;
‚ volatility of reported results due to changes in fair value of certain instruments or assets;
‚ the rate of growth in total outstanding U.S. residential mortgage debt and the size of the U.S. residential mortgage market;
‚ preferences of originators in selling into the secondary market;
‚ borrower preferences for Ñxed-rate mortgages or ARMs;
‚ investor preferences for mortgage loans and mortgage-related and debt securities versus other investments;
‚ the occurrence of a major natural or other disaster in geographic areas in which portions of our Total mortgage portfolio
are concentrated;
‚ other factors and assumptions described in this Information Statement, including in the sections titled ""BUSINESS,''
""RISK FACTORS'' and ""MD&A;''
‚ our assumptions and estimates regarding the foregoing; and
‚ market reactions to the foregoing.
We undertake no obligation to update forward-looking statements we make 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 incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income before cumulative eÅect of changes in accounting
principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of changes in accounting principles, net of taxes ÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends and issuance costs on redeemed
preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Earnings per common share before cumulative eÅect of changes in
accounting principles:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per common share after cumulative eÅect of changes in
accounting principles:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Weighted average common shares outstanding (in thousands):
At or for the Year Ended December 31,
2005
2004
2003
2002
2001
(dollars in millions, except share-related amounts)
5,370
199
$
9,137
(3,039)
$
9,498
(244)
$
9,525
7,154
$
7,448
(1,591)
2,189
(59)
2,130
(223)
1,907
2.84
2.83
2.76
2.75
1.52
$
$
$
$
2,937
Ì
2,937
(210)
2,727
3.96
3.94
3.96
3.94
1.20
$
$
$
$
4,816
Ì
4,816
(216)
4,600
6.69
6.68
6.69
6.68
1.04
$
$
$
$
10,090
Ì
10,090
(239)
9,851
14.22
14.17
14.22
14.17
0.88
$
$
$
$
3,115
43
3,158
(217)
2,941
4.19
4.17
4.25
4.23
0.80
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
691,582
693,511
689,282
691,521
687,094
688,675
692,727
695,116
692,603
695,973
Balance Sheet Data
Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 806,222
288,532
Senior debt, net due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
454,627
Senior debt, net due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,633
Subordinated debt, net due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Miscellaneous liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
29,290
949
Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
27,191
Portfolio Balances(3)
Retained portfolio (unpaid principal balances)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 710,017
Total Guaranteed PCs and Structured Securities issued (unpaid
principal balances)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage portfolio (unpaid principal balances) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratios
Return on average assets(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on common equity(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on total equity(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend payout ratio on common stock(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity to assets ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,335,524
1,684,217
$ 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
$ 652,936
$ 645,466
$ 567,272
$ 497,639
1,208,968
1,505,206
1,162,068
1,414,399
1,090,624
1,316,609
961,511
1,150,723
0.3%
7.7
7.3
56.4
3.7
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
(1) EÅective January 1, 2005, we changed our method of accounting for interest expense related to callable debt instruments to recognize interest expense
using an eÅective interest method over the contractual life of the debt and changed our method for determining gains and losses upon the re-sale of
PCs and Structured Securities related to deferred items recognized in connection with our guarantee of those securities. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements. EÅective January 1, 2003, we adopted
the provisions of 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 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.'' We also adopted the provisions of Statement of Financial Accounting Standards
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.
(2) Includes (a) Due to Participation CertiÑcate investors, (b) Accrued interest payable, (c) Guarantee obligation, (d) Derivative liabilities, at fair
value, (e) Reserve for guarantee losses on Participation CertiÑcates and (f) Other liabilities, as presented on our consolidated balance sheets.
(3) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(4) The Retained portfolio presented in our consolidated balance sheets diÅers from the Retained portfolio on this table because the consolidated balance
sheet caption includes valuation adjustments and deferred balances. See ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì
Table 17 Ì Characteristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio'' for more information.
(5) Excludes Structured Securities where we have resecuritized PCs and other previously issued Structured Securities. These excluded Structured
Securities do not increase our credit-related exposure and consist of single-class Structured Securities backed by PCs, REMICs and principal-only
strips. The notional balances of interest-only strips are excluded because this line item is based on unpaid principal balance. Also excluded from this
line item are modiÑable and combinable REMIC tranches and interest and principal classes where the holder has the option to exchange the
security tranches for other pre-deÑned security tranches.
(6) Ratio computed as Net income divided by the simple average of beginning and ending Total assets.
(7) 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.
(8) Ratio computed as Net income divided by the simple average of beginning and ending Stockholders' equity.
(9) Ratio computed as Common stock dividends declared divided by Net income available to common stockholders.
(10) 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
EXECUTIVE SUMMARY
Our Business
Freddie Mac is one of the leading institutions Ñnancing residential mortgage loans in the United States. We purchase
residential mortgages and mortgage-related securities in the secondary market and use them to issue our own mortgage-
related securities. We also purchase residential mortgages and mortgage-related securities in the secondary market to hold
for investment purposes in our Retained portfolio. We Ñnance our purchases primarily by issuing a variety of debt
instruments in the capital markets.
In general, our purchases of mortgage loans are driven by the growth in total residential mortgage debt outstanding, the
requirements of our charter, the aÅordable housing goals and subgoals set for us by HUD, the attractiveness of the returns
available to us from securitization and portfolio investment activities and our level of customer service. In 2005, our share
of the total residential mortgage debt market improved as we increased our single-family mortgage purchases and our
purchases of non-agency mortgage-related securities for our Retained portfolio. Our share of the portion of the mortgage
securitization market attributable to the GSEs increased from about 41 percent in 2004 to about 45 percent in 2005. Our
market share will vary from period to period. We continue to seek lasting improvements in our overall market share and our
GSE market share over time by improving customer service, diversifying our customer base and expanding the types of
mortgages we guarantee and products we oÅer.
Our Mission
Our mission is to provide liquidity, stability and aÅordability in the secondary market for residential mortgages. Our
activities contribute to the availability of aÅordable mortgage products in the U.S. We view the purchase of mortgage loans
beneÑting low- and moderate-income families and neighborhoods as an integral part of our mission and business, and we
are committed to fulÑlling the needs of these borrowers and markets. We are also subject to aÅordable housing goals set by
HUD. We have reported to HUD that we achieved each of the aÅordable housing goals and subgoals for 2005, although
HUD will make the Ñnal determination.
Responding to events such as the devastation on the Gulf Coast is at the core of our mission. In the immediate
aftermath of Hurricane Katrina, we provided temporary mortgage payment relief, expedited the release of insurance
proceeds, and modiÑed our policies to accommodate our sellers and servicers, and ultimately the homeowners and renters,
aÅected by the hurricanes. We committed to infuse up to $300 million of liquidity into the aÅected Gulf area and took
humanitarian steps Ì committing more than $10 million to hurricane relief eÅorts and providing temporary housing
assistance to approximately 1,100 families. We are also using our Retained portfolio to buy up to $1 billion in mortgage
revenue bonds, enabling state housing finance authorities to make low-cost mortgages and home repair loans for up to 10,000
low- and moderate-income families.
Fair Value Management
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 substantially all Ñnancial assets and liabilities, rather than an approach that
combines historical cost and fair value measurements, as is the case with our GAAP-based consolidated Ñnancial
statements. Fair value is deÑned as the amount at which an asset or liability could be exchanged between willing parties,
other than in a forced or liquidation sale. We use estimates of fair value on a routine basis to make decisions about our
business activities. In addition, we use fair value derived performance measures to establish corporate objectives and as a
factor in determining management compensation. Our consolidated fair value balance sheets are an important component of
our risk management processes, as we use estimates of the changes in fair value to calculate our Portfolio Market Value
Sensitivity, or PMVS, and duration gap measures. For information about how we estimate the fair value of Ñnancial
instruments, see ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements.
We promote long-term growth in the fair value of net assets primarily by seeking investment portfolio opportunities that
oÅer attractive net mortgage-to-debt option-adjusted spreads and credit guarantee opportunities that oÅer attractive spreads
relative to anticipated credit risks. We actively manage risks to long-term fair value growth inherent in these portfolios. Our
long-term expectation is to generate returns, before capital transactions, over time on the average fair value of net assets
attributable to common stockholders in the low- to mid-teens.
Capital Management
Our objective in managing capital is to preserve our safety and soundness, while maintaining suÇcient capital to take
advantage of new business opportunities and support our mission at attractive long-term returns. If available, we consider
20
Freddie Mac
returning excess capital to stockholders. At December 31, 2005, our estimated regulatory core capital was $36.0 billion,
with an estimated minimum capital surplus of $11.0 billion and an estimated surplus in excess of the 30 percent mandatory
target of approximately $3.5 billion. We expect to be able to maintain a surplus over both our regulatory minimum capital
requirement and the 30 percent mandatory target across a wide range of market conditions.
In 2005, we increased our quarterly common stock dividend on two occasions: a 17 percent increase in the Ñrst quarter
(from $0.30 per share to $0.35 per share) and an additional 34 percent increase in the fourth quarter (from $0.35 per share
to $0.47 per share). In October 2005, our board authorized us to repurchase up to $2 billion of outstanding shares of
common stock and to issue up to $2 billion of non-cumulative perpetual preferred stock. With the release of our 2005
Ñnancial results in May, we have moved forward with the repurchase of common stock and we expect to issue the authorized
preferred stock from time to time depending on market conditions and other factors.
Risk Management
Our portfolio investment and credit guarantee activities expose us to three broad categories of risk: (a) operational risks,
(b) interest-rate and other market risks, and (c) credit risks. Risk management is a critical aspect of our business.
EÅectively managing risk enables us to accomplish our mission and generate revenue and long-term value. Our strategies for
managing these risks are discussed in ""RISK MANAGEMENT.''
Operational Risks and Internal Controls
We have devoted substantial Ñnancial and personnel resources to improving our internal controls. We continue to
remediate material weaknesses and other deÑciencies in internal control over Ñnancial reporting. Although we accelerated a
number of previously planned control initiatives, we have a signiÑcant number of internal control deÑciencies that have not
been fully remediated and considerable challenges remain. See ""RISK MANAGEMENT Ì Operational Risks Ì
Internal Control over Financial Reporting'' and ""RISK FACTORS Ì Business and Operational Risks.''
Interest-Rate Risk
Our interest-rate risk remains low. For all of 2005 and through May of 2006, PMVS and duration gap have averaged
one percent and zero months, respectively. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''
for more information about these risks and our strategies for managing them.
Credit Risk
Our credit losses also remain low. Our single-family delinquency rate declined to 69 basis points at December 31, 2005
from 73 basis points at the end of 2004. At April 30, 2006 our single-family delinquency rate declined further to 56 basis
points. For 2005, our credit losses totaled $149 million or 1.1 basis points of our average Total mortgage portfolio. Our
credit-related expenses, which include changes in our provision for loan losses and expenses related to real estate owned, or
REO, increased in 2005 primarily as a result of Hurricane Katrina. See ""RISK MANAGEMENT Ì Credit Risks'' for
more information about these risks and our strategies for managing them.
Summary of 2005 Financial Results
GAAP Results
Changes in the level and volatility of interest rates continue to cause signiÑcant volatility in our reported Ñnancial results
primarily because only a portion of our balance sheet is marked to fair value. Net income after the cumulative eÅect of a
change in accounting principle was $2,130 million for 2005, down from $2,937 million for 2004. Diluted earnings per
common share after the cumulative eÅect of a change in accounting principle was $2.75 for 2005, down from $3.94 for
2004. The decline in net income for 2005 compared to 2004 was primarily due to lower net interest income as a result of
narrowing spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005, an agreement to
settle the securities class action and shareholder derivative litigation, charges related to Hurricane Katrina, and the net
impact of certain accounting changes, partially oÅset by lower losses related to our derivative instruments not in qualifying
hedge accounting relationships. Our derivatives portfolio continued to be an eÅective component of our risk management
activities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial
statements for information about our changes in accounting principles and changes in estimates.
Fair Value Balance Sheets
During 2005, the fair value of net assets attributable to common stockholders, before capital transactions, increased by
$1.0 billion, which represents a return on the average fair value of net assets attributable to common stockholders of
approximately 3.7 percent. The fair value of net assets attributable to common stockholders at December 31, 2005 was
unchanged, after capital transactions, at $26.8 billion, from December 31, 2004. Subsequent to the issuance of our
Information Statement Supplement dated May 30, 2006, we increased the fair value of net assets at December 31, 2005 by
$0.1 billion to correct an error in the calculation of the fair value of our debt securities issued.
21
Freddie Mac
Looking beyond 2005, our long-term expectation is to generate returns, before capital transactions, on the average fair
value of net assets attributable to common stockholders, in the low- to mid-teens, although period-to-period returns may
Öuctuate substantially due to market conditions. Our expectations are based upon assumptions regarding rates of growth in
our business, spreads we expect to earn on our business, and required capital levels, among other factors. We have assumed
no adverse impacts from legislative or regulatory actions. Our actual results may diÅer materially from our expectations for
a number of reasons, including those discussed in ""RISK FACTORS'' and ""FORWARD-LOOKING STATEMENTS.''
The primary drivers of our fair value results during 2005 were core spread income from the Retained portfolio (deÑned
as the net revenue resulting from the option-adjusted spread, or OAS, between mortgage-related investments and debt) and
fee-based income (including guarantee fees and credit fees related to our guaranteed mortgage-related securities),
substantially oÅset by a decrease from wider net mortgage-to-debt OAS, which we estimate reduced fair value by
approximately $1.3 billion (after-tax). We believe disclosing the estimated impact of changes in OAS on the fair value of net
assets is helpful to understanding our current-period fair value results in the context of our long-term fair value return
expectations. Our estimate of the impact of changes in OAS is discussed further in ""CONSOLIDATED FAIR VALUE
BALANCE SHEETS ANALYSIS Ì Discussion of Fair Value Results.''
Our fair value results also were aÅected by the net eÅect of changes in our approach for estimating the fair values of
certain Ñnancial instruments implemented as of the Ñrst quarter 2005, which we estimate reduced fair value by
approximately $0.5 billion (after-tax). This reduction includes the net eÅect of changes we made to our fair value estimates
for our guarantee-related assets and liabilities, where we implemented an approach that uses more market data for
determining these fair values. We estimate that our improved approach for valuing guarantee-related assets and liabilities
reduced fair value in the Ñrst quarter of 2005 by approximately $0.8 billion (after-tax). Our approach for estimating fair
values and the recent improvements are discussed in more detail in ""NOTE 2: TRANSFERS OF SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements. During 2005, we also
improved our approach for estimating the fair values of multifamily whole loans and the minority interests in consolidated
real estate investment trusts, or REITs, as well as other securities by increasing the amount of market data used in the
valuation process.
In addition, our fair value results were aÅected by the agreement to settle the securities class action and shareholder
derivative litigation, the eÅect of which reduced fair value by approximately $0.2 billion (after-tax), and the eÅect of
charges related to Hurricane Katrina, which reduced fair value by approximately $0.2 billion (after-tax).
22
Freddie Mac
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of our consolidated results of operations should be read in conjunction with our consolidated
Ñnancial statements, including the accompanying notes. Also see ""CRITICAL ACCOUNTING POLICIES AND
ESTIMATES'' for more information concerning the most signiÑcant accounting policies and estimates applied in
determining our reported Ñnancial position and results of operations.
Net Interest Income
Table 7 summarizes our Net interest income and net interest yield and provides an attribution of changes in annual
results to changes in rates or changes in volumes of our interest-earning assets and interest-bearing liabilities. Average
balance sheet information is presented because we believe end-of-period balances are not representative of activity
throughout the periods presented. 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.
Table 7 Ì Average Balance, Net Interest Income and Rate/Volume Analysis
2005
Interest
Average
Income
Balance(1)(2) (Expense)(1) Rate(3)(4)
Average
Interest-earning assets:
Mortgage loans(6)(7)(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities(8)(9)ÏÏÏÏÏÏÏ
Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏ
Investments(10)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements
to resell and Federal funds sold ÏÏÏÏÏ
Total interest-earning assets ÏÏÏÏÏÏ
Interest-bearing liabilities:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate
investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-bearing liabilities ÏÏÏ
$ 61,248
611,452
672,700
53,252
25,344
$751,296
$192,497
524,270
716,767
10,399
727,166
$ 4,037
29,684
33,721
1,773
833
$ 36,327
$ (6,102)
(23,246)
(29,348)
(551)
(29,899)
6.59%
4.85
5.01
3.33
3.28
4.83
(3.17)
(4.43)
(4.09)
(5.30)
(4.11)
Income (expense) related to
derivatives(12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of net non-interest-bearing
funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total funding of interest-earning
assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income/yieldÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment(13)
Net interest income/yield (fully
taxable-equivalent basis) ÏÏÏÏÏÏ
(1,058)
(0.15)
24,130
Ì
0.14
15,329
$751,296
$(30,957)
$ 5,370
339
(4.12)
0.71
0.05
$763,618
Year Ended December 31,
2004
2003
Interest
Income
Average
Average
Average
Balance(1)(2)(5) (Expense)(1) Rate(3)(4)(5)
(dollars in millions)
Interest
Income
Average
Balance(1)(2)(5) (Expense)(1) Rate(3)(4)(5)
$ 61,576
590,213
651,789
81,833
29,996
$763,618
$205,072
530,816
735,888
12,401
748,289
$
4,007
28,460
32,467
2,716
420
$ 35,603
$ (2,908)
(22,950)
(25,858)
(708)
(26,566)
100
Ì
$(26,466)
9,137
$
267
6.51%
4.82
4.98
3.32
1.40
4.66
(1.42)
(4.32)
(3.51)
(5.71)
(3.55)
0.01
0.07
(3.47)
1.20
0.03
$ 63,893
544,359
608,252
94,768
49,085
$752,105
$226,850
478,028
704,878
26,234
731,112
$
4,251
29,051
33,302
3,246
550
$ 37,098
$ (2,785)
(22,083)
(24,868)
(1,641)
(26,509)
6.65%
5.34
5.47
3.43
1.12
4.93
(1.23)
(4.62)
(3.53)
(6.26)
(3.63)
(1,091)
(0.15)
20,993
Ì
0.11
$752,105
$(27,600)
9,498
$
227
(3.67)
1.26
0.03
$ 5,709
0.76%
$
9,404
1.23%
$
9,725
1.29%
2005 vs. 2004 Variance
Due to
2004 vs. 2003 Variance
Due to(5)
Rate(14)
Volume(14)
Total
Change
Rate(14)
Volume(14)
Interest-earning assets:
Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-bearing liabilities:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total funding of interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
51
194
245
9
487
741
$(3,383)
(581)
(3,964)
48
(3,916)
(1,158)
$(5,074)
$(4,333)
76
$(4,257)
$ (21)
1,030
1,009
(952)
(74)
$ (17)
$ 189
285
474
109
583
Ì
$ 583
$ 566
(4)
$ 562
(in millions)
$
$
30
1,224
1,254
(943)
413
724
$(3,194)
(296)
(3,490)
157
(3,333)
(1,158)
$(4,491)
$(3,767)
72
$(3,695)
$
(92)
(2,928)
(3,020)
(98)
116
$ (3,002)
$
$
$
$
(406)
1,472
1,066
133
1,199
1,191
2,390
(612)
38
(574)
$
$
$
(152)
2,337
2,185
(432)
(246)
1,507
283
(2,339)
(2,056)
800
(1,256)
Ì
$ (1,256)
251
$
2
253
$
Total
Change
$ (244)
(591)
(835)
(530)
(130)
$(1,495)
$ (123)
(867)
(990)
933
(57)
1,191
$ 1,134
$ (361)
40
$ (321)
(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 on the unpaid principal balances of impaired
securities. For securities in the Retained portfolio classiÑed as trading, we calculate average balances excluding their mark-to-fair-value
23
Freddie Mac
adjustments. For securities in the Cash and investments portfolio classiÑed as trading during 2004 and 2003, we calculated 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 calculated on the historical cost basis, which is not aÅected by the change in fair value
that is reÖected in the Accumulated other comprehensive income, or AOCI, component of Stockholders' equity.
(5) Certain amounts for 2004 and 2003 have been revised to conform with the 2005 presentation.
(6) Non-accrual loans are included in average balances.
(7) Loan fees included in mortgage loan interest income were $371 million, $223 million and $120 million for the years ended December 31, 2005, 2004
and 2003, respectively.
(8) A change in estimate resulted in a net pre-tax reduction in Net interest income of $(166) million in the Ñrst quarter of 2005. Of this amount,
$(92) million relates to Mortgage interest income and $(74) million relates to mortgage-related securities interest income. See ""Net Interest
Income Ì 2005 versus 2004.''
(9) Average rates calculated on a fully taxable-equivalent basis were 4.90 percent, 4.86 percent and 5.37 percent for the years ended December 31, 2005,
2004 and 2003, respectively, based upon related income of $29,966 million, $28,688 million and $29,246 million, respectively.
(10) For 2005, investments consist of Cash and cash equivalents and the Non-mortgage-related securities subtotal of Cash and Investments as reported on
our consolidated balance sheets. 2004 and 2003 also include Mortgage-related securities held in the Cash and Investments portfolio.
(11) Includes current portion of long-term debt. See ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to our consolidated
Ñnancial statements for a reconciliation of Senior debt, due within one year on our consolidated balance sheets.
(12) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our
consolidated Ñnancial statements for more information.
(13) The determination of Net interest income/yield (fully taxable-equivalent basis), which reÖects fully taxable-equivalent adjustments to interest
income, involves 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 of 35 percent.
(14) Combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.
Table 8 summarizes components of our Net interest income.
Table 8 Ì Net Interest Income
2005
Contractual amounts of Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred item amortization expense, net:(1)
Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred item amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives:(2)
Amortization of deferred balances in AOCI, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrual of periodic settlements of derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income (fully taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2004
(in millions)
$11,746
2003
$12,990
$ 8,877
(1,003)
(1,446)
(2,449)
(1,966)
908
(1,058)
5,370
339
$ 5,709
(1,408)
(1,301)
(2,709)
(1,814)
1,914
100
9,137
267
$ 9,404
(1,422)
(979)
(2,401)
(1,482)
391
(1,091)
9,498
227
$ 9,725
(1) Amortization relates to premiums, discounts, deferred fees and other basis adjustments to the carrying value of our Ñnancial instruments and the
reclassiÑcation of previously deferred balances from AOCI for certain derivatives in cash Öow hedge relationships related to individual debt issuances
and mortgage purchase transactions.
(2) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our
consolidated Ñnancial statements for more information.
2005 versus 2004
Net interest income and net interest yield on a fully taxable-equivalent basis both decreased in 2005 due to narrowing
spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005. Net interest yield declined
47 basis points to 76 basis points for 2005 from 123 basis points for 2004, on a fully taxable-equivalent basis. This
compression of the net interest yield and the decline in Net interest income reÖected the impact of a Öattening yield curve
driven by increases in short-term interest rates. Because the repricing of our variable-rate assets lagged the increase in the
cost of our short-term debt, the impact of the rising short-term rates on our short-term debt was only partially oÅset by the
impact of rising rates on our variable-rate assets. Also, the decline in Net interest income for 2005 reÖected the change in
the asset mix, as the composition of our Retained portfolio shifted to a greater percentage of lower-yielding, variable-rate
assets, and higher interest expense on derivatives in qualifying hedge accounting relationships. Another factor in the decline
in Net interest income for 2005 was the result of our decision to cease the PC market-making and support activities
conducted through our Securities Sales and Trading Group, or SS&TG, business unit and our external Money Manager
program during the fourth quarter of 2004. This result is reÖected in the $28.6 billion, or 35 percent, decline in the average
balance of our Investments portfolio. These negative factors were partially oÅset by a $20.9 billion, or 3 percent, increase in
the average balance of our Retained portfolio.
Interest income related to our Retained portfolio increased by $1,254 million for 2005, as compared to 2004, as a result
of the increase in the average balance of the portfolio as well as the rising rate environment. These positive factors were
partially oÅset by the shift in the composition of the portfolio to lower-yielding, variable-rate non-agency securities. Interest
income for the Retained portfolio in the Ñrst quarter of 2005 also includes the eÅect of enhancements to certain models
24
Freddie Mac
used to estimate prepayment speeds on mortgage-related securities and our approach for estimating uncollectible interest on
single-family mortgages greater than 90 days delinquent. We implemented these enhancements as changes in estimates,
resulting in a net decrease in interest income of $(166) million (pre-tax) during the Ñrst quarter of 2005.
Interest income related to our Investments portfolio declined by $943 million during 2005, as compared to 2004 as the
average balance of this portfolio declined. By the end of 2004, we divested the trading portfolios related to our SS&TG
business unit and our external Money Manager program in the Investments portfolio. This divestiture reduced the interest
expense for funding the Investments portfolio as well as the hedging costs associated with it, which were reÖected in Gains
(losses) on investment activity. Our investments in mortgage-related securities held by our SS&TG business unit and
external Money Manager program were generally hedged by entering into forward sales of mortgage-related securities. To
determine the fair value of these positions, the held investment was valued at the current market, or spot price, while the
forward sale commitments were valued at the discounted sales price, or forward price. For 2004 and 2003, the spot-forward
diÅerence between the trading securities and the related forward sale commitments resulted in a loss of $1,101 million and
$981 million, respectively, in Gains (losses) on investment activity that was oÅset by Net interest income on the held
position.
Interest income related to Securities purchased under agreements to resell and Federal funds sold increased by
$413 million for 2005, as compared to 2004, due to the increase in short-term interest rates discussed above, which more
than oÅset the 16 percent decline in the related average balance of such securities.
Total interest expense on debt securities increased by $3,490 million for 2005, compared to 2004. Interest expense on
short-term debt increased by $3,194 million for 2005, as compared to 2004, due to the increase in short-term interest rates
during 2005. Interest expense related to long-term debt increased by $296 million for 2005, as compared with 2004, as the
increase in rates more than oÅset the decrease in the average balance of long-term debt.
Interest expense related to amounts due on pass through payments to PC investors decreased by $157 million for 2005,
as compared to 2004, as liquidation rates on outstanding guaranteed PCs and Structured Securities declined to 24 percent
for 2005, as compared to 29 percent for 2004, driving the year-over-year decline in the average balance of Due to PC
investors.
Income (expense) related to derivatives in qualifying hedge accounting relationships decreased $1,158 million to an
expense of $1,058 million during 2005, as compared to income of $100 million during 2004, primarily as a result of the
increased interest expense associated with the accrual of periodic settlements related to our receive-Ñxed swaps and foreign-
currency swaps resulting from increases in LIBOR. Also contributing to this change was our decision in 2004 to discontinue
hedge accounting treatment for a signiÑcant amount of our pay-Ñxed interest-rate swaps and receive-Ñxed interest-rate
swaps. The net impact of this decision was that the net interest expense related to these interest-rate swaps was no longer a
component of Net interest income in 2005 but rather a component of Derivative gains (losses).
2004 versus 2003
Net interest income on a fully taxable-equivalent basis decreased by $321 million in 2004, as compared with 2003. Net
interest yield on a fully taxable-equivalent basis decreased by 6 basis points to 123 basis points in 2004 from 129 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 in 2004 due to the Retained portfolio's acquisition of relatively lower-yielding assets and the
liquidation of higher-coupon securities, partially oÅset by an improvement in the yield on our Securities purchased under
agreements to resell and Federal funds sold as short-term interest rates increased during 2004. The yield on interest-bearing
liabilities declined in 2004 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 a decrease in interest expense related to amounts due to PC investors. This decline in
yield was partially oÅset by higher short-term debt yields in 2004.
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 increased purchases of
lower-coupon non-agency mortgage-related securities (such as variable-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 additional interest income related to 7 percent
growth in the average unpaid principal balance of our Retained portfolio. We also earned lower interest income related to our
Investments portfolio as well as our Securities purchased under agreements to resell and Federal funds sold during 2004 as
compared to 2003. The average balance of these portfolios declined by 14 percent and 39 percent, respectively, during 2004
as we ceased the PC market-making and support activities conducted through our SS&TG business unit and our external
Money Manager program during the fourth quarter of 2004. The decline in these average balances more than oÅset a
28 basis point increase in the yield we earned on our Securities purchased under agreements to resell and Federal funds sold
during 2004 as compared to 2003, due to a change in the asset mix and increases in short-term interest rates during 2004.
25
Freddie Mac
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 of long-term debt increased by
approximately $53 billion, or 11 percent, compared to 2003. This increase more than oÅset 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) mil-
lion in 2003 primarily as a result of moving certain pay-Ñxed swaps out of hedge accounting relationships. In 2004, we
discontinued hedge accounting treatment for pay-Ñxed swaps with a notional balance of approximately $108 billion, moving
them from cash Öow hedge designation to no hedge designation. This movement had a signiÑcant impact on Net interest
income during 2004 because the net interest expense on these swaps 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 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 the fair
value hedge designation to no hedge designation.
Interest expense related to amounts due to PC investors decreased by $933 million as liquidation rates on outstanding
PCs and Structured Securities declined to 29 percent in 2004 from 63 percent in 2003.
Non-Interest Income (Loss)
Management and Guarantee Income
Table 9 provides summary information about Management and guarantee income. The total management and
guarantee rate consists of the contractual management and guarantee fee rate, and the eÅects of the amortization of certain
pre-2003 deferred fees, including credit fees and buy-down fees. Management and guarantee income is the primary
component of the revenue we earn from our credit guarantee activities. Other guarantee-related revenue is deferred and
recognized over time as a component of Income on Guarantee obligation.
Table 9 Ì Management and Guarantee Income(1)
2005
Year Ended December 31,
2004
2003
Contractual management and guarantee feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of credit and buy-down fees included in Other liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,431
19
$1,450
Amount
Rate
Rate
Amount
Amount
(dollars in millions, rate in basis points)
$1,229
424
$1,653
$1,303
79
$1,382
16.5
1.0
17.5
15.7
0.2
15.9
Rate
17.3
6.0
23.3
Unamortized balance of credit and buy-down fees included in Other liabilities, at period
end(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 186
$ 323
$ 465
(1) Excludes amounts related to PCs we held, which are reported in Net interest income.
(2) Credit and buy-down fees 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.
(3) Previous periods' balances have been revised to conform with the 2005 presentation.
2005 vs. 2004
Management and guarantee income increased in 2005 as compared to 2004 primarily driven by a 15 percent increase in
the average outstanding PCs balance, partially oÅset by lower amortization of deferred fees. The total management and
guarantee fee rate was lower for 2005 at 15.9 basis points as compared to 17.5 basis points for 2004. The contractual
management and guarantee fee rate recognized in 2005 decreased to 15.7 basis points from 16.5 basis points in 2004
reÖecting lower fee rates on new business and the liquidation of existing business with relatively higher fee rates. The lower
fee rates on new business were the result of competitive pricing pressures, an increase in buy-down activity, where lenders
pay a portion of their guarantee fee up-front resulting in a lower contractual guarantee fee rate over the life of the related
PCs, and continued use of market adjusted pricing through which guarantee fees are adjusted upward or downward to
compensate for the strength or weakness of our PC prices relative to competing securities. It is important to note that the
increase in buy-downs generates up-front fees that, beginning in 2003, are deferred and recognized over time as a
component of Income on Guarantee obligation.
26
Freddie Mac
Management and guarantee income includes amortization of pre-2003 deferred credit fees and buy-down fees on our
PCs. The unamortized balance of deferred fees related to outstanding PCs was approximately $186 million, $323 million
and $465 million at December 31, 2005, 2004 and 2003, respectively, and will ultimately be reduced to zero over time. The
portion of the management and guarantee fee rate related to the amortization of deferred fees was 0.2 basis points and
1.0 basis point for 2005 and 2004, respectively. The decrease was primarily driven by higher average interest rates for 2005
compared to 2004, resulting in longer estimated lives of the loans underlying our PCs and a decrease in the pace of
amortization. In addition, during the Ñrst quarter of 2005, we improved our approach for estimating the expected weighted
average lives of mortgages underlying our PCs with related deferred credit fees, which in turn are used to calculate the
recognition of deferred fees based on the eÅective interest method. This change in estimate reduced amortization income for
the Ñrst quarter 2005 by $17 million. The decline in the unamortized balance of credit and buy-down fees between 2005 and
2004 relates primarily to the correction of an error in the calculation of the amortization of this balance in prior periods that
reduced the balance by $103 million with a corresponding increase recorded in Other income in 2005.
2004 vs. 2003
Management and guarantee income decreased in 2004 as compared to 2003. This decrease was primarily driven by an
81 percent decrease in amortization of pre-2003 deferred fees, the eÅect of a change in our approach to amortizing deferred
fees implemented in the Ñrst quarter of 2003, which is discussed below, and the decline in the balance of deferred fees
contributed to this decrease. The total management and guarantee income rate declined to 17.5 basis points in 2004 from
23.3 basis points in 2003. 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 primary drivers of the decrease in amortization of deferred fees in
2004 were higher interest rates in 2004 resulting in longer estimated lives of the loans underlying our PCs and a reduction in
the unamortized balances of deferred fees being amortized through Management and guarantee income.
In the Ñrst quarter of 2003, improvements to our amortization approach with respect to deferred fees resulted in the
recognition of $110 million (i.e., 1.5 basis points) of additional amortization income in Management and guarantee income.
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 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 previously outstanding PCs that were liquidated
during 2004. This rate decline was partly driven by the impact of market adjusted pricing on new business purchases. 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.
Gains (Losses) on Guarantee Asset
The change in fair value of the Guarantee asset reÖects:
‚ reductions related to 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. Two principal factors aÅect the fair value of the Guarantee
asset. First, with the passage of time, actual expected cash Öows are realized when received, resulting in a reduction in the
value of the Guarantee asset. Cash Öows received, which are recorded as Management and guarantee income, represent in
part a reduction of our investment in the Guarantee asset. As shown on ""Table 10 Ì Attribution of Change Ì Gains
(Losses) on Guarantee Asset,'' 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).
Second, the fair value of the Guarantee asset is also aÅected by changes in the fair value of future expected cash Öows.
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. See ""Table 24 Ì Changes in Guarantee Asset'' for additional information about the Guarantee asset.
27
Freddie Mac
Table 10 Ì Attribution of Change Ì Gains (Losses) on Guarantee Asset(1)
Year Ended December 31,
2004
(in millions)
Total cash Öows received(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,270) $(1,086)
257
Portion of cash Öows received related to imputed interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(829)
Return of investment in Guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(306)
Change in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in estimate(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,064) $(1,135)
371
(899)
(138)
(27)
2005
$ (891)
244
(647)
(814)
Ì
$(1,461)
2003
(1) Represents the change in fair value of the Guarantee asset related to PCs held by third parties that have previously been sold pursuant to SFAS 140 or
PCs issued through our Guarantor Swap program, where we primarily exchange mortgage loans for PCs.
(2) Represents guarantee fees received related to PCs and Structured Securities held by third parties for which a recognized Guarantee asset exists.
(3) Represents a change in estimate resulting from enhancing our approach for determining the fair value of the Guarantee asset. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements for further information.
Losses on the Guarantee asset decreased $71 million, or 6 percent, in 2005 as compared with 2004. The decrease in the
change in fair value of future cash Öows during 2005 reÖects, in part, the new valuation approach implemented for 2005,
which uses more market-based information to determine the fair value of the Guarantee asset. Our new valuation approach
eÅectively equates the majority of the fair value of the Guarantee asset with the current, or ""spot,'' market values quoted by
third-party dealers as if the cash Öows were structured in excess-servicing interest-only securities and uses other market
inputs for valuing the remaining portion. Accordingly, changes in the fair value of the Guarantee asset, which are recorded
in current period earnings through Gains (losses) on Guarantee asset, will reÖect the volatility associated with these
market-based inputs. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' to our consolidated Ñnancial statements for more information about this new approach.
The decrease in the change in the fair value of future cash Öows during 2004 was primarily due to a smaller overall
decline in mortgage interest rates in 2004 compared to 2003, which aÅected actual and expected prepayments. Return of
investment for each year was consistent with the growth of the outstanding PCs and Structured Securities, as shown in
""Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs and Structured Securities Issued Based on Unpaid
Principal Balances.''
Income on Guarantee Obligation
Table 11 summarizes our income on Guarantee obligation.
Table 11 Ì Income on Guarantee Obligation
Year Ended December 31,
2003
2004
2005
(dollars in millions)
Amortization income related to:
Credit and buy-down fees received in FIN 45 transactions(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 197 $ 128 $
Other components of recognized Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
57
868
Income on Guarantee obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 920 $ 732 $ 925
604
723
Components of the Guarantee obligation, at period end:
Unamortized balance that is attributable to credit and buy-down fees received in FIN 45 transactions(1) ÏÏÏÏÏÏÏÏ $1,167 $ 940 $ 612
Unamortized balance that is attributable to the other components of the Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,374
2,292
Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065 $2,904
3,125
Liquidation rate for outstanding PCs and Structured Securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
24%
29%
63%
(1) Related to upfront cash payments in the form of credit fees and buy-down payments that are received from counterparties to guarantee transactions
that are accounted for pursuant to FIN 45 (e.g., Guarantor Swaps).
(2) Related to outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and investments portfolio
during 2004 and 2003).
In 2005, Income on Guarantee obligation increased as the balance of the Guarantee obligation increased during the
year, oÅsetting the impact of lower PC and Structured Security liquidation rates. The amortization of the Guarantee
obligation is reduced by lower liquidation rates because the rate of amortization is based on changes in the unpaid principal
balance of the underlying mortgage loans. Amortization of credit fees and buy-downs increased in 2005 and 2004 as deferred
balances increased.
In 2004, our Guarantee obligation increased, but our Income on Guarantee obligation decreased as the 2004 full-year
liquidation rate for our outstanding PCs and Structured Securities was signiÑcantly lower than 2003 resulting in
comparatively lower amortization.
28
Freddie Mac
Derivative Overview
Table 12 shows the notional amount for each of our hedge accounting classiÑcations and the corresponding impact of
those positions on our consolidated Ñnancial statements. The application and eÅectiveness of our hedge accounting
strategies can materially aÅect stockholders' equity and the timing of our recognition of earnings because those strategies
determine the accounting for the derivatives involved.
Table 12 Ì Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions
Description
Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance related to closed cash Öow hedges ÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Description
Fair value hedges-open(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedges-open(5)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets
December 31, 2005
Fair Value
(Pre-Tax)(1)
AOCI
(Net of Taxes)(2)
Notional
Amount
December 31, 2004
Fair Value
(Pre-Tax)(1)
AOCI
(Net of Taxes)(2)
$ 3,402
(26)
3,131
6,507
Ì
$ 6,507
(in millions)
$ Ì
4
Ì
4
(6,291)
$(6,287)
$113,101
21,214
622,463
756,778
Ì
$756,778
$12,317
228
2,486
15,031
Ì
$115,031
$ Ì
(25)
Ì
(25)
(7,899)
$(7,924)
Notional
Amount
$115,146
668
567,558
683,372
Ì
$683,372
Consolidated Statements of Income for the Years Ended December 31,
2004
2003
2005
Derivative
Gains
(Losses)
$ Ì
(25)
(1,332)
$(1,357)
Hedge
Accounting
Gains
(Losses)(4)
$ 22
Ì
Ì
$ 22
Derivative
Gains
(Losses)
Hedge
Accounting
Gains
(Losses)(4)
(in millions)
$ Ì
2
(4,477)
$(4,475)
$742
1
Ì
$743
Derivative
Gains
(Losses)
$Ì
29
10
$39
Hedge
Accounting
Gains
(Losses)(4)
$697
(53)
Ì
$644
(1) The fair values of derivatives (netted by counterparty) are presented as Derivative assets, at fair value, and Derivative liabilities, at fair value, on our
consolidated balance sheets.
(2) Derivatives that meet speciÑc criteria may be accounted for as cash Öow hedges. Changes in the fair value of the eÅective portion 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 included in AOCI, net of taxes, until the related forecasted transaction is determined to be probable of not
occurring or aÅects earnings.
(3) 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 forward purchase and sale commitments of securities classiÑed as trading (with notional balances of approximately
$Ì billion, $Ì billion and $78 billion at December 31, 2005, 2004 and 2003, 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
attributable to the hedged risk. For further information, see ""Hedge Accounting Gains (Losses)'' below and ""NOTE 12: DERIVATIVES'' to our
consolidated Ñnancial statements.
(5) For all derivatives in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in Net interest income on our
consolidated statements of income and therefore, those amounts are not included above. For derivatives not in qualifying hedge accounting
relationships, the accrual of periodic cash settlements is recorded in Derivative gains (losses) on our consolidated statements of income.
(6) Derivative gains (losses) in each period include 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.
As Table 12 shows, the majority of our derivatives were not designated in hedge accounting relationships at
December 31, 2005 and 2004. Derivatives that are not in qualifying hedge accounting relationships generally increase the
volatility of reported Non-interest income (loss) because the fair value gains and losses on the derivatives are recognized in
earnings without the oÅsetting recognition in earnings for the change in value of the economically hedged exposures.
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 our counterparty. Conversely, a pay-Ñxed swap requires us to make a Ñxed interest-rate payment to
our counterparty in exchange for a variable-rate payment from our counterparty. Call and put swaptions are options to enter
into receive- and pay-Ñxed 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 mortgage-related assets in the Retained
portfolio. Generally, receive-Ñxed swaps increase in value and pay-Ñxed swaps decrease in value when interest rates decrease
(with the opposite being true when interest rates increase). The fair values of purchased call and put swaptions are sensitive
to changes in interest rates. 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.
EÅective at 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 hedge
accounting requirements. Consequently, we discontinued hedge accounting treatment for these relationships at that time
29
Freddie Mac
resulting in a move of pay-Ñxed swaps with a notional balance of approximately $108 billion 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 a move of receive-Ñxed swaps with a notional
balance of approximately $50 billion from fair value hedge designation to no hedge designation. EÅective at the beginning
of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward purchase
commitments and the majority of our new commitments to forward sell mortgage-related securities. In addition, eÅective
March 31, 2006, we voluntarily discontinued hedge accounting treatment for all derivatives, with the exception of certain
commitments to forward sell mortgage-related securities and one foreign-currency hedge strategy. We believe that our
voluntary discontinuation of hedge accounting treatment for these derivatives assists us in addressing 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.
Derivative Gains (Losses)
Derivative gains (losses) are aÅected by the change in the fair value of and the accrual of periodic settlements of all
derivatives not in hedge accounting relationships. We experienced signiÑcant income volatility 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,
particularly due to the discontinuation of hedge accounting treatment described above. Table 13 provides a summary of the
period-end notional amounts and the gains and losses related to swaptions, swaps and other derivatives that we used to
manage interest-rate risk, but were not accounted for in hedge accounting relationships.
Table 13 Ì Derivatives Not in Hedge Accounting Relationships
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrual of periodic settlements(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Derivative
Gains
(Losses)
Year Ended December 31,
2004
Derivative
Gains
(Losses)
Notional
(in billions)
$(0.4)
0.2
(1.5)
0.6
0.1
(1.0)
(0.4)
$(1.4)
$189.9
25.2
25.6
95.0
286.8
622.5
$622.5
$ 0.4
(1.4)
(0.4)
(0.8)
(0.6)
(2.8)
(1.7)
$(4.5)
Notional
$146.6
34.7
81.2
181.6
123.5
567.6
$567.6
2003
Derivative
Gains
(Losses)
$(0.6)
(0.3)
(0.2)
2.8
(0.7)
1.0
(1.0)
$ Ì
Notional
$216.9
123.1
13.8
47.1
395.4
796.3
$796.3
(1) Other consists of basis swaps, certain option-based contracts, futures, foreign-currency swaps, interest-rate caps, commitments, derivatives held as part
of our external Money Manager program (in 2003) and other derivatives not accounted for in hedge accounting relationships, including credit
derivatives, swap guarantee derivatives and a prepayment management agreement.
(2) Derivative gains (losses) in each period include 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 transactions are probable of not occurring.
(3) Composed of receive-Ñxed swaps of $0.4 billion and $0.1 billion and pay-Ñxed swaps of $(0.8) billion and $(1.8) billion for the years ended
December 31, 2005 and 2004, respectively.
During 2005, long-term and short-term interest rates generally rose, with short-term interest rates increasing more
signiÑcantly than long-term interest rates. These interest-rate movements caused our pay-Ñxed swaps, which are primarily
long-term, to increase in fair value and our receive-Ñxed swaps, which are primarily short-term, to decrease in fair value.
The accrual of periodic settlements declined during 2005 compared to 2004 because interest accruals related to our pay-
Ñxed and receive-Ñxed swaps not in qualifying hedge accounting relationships largely oÅset one another during 2005, but
only did so for the later part of 2004, following the discontinuation of hedge accounting discussed above.
During 2004, we experienced net losses on our call and put swaption positions as the fair values of these positions were
driven down by changes in swap rates and the decline in implied volatilities of interest rates (i.e., the market's expectation of
potential changes in future interest rates). During 2004, a large portion of our pay-Ñxed swaps not in hedge accounting
relationships were forward-starting. Generally, spot and forward rates move 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. The net loss on our pay-Ñxed portfolio for 2004 was caused by the overall
decline in forward rates.
The movement of the pay-Ñxed and receive-Ñxed swaps to no hedge designation at diÅerent dates during 2004 was the
primary cause of the increase in the accrual of periodic settlements 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 instead been reported as a component of Net interest income (loss). The increase in the
30
Freddie Mac
notional balance of our pay-Ñxed swaps not in hedge accounting relationships contributed to a $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 compared to an increase in interest rates during the third quarter of 2003. As interest rates increased during the third
quarter of 2003, our call swaptions declined in value and we incurred losses on commitments to purchase or sell mortgages
and mortgage-related securities. These losses were partially oÅset by gains on pay-Ñxed swaps.
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 amount of any hedge ineÅectiveness, which is 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. Our net hedge ineÅectiveness gains in 2005 related to derivatives used to manage interest-rate risk associated
with our debt securities, along with other derivatives in other fair value hedge accounting relationships. Net hedge
ineÅectiveness gains in 2004 and 2003 related primarily to our fair value hedge accounting relationships where the derivative
is valued using forward rates while the hedged debt is valued using spot rates. As discussed in ""Derivative Overview'' above,
a substantial portion of our derivatives in fair value hedge accounting relationships were reclassiÑed to no hedge designation
during 2004.
Gains (Losses) on Investment Activity
Table 14 summarizes the components of Gains (losses) on investment activity.
Table 14 Ì Gains (Losses) on Investment Activity
2005
Year Ended December 31,
2004
(in millions)
2003
Gains (losses) on trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(289) $(1,071)
Gains (losses) on PC residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on sale of mortgage loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on sale of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Security impairments:
(95)
92
546
58
209
584
Mortgage-related interest-only security impairmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(71)
Other security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300)
Total security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (371)
(10)
(66)
(60)
(126)
(2)
Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(127) $ (348)
Lower-of-cost-or-market adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(1,606)
(144)
725
826
(524)
(212)
(736)
(179)
$(1,114)
(1) Represents mortgage loans sold in connection with securitization transactions.
Gains (losses) on trading securities
The fair value of trading securities in our Retained portfolio declined in 2005 as medium- and long-term interest rates
increased during the year. Prior to 2005, our trading positions related primarily to our SS&TG business unit and external
Money Manager program, both of which ceased operations in the fourth quarter of 2004. The trading activities of our
SS&TG business unit resulted in spot-forward diÅerences, or trading losses, that totaled $1,101 million and $981 million in
2004 and 2003, respectively, which were oÅset by net interest income on the held positions. Absent these spot-forward
diÅerences, our trading gains (losses) netted to a $30 million gain in 2004 and a $625 million loss in 2003. These gains and
losses were primarily caused by changes in the prevailing medium- and long-term market interest rates (i.e., 10-year swap
rate). In 2004, trading losses were adversely impacted by prepayments on mortgage-related securities that we held in the
trading portfolios of our SS&TG business unit and external Money Manager program. In 2003, our trading securities
portfolio experienced losses as a result of prepayments that reduced the fair value of these securities during the Ñrst half of
2003. In addition, during the second half of 2003, the portfolio experienced losses as rising interest rates decreased the value
of these investments.
Gains (losses) on PC residuals, at fair value
Gains (losses) on PC residuals that we classify as trading securities relate to certain PCs and Structured Securities we
hold in our Retained portfolio and represent the net fair value of the future cash inÖows and cash outÖows related to our
guarantee of these securities. The fair value of PC residuals is aÅected by several factors including: (a) changes in interest
rates, which aÅect the expected lives of the related PCs and Structured Securities; (b) default experience and loss severity
trends related to our guarantee and (c) third party information with respect to fair value. In 2005, losses on PC residuals
31
Freddie Mac
were also aÅected by changes in the approach we use to estimate the fair values of our guarantee-related assets and
liabilities, which resulted in net pre-tax losses of $(78) million in the Ñrst quarter of 2005. In addition, PC residual losses in
2005 were aÅected by the impact of Hurricane Katrina, which increased the estimated future credit costs considered in the
valuation of the Guarantee obligation component of the PC residuals. In 2004, expected default costs declined due to
continued house price appreciation, generating gains, partially oÅset by declines in mortgage interest rates that reduced the
expected life of the Guarantee asset, generating losses. We recorded losses in 2003, primarily driven by reductions in
mortgage interest rates.
Gains (losses) on sale of mortgage loans
Gains and losses on the sale of mortgage loans are primarily determined based on the volume of mortgage loan sales and
interest rate movements from the time the loans are purchased until the time they are sold in any given period. Net gains on
sales of mortgage loans have declined since 2003 primarily due to the decline in the volume of loan sales as our guarantee
activities have trended toward a higher proportion of Guarantor Swap transactions as opposed to sales of mortgage loans
from our Retained portfolio. Net gains on the sales of mortgage loans from our Retained portfolio decreased in 2005 and
2004 from 2003 levels as the proceeds from such sales have declined to approximately $24 billion in 2005 from $31 billion
in 2004 and $84 billion in 2003 reÖecting the decline in volume.
Gains (losses) on sale of available-for-sale securities
Proceeds from the sale of available-for-sale securities totaled $95 billion, $86 billion and $144 billion during 2005, 2004
and 2003, respectively, and we recognized net gains during each year. Prior to 2005, we generated a large volume of these
sales through our SS&TG business unit and external Money Manager program, which ceased operations during the fourth
quarter of 2004. During 2005, our sales of available-for-sale securities were primarily from the Retained portfolio reÖecting
structuring activity designed to improve returns and to enhance liquidity by broadening the investor base for our mortgage-
related securities.
Total security impairments
Total security impairments for 2005 were $371 million. Of that amount, approximately $185 million relates to
impairments of certain commercial mortgage-backed securities, or CMBS, which involved cash Öows from mixed pools (i.e.,
mortgage loan pools containing both multifamily residential loans and non-residential commercial loans). In December
2005, HUD determined that such mixed-pool investments are not authorized under our charter. OFHEO concurred with
HUD's determination and subsequently directed us to provide a written plan for the divestiture of these assets, which we
have done. Accordingly, we determined that we no longer had the ability or intent to hold these investments and, pursuant to
relevant accounting guidance, recognized impairments on aÅected CMBS investments with an unrealized loss at
December 31, 2005. Accounting guidance does not permit the recognition of unrealized gains on other aÅected CMBS until
such securities are sold. As such, we anticipate that the sale of the related assets in 2006 would result in a net gain, absent
signiÑcant changes in market prices. Also included within the $371 million in total security impairments in 2005 were
$71 million of impairments of mortgage-related interest-only securities, primarily related to the decline in mortgage interest
rates experienced in the second quarter of 2005, and $115 million of remaining security impairments, mainly associated with
an adverse change in estimated cash Öows on securities in an unrealized loss position.
Impairments in 2004 and 2003 included impairments on manufactured housing securities totaling $44 million and
$208 million, respectively, as a result of the comparatively low credit quality of these securities. In 2003, we also recorded
impairments on mortgage-related interest-only securities totaling $524 million primarily driven by declines in mortgage
interest rates during the Ñrst half of the year.
Lower-of-cost-or-market adjustments
We value mortgage loans classiÑed as held-for-sale at the lower-of-cost-or-market with resulting valuation adjustments,
if any, reÖected in this caption. Increases in mortgage interest rates during 2005, particularly in the Ñrst, third and fourth
quarters, resulted in higher lower-of-cost-or-market adjustments than recorded in 2004. 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-cost-or-market valuation adjustments that totaled
$(178) million in the third quarter of 2003.
Gains (Losses) on Debt Retirement
During 2005, we recognized a pre-tax gain of $206 million on debt repurchases of $11.7 billion. During 2004 and 2003,
we recognized pre-tax losses of $(327) million and $(1,775) million, respectively, on debt repurchases of $14.5 billion and
$27.3 billion, respectively. We repurchase our outstanding debt securities on a regular basis to help preserve the liquidity of
32
Freddie Mac
our debt securities and to manage our mix of assets and liabilities. For example, in early 2005, we executed a tender oÅer for
certain debt securities with expired European call options because the price of those securities had declined relative to other
debt securities. In 2005, we also recorded gains on repurchases of debt originally issued in response to investor requests. See
""LIQUIDITY AND CAPITAL RESOURCES'' for further discussion of our debt management activities. Our 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. In all periods, Gains (losses) on debt retirement include previously deferred amounts
related to cash Öow hedges associated with the repurchased debt securities.
Resecuritization Fees
Table 15 summarizes the components of our single-class and multi-class structured resecuritization activities.
Table 15 Ì Total Resecuritization Fees and Activity
Resecuritization fees(1):
2005
Year Ended December 31,
2004
(in millions)
2003
Multi-classÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Single-class ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
119
6
125
$
$
149
10
159
$
$
338
14
352
(1) Represents the portion of resecuritization fee income that we recognize as Resecuritization fees, which relate to resecuritization classes held by third
parties.
Investor demand for multi-class structured cash Öows tends to increase in periods characterized by a steep yield curve
and declining interest rates. Beginning in the second half of 2005, a Öattening of the yield curve accompanied by rising
mortgage interest rates slowed investor demand for our multi-class Structured Securities, particularly REMICs. Conversely,
during 2004 and 2003, investor demand for our multi-class Structured Securities remained high largely due to the
comparatively steep yield curve during these periods.
During 2005, partly in response to competitive market conditions, we began to issue select REMIC products (e.g.,
Reference REMICSM securities, Whole Loan REMIC and alternative collateral deals) and Giant PCs without charging up-
front transaction fees, which we previously charged under our normal practice.
Other Income
Other income totaled $24 million, $230 million and $493 million for 2005, 2004 and 2003, respectively. Absent
Öuctuations related to certain prior period accounting errors in 2005, 2004 and 2003 (discussed in more detail below), Other
income would have been $104 million, $172 million and $279 million in 2005, 2004 and 2003, respectively. Other income
declined in 2005 and 2004, primarily due to a decline in the use of Loan Prospector», our automated loan-underwriting tool,
as the proportion of loans underwritten using alternate underwriting tools prior to purchase has increased.
In the process of reviewing our accounting policies and practices during 2005, 2004 and 2003, we identiÑed certain
errors not material to our Ñnancial statements that related to income in previously reported periods. During 2005, 2004 and
2003, we identiÑed approximately $80 million of expense, net ($52 million after-tax), $58 million of income, net
($38 million after-tax) and $214 million of income, net ($139 million after-tax) of such errors, which were recorded in the
Ñrst quarter of each respective year. During 2005, our largest correction related to an error associated with the accrual of
interest income for certain mortgage-related securities during 2001 to 2004, which reduced Other income in 2005 by
approximately $210 million ($137 million after-tax). In addition, we corrected errors related to the ending balance of pre-
2003 deferred credit and buy-down fees at December 31, 2004 that increased Other income in 2005 by $103 million
($67 million after-tax) as well as other errors that increased Other income in 2005 by $27 million ($18 million after-tax).
33
Freddie Mac
Non-Interest Expense
Table 16 summarizes the components of Non-interest expenses.
Table 16 Ì Non-Interest Expense
2005
Year Ended December 31,
2004
(in millions)
2003
Administrative expenses:
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 805
386
Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
58
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
286
Other administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,535
Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
251
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40
REO operations (income) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
320
Housing tax credit partnershipsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
96
Other expenses:
339
Reserve for legal settlementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
234
Realized losses on certain guaranteesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
99
Amortization of credit enhancementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Selected aÅordable housing transaction fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
51
Loan Prospector»-related expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
OFHEO civil money penaltyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
48
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total other expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
771
Total Non-interest expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,013
$ 758
588
60
144
1,550
143
(3)
281
129
Ì
33
86
41
56
Ì
55
271
$2,371
$ 624
311
52
194
1,181
(5)
7
200
157
75
60
134
124
99
125
79
696
$2,236
Administrative Expenses
Salaries and employee beneÑts increased during each of the past three years primarily because we hired additional
employees in support of our Ñnancial reporting and infrastructure-related activities. In addition, we continued to experience
increases in employee incentive compensation costs, such as employee stock compensation, special incentive awards and
annual employee bonuses, in an eÅort to recruit new talent and retain existing employees. The cessation of our SS&TG
business unit and external Money Manager program activities during the fourth quarter of 2004 and related employee
terminations partially oÅset other increases in Salaries and employee beneÑts during 2005. Furthermore, Salary and
employee beneÑts in 2004 included an $18 million charge for employee severance and related costs associated with the
cessation of SS&TG and external Money Manager activities.
Professional services expense Öuctuated with our ongoing Ñnancial reporting and internal control and remediation
activities. Professional services expense declined during 2005 compared to 2004, in part because we were able to replace
consultants with employees, increasing our Salaries and employee beneÑts expense as a consequence.
Other administrative expenses are presented net of certain expenses that we defer related to capitalized software
development activities. The net eÅect of these capitalized software costs, including the write-oÅ of previously capitalized
amounts, was an increase (reduction) to Other administrative expenses totaling $29 million, $(94) million and $(42) million
in 2005, 2004 and 2003, respectively. In addition, Other administrative expenses increased in 2005 compared to 2004 as a
result of higher OFHEO regulatory assessments associated with its oversight responsibilities and charitable contributions,
particularly associated with Hurricane Katrina.
Provision for Credit Losses
The Provision 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 for credit
losses was $251 million and $143 million in 2005 and 2004, respectively, compared to a beneÑt of $5 million in 2003.
The Provision for credit losses increased during 2005 primarily because Hurricane Katrina heavily damaged properties
underlying some of the mortgage loans we hold in the Retained portfolio or that underlie our guaranteed PCs and Structured
Securities. The 2005 provision also includes increases related to the single-family portfolio as we anticipate an increase in
the severity of losses on a per-property basis driven, in part, by the expectation of low or slower home price appreciation in
certain areas and increased incurred losses as delinquencies occur for loans that are expected to experience higher default
rates based on their year of origination. The Provision 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. However, a decrease in
the estimated incurred losses for the multifamily mortgage portfolio, driven primarily by an increase in the estimated fair
value of multifamily properties in certain areas, partially oÅset the increase resulting from the single-family portfolio.
34
Freddie Mac
Housing Tax Credit Partnerships
Operating losses of our housing tax credit partnerships, which are recorded as a component of Non-interest expense,
have increased over the last three years as our investments in these partnerships have increased. The increased investment
in Housing tax credit partnerships have generated related tax beneÑts, which consist of tax credits and the tax deductibility of
the operating losses. See ""Income Tax Expense'' for a description of the impact of these investments on our income tax
expense.
Other Expenses
Reserve for legal settlements
On April 20, 2006, we announced that we reached an agreement in principle to settle the securities class action and
stockholder derivative lawsuits that relate to our restatement. The $339 million expense recorded in 2005 for Reserves for
legal settlements includes this settlement, net of expected insurance proceeds. This expense is in addition to the $75 million
expense we recorded in 2003 for a loss contingency reserve related to legal proceedings arising from the restatement. See
""NOTE 13: LEGAL CONTINGENCIES'' to our consolidated Ñnancial statements for more information.
Realized losses on certain guarantees
The increase in Realized losses on certain guarantees during 2005 resulted primarily from the application of our new
approach for determining the initial fair values of our guarantee-related assets and liabilities that employs more direct
market-based information. Such losses arise in connection with our Guarantor Swap transactions and in 2005 were partly
driven by our eÅorts to meet the aÅordable housing goals and subgoals established by HUD. When determining the fees we
will charge customers with respect to providing our credit guarantee, we consider all of the mortgage loans we expect to
guarantee. However, the recognition of realized losses on certain guarantees or the deferral of guarantee income is
determined based upon the speciÑc loan pools formed that underlie our PCs and Structured Securities. Our new approach
for valuing our guarantee-related assets and liabilities is discussed in ""NOTE 2: TRANSFERS OF SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements.
Amortization of credit enhancements
Amortization of our credit enhancement asset accelerates when the related PC or Structured Security liquidates. Total
Guaranteed PCs and Structured Securities Issued liquidated at roughly the same pace in 2005 and 2004, resulting in
relatively Öat amortization expense during these years. These securities liquidated at a much faster pace in 2003 compared to
2004 and 2005 because mortgage interest rates declined during the Ñrst half of 2003, resulting in relatively higher
amortization expense.
Other expenses
Other expenses in 2003 included a $125 million civil money penalty we paid in connection with the OFHEO consent
order. We entered into certain multifamily aÅordable transactions during 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. We did not enter into similar transactions during 2005.
Income Tax Expense
For 2005, 2004 and 2003, our eÅective tax rates were 14 percent, 21 percent and 31 percent, respectively. The decrease
in the eÅective tax rate over the past three years is primarily due to the decline in pre-tax income and year-over-year
increases in tax credits related to our investments in housing tax credit partnerships and interest earned on tax-exempt
securities. Tax beneÑts associated with our investments in housing tax credit partnerships reduced Income tax expense by
$476 million, $378 million and $302 million for 2005, 2004 and 2003, respectively. We expect tax credits resulting from our
investments in housing tax credit partnerships to grow in the future. However, our ability to use all of the tax credits
generated by existing or future investments in housing tax credit partnerships to reduce our federal income tax liability may
be limited, depending on the amount of our future federal income tax liability, which cannot be predicted with certainty.
Our eÅective tax rate for 2004 beneÑted from a $94 million reduction to our tax reserves as a result of a closing
agreement we entered into with the Internal Revenue Service relating to the tax treatment of dividends paid on step-down
preferred stock issued by our two REIT subsidiaries. In 2003, we recorded a non-tax deductible $125 million OFHEO civil
money penalty and a $75 million loss contingency reserve described above in ""Other expenses,'' which increased our
eÅective tax rate.
35
Freddie Mac
CONSOLIDATED BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated
Ñnancial statements, including the accompanying notes. Also see ""CRITICAL ACCOUNTING POLICIES AND
ESTIMATES'' for more information concerning our signiÑcant accounting policies.
Retained Portfolio
Table 17 provides detail regarding the mortgage loans and mortgage-related securities that comprised our Retained
portfolio.
Table 17 Ì Characteristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio
Fixed
Rate
2005
Variable
Rate(1)
December 31,
Total
Fixed
Rate(2)
(in millions)
2004
Variable
Rate(1)(2)
Total(2)
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 56,458
Guaranteed PCs and Structured Securities:(3)
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Guaranteed PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
299,188
247
299,435
$
5,023
$ 61,481
$ 56,530
$
4,830
$ 61,360
61,745
144
61,889
360,933
391
361,324
304,555
261
304,816
51,737
145
51,882
356,292
406
356,698
Non-Freddie Mac mortgage-related securities:
Agency mortgage-related securities:(4)
Fannie Mae:
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae:
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
28,818
1,294
1,045
30
31,187
13,180
41
218
Ì
13,439
Non-agency mortgage-related securities:(5)
5,795
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35,860
Commercial mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage revenue bonds(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,171
Manufactured housing(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,183
54,009
Total non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total unpaid principal balance of Retained portfolio(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $441,089
180,632
7,627
150
168
188,577
$268,928
Premiums, discounts, deferred fees and other basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gains (losses) on mortgage-related securities, pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
41,828
1,589
1,599
31
45,047
14,504
83
81
Ì
14,668
8,243
36,791
8,945
1,289
55,268
$461,661
115,168
4,393
132
202
119,895
$191,275
41,998
1,335
1,263
30
44,626
186,427
43,487
11,321
1,351
242,586
710,017
2,440
(3,551)
597
(119)
$709,384
56,332
1,672
1,680
31
59,715
123,411
41,184
9,077
1,491
175,163
652,936
4,039
6,762
845
(114)
$664,468
(1) Variable-rate mortgages include mortgages with a current contractual coupon that is scheduled to change prior to contractual maturity, ARMs, and
mortgage-related securities backed by ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods. Mortgage loans also include mortgages with
balloon/reset provisions.
(2) Amounts for 2004 have been revised to conform with the 2005 presentation.
(3) We guarantee the payment of principal and interest on our Guaranteed PCs and Structured Securities and are subject to the credit risk associated with
the underlying mortgage loan collateral.
(4) 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.
(5) Credit rating of most non-agency mortgage-related securities is designated by at least two nationally recognized credit rating agencies.
(6) Consists of obligations of states and political subdivisions. Approximately 66 percent and 72 percent were AAA rated at December 31, 2005 and 2004,
respectively.
(7) At December 31, 2005 and 2004, 51 percent and 43 percent, respectively, of mortgage-related securities backed by manufactured housing were rated
BBB¿ or above. For the same dates, 75 percent and 96 percent, respectively, of these securities were supported by third-party credit enhancements
(e.g., bond insurance) and other credit enhancements (e.g., deal structure through subordination). Approximately 33 percent were AAA rated at
December 31, 2005 and 2004.
(8) Approximately 98 percent and 97 percent were AAA rated at December 31, 2005 and 2004, respectively.
The aggregate carrying value of the loans and securities held in our Retained portfolio increased 7 percent during 2005
while their aggregate unpaid principal balance increased by 9 percent. The aggregate unpaid principal balance of the loans
and securities held in our Retained portfolio 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. The non-agency mortgage-related securities portion of the Retained portfolio grew during 2005 in both unpaid
principal balance and as a percentage of the total Retained portfolio. This growth was a result of the attractive option-
adjusted spreads on, and increased supply of, non-agency mortgage-related securities, particularly variable-rate products,
and fewer attractive investment opportunities in agency Ñxed-rate products. During 2005, strong demand from other
investors, combined with fewer mortgage loan originations, generally resulted in unattractive mortgage-to-debt option-
adjusted spreads on agency Ñxed-rate products. Net unrealized gains (losses) on mortgage-related securities, pre-tax was a
36
Freddie Mac
loss at December 31, 2005 compared to a gain at December 31, 2004. This change was primarily attributable to rising
interest rates.
Table 18 provides additional detail regarding the fair value of mortgage-related securities in the Retained portfolio.
Table 18 Ì Fair Value of Available-For-Sale and Trading Mortgage-Related Securities in the Retained Portfolio
2005
December 31,
2004
(in millions)
2003
Available-for-sale securities:
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $351,447
43,306
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,115
231,356
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,241
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
638,465
Total available-for-sale mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$352,102
59,519
1,762
168,058
9,020
590,461
$384,426
76,844
2,918
109,409
7,729
581,326
Trading securities:
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8,156
534
204
8,894
Total fair value of available-for-sale and trading mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $647,359
11,398
385
59
11,842
$602,303
17,590
586
24
18,200
$599,526
Issuers Greater than 10 Percent of Stockholders' Equity
At December 31, 2005, we held Fannie Mae securities in our Retained portfolio with a fair value of $43.8 billion that
represented 161 percent of Total stockholders' equity. No other individual issuer at the individual trust level exceeded
10 percent of Total stockholders' equity at December 31, 2005.
Cash and Investments
Table 19 provides additional detail regarding the non-mortgage-related securities that comprised our Cash and
investments portfolio.
Table 19 Ì Cash and Investments
2005
Average
Maturity
(Months)
Fair
Value
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,468
Investments:
Non-mortgage-related securities:
Asset-backed securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal funds sold and Eurodollars ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
30,578
5,823
5,764
42,165
9,909
5,250
15,159
57,324
Total Cash and investments per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏ $67,792
G3
N/A
282
G3
G3
G3
December 31,
% of Portfolio
A Rated or
Better(1)
Fair
Value
(dollars in millions)
$35,253
N/A
2004
Average
Maturity
(Months)
% of Portfolio
A Rated or
Better(1)
G3
N/A
N/A
303
Ì
G3
G3
100.0%
99.7%
Ì
99.9%
N/A
N/A
100.0%
100.0%
100.0%
100.0%
N/A
N/A
21,733
8,097
Ì
29,830
18,647
13,550
32,197
62,027
$97,280
(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.
The balance of our Cash and investments portfolio at December 31, 2005 decreased by approximately 30 percent from
December 31, 2004. The balance at December 31, 2004 included funds from the liquidation of the portfolios of our SS&TG
business unit and external Money Manager program. The decrease in 2005 was also driven by our use of Cash and cash
equivalents to return swap collateral to our derivative counterparties, as the fair market value of derivative instruments
covered by counterparty collateral arrangements at December 31, 2005 decreased as compared to December 31, 2004. See
""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative
Counterparty Credit Risk'' for further discussion of these arrangements.
37
Freddie Mac
Table 20 provides additional detail regarding the fair value of securities in the Cash and investments portfolio.
Table 20 Ì Fair Value of Securities in the Cash and Investments Portfolio(1)
2005
December 31,
2004
(in millions)
2003
Available-for-sale securities:
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,578
Ì
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,823
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,764
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
42,165
Total available-for-sale non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$21,733
Ì
8,097
Ì
Ì
29,830
Trading securities:
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies ÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
Ì
Ì
Total mortgage-related and non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $42,165
Ì
Ì
Ì
Ì
Ì
Ì
$29,830
$16,596
4,924
9,494
150
64
31,228
17,266
15,052
490
9
32,817
52
479
341
437
5
1,314
$65,359
(1) The reduction of trading securities within the Cash and investments portfolio in 2004 was attributable to the liquidation in the fourth quarter of 2004 of
securities purchased through our SS&TG business unit and external Money Manager program.
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, 2005 and 2004, respectively.
38
Freddie Mac
Derivative Assets and Liabilities, at Fair Value
Table 21 summarizes the notional or contractual amounts and related fair value of our total derivative portfolio by
product type.
Table 21 Ì Total Derivative Portfolio
December 31,
2005
2004
Notional or
Contractual
Amount(1)
Fair Value(2)
Notional or
Contractual
Amount(1)
Fair Value(2)
(in millions)
Interest-rate swaps:
Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis (Öoating to Öoating)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$181,562
159,212
234
341,008
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Futures(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-rate caps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total derivative portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
146,615
34,675
11,814
193,104
86,252
37,850
45
658,259
21,961
2,414
738
Ì
$683,372
$ (991)
756
Ì
(235)
3,453
1,200
(7)
4,646
19
2,124
Ì
6,554
(44)
(1)
(2)
Ì
$6,507
$ 95,043
83,602
94
178,739
189,945
25,175
9,084
224,204
129,110
56,850
9,897
598,800
32,952
10,926
408
113,692
$756,778
$(2,879)
2,394
1
(484)
4,988
267
(3)
5,252
(33)
10,303
5
15,043
(9)
(2)
(1)
Ì
$15,031
(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 on 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, and is reported in the Derivative assets, at fair value and Derivative liabilities, at fair
value captions. The fair values for futures are directly derived from quoted market prices. Fair values of other derivatives are derived primarily from
valuation models using market data inputs.
(3) Primarily represents written options, including guarantees of stated Ñnal maturity of issued Structured Securities and written call options on PCs we
issued (see ""NOTE 4: FINANCIAL GUARANTEES'' to our consolidated Ñnancial statements for more information).
(4) Includes Treasury futures notional amounts of $Ì million and $2,001 million at December 31, 2005 and 2004, respectively.
The carrying value of our derivative assets and liabilities on our consolidated balance sheets is equal to their fair value,
which is aÅected by changes in market conditions such as the level and expected volatility of interest rates. The composition
of our derivative portfolio will change from period to period as a result of derivative purchases, terminations prior to
contractual maturity and expiration of the derivatives at their contractual maturity. We record changes in fair values of our
derivatives in current income or, to the extent our accounting hedge relationships are eÅective, we may defer those changes
in AOCI or oÅset them by basis adjustments to the related hedged item. As a result, the increases or decreases in fair value
by derivative categories will not correspond directly to Derivative gains (losses) or Hedge accounting gains (losses) on our
consolidated statements of income.
The fair value of the total derivative portfolio declined in 2005 due to a decline in the fair value of foreign-currency
swaps used primarily to hedge Euro-denominated debt as the U.S. dollar strengthened relative to the Euro during the year.
The notional balance of our total derivative portfolio declined by $73.4 billion during 2005 as a result of the termination of
our prepayment management agreement at December 31, 2005 and a change in the composition of our derivative portfolio.
The composition of our derivative portfolio changed with an increase in the notional balance of interest-rate swaps, oÅset
by decreases in the notional balance of call swaptions, futures and foreign-currency swaps. Several factors contributed to this
change in derivative composition. The asset mix in the Retained portfolio has moved toward a greater proportion of non-
agency, variable-rate mortgage-related securities, which generally require less interest-rate protection than Ñxed-rate
products. Also, the gradual increase in market interest rates and the Öattening of the yield curve in 2005 has reduced the
interest-rate risk of our existing Ñxed-rate investments, thereby reducing our need for call swaptions to manage the related
risk. In addition, during 2005 and 2004, we sought to oÅset the prepayment risk in the Retained portfolio by increasing the
amount of our callable debt outstanding.
The notional balance of our interest-rate swaps increased in the aggregate during 2005. Due to the Öattening of the yield
curve and generally higher interest rates in 2005, we entered into pay-Ñxed swaps with relatively short maturities to oÅset
our yield curve exposure. The notional balance of receive-Ñxed swaps increased primarily as a result of economic hedging
39
Freddie Mac
activities related to our callable debt securities outstanding. Callable debt gives us the option to redeem the debt security on
one or more speciÑed call dates or at anytime on or after a speciÑed call date. We employ receive-Ñxed swaps to protect
against a decline in interest rates until the speciÑed call date and in between speciÑed call dates. As a result of changes in
the composition of our debt securities issued, we also reduced the notional balance of our call swaptions during 2005. The
notional balance of our futures declined in 2005 primarily because we reduced our position in Eurodollar future contracts
held for risk-management purposes in response to movements in short-term rates. The notional balance of our foreign-
currency swaps declined due to maturities of such swaps throughout 2005 that were not replaced by new contracts.
Table 22 summarizes the changes in derivative fair values.
Table 22 Ì Changes in Derivative Fair Values
December 31,
2005
2004
(in millions)
Beginning balance, at January 1 Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15,031
$15,823
Net change in:
FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives:(1)
Changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of new contracts entered into during the period(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contracts realized or otherwise settled during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance, at December 31 Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52
(35)
1
(1)
(214)
221
(7)
(1)
(8,486)
2,522
(2,577)
$ 6,507
(627)
1,733
(1,897)
$15,031
(1) Includes fair value changes for over-the-counter, or OTC, interest-rate swaps, option-based derivatives, foreign-currency swaps and interest-rate caps.
(2) Consists primarily of cash premiums paid or received on options and the initial value of interest-rate swaps after we have exercised related swaptions.
Table 23 shows the fair value for each derivative type and the maturity proÑle of our derivative positions. The fair value
of a longer-term derivative generally will vary more over time than a comparable derivative with a shorter term. A positive
fair value in Table 23 for each derivative type is the estimated amount, prior to netting by counterparty, that we would be
entitled to receive if we terminated the derivatives of that type. A negative fair value for a derivative type is the estimated
amount, prior to netting by counterparty, that we would owe if we terminated the derivatives of that type. See Table 35
under ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for additional information regarding
derivative counterparty credit exposure. Table 23 also provides the weighted-average Ñxed rate of our pay-Ñxed and receive-
Ñxed swaps.
40
Freddie Mac
Table 23 Ì Derivative Fair Values and Maturities
Interest-rate swaps:
Pay-Ñxed:
SwapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forward-starting swaps(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receive-Ñxed:
SwapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Option-based:
Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other option-based derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005
Fair Value(1)
Total Fair
Value
Less than
1 Year
1 to 3
Years
Greater than
3 and up to
5 Years
In Excess
of 5 Years
(dollars in millions)
$
882
$
(1,873)
$ 551
$ 376
23
4.02%
Ì
Ì
23
(147)
3.95%
(147)
(124)
4.25%
Ì
Ì
551
(344)
4.22%
(344)
207
86
7
Ì
93
19
297
(44)
Ì
$ 241
877
Ì
Ì
877
Ì
144
Ì
Ì
$1,228
4.56%
Ì
Ì
376
395
4.69%
395
771
406
124
Ì
530
Ì
1,178
Ì
Ì
$2,479
$
(68)
4.94%
(1,873)
6.05%
(1,941)
852
5.07%
852
(1,089)
2,084
1,069
(7)
3,146
Ì
505
Ì
(2)
$ 2,560
(991)
756
756
(235)
3,453
1,200
(7)
4,646
19
2,124
(44)
(2)
6,508
Credit derivative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1)
$ 6,507
(1) Fair value is categorized based on the years from December 31, 2005 until the contractual maturity of the derivative.
(2) Represents interest-rate swap agreements scheduled to begin on a future date.
Guarantee Asset
Table 24 summarizes the changes in our Guarantee asset balance.
Table 24 Ì Changes in Guarantee Asset
Beginning balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,516
1,631
Additions, net of repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,064)
Ending balance, at December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,083
$3,686
1,965
(1,135)
$4,516
(1) 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 2005 and 2004, the primary 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 2004 primarily because net
repurchases of PCs and Structured Securities into the Retained portfolio increased by approximately 28 percent in 2005 as
compared to 2004 (based on unpaid principal balances).
December 31,
2005
2004
(in millions)
41
Freddie Mac
Total Debt Securities, Net
Table 25 reconciles the par value of our debt securities to the amounts shown on our consolidated balance sheets.
Table 25 Ì Reconciliation of the Par Value of Total Debt Securities to the Consolidated Balance Sheets
December 31,
2005
2004
(in millions)
Total debt securities:
Par value(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $780,382
Unamortized balance of discounts and premiums(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(39,338)
Foreign-currency-related and hedging-related basis adjustments(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7,748
Total debt securities, net per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $748,792
$749,219
(33,899)
16,377
$731,697
(1) Includes securities sold under agreements to repurchase and Federal funds purchased and swap collateral obligations.
(2) Primarily represents unamortized discounts on zero-coupon debt securities. Also, includes accrued interest payable on swap collateral obligations.
(3) Primarily represents the mark-to-market of foreign-currency debt that is in hedge accounting relationships. Balance will Öuctuate due to a number of
factors, primarily the U.S. dollar to Euro exchange rate.
Total debt securities, net increased by approximately $17.1 billion during 2005 while the par value of outstanding debt
securities increased by $31.2 billion as a result of our net issuance of Medium-term Notes, partially oÅset by reductions in
swap collateral obligations. The increase in par value was oÅset by increases in the unamortized balance of net discounts,
and a decline in foreign-currency-related and hedging-related basis adjustments. During 2005, the par value of our callable
Medium-term Notes increased by $26.3 billion, resulting from issuances of $88.8 billion oÅset by calls, maturities and
repurchases. In 2005, we issued more callable Ñxed-rate debt as part of our eÅort to reduce the liquidity risk of short-term
debt at a time when relative funding costs across our credit curve were more attractive. Our foreign-currency-related and
hedging-related basis adjustments declined during 2005 primarily due to Öuctuations in foreign-currency exchange rates. See
""LIQUIDITY AND CAPITAL RESOURCES'' for further discussion of our debt management activities.
Table 26 summarizes our Senior debt, due within one year.
Table 26 Ì Senior Debt, Due Within One Year
December 31,
2005
Average Outstanding
During the Year
Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4)
Weighted
Average
Weighted
Average
Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to repurchase and Federal funds
purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedging-related basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$181,468
2,032
450
8,768
(5)
192,713
95,819
$288,532
4.00%
4.17
4.26
4.30
N/A
4.02
3.42
3.82
(dollars in millions)
$181,878
850
267
10,374
3.11%
3.35
3.08
3.14
December 31,
2004
Average Outstanding
During the Year
Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4)
Weighted
Average
Weighted
Average
Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to repurchase and Federal funds
purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$180,198
162
Ì
16,279
196,639
85,664
$282,303
2.04%
2.51
Ì
2.24
2.05
3.33
2.44
(dollars in millions)
$184,834
4,289
801
13,549
1.40%
1.31
1.37
1.36
Maximum
Balance, Net
Outstanding at Any
Month End
$194,578
2,032
1,000
13,533
Maximum
Balance, Net
Outstanding at Any
Month End
$212,715
5,320
3,046
16,279
42
Freddie Mac
December 31,
2003
Average Outstanding
During the Year
Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4)
Weighted
Average
Weighted
Average
Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to repurchase and Federal funds
purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold, not yet purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$188,309
5,300
1,611
16,082
733
212,035
83,227
$295,262
1.12%
1.18
0.96
1.02
N/A
1.11
3.61
1.81
(dollars in millions)
$207,374
1,243
2,283
11,694
1.21%
1.32
0.94
1.13
Maximum
Balance, Net
Outstanding at Any
Month End
$264,370
5,300
8,296
16,082
(1) Represents par value, net of associated discounts or premiums. Swap collateral obligations include the related accrued interest payable.
(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) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on our consolidated balance sheets.
(4) 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.
Guarantee Obligation
Table 27 summarizes the changes in the Guarantee obligation balance.
Table 27 Ì Changes in the Guarantee Obligation
December 31,
2005
2004
(in millions)
Beginning balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,065
Transfer-out to the loan loss reserve(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10)
Additions, net of repurchases:
Fair value of newly-issued guarantee obligations(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred gains on newly-executed guarantees(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,629
777
Amortization income related to:
Credit and buy-down fees received(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(197)
(723)
Initial fair value of contractual guarantee fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(920)
Ending balance, at December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541
Components of the Guarantee obligation, at period end:
Unamortized balance that is attributable to credit and buy-down fees received in FIN 45 transactions(4) ÏÏÏÏÏÏÏÏÏÏÏÏ $1,167
4,374
Unamortized balance that is attributable to the other components of the Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541
$2,904
(13)
1,174
732
(128)
(604)
(732)
$4,065
$ 940
3,125
$4,065
(1) Represents portions of the Guarantee obligation 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.
(2) Includes the fair value of the Guarantee obligation that was recognized in connection with transfers of PCs and Structured Securities that qualiÑed as
sales, as well as the fair value of the Guarantee obligation 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.
(3) Represents the excess of recognized consideration received on guarantee transactions that are accounted for pursuant to the requirements of FIN 45
over the recognized fair value of the corresponding Guarantee obligation. Consideration received includes the contractual right to receive guarantee
fees, various credit enhancements for which we are the named beneÑciary and upfront cash payments that relate to credit and buy-down fees.
(4) Relates to upfront cash payments in the form of credit fees and buy-down payments that are received from counterparties to guarantee transactions that
are accounted for pursuant to FIN 45 (e.g., Guarantor Swaps).
In 2005, the Guarantee obligation increased due to business volume, the application of a new approach for estimating
the initial fair value of the Guarantee obligation and generally increasing mortgage interest rates during the year resulting in
lower liquidation rates on outstanding PCs and Structured Securities and lower rates of amortization. In addition, in 2004,
the Guarantee obligation increased due to business volume. See ""NOTE 2: TRANSFERS OF SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS'' for a discussion of our approach for estimating the initial fair value
of the Guarantee obligation.
Total Stockholders' Equity
The balance of Total stockholders' equity as presented on our consolidated balance sheets declined in 2005 primarily as
a result of an increase in net unrealized losses on available-for-sale securities, which are a component of the AOCI balance,
partially oÅset by an increase in Retained earnings. The driver of the increase in Retained earnings was net income earned
in 2005, partially oÅset by preferred and common stock dividends declared during 2005. Common stock dividends were
higher in 2005 due to increases in quarterly dividends declared by our board of directors in March and December of 2005.
43
Freddie Mac
The balance of AOCI at December 31, 2005 was a loss of approximately $8.8 billion, net of tax, compared to a loss of
$3.6 billion, net of tax, at December 31, 2004. This decline in the AOCI balance was primarily the result of changes in the
mark-to-fair value of our available-for-sale securities. Our available-for-sale securities are primarily funded with debt
securities which are recorded at amortized cost. As interest rates rose during 2005, the balance of AOCI related to available-
for-sale securities shifted to a net unrealized loss position from a net unrealized gain position at December 31, 2004. The
balance of AOCI associated with our available-for-sale securities was a loss of approximately $2.5 billion, net of tax, at
December 31, 2005 compared to a gain of $4.3 billion, net of tax, at December 31, 2004. The decline in the AOCI balance
associated with our available-for-sale securities was partially oÅset by the recognition of deferred losses in AOCI related to
derivatives in cash Öow hedge accounting relationships. The balance of net deferred losses in AOCI related to derivatives in
cash Öow hedge relationships was a loss of $6.3 billion, net of tax, at December 31, 2005 compared to a loss of $7.9 billion,
net of tax, at December 31, 2004.
At December 31, 2005, $668 million notional amount of derivative contracts was designated in cash Öow hedge
relationships, consisting of $534 million notional amount of foreign-currency swaps and $134 million notional amount of
commitments. For derivatives that receive cash Öow hedge accounting treatment, 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 the derivative generally oÅsets, on a cumulative basis, the cumulative
change in the present value of the hedged cash Öows.
At December 31, 2005, the net cumulative change in the fair value of all derivatives designated in cash Öow hedge
relationships for which the forecasted transactions had not yet aÅected earnings since SFAS 133 was implemented on
January 1, 2001 (net of amounts previously reclassiÑed to earnings through December 31, 2005) or that were still open was a
loss of approximately $6.3 billion on an after-tax basis. This amount related almost entirely to net deferred losses on closed
cash Öow hedge relationships, which involve derivatives that have been terminated or are no longer designated in 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. 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 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
immediately.
Of the $6.3 billion net unrealized loss included in AOCI, net of taxes, with respect to cash Öow hedge relationships at
December 31, 2005, approximately $5.9 billion relates to hedges associated with the forecasted issuances of non-callable
debt securities with maturities or interest payment frequencies of approximately one month to one year. Such debt issuances
are forecasted over the next 28 years; however, over 90 percent of the deferred losses relates to such issuances over the next
10 years. Over the next 10 years, the forecasted debt issuances associated with these hedges range from approximately
$24 billion to $105 billion in any one quarter, with an average of $74 billion per quarter.
Table 28 presents the scheduled amortization of the net deferred losses in AOCI at December 31, 2005, related to
closed cash Öow hedges based on a number of hypothetical assumptions that may diÅer from our expectations of future
events or from actual future events. It is likely that actual amortization in any given future period will diÅer from the
scheduled amortization presented in Table 28, 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 the related debt and that no other factors aÅecting debt
issuance probabilities will change. In addition, for forward purchase commitments in closed cash Öow hedge relationships,
the scheduled amortization assumes no changes in prepayment activities or other factors aÅecting the timing of
reclassiÑcations.
44
Freddie Mac
Table 28 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to Closed Cash Flow Hedge
Relationships
Period of Scheduled Amortization to Income
2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2011 to 2015ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net deferred losses in AOCI related to closed cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net deferred gains in AOCI related to open cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total AOCI related to cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005
Amount
(Pre-tax)
Amount
(After-tax)
(in millions)
$(1,969)
(1,462)
(1,329)
(1,105)
(912)
(2,156)
(746)
(9,679)
7
$(1,280)
(950)
(864)
(718)
(593)
(1,401)
(485)
(6,291)
4
$(9,672)
$(6,287)
CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated fair values of Ñnancial instruments recorded in our
consolidated balance sheets prepared in accordance with GAAP, as well as oÅ-balance sheet Ñnancial instruments that
represent our assets or liabilities that are not recorded in our GAAP consolidated balance sheets. These oÅ-balance sheet
items predominantly consist of: (a) the unrecognized Guarantee asset and Guarantee obligation associated with our PCs
issued through our Guarantor Swap program prior to the implementation of FIN 45, (b) commitments to purchase
multifamily and single-family mortgage loans that will be classiÑed as held-for-investment in our GAAP consolidated
Ñnancial statements and (c) certain credit enhancements on manufactured housing asset-backed securities. See ""OFF-
BALANCE SHEET ARRANGEMENTS'' and ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES'' as well
as ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 16: FAIR VALUE
DISCLOSURES'' to our consolidated Ñnancial statements for more information on fair values.
In conjunction with the preparation of our consolidated fair value balance sheets, we use a number of Ñnancial models.
See ""RISK MANAGEMENT Ì Operational Risks'' and ""RISK MANAGEMENT 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 and are attributable to changes in a number of key components:
Core spread income
Core spread income on the Retained portfolio is a fair value estimate of the net current period accrual of income from
the spread between mortgage-related investments and debt, calculated on an option-adjusted basis. An option-adjusted
spread, or OAS, is an estimate of the yield spread between a given security and a benchmark (LIBOR, agency or Treasury)
yield curve, after consideration of variability in the security's cash Öows across diÅerent potential future interest rate
scenarios resulting from any options embedded in the security, such as prepayment options.
Changes in mortgage-to-debt OAS
The fair value of our net assets can be signiÑcantly aÅected from period to period by changes in the net OAS between
the mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of
the net unrealized increase or decrease in fair value of net assets arising from net Öuctuations in OAS during that period
between our mortgage asset holdings and our outstanding debt securities. We do not attempt to hedge or actively manage the
impact of changes in mortgage-to-debt OAS because we generally hold a substantial portion of our mortgage assets for the
long term and we do not believe that periodic increases or decreases in the fair value of net assets arising from Öuctuations
in OAS will signiÑcantly aÅect the long-term value of the Retained portfolio. Our estimate of the eÅect of changes in OAS
excludes the impact of other market risk factors, primarily duration and convexity risk, yield curve risk, volatility risk and
basis risk, the majority of which we actively manage, or economically hedge, to keep interest-rate risk exposure within
prescribed limits. The estimated impacts of these other market risk factors are subsumed within the ""Return on risk
positions'' component discussed below.
Return on risk positions
Return on risk positions represents the estimated net increase or decrease in the fair value of net assets resulting from
net exposures related to the market risks we actively manage. The types of market risks to which we are exposed as a result
of our Retained portfolio activities include duration and convexity risks, yield curve risk, volatility risk and basis risk. We
45
Freddie Mac
actively manage, or hedge, the majority of these risks to keep interest-rate risk exposures 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 a limited net exposure to these risks, which will result in a net increase
or decrease in fair value for a given period. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''
for more information.
Core guarantee fees, net
Core guarantee fees, net represents the annual income of the credit guarantee portfolio, based on current portfolio
characteristics and market conditions. This estimate considers 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, and associated costs and
obligations which include default and capital costs.
Change in the fair value of the guarantee portfolio
Change in the fair value of the 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. In 2005, we changed our method for estimating the fair values of the Guarantee asset
and Guarantee obligation. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-
RELATED ASSETS'' to our consolidated Ñnancial statements for additional information.
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 our expectation 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). However, 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 substantially all Ñnancial assets and liabilities, rather than an approach that
combines historical cost and fair value measurements, as is the case with our GAAP-based consolidated Ñnancial
statements. We use estimates of fair value on a routine basis to make decisions about our business activities. In addition, we
use fair value derived performance measures to establish corporate objectives and as a factor in determining management
compensation. Our consolidated fair value balance sheets are an important component of our risk management processes,
as we use estimates of the changes in fair value to calculate our PMVS and duration gap measures.
Discussion of the estimated impact of mortgage-to-debt OAS on fair value results
We believe disclosing the impact of changes in mortgage-to-debt OAS on the fair value of net assets is helpful to
understanding our current period fair value results in the context of our long-term fair value return expectation. Our long-
term expectation is to generate returns, before capital transactions, over time on the average fair value of net assets
attributable to common stockholders in the low- to mid-teens. In discussing this long-term expectation, we qualify it by
noting that period-to-period returns may Öuctuate substantially due to market conditions. These market conditions include
changes in interest rates and other market factors that aÅect certain components of our fair value changes, including those
which we do not attempt to hedge or actively manage Ì speciÑcally, the change in mortgage-to-debt OAS with respect to
our Retained portfolio and the change in the fair value of the single-family guarantee portfolio.
Our estimate of the periodic increases or decreases in the fair value of net assets associated with Öuctuations in option-
adjusted spreads provides insight into a component of our fair value results that we do not believe will signiÑcantly aÅect the
46
Freddie Mac
long-term fair value of the Retained portfolio. This belief is based on our expectation that diÅerences between the
prepayments forecasted by our models and the actual prepayments we will experience are not likely to be signiÑcant.
During the year ended December 31, 2005, the fair value of net assets attributable to common stockholders, before
capital transactions, increased by $1.0 billion. We estimate that this $1.0 billion is net of a decrease of approximately
$1.3 billion due to the net widening of mortgage-to-debt OAS.
How we estimate the impact of mortgage-to-debt OAS on fair value results
The method we have chosen to estimate the OAS impact is to fully revalue the fair value of identiÑed Ñnancial
instruments for a given period using the OAS level from the end of the previous period and subtract the revalued amount
from the estimated fair value of those instruments. We make this calculation as of the end of each month and sum these
monthly results into quarterly and annual estimates. To achieve consistency month-to-month, we use the smaller unpaid
principal balance for a given instrument between months so that we are measuring the OAS impact on constant positions,
with newly acquired positions excluded entirely during the month of acquisition.
For certain Ñnancial instruments in the Retained portfolio that aÅect our total change in fair value of net assets, we did
not estimate the impact of changes in OAS on fair value. We did not estimate the impact of changes in OAS for single-
family and multifamily whole loans because we do not have a reliable methodology for estimating OAS impacts on these
loans at this time. We did not estimate the impact of changes in OAS for certain other instruments, including mortgage
revenue bonds, other securities and LIBOR-based derivatives, because an OAS measured in relation to LIBOR is not
relevant for these instruments. The Retained portfolio instruments for which we did not estimate an impact of the changes
in OAS represent approximately 17 percent of our total Retained portfolio. The funding instruments (including preferred
stock) for which we did not estimate an impact of the changes in OAS represent approximately 9 percent of our total debt
and preferred stock securities. The majority of this 9 percent was short-term debt instruments with maturities less than
thirty days.
The impact of changes in OAS on fair value should be understood as an estimate rather than a precise measurement. To
estimate the impact of OAS, we use models that involve the forecast of interest rates, prepayment behavior and other inputs.
We also make assumptions about a variety of factors, including macroeconomic and security-speciÑc data, interest-rate
paths, cash Öows and prepayment rates. We use these models and assumptions in running our business, and we rely on many
of the models in producing our Ñnancial statements and measuring, managing and reporting interest-rate and other market
risks. The use of diÅerent estimation methods or the application of diÅerent assumptions could result in a materially
diÅerent estimate.
Understanding our estimate of the impact of mortgage-to-debt OAS on fair value results
A number of important qualiÑcations apply to our disclosed estimates. The estimated impact of the change in option-
adjusted spreads on the fair value of our net assets in any given period does not depend on other components of the change
in fair value. Although the net fair value of our Ñnancial instruments will generally move toward their par values as the
instruments approach maturity, investors should not expect that the eÅect of past changes in OAS will necessarily reverse
through future changes in OAS. To the extent that actual prepayment or interest rate distributions diÅer from the forecasts
contemplated in our models, changes in values reÖected in mortgage-to-debt OAS may not be recovered in fair value
returns at a later date.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other things being equal.
However, we believe such OAS widening has the eÅect of increasing the likelihood that, in future periods, we will recognize
income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens Ì current
period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on the asset
is more likely to be earned at a reduced spread. Although a widening of OAS is generally accompanied by lower current
period fair values, it can also provide us with greater opportunity to purchase new assets for our Retained portfolio at the
wider mortgage-to-debt OAS. (Again, the reverse can be true when OAS tightens.)
For these reasons, our estimate of the impact of the change in OAS provides information regarding one component of
the change in fair value for the particular period being evaluated, but results for a single period should not be used to
extrapolate long-term fair value returns. We believe the potential fair value return of our business over the long term
depends primarily on our ability to add new assets at attractive mortgage-to-debt OAS and to eÅectively manage over time
the risks associated with these assets, as well as those of our existing portfolio to ensure that we realize anticipated returns
on our business. In other words, to capture the fair value returns we expect, we have to apply accurate estimates of future
47
Freddie Mac
prepayment rates and other performance characteristics at the time we purchase assets, and then manage successfully the
range of market risks associated with a debt-funded mortgage portfolio over the life of these assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to make payments upon the maturity or repurchase
of our debt securities, purchase mortgage loans, mortgage-related securities and other investments, make payments of
principal and interest on our debt securities and on our guaranteed PCs and Structured Securities, make net payments on
derivative instruments, fund our general operations and pay dividends on our preferred and common stock.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
‚ receipts of principal and interest payments on securities we hold or mortgage loans we have securitized and sold;
‚ sales of securities we hold;
‚ 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 position on a daily basis, netting uses of cash with sources of cash. We manage the net cash
position over a rolling forecasted 90-day period, with the goal of providing the amount of debt funding needed to cover
expected net cash outÖows without adversely aÅecting our overall funding levels. We maintain alternative sources of liquidity
to allow normal operations for 90 days without relying upon issuance of unsecured debt and comply with industry practices
of sound liquidity management. We conduct our daily liquidity management activities in accordance with our October 2000
Liquidity Management and Contingency Planning commitment, incorporated into our agreement with OFHEO in
September 2005. See ""RISK MANAGEMENT AND DISCLOSURE COMMITMENTS'' for further information.
The Federal Reserve Board has revised its payments system risk policy, eÅective beginning in July 2006, to restrict or
eliminate daylight overdrafts by GSEs in connection with their use of the Fedwire system. The revised policy also includes a
requirement that the GSEs fully fund their accounts in the system to the extent necessary to cover payments on their debt
and mortgage-related securities each day, before the Federal Reserve Banks, acting as Ñscal agents for the GSEs, will initiate
such payments. We are taking actions to fully fund our account as necessary and we believe that these revisions to the
Federal Reserve's policies will not have a material adverse eÅect on our liquidity.
To fund our business activities, we depend substantially on the continuing willingness of investors to purchase our debt
securities. Any change in applicable legislative or regulatory exemptions, including those described in ""REGULATION
AND SUPERVISION'' 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 capital markets, our sources of liquidity have remained adequate to meet our needs and we anticipate that they will
continue to be so.
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.
Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk management
activities, our derivative portfolio can be either a net source 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.
We are required to pledge collateral to third parties in connection with secured Ñnancing and daily trade activities. In
accordance with contracts that we voluntarily entered into with certain derivative counterparties, we post collateral to those
counterparties for derivatives in a net loss position, after netting by counterparty, above agreed-upon posting thresholds. See
""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to our consolidated Ñnancial
statements for information about assets we pledge as collateral.
We are involved in various legal proceedings, including those discussed in ""NOTE 13: LEGAL CONTINGENCIES''
to our consolidated Ñnancial statements, which may result in a use of cash.
Debt Securities
We fund our operating cash needs and 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 short-term and long-term debt. Table 29 below summarizes the par value of the debt securities we issued (based
48
Freddie Mac
on settlement dates) during 2005 and 2004. We seek to maintain a variety of consistent, active funding programs that
promote high-quality coverage by market makers and reach a broad group of institutional and retail investors. By diversifying
our investor base and the types of debt securities we oÅer, we believe we enhance our ability to maintain continuous access
to the debt markets under a variety of conditions.
Table 29 Ì Debt Security Issuances by Product, at Par Value(1)
Year Ended December 31,
2005
2004
(in millions)
Short-term debt:
Reference Bills» securities and discount notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $826,253
1,745
Medium-term Notes Ì Callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
360
Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
828,358
Long-term debt:
Medium-term Notes Ì Callable(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. dollar Reference Notes» securities Ì Non-callable(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4Reference Notes» securities Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
87,047
33,624
48,146
Ì
168,817
Total debt securities issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $997,175
$793,462
145
46
793,653
144,431
6,428
40,000
8,680
199,539
$993,192
(1) Excludes securities sold under agreements to repurchase and Federal funds purchased, swap collateral obligations and securities sold, not yet
purchased.
(2) Includes $Ì million and $717 million of Medium-term Notes issued for the years ended December 31, 2005 and 2004, respectively, which were
accounted for as debt exchanges.
(3) Includes $3,396 million and $Ì million of Reference Notes» securities issued for the years ended December 31, 2005 and 2004, respectively, which
were accounted for as debt exchanges.
Short-Term Debt. We fund our operating cash needs primarily by issuing 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» securities program consists of large issues of short-term debt that we
auction to dealers on a regular schedule. 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. We issue a variety of Ñxed- and variable-rate Medium-term Notes, including callable and
non-callable Ñxed-rate securities, zero coupon securities and variable-rate securities, 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 10 years after the securities
are issued.
Reference Notes» Securities. 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. Reference Notes» securities are
regularly issued, non-callable Ñxed-rate securities, which we currently issue with original maturities ranging from two
through ten years. We primarily issue securities denominated in U.S. dollars. We have also issued 4Reference Notes»
securities denominated in Euros but did not issue any such securities in 2005. We hedge our exposure to changes in
foreign-currency exchange rates by entering into swap transactions that convert foreign-denominated obligations to
U.S. dollar-denominated obligations. 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. We did not issue any Freddie SUBS» during 2005, 2004 or 2003. In accordance with our risk
management and disclosure commitments with OFHEO (described in ""RISK MANAGEMENT AND DISCLOSURE
COMMITMENTS''), we issued Freddie SUBS» with a principal amount of approximately $1.25 billion in June 2006. Our
ability to issue additional subordinated debt may be limited until we return to regular Ñnancial reporting. See ""RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS'' and ""NOTE 10: REGULATORY CAPITAL'' to our
consolidated Ñnancial statements for additional information.
Debt Repurchase Activities.
In order to manage our mix of assets and liabilities, we regularly conduct repurchases of
outstanding debt securities. Our repurchase activities support the liquidity and predictability of the market for our long-term
49
Freddie Mac
debt securities. When our debt securities become seasoned or European call options on our debt securities expire, they may
become less liquid, which could cause their price to decline. By periodically repurchasing debt securities, we help preserve
the liquidity of our debt securities and improve their price performance, which helps to reduce our funding costs over the
long-term. Our repurchase activities also help us manage the funding mismatch, or duration gap, created by declines in
interest rates. When interest rates decline, the expected lives of the mortgage-related securities held in our Retained portfolio
decrease, reducing the need for long-term debt. We use a number of diÅerent means to shorten the eÅective weighted
average lives of our outstanding debt securities and thereby manage the duration gap, including retiring long-term debt
through repurchases or calls; issuing additional short-term debt; or using derivative instruments, such as entering into
receive-Ñxed interest-rate swaps or terminating or assigning pay-Ñxed interest-rate swaps. 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.
Table 30 provides the par value of debt securities we repurchased, called and exchanged (based on settlement dates)
during 2005 and 2004.
Table 30 Ì Debt Security Repurchases, Calls and Exchanges
Year Ended
December 31,
2005
2004
(in millions)
Repurchases of outstanding U.S. dollar Reference Notes» securities and 4Reference Notes» securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repurchases of outstanding Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Calls of callable Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exchanges of U.S. dollar Reference Notes» securities and Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,007
5,530
119,987
717
Credit Ratings. Our ability to access the capital markets and other sources of funding, as well as our cost of funds, are
$ Ì $
11,663
36,236
3,043
highly dependent upon our credit ratings. Table 31 indicates our credit ratings at June 1, 2006.
Table 31 Ì Freddie Mac Credit Ratings
Standard & Poor's
Rating Agency
Moody's
Fitch
Senior long-term debt(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 Reference Notes» securities and 4Reference Notes» securities.
(2) Includes Reference Bills» securities and discount notes.
In addition to the ratings described in Table 31, 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 June 1, 2006. 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 June 1, 2006.
Equity Securities
During 2005 and 2004, we did not issue, redeem or repurchase any equity securities, other than reissuances of previously
issued treasury stock to employees and non-employee directors under our stock compensation plans. With the release of our
2005 Ñnancial results in May, we have moved forward with the repurchase of common stock and we expect to issue the
authorized preferred stock depending on market conditions and other factors. See ""Capital Resources Ì Capital Transac-
tions'' below for further information.
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, 2005, the investments in this portfolio consisted of liquid
non-mortgage-related securities that we could sell or Ñnance to provide us with an additional source of liquidity to fund our
business operations. We also use the portfolio to help manage recurring cash Öows and meet our other cash management
needs. In addition, we use the portfolio to hold capital on a temporary basis until we can deploy it into Retained portfolio
investments or credit guarantee opportunities. We may also sell or Ñnance the securities in this portfolio to maintain capital
reserves to meet mortgage funding needs, provide diverse sources of liquidity, or 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. For additional information on our Cash and investments
50
Freddie Mac
portfolio, see ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Cash and Investments.'' The non-mortgage-
related investments in this portfolio may expose us to institutional credit risk and the risk that the investments could 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.
Contractual Obligations
Table 32 provides 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 32 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 debt securities and other liabilities reported on our consolidated balance
sheets and our operating leases at December 31, 2005. 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 this table, purchase obligations are included
through the termination date speciÑed in the respective agreements, even if the contract is renewable. Many of our 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, this table includes such obligations without regard to such termination
clauses (unless we have provided the counterparty with actual notice of our intention to terminate the agreement).
Table 32 excludes our Guarantee obligation, which represents our obligation 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. See ""NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated financial statements for additional information about our
Guarantee obligation.
We maintain a tax-qualiÑed, funded deÑned beneÑt pension plan, or Pension Plan, covering substantially all of our
employees. We generally contribute to our 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. See ""NOTE 15:
EMPLOYEE BENEFITS'' to our consolidated Ñnancial statements for additional information about contributions to the
Pension Plan.
With the exception of purchase commitments that are accounted for as derivatives, derivative transactions that may
require cash settlement in future periods are not reÖected on Table 32. See ""Table 23 Ì Derivative Fair Values and
Maturities,'' which describes the fair value for each derivative type and the maturity proÑle of the positions.
Dividend payments on preferred stock we issue are not reÖected on Table 32, since all classes of preferred stock are non-
cumulative. See ""NOTE 9: STOCKHOLDERS' EQUITY'' to our consolidated Ñnancial statements for additional
information. Dividend payments on cumulative preferred stock issued by our two consolidated REIT subsidiaries are not
reÖected on Table 32 since the timing of these payments is dependent upon declaration by the boards of the REITs. See
""NOTE 18: MINORITY INTERESTS'' to our consolidated Ñnancial statements for additional information.
On April 20, 2006, we reached an agreement in principle to settle the securities class action lawsuits and the shareholder
derivative lawsuits related to our restatement. The settlement of these actions includes a cash payment of $410 million,
including the application of expected net insurance proceeds, and is not included in Table 32 since this was not a contractual
obligation at December 31, 2005. See ""NOTE 13: LEGAL CONTINGENCIES'' for additional information.
51
Freddie Mac
Table 32 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2005)
Total
2006
2007
2008
2009
2010
Thereafter
(in millions)
Long-term debt securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $585,804 $ 95,596 $106,696 $72,125 $47,348 $52,249 $211,790
Short-term debt securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,578
Ì
Other liabilities reÖected on our consolidated balance sheets:
194,578
Ì
Ì
Ì
Ì
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued interest payable(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other contractual liabilities(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,607
7,611
3,931
10,607
7,611
2,179
Ì
Ì
1,006
Ì
Ì
425
Ì
Ì
126
Ì
Ì
63
Ì
Ì
132
Purchase obligations:
Purchase commitments(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
27
39
Total speciÑed contractual obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $816,135 $323,892 $107,807 $72,608 $47,504 $52,336 $211,988
13,095
408
101
13,095
209
17
Ì
20
10
Ì
91
14
Ì
14
10
Ì
47
11
(1) Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our debt securities, see
""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to our consolidated Ñnancial statements.
(2) 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 of all derivatives, netted by counterparty.
(3) Other contractual liabilities primarily represent future cash payments due under our contractual obligations to make delayed equity contributions to
low-income housing tax credit partnerships that are unconditional and legally binding.
(4) Accrued obligations related to our deÑned beneÑt plans, deÑned contribution plans and executive deferred compensation plan are included in the Total
and 2006 columns. However, the timing of payments due under these obligations is uncertain. See ""NOTE 15: EMPLOYEE BENEFITS'' to our
consolidated Ñnancial statements for additional information.
(5) 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.
Capital Resources
Our objective in managing capital is to preserve our safety and soundness, while maintaining suÇcient capital to take
advantage of new business opportunities and support our mission at attractive long-term returns.
Capital Transactions
During 2005 and 2004, we added approximately $1.0 billion and $2.0 billion, respectively, to Core capital primarily from
Net income of $2.1 billion and $2.9 billion, respectively, oÅset by the payment of common and preferred stock dividends
totalling $1.3 billion and $1.0 billion, respectively. See ""NOTE 10: REGULATORY CAPITAL'' to our consolidated
Ñnancial statements for additional information.
Our board of directors approved a dividend per common share of $0.47 for the fourth quarter of 2005, an increase of
34 percent over the previous quarterly dividends in 2005. The dividend per common share was $0.35 for the Ñrst three
quarters in 2005, an increase of 17 percent over the $0.30 per common share quarterly dividend paid each quarter
during 2004. We paid a quarterly dividend per common share of $0.26 in 2003. Our board of directors will determine the
amount of dividends, if any, declared and paid in any quarter after considering our capital position and earnings and growth
prospects, among other factors.
In addition, as described in ""MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCK-
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES,'' on October 5, 2005, our board of
directors authorized us to repurchase up to $2.0 billion of outstanding shares of common stock and issue up to $2.0 billion of
non-cumulative, perpetual preferred stock. With the release of our 2005 Ñnancial results in May, we moved forward with
the repurchase of common stock and we expect to issue the authorized preferred stock depending on market conditions and
other factors.
Subject to being consistently well capitalized relative to our regulatory requirements and risks and having suÇcient
capital to support our business and mission, we will consider returning excess capital to our stockholders in future periods.
The amount of capital available to distribute to our stockholders is aÅected primarily by our capital position and earnings
and growth prospects, among other factors. In addition, as long as OFHEO's capital monitoring framework remains in
place, certain capital transactions, including the repurchase of any shares of common stock, require prior written OFHEO
approval.
For a summary of our preferred stock outstanding at December 31, 2005 and information on redemption dates for our
preferred stock issuances, see ""NOTE 9: STOCKHOLDERS' EQUITY'' to our consolidated Ñnancial statements.
We periodically reissue treasury stock to employees and non-employee directors as part of our stock-based compensa-
tion plans. See ""NOTE 11: STOCK-BASED COMPENSATION'' to our consolidated Ñnancial statements for a
description of these plans.
52
Freddie Mac
Capital Adequacy
We regularly assess the adequacy of our capital to ensure that we hold capital suÇcient to comply with our minimum,
critical and risk-based regulatory capital requirements.
We evaluate ongoing compliance with minimum and critical capital requirements under changing market conditions
through regular assessments of the impact of these conditions on the level of our minimum capital surplus. We measure the
eÅects of changes in key market 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 market scenarios. We monitor the level and variability of our capital surplus relative to the
30 percent mandatory target surplus established under the capital monitoring framework mandated by OFHEO. We believe
that our actual surplus would exceed the mandatory target surplus across a wide range of market scenarios. We also
evaluate ongoing compliance with the risk-based capital requirement through regular intra-quarter analysis of the sensitivity
of our risk-based capital surpluses to changes in interest rates and house prices, among other factors.
At December 31, 2005, we exceeded each of our capital requirements, including the 30 percent mandatory target
surplus. See ""NOTE 10: REGULATORY CAPITAL'' to our consolidated Ñnancial statements for further information
regarding our regulatory capital requirements and OFHEO's capital monitoring framework.
RISK MANAGEMENT
Our business is exposed to operational risks, interest-rate and other market risks, and credit risks. We are also exposed
to other risks, such as those described in ""RISK FACTORS,'' including reputation risk and risks related to implementing
our business strategies. We manage risk through a framework that recognizes primary risk ownership and management by
our business units, oversight by our executive management committees and divisions responsible for independent risk
oversight functions, and oversight by our board of directors and its committees.
Executive management committees and other internal advisory groups monitor performance against our risk manage-
ment strategies and established risk limits; identify and assess potential issues; and provide oversight regarding changes in
business processes and activities. Within the business units, risk management personnel identify, monitor and report risks.
Independent oversight of risk management is provided by our Enterprise Risk Oversight, Corporate Compliance and Internal
Audit divisions, in addition to the oversight provided by the board of directors and its committees. Together, these groups
assess the adequacy and eÅectiveness of the risk management functions across the company.
While we believe that both our day-to-day and long-term management of interest-rate and other market risks and credit
risks is satisfactory, weaknesses exist in our overall risk governance framework. We are focused on strengthening our
capacity in four important areas: risk governance, risk identiÑcation, risk measurement and assessment, and related
education and communication. Our risk management framework is being reviewed under a new leadership team in our
Enterprise Risk Oversight division to address these issues and to establish clear lines of authority, clarify roles and
responsibilities, and to improve the overall eÅectiveness of the risk oversight function. We recently created an executive
management enterprise risk committee to provide an enterprise-wide view of risk. Our board of directors also assigned
primary responsibility for oversight of enterprise risk management to the newly re-chartered Governance, Nominating and
Risk Oversight Committee of the board of directors.
Operational Risks
Operational risks are inherent in all of our business activities and can become apparent in various ways, including
accounting or operational errors, business interruptions, fraud, failures of the technology used to support our business
activities, and other operational challenges from failed or inadequate internal controls. We face a number of signiÑcant
operational risks, including material weaknesses and other signiÑcant deÑciencies in our internal control over Ñnancial
reporting. These operational risks may expose us to Ñnancial loss, may delay or interfere with our ability to return to and
sustain timely Ñnancial reporting, or may result in other adverse consequences.
We endeavor to mitigate our operational risks related to properly executing and recording transactions through
comprehensive processes that include approval authorities, data quality standards and control procedures within business
processes. A cross-divisional committee oversees new products and transaction types.
Our business processes are highly dependent on our use of technology and business and Ñnancial models. As described
below, we are making signiÑcant investments to build new Ñnancial reporting and operational systems and to move to more
eÅective and eÇcient business processing systems. See ""Internal Control Over Financial Reporting'' for more information
concerning internal control deÑciencies related to our systems. In recent years, we have strengthened our processes to
validate model assumptions, code, theory, and the system applications that utilize our models. We are currently improving
our model oversight processes and enhancing our staÇng both within the business areas and in our risk oversight functions.
53
Freddie Mac
We currently outsource certain key functions to external parties, including processing functions for trade capture,
market risk management analytics, asset valuation, and mortgage loan underwriting. We mitigate the risk from outsourcing
by engaging in active vendor management, including establishing detailed vendor requirements, reviewing business
continuity plans, monitoring quality assurance processes and engaging third party reviews of our vendors. In addition, we use
a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, we provide
originators with a series of mortgage underwriting guidelines and they represent and warrant to us that the mortgages sold to
us meet these guidelines. See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì
Underwriting Requirements and Quality Control Standards'' and ""Institutional Credit Risk Ì Mortgage Seller/Servicers''
for information about how we mitigate the risks associated with delegated underwriting.
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 is desirable and are challenged to deliver integrated production systems. Certain of these end-user computing
systems increase the risk of errors in some of our core operational processes and increase our reliance on monitoring
controls, which is an area where we have a material weakness in our internal control over Ñnancial reporting. They may also
limit our capacity for change. In the near term, we are mitigating this risk by improving our documentation and controls
over these systems and placing key end-user systems under the same technology controls as our production applications. We
also face challenges in the areas of system security, change management and information technology application and general
controls. See ""Internal Control over Financial Reporting'' for more information concerning internal control issues related to
our systems, both Ñnancial and non-Ñnancial reporting.
We are also exposed to the risk that our business processes could be adversely aÅected by inadequate staÇng, which
strains existing resources and increases the risk that an error or fraud will not be detected. This risk is of particular concern
for us because of high turnover rates, critical vacancies and recent changes in our senior management. We have Ñlled some
important vacancies such as General Counsel, General Auditor, Principal Accounting OÇcer, and Senior Vice President,
Enterprise Operational Risk. Our President and Chief Operating OÇcer has assumed the responsibilities of the Chief
Financial OÇcer while we conduct a search to Ñll that position. Recently, high employee turnover rates have contributed to
increased operational risk. While we have made progress in our eÅorts to build a strong management team by Ñlling several
senior positions, we need to continue to recruit additional qualiÑed people into leadership positions across the organization
in order to achieve our objectives in regard to remediation of our internal control deÑciencies.
In addition to the particular risks and challenges we are facing, we face ongoing risks that are similar to those of other
large Ñnancial institutions. For example, 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 business continuity plans and have established backup
facilities for critical business processes and systems away from, although in the same metropolitan area as, our main oÇces.
In 2005, we began an eÅort to establish out-of-region capabilities for clearing and treasury services. However, it is not clear
that these measures will be suÇcient to respond to the full range of catastrophic events that might occur.
Internal Control over Financial Reporting
Since the revision and restatement of our Ñnancial results for 2000 through 2002, we have had to face many challenging
and complex accounting and Ñnancial reporting issues, including ongoing controls remediation and systems re-engineering
and development. We fell behind in our periodic reporting for the years ended December 31, 2002, 2003, 2004 and 2005,
and we have not yet returned to quarterly reporting. Improving internal control over Ñnancial reporting and mitigating the
risks presented by material weaknesses and other control deÑciencies in our Ñnancial reporting processes continue to be top
corporate priorities. Many of the material weaknesses and other control deÑciencies identiÑed in prior years persisted
throughout 2005 and continue to present challenges for us in 2006. In addition, we determined that some previously
identiÑed deÑciencies were more serious than originally assessed. We also identiÑed additional control deÑciencies in 2005.
While we believe we have made progress in the remediation of certain material weaknesses and other control deÑciencies
that have been identiÑed, these will continue to pose signiÑcant risks to our Ñnancial reporting process until fully
remediated. For example, in the course of completing our Ñnancial reporting processes for 2005, we discovered a number of
internal control issues that resulted in adjustments to our interim 2005 Ñnancial results.
The material weaknesses that aÅected us throughout 2005 and at the end of the year included:
‚ Integration among our systems, business units and external service providers Ì Integration issues among our systems
and processes related to our operational and Ñnancial accounting systems, business units and external service
providers, which collectively increase the risk of error in our Ñnancial reporting due to: (a) the potential failure to
correctly pass information between systems and processes; (b) incompatibility of data between systems;
(c) incompatible systems; or (d) a lack of clarity in process ownership. To compensate for this weakness, we have
54
Freddie Mac
implemented compensating controls, including the performance of signiÑcant data validation and Ñnancial analytics,
which contributed to our delayed Ñnancial reporting timeline.
‚ Information technology general controls as they relate to change management Ì Our controls over managing
changes related to the introduction of program and data changes and our controls related to production data and
applications need improvement. Weaknesses in these controls include lack of consistent standards and inadequate
testing of changes prior to deployment.
‚ Information technology general controls as they relate to security administration, management and technology Ì Our
controls over information systems security administration and management functions need to improve in the
following areas: (a) development of and adherence to procedures and guidelines; (b) segregation of duties;
(c) logging and monitoring user access rights; and (d) periodic review of the appropriateness of access rights.
Weaknesses in these controls could allow unauthorized users to enter, delete or change data in these systems, as well
as increase the possibility that entries could be duplicated or omitted inadvertently.
‚ Monitoring controls within Ñnancial operations and reporting functions Ì Monitoring controls are those controls that
are designed to evaluate how other controls are working, such as the performance of Ñnancial analytics and the
completion of account reconciliations. Despite the progress made in the identiÑcation, documentation, and
enhancement of monitoring controls during 2005, there were several instances where these controls did not identify
issues that ultimately led to accounting adjustments.
‚ StaÇng adequacy Ì While we have made progress in our eÅorts to build a strong management team by Ñlling several
senior positions, we need to continue to recruit additional qualiÑed people into leadership positions across the
organization in order to achieve our objectives with regard to the remediation of weaknesses and deÑciencies within
our internal control infrastructure and our return to timely Ñnancial reporting. We have recently experienced high
employee turnover rates, which strain existing resources and contribute to increased operational risk. We are also
assessing our standards of performance and how we enforce those standards to create a more eÅective culture of
accountability.
‚ Management risk and control self-assessment process Ì Our process to identify deÑciencies in key Ñnancial reporting
controls, prior to testing, does not provide reliable information on our risk and control environment.
In addition to these material weaknesses, a number of signiÑcant deÑciencies in our internal control were apparent that,
although not determined to be material at this time, still present risks of error in our Ñnancial reporting. For example, we
place reliance on end-user computing solutions with both insuÇcient documentation and change controls. This control
deÑciency was considered a material weakness at December 31, 2004. We believe that our remediation eÅorts have reduced
the severity of this deÑciency, however, it continues to pose signiÑcant risk to our Ñnancial reporting processes and requires
us to allocate signiÑcant resources to continue progress toward full remediation and to provide that this deÑciency does not
become material again.
Other signiÑcant deÑciencies include areas that need improvement: the governance over our risk management processes,
where we need to strengthen the resources engaged in this oversight role and our ability to aggregate risks across our
organization; our new product implementation process; and the governance of and processes related to our valuation of our
guarantee-related assets and liabilities. We also need to strengthen our procedures for monitoring instances where we make
simplifying assumptions in the application of our accounting policies in our Ñnancial reporting, and we need to reduce our
reliance on such assumptions. The excessive use of such assumptions increases the risk that diÅerences, when compared to a
stricter application of our accounting policies, could become consequential over time and result in errors that are not
detected (e.g., if the underlying transaction volume increases). Furthermore, we are examining the cause of certain data
quality issues associated with information provided to us by seller/servicers related to mortgage loans underlying our PCs and
Structured Securities and the use of that data within our operational transaction systems and Ñnancial reporting systems.
As we continue the remediation activities noted below, we may identify additional material weaknesses, signiÑcant
deÑciencies or other operational issues in our internal controls or conclude that signiÑcant deÑciencies we have already
identiÑed should be regarded as material weaknesses, either individually or in the aggregate.
During 2005, we implemented an internal control testing and evaluation program designed to evaluate the signiÑcant
components of our internal control over Ñnancial reporting and to identify whether deÑciencies exist within our internal
control environment. Upon discovering the need for several adjustments to our 2005 interim Ñnancial results in the course of
our Ñnancial reporting processes for 2005, we began a more comprehensive review of our internal control environment. This
review includes an assessment of the design and eÅectiveness of our internal control environment, an initiative to improve
information technology general controls, and remedial actions needed to address any issues identiÑed in the course of these
reviews.
55
Freddie Mac
This review is expected to continue throughout 2006 and contemplates the implementation of several planned system
enhancements to our accounting, Ñnancial reporting and operational infrastructure later in the year. This review will enable
us to further evaluate the risk severity of our existing deÑciencies and may identify new material weaknesses or other
deÑciencies. We believe that this process will provide consistency in evaluations and veriÑcation of the appropriateness and
completeness of our remediation activities. After a control deÑciency is identiÑed, the responsible business area is required
to establish a remediation plan to address it. Upon achieving milestones in our remediation plans, we will test the results.
To provide for Ñnancial reporting at the end of 2006, we will conduct an assessment of the existing material weaknesses and
deÑciencies and remediation activities. We will regularly monitor and report on our remediation progress to senior
management, our board of directors, OFHEO and our internal and external auditors.
In order to devote the resources needed to complete the review eÅectively and return to timely reporting as soon as
possible, we have decided to delay our interim Ñnancial reporting for 2006. We have also decided to limit the number of
initiatives we plan to undertake in 2006 and defer lower priority systems initiatives until we have progressed further with our
internal controls. It is our objective to return to quarterly reporting with our release of full-year 2006 Ñnancial results. After
we resume regular quarterly reporting, we will begin the process of registering our common stock with the SEC.
Our review of the internal control environment and our ongoing control remediation activities are intended to provide a
basis for our reliance on our internal control over Ñnancial reporting. Our ability to rely on internal controls is essential to our
return to timely reporting, because it will alleviate the need to perform substantive procedures to compensate for our
material weaknesses and other control deÑciencies.
The material weaknesses and signiÑcant deÑciencies in our internal control over Ñnancial reporting adversely aÅect our
ability to record, process, summarize and report Ñnancial data in a timely manner. Based on the continued existence of
material weaknesses at December 31, 2005, our Chief Executive OÇcer and President and Chief Operating OÇcer have
concluded that our internal control over Ñnancial reporting was not eÅective at December 31, 2005. In order to compensate
for the material weaknesses and other deÑciencies in our internal controls, we continue to perform extensive veriÑcation and
validation procedures to provide reasonable assurance that our consolidated Ñnancial statements are prepared in accordance
with GAAP. Therefore, in view of the alternative procedures we performed, we believe that these weaknesses do not prevent
us from preparing and issuing our consolidated Ñnancial statements in accordance with GAAP.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the
information required to be disclosed by a company in its Ñnancial reports is accumulated and communicated to its senior
management team as appropriate to allow timely decisions regarding required disclosure. Full evaluation of our disclosure
controls and procedures has been delayed pending our completion of the design and implementation of these controls and
procedures and the testing program for evaluating their eÅectiveness.
Interest-Rate Risk and Other Market Risks
Our interest-rate risk management objective is to serve our housing mission by protecting shareholder value in all
interest-rate environments. Our disciplined approach to interest-rate risk management is essential to maintaining a strong
and durable capital base and uninterrupted access to debt and equity capital markets.
Sources of Interest-Rate Risk and Other Market Risks
Our Retained portfolio activities expose us to interest-rate risk and other market risks arising 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 a prepayment penalty) or to hold the mortgage loan to its stated maturity.
Our credit guarantee activities also expose us to interest-rate risk because changes in interest rates can cause
Öuctuations in the fair value of our existing credit guarantee portfolio. We generally do not hedge these changes in fair value
except for interest-rate exposure related to net buy-ups and Öoat. Float, which arises from timing diÅerences between when
the borrower pays us and when we reduce the PC balance, can lead to signiÑcant interest expense if the interest rate paid to
a PC investor is higher than the reinvestment rate we earn on payments received from mortgage borrowers.
The types of interest-rate risk and other market risks to which we are exposed are described below.
Duration Risk and Convexity Risk. Duration is a measure of a Ñnancial instrument's price sensitivity to changes in
interest rates. Convexity is a measure of how much a Ñnancial instrument's duration changes as interest rates change. Our
convexity risk primarily results from prepayment risk. We actively manage duration risk and convexity risk through asset
selection and structuring (that is, by identifying or structuring mortgage-related securities with attractive prepayment and
56
Freddie Mac
other characteristics), by issuing a broad range of both callable and non-callable debt instruments and by using interest-rate
derivatives. Managing the impact of duration risk and convexity risk is the principal focus of our daily market risk
management activities. These risks are encompassed in our PMVS and duration gap risk measures, discussed in greater
detail below. We use prepayment models to determine the estimated duration and convexity of mortgage assets for our
PMVS and duration gap measures. Expected results can be aÅected by diÅerences between prepayments forecasted by the
models and actual prepayments.
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 shareholder value. Because 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, 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 shareholder value. 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. Since mortgage assets
generally include the borrower's option to prepay a loan without penalty, changes in implied volatility aÅect the value of
mortgage assets. We manage volatility risk through asset selection and by maintaining a consistently high percentage of
option-embedded liabilities 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 that is acceptable to us.
Basis Risk. Basis risk is the risk that interest rates in diÅerent market sectors will not move in tandem and will
adversely aÅect shareholder value. This risk arises principally because we generally hedge mortgage-related investments with
debt securities. 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 ANALYSIS Ì Key Components of Changes in Fair Value of Net Assets Ì Changes in mortgage-
to-debt OAS '' for additional information.
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 shareholder value. We are exposed to foreign currency risk because we
have debt denominated in currencies other than the U.S. dollar, our functional currency. We mitigate foreign-currency risk
by entering into swap transactions that eÅectively convert foreign-denominated obligations into U.S. dollar denominated
obligations.
Portfolio Market Value Sensitivity and Measurement of Interest-Rate Risk
We employ a risk management strategy that seeks to substantially match the duration characteristics of our assets and
liabilities. To accomplish this, we employ an integrated strategy encompassing asset selection and structuring and asset and
liability management.
The prepayment option held by mortgage borrowers drives the market value proÑle of our mortgage assets such that the
combined market value of our mortgage assets and non-callable debt will decline if interest rates move signiÑcantly in either
direction. We mitigate much of our exposure to changes in interest rates by funding a signiÑcant portion of our mortgage
portfolio with callable debt. When interest rates change, our option to redeem this debt oÅsets a large portion of the fair
value change driven by the mortgage prepayment option. Currently, approximately 60 percent of our Ñxed-rate mortgage
assets are funded and economically hedged with callable debt. However, because the mortgage prepayment option is not fully
hedged by callable debt, the combined market value of our mortgage assets and debt will be aÅected by changes in interest
rates.
To further reduce our exposure to changes in interest rates, we hedge a signiÑcant portion of the remaining prepayment
risk with option-based derivatives. These derivatives primarily consist of call swaptions, which tend to increase in value as
interest rates decline, and put swaptions, which tend to increase in value as interest rates increase. With the addition of
these option-based derivatives, the market value of stockholders' equity becomes relatively stable over a wide range of
interest rates because a greater portion of our prepayment risk has been hedged. The market value of stockholders' equity is
further stabilized by our ongoing portfolio rebalancing primarily involving interest-rate swaps. Generally, receive-Ñxed swaps
increase in value as interest rates decline and pay-Ñxed swaps increase in value as interest rates increase. Although some
unhedged exposure to changes in interest rates remains, these exposures are generally well understood, subject to established
limits, monitored and controlled through our disciplined risk management process.
We measure our exposure to key interest-rate risks every day against both internal management limits and limits set by
our board of directors. Throughout 2005, our interest-rate risk remained low and well below management and board limits.
57
Freddie Mac
PMVS and Duration Gap. Our primary interest-rate risk measures are 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). 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.
Our PMVS and duration gap estimates are determined using models that involve our best judgment of interest-rate and
prepayment assumptions. 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 as precise measurements.
While PMVS and duration gap estimate the exposure of the fair value of net assets attributable to common stockholders
(measured as fair value of total net assets less the fair value of preferred stock) 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 option-adjusted spreads and foreign-currency risk. The impact of these other market risks can be signiÑcant. See
""Sources of Interest-Rate Risk and Other Market Risks'' and ""CONSOLIDATED FAIR VALUE BALANCE SHEETS
ANALYSIS Ì Key Components of Changes in Fair Value of Net Assets Ì Changes in mortgage-to-debt OAS '' for
further information.
‚ 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, 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.
‚ 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.
‚ 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. 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, we believe duration gap is
most useful when used in conjunction with PMVS.
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 and 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 Öoat. 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:
‚ Credit guarantee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups and Öoat),
the sensitivity of the fair value of the credit guarantee 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 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 credit guarantee 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.
PMVS Results. Table 33 provides estimated point-in-time PMVS-L and PMVS-YC results at December 31, 2005
and 2004. Table 33 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 33, the PMVS-L results based on a 100 basis point shift
58
Freddie Mac
in the LIBOR curve are disproportionately higher than the PMVS-L results based on a 50 basis point shift in the LIBOR
curve.
Table 33 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve
Portfolio Market Value Sensitivity
PMVS-YC
25 bp
PMVS-L
50 bp
100 bp
Potential Pre-Tax Loss in
Portfolio Market Value (in millions)
PMVS-YC
25 bp
PMVS-L
100 bp
50 bp
At:
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì%
Ì%
1%
3%
3%
8%
$ 26
$ 25
$236
$725
$ 798
$2,083
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 34 shows that the low PMVS-L risk levels for the periods presented would generally have been higher if we had
not used derivatives to manage our interest-rate risk exposure.
Table 34 Ì Derivative Impact on PMVS
Before
Derivatives
After
Derivatives
EÅect of
Derivatives
At December 31, 2005
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
At December 31, 2004
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2%
Ì%
7%
1%
1%
Ì%
3%
Ì%
(1)%
Ì%
(4)%
(1)%
Duration Gap Results. Our estimated average duration gap for the months of December 2005 and 2004 was zero
months and negative one month, respectively.
The disclosure in our Monthly Volume Summary reports, which are available on our website at www.FreddieMac.com,
reÖects the average of the daily PMVS-L, PMVS-YC and Duration Gap estimates for a given reporting period (a month,
quarter or year).
Use of Derivatives and Interest-Rate Risk Management
Use of Derivatives. We use derivatives primarily to:
‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;
‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate
characteristics of our mortgage assets; and
‚ hedge foreign-currency exposure (discussed above in ""Sources of Interest-Rate Risk and Other Market Risks Ì
Foreign-Currency Risk.'')
Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase mortgage
investments on an opportunistic basis for a future settlement, typically ranging 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 economically hedge the interest-rate risk exposure from the time we commit to purchase a
mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic
equivalent of various debt funding structures. For example, the combination of a series of short-term debt issuances over a
deÑned longer-term period and a pay-Ñxed swap with the same maturity as the last issuance is the substantive economic
equivalent of a long-term Ñxed-rate 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. These derivatives strategies increase our funding Öexibility and allow us to
better match asset and liability cash Öows, often reducing the overall funding costs.
Adjust Funding Mix. We generally use interest-rate swaps to mitigate contractual funding mismatches between our
assets and liabilities. We also use swaptions and other option-based derivatives to adjust the contractual funding of our debt
in response to changes in the expected lives of mortgage-related assets in the Retained portfolio. As market conditions
dictate, we take rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining
interest-rate environment, we typically enter into receive-Ñxed swaps or purchase Treasury-based derivatives to shorten the
duration of our funding to oÅset the declining duration of our mortgage assets. In a rising interest-rate environment, we
typically enter into pay-Ñxed swaps or sell Treasury-based derivatives in order to lengthen the duration of our funding to
oÅset the increasing duration of our mortgage assets.
59
Freddie Mac
Types of Derivatives. The derivatives we use are common in the Ñnancial markets. We principally use the following
types of derivatives:
‚ 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 the following:
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.
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.
Prepayment Management Agreement. Beginning in 2002, we required that certain mortgage pools delivered to us
between 2001 and 2003, which we considered to pose an 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 was within deÑned ranges. EÅective December 31, 2005, we agreed
to an early termination of this prepayment management agreement.
Credit Derivatives. See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for
more information.
Derivative-Related Risks
Our use of derivatives exposes us to derivative market liquidity risk and counterparty credit risk.
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. To help maintain continuous access
to derivative markets, we use a variety of products and transact with many diÅerent derivative counterparties. In addition to
OTC derivatives, we also use exchange-traded derivatives, asset securitization activities, callable debt and short-term debt to
rebalance our portfolio.
We limit our duration and convexity exposure to each counterparty. At December 31, 2005, the largest single
uncollateralized exposure of our 25 approved OTC counterparties listed in ""Table 35 Ì Derivative Counterparty Credit
Exposure'' was related to a AAA-rated counterparty, constituting $93 million, or 49 percent, of the total uncollateralized
exposure of our OTC interest-rate swaps, option-based derivatives and foreign-currency swaps.
Derivative Counterparty Credit Risk. Counterparty credit risk arises from the possibility that the derivative
counterparty will not be able to meet its contractual obligations. 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., it is 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 using several tools, 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;
60
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 our internal standards. We assign internal ratings, credit, capital and trading limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or events aÅecting an individual counterparty occur.
Derivative Counterparties. Our use of OTC interest-rate swaps, option-based derivatives and foreign-currency swaps is
subject to 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. See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to our consolidated Ñnancial
statements for additional information.
61
Freddie Mac
Table 35 summarizes our exposure to counterparty credit risk in our derivatives, which represents the net positive fair
value of derivative contracts and related accrued interest after netting by counterparty as applicable (i.e., net amounts due to
us under derivative contracts). This table is useful in understanding the credit risk related to our derivative portfolio.
Table 35 Ì Derivative Counterparty Credit Exposure
Rating(1)
Number of
Counterparties(2)
Notional
Amount
December 31, 2005
Total
Exposure at
Fair Value(3)
Exposure,
Net of
Collateral(4)
(dollars in millions)
Weighted Average
Contractual
Maturity
(in years)
2
7
8
5
2
1
25
AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives(6) ÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivative ÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivativesÏÏÏÏ
Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3,102
148,135
156,058
227,842
24,879
210
560,226
98,033
21,961
2,414
738
$683,372
$
93
619
2,499
5,297
364
3
8,875
Ì
35
Ì
Ì
$8,910
$ 93
16
73
2
5
1
190
Ì
35
Ì
Ì
$225
2.7
4.3
5.8
5.8
4.0
6.0
5.3
Rating(1)
Number of
Counterparties(2)
Notional
Amount
December 31, 2004
Total
Exposure at
Fair Value(3)
Exposure,
Net of
Collateral(4)
(dollars in millions)
Weighted Average
Contractual
Maturity
(in years)
2
1
5
7
6
3
1
25
AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other derivatives(6) ÏÏÏÏÏÏÏÏÏÏ
Prepayment management
agreementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit derivativesÏÏÏÏÏÏÏÏÏÏÏÏ
Swap guarantee derivativesÏÏÏÏ
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
$498
32
25
36
Ì
8
2
601
Ì
Ì
40
Ì
Ì
$641
2.5
23.9
4.4
5.2
5.1
5.1
7.0
5.0
Collateral Posting
Threshold
Mutually agreed upon
$10 million or less
$10 million or less
$1 million or less
$1 million or less
$1 million or less
Collateral Posting
Threshold
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 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) Consists of OTC derivative agreements for interest-rate swaps, option-based derivatives, excluding written options, foreign-currency swaps and
purchased interest-rate caps. 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.
(6) Consists primarily of exchange-traded contracts.
Over time, our exposure to individual 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 these derivatives, after applying netting agreements and collateral, decreased to $190 million
at December 31, 2005 from $601 million at December 31, 2004. This decrease was due to a signiÑcant decrease in
uncollateralized exposure to AAA-rated counterparties, which typically are not required to post collateral given their low
risk proÑle.
At December 31, 2005, the uncollateralized exposure to non-AAA-rated counterparties was due to uncollateralized
exposure below the applicable counterparty posting threshold as well as market movements during the time period between
when a derivative was marked to fair value and the date we received the related collateral.
As indicated in Table 35, approximately 98 percent of our counterparty credit exposure for OTC interest-rate swaps,
option-based derivatives and foreign-currency swaps was collateralized at December 31, 2005. In the event that all of our
62
Freddie Mac
counterparties for these derivatives were to have defaulted simultaneously on December 31, 2005, our maximum loss for
accounting purposes would have been approximately $190 million. Our economic loss, as measured by our potential
additional uncollateralized exposure, may be higher than the uncollateralized exposure of our derivatives if we were not able
to replace the defaulted derivatives in a timely fashion. 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 by performing daily market stress tests. These tests evaluate the potential additional uncollateral-
ized exposure we would have to each of these derivative counterparties assuming changes in the level and implied volatility
of interest rates and changes in foreign-currency exchange rates over a brief time period.
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 credit risk
management policies and collateral requirements.
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. However, 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. As indicated in Table 35, the exposure to
OTC commitments counterparties of $35 million and $40 million at December 31, 2005 and 2004, respectively, was
uncollateralized.
Credit Risks
Our credit guarantee portfolio is 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 or security we
own or guarantee. 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. See ""Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs
and Structured Securities Issued Based on Unpaid Principal Balances'' for more information on the composition of our
Total mortgage portfolio.
Mortgage Credit Risk
Mortgage Credit Risk Management Strategies. Mortgage credit risk is primarily inÖuenced by the credit proÑle of
the borrower on the mortgage, the features of the mortgage itself, the type of property securing the mortgage and by the
general economy, especially the movement of house prices. To manage our mortgage credit risk, we focus on three key
areas: underwriting requirements and quality control standards; portfolio diversiÑcation; and portfolio management activities,
including loss mitigation, and the use of credit enhancements and credit risk transfers. While we have historically focused on
obtaining credit enhancements at the time of mortgage purchase, we are continuing to expand our capabilities in this area
to allow more active and ongoing credit portfolio rebalancing and risk transfers.
Underwriting Requirements and Quality Control Standards. All mortgages that we purchase or guarantee have an
inherent risk of default. We seek to manage the underlying risk in a given mortgage we securitize or purchase for our
Retained portfolio by adequately pricing for the risk we assume using our underwriting and quality control processes. We use
a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, we provide
originators with a series of mortgage underwriting guidelines 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/servicer to repurchase that mortgage or make us
whole in the event of a default. We provide originators with written standards and/or automated underwriting software tools,
such as Loan Prospector» and other quantitative credit risk management tools that are designed to evaluate single-family
mortgages and monitor the related mortgage credit risk for loans we may purchase. Loan Prospector» generates a credit
risk classiÑcation by evaluating information on signiÑcant indicators of mortgage default risk, such as loan-to-value ratios,
credit scores and other mortgage and borrower characteristics. These statistically-based risk assessment tools increase our
ability to distinguish among single-family loans based on their expected risk, return and importance to our mission. We may
allow seller/servicers to underwrite mortgages for sale to us using other automated underwriting systems and agreed-upon
underwriting standards that diÅer from our normal standards.
The percentage of our single-family mortgage purchase volume evaluated using Loan Prospector» prior to purchase has
declined over the last three years. 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 classiÑcations inÖuence both the price we charge to guarantee loans and the loans we review
in quality control.
63
Freddie Mac
We have been expanding the share of mortgages we purchase that were underwritten and originated using alternative
automated underwriting systems, which could increase our credit risk. We regularly monitor the performance of mortgages
purchased using these systems and if they underperform mortgages originated using Loan Prospector we may seek
additional compensation for guaranteeing such mortgages in the future.
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
rely on third-party appraisals and environmental and engineering reports.
Credit Enhancements. Our charter requires that single-family mortgages with loan-to-value ratios above 80 percent at
the time of purchase must be covered by one or more of the following: (a) primary mortgage insurance; (b) a seller's
agreement to repurchase or replace any mortgage in default (for such period and under such circumstances as we may
require); or (c) retention by the seller of at least a ten percent participation interest in the mortgages. 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 enhancements. 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. At December 31, 2005 and 2004, credit-enhanced single-family
mortgages and mortgage-related securities represented approximately 17 percent and 19 percent of the $1,395 billion and
$1,267 billion, respectively, unpaid principal balance of the Total mortgage portfolio, excluding non-Freddie Mac mortgage-
related securities and that portion of issued Structured Securities that is backed by Ginnie Mae CertiÑcates. We exclude
non-Freddie Mac mortgage-related securities because they expose us primarily to institutional credit risk. We exclude that
portion of Structured Securities backed by Ginnie Mae CertiÑcates because the incremental credit risk to which we are
exposed is considered de minimis. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Table 17 Ì Charac-
teristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio'' for additional information about
our non-Freddie Mac mortgage-related securities. 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, the risk proÑle of our portfolio and the future availability of eÅective credit enhancements at prices that permit
an attractive return. While the use of credit enhancements reduces our exposure to mortgage credit risk, it increases our
exposure to institutional credit risk.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our Total mortgage portfolio
and is typically provided on a loan-level basis for certain single-family mortgages. Primary mortgage insurance transfers
varying portions of the credit risk associated with a mortgage to a third-party insurer. The amount of insurance we obtain on
any mortgage depends on our requirements, which depend on 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. 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 indemniÑcation agreements (under which
we may require a lender to reimburse us for credit losses realized on mortgages), government guarantees, collateral
(including cash or high-quality marketable securities) pledged by a lender and subordinated security structures.
For multifamily mortgages, we occasionally use credit enhancements to mitigate risk. The types of credit enhancements
used for multifamily mortgage loans include recourse, third-party guarantees or letters of credit, cash escrows, subordinated
participations in mortgage loans or structured pools, and cross-default and cross-collateralization provisions. Cross-default
and cross-collateralization provisions typically work in tandem. 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. In cases where the borrower agrees to cross-collateralization, 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 its speciÑed aÇliates relating to other multifamily mortgage loans we own. For information about our maximum coverage
in regards to these credit enhancements, see ""NOTE 4: FINANCIAL GUARANTEES'' to our consolidated Ñnancial
statements. We also receive similar credit enhancements for multifamily PC Guarantor Swaps; for tax-exempt multifamily
64
Freddie Mac
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 the 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.
Portfolio DiversiÑcation. A key characteristic of our credit risk portfolio is 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. As part of our risk
management practices, we have adopted a set of limits on our purchases and holdings of certain types of loans that are
deemed to have higher risks, including interest-only loans, Option ARMs, loans with high loan-to-value ratios, and
mortgages originated with limited or no underwriting documentation.
Table 36 provides the distribution of our Total mortgage portfolio.
Table 36 Ì Total Mortgage Portfolio Distribution(1)(2)
December 31,
2005
2004
(dollars in millions)
Balances related to:
Guaranteed PCs and Structured Securities:
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Structured Securities backed by non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans in the Retained Portfolio:
Single-Family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Unpaid Principal Balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,294,521
14,503
26,500
20,396
41,085
$1,397,005
$1,173,847
15,546
19,575
23,389
37,971
$1,270,328
Product Distribution
Single-family
30-year Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15-year Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ARMS/Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Option ARMS(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest only(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balloon/Resets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
59%
23
8
1
2
2
1
96
4
100%
56%
28
8
Ì
Ì
3
1
96
4
100%
(1) Based on unpaid principal balances.
(2) Excludes non-Freddie Mac mortgage-related securities other than those that underlie Structured Securities.
(3) Represents loans that may expose the borrower to future increases in the loan obligation in excess of increases that result solely from contractual
interest-rate adjustments. Includes mortgage loans we purchased that underlie the guaranteed portion of whole-loan REMICs and that portion of
alternative collateral deals that are backed by negative amortization loans.
(4) Represents loans where the borrower pays only interest for a period of time before the loan begins to amortize.
(5) Represents alternative collateral deals that include Structured Securities backed by non-agency securities, which were backed by FHA/VA and
subprime mortgage loans primarily, and Structured Securities backed by Ginnie Mae securities.
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 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 2005, 2004 and 2003, this trend was reversed with ARMs exhibiting lower
default rates than Ñxed-rate mortgages.
During 2005 and 2004, there was a rapid proliferation of alternative product types designed to address a variety of
borrower needs, including issues of aÅordability and lack of income documentation. While each of these products has been
on the market for some time, their prevalence increased in 2005 and 2004. We expect each of these products to default more
often than traditional products and we consider this when determining our guarantee fee. Our purchases of interest-only
and Option ARM mortgage products increased in 2005, representing approximately 11 percent of our Total mortgage
portfolio purchases as compared to 2 percent in 2004, and we expect this trend to continue in 2006. Despite this recent
65
Freddie Mac
increase in purchases, these products represent a small percentage of the unpaid principal balance of our Total mortgage
portfolio. At December 31, 2005 and 2004, interest-only and option ARMs collectively represented approximately 3 percent
and less than 1 percent, respectively, of the unpaid principal balance of the Total mortgage portfolio. We will continue to
monitor the growth of these products in our portfolio and, if appropriate, may seek credit enhancements to further manage
the incremental risk.
We also hold securities issued by third parties where the underlying collateral may include interest-only and Option
ARM mortgage products. We generally mitigate credit risk inherent in these securities through a guarantee from the third
party issuer or the underlying structure of the security. For additional information about the credit quality and credit risk
management of non-Freddie Mac securities we hold see ""Institutional Credit Risk Ì Non-Freddie Mac Mortgage-Related
Securities'' and ""MD&A Ì CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Retained Portfolio.''
The subprime segment of the mortgage market primarily serves borrowers with lower quality credit payment histories.
Our participation in this market helps reduce barriers to homeownership for these borrowers by increasing the availability of
mortgage credit and reducing the costs of homeownership. We participate in the subprime market segment primarily 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. Second, we guarantee securities backed by subprime mortgages, which comprise a portion of the ""alternative
collateral deals'' we purchase. These securities have previously been credit enhanced and at the time of our purchase most
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 credit risks of the securities without regard to the beneÑts of our guarantee. At December 31,
2005 and 2004, we guaranteed $2.3 billion and $4.5 billion of securities backed by subprime mortgages which constituted
less than one percent of our Total mortgage portfolio, respectively. In addition to the non-Freddie Mac mortgage-related
securities discussed above, we make investments through our Retained portfolio in some of the Structured Securities we
issue with underlying collateral that is subprime.
The distribution of the single-family loans underlying our Total mortgage portfolio by original and estimated current
loan-to-value ratio, credit scores, loan purpose, property type and occupancy type is shown in Table 37.
66
Freddie Mac
Table 37 Ì Characteristics of Single-Family Total Mortgage Portfolio(1)
Original Loan-to-Value, or LTV, Ratio Range(2)
Purchases During
the Year Ended
December 31,
2004
2003
2005
Ending Balance
December 31,
2004
2003
2005
Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21% 23% 29%
16
16
46
50
8
7
6
4
1
2
100% 100% 100%
19
40
7
4
1
25% 26% 26%
17
17
42
44
9
8
5
5
1
1
100% 100% 100%
17
41
9
6
1
Weighted average original loan-to-value ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated Current LTV Ratio Range(3)
71% 71% 68%
70% 70% 70%
Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average estimated current LTV ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credit Score(4)
57% 53% 44%
19
17
18
18
7
6
2
1
1
1
100% 100% 100%
20
23
9
3
1
55% 57% 61%
740 and aboveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
700 to 739 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
660 to 699 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
620 to 659 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
44% 41% 49%
24
23
20
19
11
10
4
4
Ì
Ì
100% 100% 100%
23
17
8
3
Ì
45% 44% 44%
23
23
18
18
9
9
4
4
2
1
100% 100% 100%
23
17
9
4
3
Weighted average credit score ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan Purpose
722
719
729
725
723
723
Purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other reÑnanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
44% 40% 19%
27
35
21
33
100% 100% 100%
26
55
32% 28% 25%
27
29
45
39
100% 100% 100%
26
49
Property Type
1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2-4 units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
97% 97% 98%
3
3
100% 100% 100%
2
97% 97% 97%
3
3
100% 100% 100%
3
Occupancy Type
Primary residenceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5
4
91% 92% 95%
4
4
100% 100% 100%
3
2
4
3
93% 94% 94%
3
3
100% 100% 100%
3
3
(1) Purchases and ending balances are based on the unpaid principal balance of the single-family mortgage portfolio (excluding non-Freddie Mac
mortgage-related securities, alternative collateral deals that are not backed by prime mortgage loans and that portion of Structured Securities that is
backed by Ginnie Mae CertiÑcates). Such purchases totaled $396 billion, $360 billion and $701 billion at December 31, 2005, 2004 and 2003,
respectively. Such ending balances totaled $1,333 billion, $1,203 billion and $1,151 billion at December 31, 2005, 2004 and 2003, 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. Estimated current LTV excludes alternative collateral deals and Option ARMs. Estimated current LTV ratio range is not applicable to
purchases made during the year.
(4) Credit score data are as of mortgage loan 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. 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. House prices have risen
signiÑcantly over the last 10 years, and have grown very dramatically over the last four years. This house price appreciation
67
Freddie Mac
has increased the values of properties underlying the mortgages in our portfolio. We monitor regional geographic markets
for changes in these trends, particularly with respect to new loans originated in regional markets that have had signiÑcant
house price appreciation, and may seek to reinsure a portion of this risk should we determine that the possibility of such
changes 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, increases in house prices generally 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 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, 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 725 at December 31, 2005 and 723 at both December 31, 2004 and 2003, indicating borrowers with strong
credit quality.
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 borrower
obtains 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. Given similar loan characteristics (e.g., loan-to-value ratios), purchase transactions have the lowest
likelihood of default followed by no-cash out reÑnances and then cash out reÑnances. As a practical matter, however, no-cash
out reÑnances tend to have lower loan-to-value ratios and borrowers with higher credit scores than purchase transactions
and as such, have better overall performance than purchase transactions.
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.
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.
Geographic Concentration. Since our business involves purchasing mortgages from every geographic region in the
U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation generally mitigates credit risks arising
from changing local 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 by
geographic region. Our Total mortgage portfolio's geographic distribution was relatively stable from 2003 to 2005, and
remains broadly diversiÑed across these regions.
Loss Mitigation Activities. Within our Total mortgage 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 38 summarizes our non-performing assets. The increase in our non-performing assets
from 2001 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. The increase in our troubled debt restructurings from 2004 to 2005 was
primarily related to multifamily loans impacted by Hurricane Katrina. At December 31, 2005, troubled debt restructurings
as shown in Table 38 included multifamily loans aÅected by Hurricane Katrina with unpaid principal balances totaling
approximately $210 million.
68
Freddie Mac
Table 38 Ì Non-Performing Assets
2005
2004
December 31,
2003
(in millions)
2002
2001
Troubled debt restructurings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,605 $2,297 $ 2,370 $2,164
Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6,830
Non-accrual loans(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,041
REO, net(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
594
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,673 $9,383 $10,656 $9,635
6,318
27
8,642
741
6,438
1
9,044
629
7,470
21
9,861
795
$1,617
5,070
44
6,731
447
$7,178
(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the modiÑed terms.
Troubled debt restructurings 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 $1,449 million, $2,234 million, $2,793 million, $2,290 million and $1,052 million at December 31, 2005, 2004, 2003, 2002 and 2001,
respectively. For more information about delinquency rates, see ""NOTE 6: LOAN LOSS RESERVES Ì Table 6.3 Ì Delinquency Performance'' to
the consolidated Ñnancial statements.
(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. No single-family mortgage loans are classiÑed as non-accrual.
(4) For the year ended December 31, 2005, $481 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 $140 million for the year ended December 31, 2005.
(5) For more information about REO balances, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 7: REAL
ESTATE OWNED'' to the consolidated Ñnancial 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. Other single-family loss mitigation activities include providing our single-family servicers with default
management tools designed to help them manage non-performing loans more eÅectively. 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. Repayment plans, the most common type of
foreclosure alternative, mitigate our credit losses because they assist borrowers in returning to compliance with 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. 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. The total number of loans with foreclosure
alternatives was approximately 60,000, 48,300 and 46,900 for the years ended December 31, 2005, 2004 and 2003,
respectively. The increase in foreclosure alternatives in 2005 was primarily driven by forbearance agreements related to
single-family loans aÅected by Hurricane Katrina.
We require multifamily servicers to closely manage mortgage loans they have sold us in order to mitigate potential
losses. Generally, on an annual basis, for loans over $1 million, servicers must submit an assessment of the mortgaged
property to us based on the servicer's analysis of Ñnancial and other information about the property and, except for certain
higher performing loans, an inspection of the property. We 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
may oÅer a 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. 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 based on credit risk factors such as the mortgage product type, loan purpose, loan-to-value
ratio, and other loan or borrower 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 provide Ñnancial incentives in the form of lump sum payments to selected seller/servicers if they
deliver a speciÑed volume or percentage of mortgage loans meeting speciÑed credit risk standards over a deÑned period of
69
Freddie Mac
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. 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 agreements are accounted for as credit derivatives rather than Ñnancial guarantees, in part, because
we may make payments to the seller/servicer under these agreements (depending upon actual default experience over the
lives of the mortgages). The total notional amount of mortgage loans subject to these agreements was approximately
$2.4 billion and $10.9 billion at December 31, 2005 and 2004, respectively. These risk-sharing agreements are derivatives
classiÑed as no hedge designation, 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 Derivative assets, at fair value and
Derivative liabilities, at fair value on the consolidated balance sheets, with net amounts of $(1) million and $(2) million at
December 31, 2005 and 2004, 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 the Ñnancial incentive and
credit derivative agreements may result in us making payments to the seller/servicer.
Credit Performance. Credit losses are a useful indicator of credit risk management activities; however, 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 39 presents delinquency information for the single-family loans underlying our Total mortgage
portfolio.
Table 39 Ì Single-Family Ì Delinquency Rates Ì By Region(1)(2)(3)
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total credit-enhanced and non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2004
2005
2003
0.22% 0.24% 0.28%
0.31
0.38
0.27
0.30
0.26
0.64
0.15
0.11
0.24
0.30
2.75
2.46
0.69% 0.73% 0.86%
0.32
0.27
0.28
0.19
0.27
2.96
(1) Based on mortgage loans in the Retained portfolio and Total Guaranteed PCs and Structured Securities Issued, excluding 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. Excludes delinquencies in alternative collateral deals.
(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,
VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,
CO, KS, LA, MO, NE, NM, OK, TX, WY). Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast.
While overall single-family delinquencies have declined over the past three years as a result of generally strong
economic conditions and continued house price appreciation in the United States, non-credit enhanced delinquencies
increased in 2005, with some regional variation, primarily due to Hurricane Katrina. See ""Table 6.3 Ì Delinquency
Performance'' in ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for detailed delinquency
performance information.
Our multifamily delinquency rate remained very low at zero percent, 0.06 percent and 0.05 percent at the end of 2005,
2004 and 2003, respectively. Hurricane Katrina has not aÅected our reported multifamily delinquency rate because the
contractual terms of certain aÅected mortgage loans, with unpaid principal balances totaling $210 million at December 31,
2005, were modiÑed. Multifamily delinquencies may include 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.
70
Freddie Mac
Table 40 Ì Single-Family Mortgages By Year of Origination Ì Percentage of Mortgage Portfolio and Non-Credit-
Enhanced Delinquency Rates
Year of Origination
Pre-1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
At December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Percent of Non-Credit-
December 31,
2004
Percent of Non-Credit-
2003
Percent of Non-Credit-
Single-
Family
Balance(1)
3%
2
1
Ì
4
11
34
21
24
100%
Enhanced
Delinquency
Rate(2)
0.75%
0.56
0.89
2.09
0.75
0.38
0.17
0.21
0.08
0.30%
Single-
Family
Balance(1)
4%
3
2
1
6
16
44
24
Ì
100%
Enhanced
Delinquency
Rate(2)
0.67%
0.49
0.78
1.94
0.59
0.26
0.06
0.03
Ì
0.24%
Single-
Family
Balance(1)
7%
4
3
1
10
24
51
Ì
Ì
100%
Enhanced
Delinquency
Rate(2)
0.69%
0.45
0.73
1.78
0.48
0.18
0.01
Ì
Ì
0.27%
(1) Based on unpaid principal balances of 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).
(2) Based on mortgages 90 days or more delinquent or in foreclosure.
Our single-family portfolio was aÅected by heavy reÑnance volumes in recent years. At December 31, 2005, 79 percent
of our single-family mortgage portfolio consisted of mortgage loans originated in 2005, 2004 or 2003. Mortgage loans
originated in 2002 and earlier, which represent approximately 21 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, the weaker credit quality of these loans. For example, mortgage loans originated in 2000 were
generally for purchase transactions, which typically involve more risk because they tend to have relatively higher loan-to-
value ratios and borrowers with lower credit scores, resulting in weaker credit quality, than loans originated in 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 less than one percent of the single-family Total mortgage portfolio.
71
Freddie Mac
Credit Loss Performance. Table 41 provides detail on our credit loss performance, including REO activity, charge-oÅs
and credit losses. The decrease in REO operations income of $43 million in 2005 compared to 2004 was primarily
attributable to a reduction in recoveries.
Table 41 Ì Credit Loss Performance
2005
Year Ended December 31,
2004
(dollars in millions)
2003
REO
REO balances:
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
611
18
629
$
$
740
1
741
$
$
758
37
795
REO activity (number of properties):(1)
Beginning property inventory, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending property inventory, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average holding period (in days)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,604
15,861
(17,395)
8,070
9,170
18,489
(18,055)
9,604
7,222
17,750
(15,802)
9,170
186
177
174
REO operations income (expense):
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CHARGE-OFFS
Single-family:
Foreclosure alternatives, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreclosure alternatives, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO acquisitions, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO acquisitions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family totals:
Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Single-family charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Charge-oÅs:
$
$
$
(40) $
Ì
(40) $
(1) $
4
3
$
(4)
(3)
(7)
(44) $
(47) $
23
(21)
(242)
162
(80)
(286)
185
(101)
(8)
Ì
(8)
21
(26)
(253)
139
(114)
(300)
160
(140)
Ì
Ì
Ì
(40)
17
(23)
(176)
127
(49)
(216)
144
(72)
(8)
1
(7)
Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(294)
(300)
(224)
Recoveries:
Related to primary mortgage insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Not related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CREDIT GAINS (LOSSES)(4)
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
In basis points:(5)
Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
119
66
185
(109) $
85
75
160
(140) $
(141) $
(8)
(149) $
(141) $
4
(137) $
$
$
$
(1.1)
Ì
(1.1)
(1.1)
Ì
(1.1)
94
51
145
(79)
(76)
(10)
(86)
(0.7)
(0.1)
(0.8)
(1) Includes single-family and multifamily REO properties.
(2) Represents weighted average holding period for single-family and multifamily properties based on number of REO properties disposed.
(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 mortgage insurers, servicers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements
are limited in some instances to amounts less than the full amount of the loss.
(4) Equal to REO operations income (expense) plus Charge-oÅs, net.
(5) 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.
72
Freddie Mac
Table 42 and Table 43 provide detail by region for two credit performance statistics, REO activity and charge-oÅs.
Regional REO acquisition and charge-oÅ trends generally follow a pattern that is similar to, but lags, that of regional
delinquency trends.
Table 42 Ì REO Activity By Region(1)
2005
Year Ended December 31,
2004
(number of properties)
2003
REO Inventory
Beginning property inventory, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties acquired by region:
NortheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties disposed by region:
NortheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending property inventory, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,604
9,170
7,222
1,306
4,504
5,790
3,412
849
15,861
(1,384)
(5,221)
(5,715)
(3,820)
(1,255)
(17,395)
8,070
1,500
5,499
5,787
3,926
1,777
18,489
(1,562)
(5,596)
(5,111)
(3,605)
(2,181)
(18,055)
9,604
1,600
5,378
4,643
3,503
2,626
17,750
(1,674)
(4,476)
(3,908)
(3,018)
(2,726)
(15,802)
9,170
(1) See ""Table 39 Ì Single-Family Ì Delinquency Rates-By Region'' for a description of these regions.
Table 43 Ì Single-Family Charge-oÅs and Recoveries By Region(1)(2)
Year Ended December 31,
2005
Charge-oÅs,
gross
Recoveries
Charge-oÅs,
net
Charge-oÅs,
gross
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 21
76
102
68
19
$286
$ (10)
(54)
(66)
(44)
(11)
$(185)
$ 11
22
36
24
8
$101
$ 24
84
92
66
34
$300
2004
Recoveries
(in millions)
$ (10)
(49)
(49)
(35)
(17)
$(160)
Charge-oÅs,
net
Charge-oÅs,
gross
Recoveries
Charge-oÅs,
net
2003
$ 14
35
43
31
17
$140
$ 21
62
54
43
36
$216
$ (10)
(44)
(35)
(32)
(23)
$(144)
$11
18
19
11
13
$72
(1) See ""Table 39 Ì Single-Family Ì Delinquency Rates-By Region'' 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 mortgage insurers, servicers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements
are limited in some instances to amounts less than the full amount of the loss.
73
Freddie Mac
Table 44 summarizes our loan loss reserves activity.
Table 44 Ì Loan Loss Reserves Activity
Total loan loss reserves(1):
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers-out during the period(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other transfers, net, during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs, net to Total mortgage portfolio(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
$ 264
251
(294)
185
(109)
Ì
(11)
19
$ 414
2004
Year Ended December 31,
2003
(dollars in millions)
2002
$ 299
143
(300)
160
(140)
Ì
(20)
(18)
$ 264
$ 265
(5)
(224)
145
(79)
110
(11)
19
$ 299
$ 224
122
(171)
99
(72)
Ì
(9)
Ì
$ 265
2001
$ 229
33
(129)
101
(28)
Ì
(10)
Ì
$ 224
0.8bp
3.8
1.1bp
1.9
0.7bp
3.8
0.7bp
3.7
0.3bp
8.0
(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) 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 mortgage insurers, servicers or third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements are
limited in some instances to amounts less than the full amount of the loss.
(3) On January 1, 2003, $110 million of recognized Guarantee obligation 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 portion of the Guarantee obligation recognized upon the sale of PCs or Structured Securities that correspond to incurred credit losses
reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition of a Guarantee obligation. In addition, the amount
includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004, respectively, related to prior period
adjustments for which the related income was recorded in Other income.
(6) 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 in the Retained portfolio 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 the Guarantee asset and Guarantee obligation. See ""CRITICAL ACCOUNTING POLICIES AND ESTI-
MATES Ì Credit Losses'' and ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the
consolidated Ñnancial statements for further information.
As shown in ""Table 44 Ì Loan Loss Reserves Activity,'' total loan loss reserves increased in 2005. The increase in loan
loss reserves in 2005 is primarily related to our estimate of our incurred losses as a result of Hurricane Katrina. The 2005
provision also includes additions related to the single-family portfolio as we anticipate an increase in the severity of losses
on a per-property basis driven, in part, by the expectation of low or slower home price appreciation in certain areas and
increased incurred losses as delinquencies occur for loans that are experiencing higher default rates based on their year of
origination.
Credit Risk Sensitivity. Our credit risk 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 immediate Ñve percent decline in
house prices nationwide, followed by a return to more normal growth in house prices based on historical experience. We use
an internally developed Monte Carlo simulation-based model to generate our credit risk sensitivity analyses. The Monte
Carlo model uses a simulation program to generate numerous potential interest-rate paths that, in conjunction with a
prepayment model, are used to estimate mortgage cash Öows along each path. 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.
74
Freddie Mac
The credit risk sensitivity results at December 31, 2005 and 2004 are shown in Table 45. Credit risk sensitivity results at
the end of each quarter in 2005 and the fourth quarter of 2004 are presented in ""RISK MANAGEMENT AND
DISCLOSURE COMMITMENTS.''
Table 45 Ì Credit Risk Sensitivity Ì Estimated Increase in Net Present Value, or NPV, of Credit Losses(1)
Before Receipt of Credit
Enhancements(2)
After Receipt of Credit
Enhancements(3)
NPV
NPV Ratio(4)
NPV
NPV Ratio(4)
(dollars in millions, except ratios)
At:
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$873
$794
6.5bps
6.5bps
$564
$463
4.2bps
3.8bps
(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 single-family 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
Our primary institutional credit risk exposure, other than counterparty credit risk exposure relating to derivatives, arises
from agreements with the following entities: mortgage loan insurers; mortgage seller/servicers; 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. See ""Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit
Risk'' for information concerning counterparty credit risk exposure relating to derivatives.
Mortgage Loan Insurers. We bear institutional credit risk relating to the potential insolvency or non-performance of
mortgage insurers that insure mortgages we purchase or guarantee. 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 and 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 we purchased during 2005 were rated ""AA'' or better by S&P. At
December 31, 2005, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance Corporation)
that each provided more than seven 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.
Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of or non-
performance by our mortgage seller/servicers, including performance of their repurchase obligations arising from the
representations and warranties made to us for loans they underwrote and sold to us. The servicing fee charged by mortgage
servicers varies by mortgage product. We generally 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,
on an exception basis, we allow a lower or no minimum servicing amount. The credit risk associated with servicing fees
relates 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.
In order to manage the credit risk associated with our mortgage seller/servicers, we require them to meet minimum
Ñnancial capacity standards, insurance and other eligibility requirements. We institute remedial actions against
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 seller/servicer. We conduct periodic operational reviews of our
single-family mortgage seller/servicers to help us better understand their control environment and its impact on the quality
of loans sold to us. We use this information to determine the terms of business we conduct with a particular seller/servicer.
We manage the credit risk associated with our multifamily seller/servicers by establishing 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.
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 servicers, issuers, guarantors, or third parties
75
Freddie Mac
providing credit enhancements become insolvent or do not perform. See ""Table 17 Ì Characteristics of Mortgage Loans
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 due to the high credit quality of Fannie Mae and Ginnie Mae. 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 credit rating agencies). At December 31, 2005, we held approximately $45 billion of agency
securities, representing approximately 3 percent of our Total mortgage portfolio.
Non-agency mortgage-related securities expose us to 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-related securities rely primarily
on subordinated tranches to provide credit loss protection and therefore expose us to 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 risks related to the bond insurer's ability to satisfy claims. At
December 31, 2005, substantially all of the bond insurers providing coverage for non-agency mortgage-related securities held
by us were rated AAA or equivalent by at least one nationally recognized credit rating agency. At December 31, 2005, we
held approximately $243 billion of non-agency mortgage-related securities. Of this amount, 97.8 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 creditworthiness of the issuers and servicers
of these securities and the bond insurers that guarantee them. To assess the creditworthiness of these entities, 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, we regularly evaluate our investments to determine if any
impairment in fair value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination
of both.
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. 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 potential insolvency or non-performance
of issuers or guarantors of investments held in our Cash and investments portfolio. Instruments in this portfolio are
investment grade at the time of purchase and primarily short-term in nature, thereby substantially 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.
76
Freddie Mac
OÅ-Balance Sheet Transactions
OFF-BALANCE SHEET ARRANGEMENTS
Financial instruments created through our business transactions may be recorded on our consolidated balance sheets at
their fair value or on a cost basis, or not recorded, as appropriate. 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 of oÅ-balance sheet
arrangements.
Guarantee of PCs and Structured Securities
As discussed in ""BUSINESS Ì Credit Guarantee Activities,'' we participate in the secondary mortgage market in part
by issuing PCs and Structured Securities to third party investors. 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, 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 information about our
guarantees, including details related to credit protections and maximum coverages that we obtain through credit
enhancements in our credit guarantee activities. Also, see ""RISK MANAGEMENT Ì Credit Risks'' for more information.
Most of our credit guarantee activity occurs through the Guarantor Swap 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 Swap 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.
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 is represented by non-Freddie Mac mortgage-
related securities. Our outstanding PCs and Structured Securities also include securities issued by third parties that we
guarantee. See ""NOTE 4: FINANCIAL GUARANTEES'' for more information about these guarantees. For information
about our purchase and securitization activity, see ""PORTFOLIO BALANCES AND ACTIVITIES.''
The accounting policies and fair value estimation methodologies we apply to our credit guarantee activities signiÑcantly
aÅect the volatility of our reported earnings through the initial recognition of the fair value of the Guarantee asset and
Guarantee obligation in connection with sales of PCs and Structured Securities, the recognition of subsequent gains or losses
from the change in fair value of the Guarantee asset and PC residuals generated from such sales and the repurchase and
sale of PCs into and out of our Retained portfolio. See ""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-
Interest Income (Loss)'' for an analysis of management and guarantee income and other aÅected consolidated statements of
income captions related to our credit guarantee activities. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS''
for discussion of our Guarantee asset and Guarantee obligation. The accounting 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 consolidated Ñnancial statements.
77
Freddie Mac
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 in accordance with FASB
Interpretation No. 46 (Revised December 2003), ""Consolidation of Variable Interest Entities'', or FIN 46(R). These
variable interest entities 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. A portion of these commitments are accounted for as derivatives, 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 MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' 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. These non-derivative commitments totaled
$178.8 billion and $182.9 billion at December 31, 2005 and 2004, respectively. Such commitments were not accounted for
as derivatives and were not recorded on our consolidated balance sheets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our Ñnancial
condition and results of operations 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 our consolidated Ñnancial statements.
The accounting policies discussed in this section are particularly critical to understanding our consolidated Ñnancial
statements. For additional information about these and other accounting policies, including recently issued accounting
pronouncements, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our 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 as the amount at which an asset or liability could be exchanged
between willing parties, other than in a forced or liquidation sale. We record many of our Ñnancial instruments at fair value
in our consolidated balance sheets, with changes in these fair values recognized as gains and losses in our consolidated
statements of income or deferred, net of tax, in AOCI. We also disclose fair value-based consolidated balance sheets, which
present our Ñnancial assets and liabilities at fair value (including instruments such as debt, which are presented at amortized
cost in our consolidated Ñnancial statements). Our consolidated fair value balance sheets satisfy our disclosure
requirements under SFAS No. 107, ""Disclosures about Fair Value 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 ANALYSIS'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements for
more information.
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 in fair value hedge accounting relationships, derivatives with
no hedge designation and the Guarantee asset), 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 asset. 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, including 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 the Guarantee obligation) 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
78
Freddie Mac
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.
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.
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 and are 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 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 99 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
inputs. Approximately 68 percent of the gross fair value of our derivatives portfolio relates to interest-rate and foreign-
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 32 percent of our
derivatives portfolio is valued based on prices obtained from third parties or 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 the Guarantee asset, Guarantee
obligation and PC residuals. In 2005, our approach for valuing these items incorporated more third-party market-based
information in their valuations. Our valuation methodologies and the recent improvements are discussed in
""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consoli-
dated Ñnancial statements.
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
79
Freddie Mac
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 sales of Ñnancial assets or as 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 Extinguishments 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. In this regard, we account for a transfer as a sale to the extent
we conclude that (i) assets that underlie the transferred PCs or Structured Securities are legally beyond our reach and the
reach of our creditors even in the event that we were to become Ñnancially insolvent, (ii) a third-party buyer can freely
pledge or exchange the PCs or Structured Securities that were transferred to it and (iii) we did not maintain eÅective
control over transferred PCs or Structured Securities through either (a) an arrangement that both entitles and obligates us
to repurchase or redeem transferred PCs or Structured Securities before their maturity or (b) the ability to 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 guarantee of 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.
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'', or FIN 45. 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, at the inception of an executed guarantee, we recognize 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.
With respect to all transfers of PCs and Structured Securities to third parties, the measurement of the Guarantee asset,
Guarantee obligation 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 ASSETS'' to our consolidated Ñnancial statements for further discussion of the approach we use to determine
the fair values of the Guarantee asset and Guarantee obligation.
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 substan-
tially 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. EÅective at the
80
Freddie Mac
beginning of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward
purchase commitments and the majority of our new commitments to forward sell mortgage-related securities. On March 31,
2006, we voluntarily discontinued hedge accounting treatment for all derivatives, with the exception of certain commit-
ments to forward sell mortgage-related securities and one foreign-currency hedge strategy, in an eÅort to simplify our
operations.
Our total derivative portfolio is an eÅective component of our interest-rate risk management activities. 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 hedged item or forecasted transaction aÅects earnings. 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 attributable to the hedged risk.
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. Throughout 2005, we have used a 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.
Derivatives designated as cash Öow hedges generally hedged 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 ""CONSOLI-
DATED RESULTS OF OPERATIONS Ì Derivative Overview'' and ""NOTE 12: DERIVATIVES'' to the consolidated
Ñnancial statements.
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, 2005 and 2004, the Reserve for losses on mortgage loans held-for-investment was
$119 million and $114 million, respectively. 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,
2005 and 2004, the Reserve for guarantee losses on Participation CertiÑcates was $295 million and $150 million, respectively.
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 are reÖected in earnings as a
component of the Provision for credit losses. Loan loss reserves decrease when charge-oÅs of such balances (net of
recoveries) occur or when we record realized losses.
The process for determining the level of loan loss reserves is subject to numerous estimates and assumptions that 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
81
Freddie Mac
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 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. 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.'' 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 classiÑed 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 due to changes in estimated lives 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 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.
Judgment is involved in making initial determinations about prepayment expectations and in changing those expectations
over time in response to changes in market conditions, such as interest rates and other macroeconomic factors. 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 when we have concluded that a decrease in the fair
value of a security is not temporary. For securities accounted for under EITF 99-20, an impairment loss is recognized 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. We review
securities not accounted for under EITF 99-20 for potential impairment whenever the security's fair value is less than its
amortized cost. This review considers a number of factors, including the severity of the decline in fair value, credit ratings
and the length of time the investment has been in an unrealized loss position. We recognize impairment when quantitative
and qualitative factors indicate that we may not recover the unrealized loss. One of the factors we consider is 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 judgments could have resulted in materially diÅerent impairment loss recognition. See
82
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.
Accounting Changes and Recently Issued Accounting Pronouncements
See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial
statements for more information concerning our accounting policies, changes to those policies, and recently issued
accounting pronouncements that we have not yet adopted and that will likely aÅect our consolidated Ñnancial statements.
83
Freddie Mac
Total Mortgage Portfolio
PORTFOLIO BALANCES AND ACTIVITIES
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 guaranteed PCs and Structured Securities held by third
parties. Guaranteed PCs and Structured Securities held by third parties are considered outstanding and are not included on
our consolidated balance sheets.
Table 46 provides information about our Total mortgage portfolio at December 31, 2005 and 2004.
Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs and Structured Securities Issued Based on Unpaid
Principal Balances(1)
Outstanding Guaranteed PCs and Structured Securities(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio:
PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retained portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
2004
Amounts
(dollars in
millions)
$ 974,200
361,324
287,212
61,481
710,017
$1,684,217
% of Total
Mortgage
Portfolio
58%
21
17
4
42
100%
Amounts
(dollars in
millions)
$ 852,270
356,698
234,878
61,360
652,936
$1,505,206
% of Total
Mortgage
Portfolio
56%
24
16
4
44
100%
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Represents Guaranteed PCs and Structured Securities held by third parties.
(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 and deferred balances. See ""Table 17 Ì Characteristics of Mortgage
Loans and Mortgage-Related Securities in the Retained Portfolio'' for a reconciliation of the Retained portfolio amounts shown in this table to the
amounts shown under such caption on our consolidated balance sheets.
See ""Table 49 Ì Guaranteed PCs and Structured Securities Issued and Outstanding'' for more information concerning
outstanding guaranteed PCs and Structured Securities. Also see ""Table 17 Ì Characteristics of Mortgage Loans and
Mortgage-Related Securities in the Retained Portfolio'' for more information concerning the non-Freddie Mac mortgage-
related securities in our Retained portfolio.
Table 47 presents the distribution of unsecuritized whole mortgage loans held in our Retained portfolio.
Table 47 Ì Mortgage Loans Held in the Retained Portfolio(1)
Single-family:
Conventional
Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA Ì Fixed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rural Housing Service, or RHS, and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Conventional
Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
2004
(in millions)
$18,532
903
19,435
255
706
20,396
36,961
4,121
41,082
3
41,085
$61,481
$21,409
990
22,399
344
646
23,389
34,127
3,841
37,968
3
37,971
$61,360
(1) Based on unpaid principal balances. Excludes mortgage loans traded, but not yet settled.
84
Freddie Mac
Table 48 summarizes purchases into our Total mortgage portfolio.
Table 48 Ì Total Mortgage Portfolio Purchase Detail(1)
New business purchases(2)
Single-family mortgage purchases
Year Ended December 31,
2004
2005
% of
Purchase
Amounts Amounts
% of
Purchase
Amounts Amounts
(dollars in millions)
Conventional:
30-year Ñxed-rate(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $272,702
15-year Ñxed-rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40,963
ARMs/Variable-Rate(4)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35,677
Interest Only(4)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
26,516
Option ARMs(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,918
Balloon/Resets(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,720
FHA/VA(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
177
RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 381,673
Multifamily:
Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,172
11,172
Total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 392,845
Non-Freddie Mac mortgage-related securities purchased for Structured Securities:
Alternative collateral deals backed by:
Option ARMsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(10)(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14,331
37
Ì
14,368
67% $220,867
72,754
10
50,187
9
818
7
Ì
1
9,658
Ì
319
Ì
209
Ì
354,812
94
3
3
97
3
Ì
Ì
3
12,712
12,712
367,524
5,653
85
1,552
7,290
59%
19
14
Ì
Ì
3
Ì
Ì
95
3
3
98
2
Ì
Ì
2
Total single-family and multifamily mortgage purchases and total non-Freddie Mac mortgage-related securities purchased for
Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $407,213
100% $374,814
100%
Non-Freddie Mac Mortgage-Related Securities Purchased into the Retained Portfolio:
Agency Securities:
Fannie Mae:
Single-Family:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,854
3,368
6,222
Ginnie Mae:
Single-Family:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
64
64
6,286
Non-Agency Securities:
Single-family and other mortgage-related securities
Single-family:
2,478
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,276
Total single-family and other mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150,754
CMBS:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total CMBS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,291
3,549
14,840
Mortgage Revenue Bonds:
Single-family:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,374
27
Multifamily:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
418
21
2,840
Total non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168,434
Total non-Freddie Mac mortgage-related securities purchased into the Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,720
Total new business purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $581,933
Mortgage purchases with credit enhancementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage liquidations(12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $384,674
Mortgage liquidations rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Freddie Mac securities repurchased into the Retained portfolio:
26%
17%
Single-family:
Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $106,682
29,805
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Total Freddie Mac securities repurchased into the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $136,487
$
756
3,282
4,038
Ì
Ì
4,038
1,294
101,620
102,914
8,841
2,037
10,878
1,499
Ì
414
31
1,944
115,736
119,774
$494,588
19%
$401,029
28%
$ 72,147
23,942
146
$ 96,235
(1) Based on unpaid principal balances. Excludes mortgage loans and mortgage-related securities traded but not yet settled.
(2) 2004 data includes certain mortgage-related securities that have been transferred from the Investments caption to the Retained portfolio caption on
the consolidated balance sheets.
(3) Includes 20 year Ñxed-rate mortgages.
(4) Subsequent to the issuance of our Information Statement dated June 14, 2005, we reclassiÑed select captions to agree with current period
classiÑcations.
(5) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.
(6) Represents loans where the borrower pays interest only for a period of time before the borrower begins making principal payments.
85
Freddie Mac
(7) Includes mortgage loans we purchased that underlie whole-loan REMICs. Excludes $83 million of mortgage loan purchases that collateralize the
unguaranteed portion of whole-loan REMICs.
(8) 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.
(9) Excludes FHA/VA loans that may be collateral for alternative collateral deals.
(10) Includes Structured Securities backed by non-agency securities, which were backed by a mixture of prime, FHA/VA and subprime mortgage loans.
(11) 2004 data represents $1,462 million of Ñxed-rate and $90 million of variable-rate non-Freddie Mac single-family mortgage-related securities.
(12) Excludes the eÅect of sales of non-Freddie Mac mortgage-related securities.
Guaranteed PCs and Structured Securities
Guaranteed PCs and Structured Securities Issued represent the unpaid principal balances of the mortgage-related
securities we issue or otherwise guarantee. Table 49 presents the distribution of underlying mortgage assets for total PCs and
Structured Securities issued and outstanding.
Table 49 Ì Guaranteed PCs and Structured Securities Issued and Outstanding
December 31,
2005
2004
Total Issued PCs Outstanding PCs Total Issued PCs Outstanding PCs
and Structured
Securities(2)
and Structured
Securities(1)
and Structured
Securities(2)
and Structured
Securities(1)
PCs and Structured Securities
Single-family:
Conventional:
30-year Ñxed-rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15-year Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ARMs/Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Option ARMs(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balloons/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multifamily:
Conventional:
Fixed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Structured Securities backed by Non-Freddie Mac mortgage-related
securities:
Ginnie Mae CertiÑcates(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Structured SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 810,897
321,176
131,294
3,830
26,321
849
154
1,294,521
10,149
4,354
14,503
2,021
24,479
26,500
$1,335,524
(in millions)
$614,112
220,225
88,898
414
24,973
823
154
949,599
9,902
4,210
14,112
1,900
8,589
10,489
$974,200
$ 689,945
347,135
102,273
Ì
32,966
1,350
178
1,173,847
10,787
4,759
15,546
3,015
16,560
19,575
$1,208,968
$509,923
224,627
59,234
Ì
31,075
1,340
178
826,377
10,526
4,614
15,140
2,628
8,125
10,753
$852,270
(1) Based on unpaid principal balances. Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Represents PCs and Structured Securities held by third parties.
(3) Includes 20-year Ñxed-rate mortgages.
(4) Excludes $82 million of Structured Securities issued by non-consolidated, special-purpose entities established by us that are not guaranteed by us.
(5) Excludes FHA and VA loans that may be collateral for alternative collateral deals.
(6) Ginnie Mae CertiÑcates which underlie the Structured Securities are backed by FHA/VA loans.
(7) Alternative collateral deals include Structured Securities backed by non-agency securities, which are backed by a mixture of prime, FHA/VA and
subprime mortgage loans. Outstanding alternative collateral deals include $1,520 million and $1,587 million of Ñxed-rate, $3,472 million and
$1,165 million of ARMs/variable-rate, $3,566 million and $5,286 million of FHA/VA, $12 million and $17 million of the Rural Housing Service and
other federally guaranteed loans and $19 million and $70 million of second mortgages, which are mortgage loans that are subordinate to a superior
mortgage lien on the property, at December 31, 2005 and 2004, respectively.
86
Freddie Mac
Table 50 provides further detail regarding both issued and outstanding Guaranteed PCs and Structured Securities.
Table 50 Ì Single-Class and Multi-Class PCs and Other Structured Securities Based on Unpaid Principal Balances(1)
December 31, 2005
PCs and Structured
Securities in
Retained Portfolio
PCs and Structured
Securities Outstanding
(held by
third parties)
(in millions)
Total Guaranteed
PCs and Structured
Securities Issued
PCs and Structured Securities:
Single-class(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multi-class(3)(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total PCs and Structured Securities(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004
PCs and Structured Securities:(8)
Single-class(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Multi-class(3)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total PCs and Structured Securities(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$202,970
158,354
Ì
$361,324
$219,154
137,544
Ì
$356,698
$529,901
437,668
6,631
$974,200
$454,973
390,516
6,781
$852,270
$ 732,871
596,022
6,631
$1,335,524
$ 674,127
528,060
6,781
$1,208,968
(1) Excludes Freddie Mac mortgage-related securities traded, but not yet settled.
(2) Includes PCs not backing Structured Securities and single-class Structured Securities backed by PCs and Ginnie Mae CertiÑcates.
(3) 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.
(4) Excludes $82 million of Structured Securities issued by non-consolidated, special-purpose entities established by us that are not guaranteed
by us.
(5) Principal-only strips backed by Freddie Mac mortgage-related Securities held in the Retained portfolio are classiÑed as multi-class for the
purpose of this table.
(6) See ""NOTE 4: FINANCIAL GUARANTEES,'' for a discussion of our guarantees of principal and interest related to these securities.
(7) PCs and Structured Securities Issued exclude $961,777 million and $723,429 million at December 31, 2005 and 2004, 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 (including excess interest-only strips) totaled $132,883 million and $105,703 million at
December 31, 2005 and 2004, respectively, and 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 $1,495,501 million and
$1,097,336 million at December 31, 2005 and 2004, respectively, where the holder has the option to exchange the security tranches for
other pre-deÑned security tranches.
(8) Subsequent to our Information Statement dated June 14, 2005, we reclassiÑed PCs and Structured Securities in the Retained portfolio from
Single-class to Multi-class and Total Guaranteed PCs and Structured Securities Issued from Single-class and Other to Multi-class to
conform to the current period classiÑcations.
87
Freddie Mac
Table 51 provides settlement detail for the mortgage-related securities that we issued during the past two years.
Table 51 Ì Security Settlement Detail for Total Guaranteed PCs and Structured Securities Issued(1)
Year Ended
December 31,
2005
2004
(in millions)
Total Guaranteed PCs and Structured Securities Issuance Detail:
Single-family:
Conventional:(2)
30-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ARMs/Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Only ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Option ARMs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balloon/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHA/VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$272,910
41,037
35,666
26,487
3,918
1,817
Ì
10
381,845
Multifamily:
Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,654
1,654
Non-Freddie Mac mortgage-related securities purchased for Structured Securities:
Alternative collateral deals backed by:
Option ARMs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Guaranteed PCs and Structured Securities Issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14,331
37
Ì
14,368
$397,867
$220,137
72,358
50,226
818
Ì
9,737
319
48
353,643
4,175
4,175
5,653
85
1,552
7,290
$365,108
(1) Based on unpaid principal balances. Excludes Freddie Mac mortgage-related securities traded, but not yet settled.
(2) The single-family product detail in this table does not agree to similar detail in ""Table 48 Ì Total Mortgage Portfolio Purchase Detail'' due to timing
diÅerences associated with mortgage loan purchases into the Retained portfolio and sales from the Retained portfolio. SpeciÑcally, we report mortgage
loans in Table 48 when we purchase them into the Retained portfolio whereas we report mortgage loans in Table 51 when we sell them from the
Retained portfolio to create PCs and Structured Securities.
Our new business purchases consist of mortgage loans and non-Freddie Mac mortgage-related securities that are
purchased for our Retained portfolio and serve as collateral for our issued PCs and Structured Securities. We generate a
signiÑcant portion of our mortgage purchase volume through several key mortgage lenders that have entered into unique
business arrangements with us. See ""BUSINESS Ì Credit Guarantee Activities'' for information about these relationships
and consequent risks. During 2005 and 2004, we increased purchases of adjustable-rate (i.e., ARMs/Variable-Rate and
Option ARMs) and interest-only mortgage products and non-Freddie Mac mortgage-related securities because these
products generally oÅered more attractive option-adjusted spreads than Ñxed-rate products.
88
Freddie Mac
QUARTERLY SELECTED FINANCIAL DATA
In our opinion, Ñnancial data for each quarter and full-year 2005 and 2004 reÖects all adjustments, consisting of normal
recurring adjustments, necessary for fair presentation of the results of operations for such periods. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Estimates'' and ""Ì Changes in Accounting Princi-
ples'' for more information concerning some of these adjustments.
Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of change in accounting principle, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per common share before cumulative eÅect of change in accounting principle:
Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per common share after cumulative eÅect of change in accounting principle:
Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax (expense) beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings (loss) per common share:
Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4Q
2Q
2005
3Q
(in millions, except share-related amounts)
$1,363
423
(729)
(177)
880
Ì
$ 880
$1,237
346
(761)
(138)
684
Ì
$ 684
$1,269
(278)
(583)
(68)
340
Ì
$ 340
Full-Year
$ 5,370
199
(3,013)
(367)
2,189
(59)
$ 2,130
$ 0.41
$ 0.41
$ 0.41
$ 0.41
$ 1.19
$ 1.19
$ 1.19
$ 1.19
$ 0.90
$ 0.90
$ 0.90
$ 0.90
$
$
$
$
2.84
2.83
2.76
2.75
1Q
$1,501
(292)
(940)
16
285
(59)
$ 226
$ 0.34
$ 0.33
$ 0.25
$ 0.25
1Q
2Q
2004
3Q
(in millions, except share-related amounts)
$ 2,321
$2,065
4Q
Full-Year
$ 9,137
$2,126
(26)
(503)
(285)
$1,312
$2,625
1,532
(548)
(855)
$2,754
(3,691)
(603)
467
$(1,506)
(854)
(717)
(117)
$ 377
(3,039)
(2,371)
(790)
$ 2,937
$ 1.83
$ 1.82
$ 3.92
$ 3.91
$ (2.26)
$ (2.26)
$ 0.47
$ 0.47
$
$
3.96
3.94
(1) Earnings (loss) per share is computed independently for each of the quarters presented. Due to the use of weighted-average common shares
outstanding when calculating earnings (loss) per share, the sum of the four quarters may not equal the full-year amount. Earnings (loss) per share
amounts may not recalculate using the amounts in this table due to rounding.
89
Freddie Mac
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our voluntary adoption of a series of commitments designed to enhance market discipline,
liquidity and capital. In September 2005, we entered into a written agreement with OFHEO that updated these
commitments and set forth a process for implementing them. The letters between the company and OFHEO dated
September 1, 2005 constituting the written agreement are available on the Investor Relations page of our website at
www.freddiemac.com/investors/reports.html#commit. As noted in these letters, disclosures may be affected by situations
where current financial statements are not available. Our commitments at December 31, 2005 follow:
Description
Status
1. Periodic Issuance of Subordinated Debt:
‚ We will issue Freddie SUBS» for public secondary
market trading that are rated by no less than two
nationally recognized statistical rating organizations.
‚ Freddie SUBS» will be issued in an amount such
that the sum of Total capital (core capital plus
general allowance for losses) and the outstanding
balance of ""Qualifying subordinated debt'' will equal
or exceed the sum of 0.45 percent of outstanding PCs
and Structured Securities we guaranteed and
4 percent of total on-balance sheet assets. Each
quarter we will submit to OFHEO calculations of the
quantity of qualifying Freddie SUBS» and Total
capital as part of our quarterly capital report.
‚ Every six months, beginning January 1, 2006, we will
submit to OFHEO a subordinated debt management
plan that includes any issuance plans for the six
months following the date of the plan.
2. Liquidity Management and Contingency Planning:
‚ We will maintain a contingency plan providing for at
least three months' liquidity without relying upon the
issuance of unsecured debt. We will also periodically
test the contingency plan in consultation with
OFHEO.
3. Interest-Rate Risk Disclosures:
‚ We will provide public disclosure of our duration gap,
PMVS-L and PMVS-YC interest-rate risk sensitivity
results on a monthly basis. See ""RISK
MANAGEMENT Ì Interest-Rate Risk and Other
Market Risks Ì Portfolio Market Value Sensitivity and
Measurement of Interest-Rate Risk'' for a description of
these metrics.
‚ We did not issue any Freddie SUBS» during 2005, 2004
or 2003. We issued approximately $1.25 billion of
Freddie SUBS» in June 2006. Our ability to issue
additional subordinated debt may be limited until we
return to regular Ñnancial reporting. During 2001 and
2002, we completed a total of four oÅerings of Freddie
SUBS» that provided approximately $5.5 billion in net
proceeds.
‚ At December 31, 2005, we had $5.5 billion in qualifying
Freddie SUBS» outstanding and Total capital, for the
purpose of this calculation, in the amount of
$36.4 billion, resulting in a surplus of $5.2 billion.
‚ We have submitted our semi-annual subordinated debt
management plan to OFHEO.
‚ We expect to issue additional subordinated debt in a
principal amount in excess of $1 billion from time to
time during the remainder of 2006, subject to market
conditions and other factors.
‚ We have in place a liquidity contingency plan, upon
which we report to OFHEO on a monthly basis. During
the second quarter of 2006, we also began our periodic
testing.
‚ For the twelve months ended December 31, 2005, our
duration gap averaged zero months, PMVS-L averaged
one percent and PMVS-YC averaged zero percent. Our
2005 monthly average duration gap, PMVS results and
related disclosures are provided in our Monthly Volume
Summary which is available on our website,
www.FreddieMac.com/investors/volsum.
90
Freddie Mac
Description
Status
4. Credit Risk Disclosures:
‚ We will make quarterly assessments of the impact on
expected credit losses from an immediate 5 percent
decline in single-family home prices for the entire
U.S. We will disclose the impact in present value
terms and measure our losses both before and after
receipt of private mortgage insurance claims and
other credit enhancements.
‚ Our quarterly credit risk sensitivity estimates are as
follows:
As of:
12/31/05
09/30/05
06/30/05
03/31/05(5)
12/31/04
Before Receipt
of Credit
Enhancements(1)
After Receipt
of Credit
Enhancements(2)
Net Present
NPV
Value, or NPV(3) Ratio(4) Value, or NPV(3) Ratio(4)
Net Present
NPV
(dollars in
millions)
(dollars in
millions)
$873
844
787
814
794
6.5 bps
6.6
6.3
6.6
6.5
$564
516
471
505
463
4.2 bps
4.0
3.7
4.1
3.8
(1) Assumes that none of the credit enhancements currently covering our mortgage loans
has any mitigating 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 Ginnie Mae CertiÑcates.
(4) Calculated as the ratio of net present value of increase in credit losses to the single-
family Total mortgage portfolio, deÑned above.
(5) Beginning with period ended March 31, 2005, results included in this table are based
on the model enhancements implemented on January 1, 2005. Results from March 31,
2005 using the previous model were $756 million or 6.2 bps before receipt of credit
enhancements and $447 million or 3.6 bps after receipt of credit enhancements.
‚ At June 1, 2006, our ""risk-to-the-government'' rating
from Standard & Poor's, or S&P, was ""AA¿'' and
Moody's Bank Financial Strength Rating for us was
""A¿''.
5. Public Disclosure of Risk Rating:
‚ We will seek to obtain a rating, that will be
continuously monitored by at least one nationally
recognized statistical rating organization, assessing
""risk-to-the-government'' or independent Ñnancial
strength.
91
Freddie Mac
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
92
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, 2005 and 2004,
and the results of their operations and their cash Öows for each of the three years in the period ended December 31, 2005, 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, 2005 and 2004. 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 changed
its method of accounting for interest expense related to callable debt instruments as of January 1, 2005, and its method for
determining gains and losses on sales of certain guaranteed securities as of October 1, 2005.
McLean, Virginia
June 28, 2006
93
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2005
2003
2004
(dollars in millions, except share-
related amounts)
Interest income
Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4,037
29,684
2,606
36,327
$
4,007
28,460
3,136
35,603
$
4,251
29,051
3,796
37,098
Interest expense
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense on debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)
Management and guarantee income (includes interest on Guarantee asset of $371, $257 and $244) ÏÏ
Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income on Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative gains (losses)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense
Salaries and employee beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income tax expense and cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income before cumulative eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of change in accounting principle, net of taxes of $32ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6,102)
(23,246)
(29,348)
(551)
(29,899)
(1,058)
5,370
1,450
(1,064)
920
(1,357)
22
(127)
206
125
24
199
(805)
(386)
(58)
(286)
(1,535)
(251)
(40)
(320)
(96)
(771)
(3,013)
2,556
(367)
2,189
(59)
$
2,130
(2,908)
(22,950)
(25,858)
(708)
(26,566)
100
9,137
1,382
(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
Ì
$ 2,937
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income available to common stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(223)
1,907
(210)
$ 2,727
$
$
$
Basic earnings per common share:
Earnings before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of change in accounting principle, net of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2.84
$ (0.09) $
$
2.76
$
Diluted earnings per common share:
Earnings before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of change in accounting principle, net of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2.83
$ (0.08) $
$
2.75
$
3.96
$
Ì $
$
3.96
3.94
$
Ì $
$
3.94
(2,785)
(22,083)
(24,868)
(1,641)
(26,509)
(1,091)
9,498
1,653
(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
Ì
4,816
(216)
4,600
6.69
Ì
6.69
6.68
Ì
6.68
Weighted average common shares outstanding (in thousands)
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
691,582
693,511
1.52
$
689,282
691,521
1.20
$
687,094
688,675
1.04
$
The accompanying notes are an integral part of these Ñnancial statements.
94
Freddie Mac
FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
December 31,
2005
2004
(in millions, except
share-related amounts)
Assets
Retained portfolio
Mortgage loans:
Held-for-investment, at amortized costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Held-for-sale, at lower-of-cost-or-market ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans, net of reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 60,009
(119)
1,538
61,428
$ 58,852
(114)
2,582
61,320
Mortgage-related securities:
Available-for-sale, at fair value (includes $168 and $194, respectively, pledged as collateral that may be repledged)ÏÏÏÏÏÏ
Trading, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments:
638,465
8,894
597
647,956
709,384
590,461
11,842
845
603,148
664,468
10,468
35,253
Non-mortgage-related securities:
Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate owned, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
42,165
15,159
67,792
6,373
7,097
5,083
629
9,864
$806,222
Liabilities and stockholders' equity
Debt securities, net
Senior debt:
Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued interest payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$288,532
454,627
5,633
748,792
10,607
7,611
5,541
590
295
4,646
778,082
Commitments and contingencies (Notes 1, 3, 4, 13 and 14)
Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity
Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and 692,717,422 shares and
690,606,185 shares outstanding, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss) (AOCI), net of taxes, related to:
Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total accumulated other comprehensive income (loss), net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 33,164,858 shares and 35,276,095 shares, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
949
4,609
152
924
31,559
(2,485)
(6,287)
(1)
(8,773)
(1,280)
27,191
$806,222
4,339
(7,924)
(8)
(3,593)
(1,353)
31,416
$795,284
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
The accompanying notes are an integral part of these Ñnancial statements.
95
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred stock, at redemption value
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, par value
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation, before tax eÅect of $24, $20 and $23, respectively
Income tax beneÑt from employee stock option exercises ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REIT preferred stock purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AOCI, net of taxes
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in unrealized gains (losses) related to available-for-sale securities, net
of reclassiÑcation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in unrealized gains (losses) related to cash Öow hedge relationships,
net of reclassiÑcation adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AOCI, net of taxes, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Comprehensive income (loss)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in AOCI, net of taxes, net of reclassiÑcation adjustments ÏÏÏÏÏÏÏÏÏÏÏ
Total comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
2003
Shares
Amount
Shares
Amount
Shares
Amount
(in millions)
92
92
726
726
35
(2)
33
$ 4,609
4,609
152
152
873
67
6
(13)
(9)
924
30,728
2,130
(223)
(1,076)
31,559
(3,593)
(6,824)
1,637
7
(8,773)
(1,353)
73
(1,280)
$27,191
$ 2,130
(5,180)
$(3,050)
92
92
726
726
37
(2)
35
$ 4,609
4,609
152
152
814
56
20
(17)
Ì
873
28,837
2,937
(210)
(836)
30,728
(1,498)
(2,010)
(87)
2
(3,593)
(1,427)
74
(1,353)
$31,416
$ 2,937
(2,095)
842
$
92
92
726
726
39
(2)
37
$ 4,609
4,609
152
152
744
64
16
(10)
Ì
814
24,955
4,816
(216)
(718)
28,837
2,340
(5,868)
2,040
(10)
(1,498)
(1,470)
43
(1,427)
$31,487
$ 4,816
(3,838)
978
$
The accompanying notes are an integral part of these Ñnancial statements.
96
Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
2005
Year Ended December 31,
2004
(in millions)
2003
Cash Öows from operating activities
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by operating activities:
$
2,130
$
2,937
$
4,816
Cumulative eÅect of change in accounting principle, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hedge accounting gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized losses (gains) on derivatives not in hedge accounting relationships, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset related amortization Ì premiums, discounts and hedging basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt related amortization Ì premiums and discounts on certain debt securities and hedging basis
adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net discounts paid on retirements of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) losses on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Housing tax credit partnership losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Decrease) increase in deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds of trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in amounts due to Participation CertiÑcate investors, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öows from investing activities
Purchases of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturities of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net decrease (increase) in securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏ
Repurchase of REIT preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative premiums and terminations, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öows from Ñnancing activities
Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payment of cash dividends on preferred stock and common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of housing tax credit partnerships notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in cash overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used for) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net (decrease) increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Supplemental cash Öow information
Cash (received) paid for:
InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative interest carry, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in acceleration held in the retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash investing and Ñnancing activities:
Securitized and retained available-for-sale securities of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers from mortgage loans to REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in housing tax credit partnerships Ñnanced by notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers from held-for-sale mortgages to held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
59
(22)
1,014
791
9,129
(5,207)
(206)
260
320
343
(1,452)
(26,763)
23,662
118
2,598
661
(3,077)
282
607
(567)
1,413
112
(66)
6,139
(414,063)
94,961
249,857
(12,980)
12,051
1,380
17,038
(142)
932
(127)
(51,093)
857,361
(862,176)
153,504
(125,959)
(436)
60
(1,299)
(940)
54
20,169
(24,785)
35,253
10,468
$
$
26,797
(590)
1,212
1,372
175
1,312
1,095
291
Ì
(743)
2,758
1,302
5,748
(3,085)
327
143
281
738
(346)
(31,698)
30,965
162
38,672
1,870
529
(235)
773
(830)
1,173
(170)
37
51,308
(276,573)
85,583
176,432
(12,525)
11,511
1,552
(11,615)
Ì
(193)
(69)
(25,897)
826,020
(841,638)
187,779
(183,541)
(405)
57
Ì
(644)
(1,079)
968
5,027
(3,326)
1,775
(5)
200
2,625
737
(82,074)
84,329
390
8,935
3,902
(22,369)
275
(1,074)
(1,362)
1,606
(389)
7
3,270
(446,036)
143,513
240,041
(15,567)
15,283
1,327
2,461
Ì
3,333
(32)
(55,677)
900,073
(881,860)
258,267
(210,121)
(376)
33
(934)
(349)
24
64,757
12,350
10,792
23,142
(1,046)
(498)
(28)
(13,300)
12,111
23,142
35,253
$
$
$
23,902
325
363
1,716
272
1,546
1,184
198
$
25,918
578
2,538
2,003
1,681
1,570
702
179
The accompanying notes are an integral part of these Ñnancial statements.
97
Freddie Mac
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are a stockholder-owned, government-sponsored enterprise, or GSE, established by Congress in 1970 to provide a
continuous Öow of funds for residential mortgages. Our obligations are ours alone and are not insured or guaranteed by the
U.S., or any other agency or instrumentality of the U.S. We play a fundamental role in the American housing Ñnance
system, linking the domestic mortgage market and the global capital markets. Our participation in the secondary mortgage
market includes providing our credit guarantee for residential mortgages originated by mortgage lenders and investing in
mortgage loans and mortgage-related securities that we hold in our Retained portfolio. Through our credit guarantee
activities, we securitize mortgage loans by issuing 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. Resecuritized mortgage-related securities are referred to as Structured
Securities. We also guarantee multifamily mortgage loans that support housing revenue bonds issued by third parties and we
guarantee other mortgage loans held by third parties. Securitized mortgage-related assets that back PCs and Structured
Securities that are held by third parties are not reÖected as our assets. In return for providing our guarantee on issued PCs
and Structured Securities, we may earn a management and guarantee fee that is paid to us over the life of the related PCs
and Structured Securities. Our obligation to guarantee the payment of principal and interest on issued PCs and Structured
Securities usually results in the recognition of a Guarantee asset and Guarantee obligation.
Our Ñnancial reporting and accounting policies conform to U.S. generally accepted accounting principles, or GAAP.
Certain amounts in prior periods have been reclassiÑed to conform to the current presentation.
Estimates
The preparation of Ñnancial statements requires us 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.
Our estimates and judgments include the following: the estimation of fair value for Ñnancial instruments (See
""NOTE 16: FAIR VALUE DISCLOSURES'' for a discussion of our fair value estimates); determining the expected future
cash Öows (including the timing and amounts of prepayments) of mortgage-related assets in the Retained portfolio for the
purpose of amortizing deferred amounts and assessing when securities are other-than-temporarily impaired; assessing the
reserves for credit losses on mortgage loans and guarantee losses on PCs; assessing our legal and tax contingencies;
estimating the expected timing and amounts of future issuances of non-callable debt; and determining other matters that
aÅect the reported amounts and disclosure of contingencies in the Ñnancial statements.
Net income for 2005 was reduced by approximately $206 million (after tax), or $0.30 per diluted common share,
related to the implementation of enhancements to our approach for certain valuations, the estimation of reserves for
uncollectible interest and models used to estimate prepayment behavior of mortgage assets that were recorded as changes in
accounting estimates.
EÅective January 1, 2005, we implemented several enhancements to the valuation approach that we use to estimate the
fair value of our guarantee-related assets and liabilities. With respect to our guarantee-related assets, these enhancements
include the use of third-party quotes on assets that have similar characteristics. We have also worked with third parties to
create and value hypothetical credit structures based on the collateral underlying our PCs, and used those values in
determining the fair values of our guarantee-related liabilities. The change in valuation approach for our guarantee-related
assets and liabilities primarily aÅected our Guarantee asset and Participation CertiÑcate residuals, which are both carried at
fair value, and reduced Net income by approximately $68 million (after-tax). This valuation change also aÅected the
amortization of deferred credit fees resulting in a $17 million reduction in Net income. Additional information about the
valuation methods used for our guarantee-related assets and liabilities is discussed in ""NOTE 2: TRANSFERS OF
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.''
We also changed our estimate of reserves for uncollectible interest on single-family mortgage loans we hold that are
greater than 90 days delinquent. Our new estimation approach establishes reserves for all accrued but uncollected interest on
all single-family loans that are greater than 90 days delinquent. Prior to this change, we accrued interest on all single-family
loans and established reserves for all accrued interest we deemed uncollectible using internal statistically based models. This
change resulted in a $77 million (after-tax) reduction in Net income for 2005.
Also, eÅective January 1, 2005, we implemented reÑnements to our prepayment model that is used to evaluate
prepayment behavior for assets in our Retained portfolio. As a result, prepayment speeds used in our amortization model
98
Freddie Mac
generally increased, reÖecting better estimates of the eÅects of recent market conditions on expected prepayments. This
change resulted in a $44 million (after-tax) reduction in Net income for 2005.
Net income for 2004 was decreased by approximately $56 million (after tax), or $0.08 per diluted common share, as the
result of a change in estimate related to enhancements to certain assumptions and calculations in the amortization process
for deferred fees recorded as basis adjustments on assets in our Retained portfolio.
Net income for 2003 was increased by approximately $92 million (after tax), or $0.13 per diluted common share, as a
result of changes in accounting estimates related to: (a) the amortization of certain deferred fees recorded as basis
adjustments on assets in our Retained portfolio, which increased net income by $20 million, and (b) improvements to our
approach for estimating the expected weighted-average lives of mortgages with related deferred fees, including credit fees
and buy-down fees, which increased net income by $72 million.
Table 1.1 shows the pre-tax impact of the changes in estimates on our consolidated statement of income:
Table 1.1 Ì Summary of Change in Estimates (Pre-Tax)
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest income (loss)
Management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total pre-tax impact of changes in estimatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year ended December 31,
2004
2003
2005
(in millions)
$(166) $(86)
$ 31
(17) Ì
(27) Ì
(78) Ì
(27) Ì
110
Ì
Ì
Ì
(149) Ì 110
$141
$(315) $(86)
Changes in Accounting Principles
EÅective January 1, 2005, we changed our method of accounting for interest expense related to callable debt
instruments to recognize interest expense using an eÅective interest method over the contractual life of the debt. For periods
prior to 2005, we amortized premiums, discounts, deferred issuance costs and other basis adjustments in interest expense
using an eÅective interest method over the estimated life of the debt. We implemented this change in accounting method to
facilitate improved Ñnancial reporting, particularly to promote the comparability of our Ñnancial reporting with that of our
primary competitor. The change in accounting method also reduces the operational complexity associated with determining
the estimated life of callable debt. The cumulative eÅect of this change was a $59 million (after-tax) reduction in net
income for 2005.
Table 1.2 summarizes the pro forma net income and related basic and diluted earnings per common share, had the
amortization of premiums, discounts, deferred issuance costs and other basis adjustments related to callable debt based on
the contractual maturity been in eÅect for the years ended December 31, 2004 and 2003.
Table 1.2 Ì Pro Forma Information Ì Change in Accounting for Interest Expense Related to Callable Debt
As reported:
Pro forma:
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2003
2004
(in millions, except share-
related amounts)
$2,937
$ 3.96
$ 3.94
$2,910
$ 3.92
$ 3.90
$4,816
$ 6.69
$ 6.68
$4,746
$ 6.59
$ 6.58
Beginning October 1, 2005, we changed our method for determining gains and losses upon the re-sale of PCs and
Structured Securities related to deferred items recognized in connection with our guarantee of those securities. This change
in accounting principle was facilitated by system changes that now allow us to apply and track these deferred items relative
to the speciÑc portions of the purchased PCs and Structured Securities, thus improving our Ñnancial reporting. Due to the
unavailability of certain historical data, we did not have the ability to calculate the cumulative eÅect of the change nor were
we able to determine the pro forma eÅects of applying the new method retroactively. See ""NOTE 2: TRANSFERS OF
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' for additional information.
99
Freddie Mac
Consolidation and Equity Method of Accounting
The consolidated Ñnancial statements include our accounts and those of our subsidiaries. All material intercompany
transactions have been eliminated in consolidation. For each entity with which we are involved, we determine whether the
entity should be considered our subsidiary and included in our consolidated Ñnancial statements. We consolidate (a) all
Variable Interest Entities, or VIEs, in which we are the primary beneÑciary and (b) entities that are not VIEs in which we
hold more than 50 percent of the voting rights and have the ability to exercise control over the entity.
For each entity in which we are involved, we determine if the entity is a VIE. A VIE 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. We consolidate entities that are VIEs when we are the primary beneÑciary. We are considered the primary
beneÑciary and must consolidate a VIE when we absorb a majority of expected losses or expected residual returns, or both.
In addition to the VIEs that are consolidated, we have signiÑcant variable interest in certain other VIEs that are not
consolidated because we are not the primary beneÑciary. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' for more
information.
We consolidate entities that are not VIEs when we hold more than 50 percent of the voting rights and have the ability to
exercise control over the entity. Accordingly, we consolidate our two majority-owned Real Estate Investment Trusts, or
REITs, Home Ownership Funding Corporation and Home Ownership Funding Corporation II. The equity and net earnings
attributable to the minority shareholder interests in our 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.
We use the equity method of accounting for VIEs when we are not the primary beneÑciary and for entities that are not
VIEs over which we have the ability to exercise signiÑcant inÖuence, but not control. Under the equity method of
accounting, we report our recorded investment as part of Other assets on the consolidated balance sheets and recognize our
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.
We regularly invest as a limited partner in qualiÑed low-income housing tax credit, or LIHTC, partnerships that are
eligible for federal tax credits. Most of these are VIEs. We are the primary beneÑciary and consolidate certain of these
partnerships as described further in ""NOTE 3: VARIABLE INTEREST ENTITIES.'' Our recorded investment in those
partnerships that are not consolidated is accounted for under the equity method and is reported as part of Other assets on
the consolidated balance sheets. Our share of partnership income or loss is reported in the consolidated statements of
income as Non-interest expense Ì Housing tax credit partnerships. Our 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 our cost basis in qualiÑed LIHTC partnerships diÅers from the book basis reÖected at the partnership
level, the diÅerence is amortized over the life of the tax credits and included in our share of earnings (losses) from housing
tax credit partnerships. We periodically review these investments for impairment and adjust them to fair value when a
decline in market value below the recorded investment is deemed to be other than temporary. Impairment losses are
included in our consolidated statements of income as part of Non-interest expense Ì Housing tax credit partnerships.
Cash and Cash Equivalents and Statements of Cash Flows
Highly liquid investment securities that have an original maturity of three months or less and are used for cash
management purposes are accounted for as cash equivalents. Cash collateral we obtained from counterparties to derivative
contracts where we are in a net unrealized gain position is recorded as Cash and cash equivalents. The vast majority of the
cash and cash equivalents balance is interest-bearing in nature.
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 the derivatives are
designated as a hedge of another item. Cash Öows from commitments accounted for as derivatives that result in the
acquisition or sale of mortgage securities or mortgage loans are classiÑed in either: (a) operating activities for trading
securities or mortgage loans classiÑed as held-for-sale, or (b) investing activities for available-for-sale securities or mortgage
loans classiÑed as held-for-investment. Cash Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in
operating activities until the loans have been securitized and retained as available-for-sale PCs, at which time the cash Öows
are classiÑed as investing activities. Cash Öows related to guarantee fees, including buy-up and buy-down payments, 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-up and buy-down payments are discussed further below in ""Swap-Based Issuances of
PCs and Structured Securities.'' There were less than $1 million, $428 million and $322 million of non-cash net transfers to
100
Freddie Mac
the available-for-sale classiÑcation from the trading classiÑcation related to resecuritization transactions during 2005, 2004
and 2003, respectively.
Transfers of PCs and Structured Securities that Qualify as Sales
Upon completion of a transfer of a Ñnancial asset that qualiÑes as a sale under SFAS No. 140, ""Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' (""SFAS 140''), we de-recognize all assets
sold and recognize all assets obtained and liabilities incurred. In this regard, we recognize the fair value of our obligation to
guarantee the payment of principal and interest of PCs and Structured Securities transferred in sale transactions. The
portion of such obligation that relates to our non-contingent obligation to stand ready to perform under our guarantee is
recognized as a Guarantee obligation, while the portion of the obligation that relates to estimated incurred losses on
securitized assets is recognized for consolidated balance sheet purposes as Reserve for guarantee losses on Participation
CertiÑcates. The resulting gain (loss) on sale of transferred PCs and Structured Securities is reÖected in our consolidated
statements of income as a component of Gains (losses) on investment activity.
In recording a sales transaction, we also continue to carry on our consolidated balance sheets any retained interests in
securitized Ñnancial assets. Such retained interests include our right to receive management and guarantee fees on PCs or
Structured Securities, which is classiÑed on our consolidated balance sheets as a Guarantee asset. The carrying amount of
all such retained interests is 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. Other retained interests include
PCs or Structured Securities that are not transferred to third parties upon the completion of a securitization or
resecuritization transaction.
Swap-Based Issuances of PCs and Structured Securities
In addition to issuing PCs and Structured Securities through cash-based sales transactions, we issue such securities
through various swap-based exchanges. In the case of PC-based swaps, we issue such securities to third parties through
Guarantor and MultiLender Swap transactions. Guarantor Swaps represent transactions in which Ñnancial institutions
transfer mortgage loans to us in exchange for PCs we issue that are backed by such mortgage loans. MultiLender Swaps are
similar to Guarantor Swaps, except that formed pools include loans that are contributed by more than one other party or by
us. In Guarantor and MultiLender Swaps, as in sales transactions, in return for providing our guarantee, we earn a
guarantee fee that is paid to us over the life of an issued PC. It is also common for buy-up or buy-down payments to be
exchanged between our counterparties and us upon the issuance of a PC. Buy-Ups are upfront payments made by us that
increase the guarantee fee we will receive over the life of the PC. Buy-Downs are upfront payments that are made to us that
decrease (i.e., partially prepay) the guarantee fee we will receive over the life of the PC. We also may receive upfront,
cash-based payments as additional compensation for our guarantee of mortgage loans, referred to as Credit Fees, and as
additional consideration received on such exchanges, we may receive various types of seller-provided credit enhancements
related to the underlying mortgage loans. We also issue and transfer Structured Securities to third parties in exchange for
PCs and non-Freddie Mac mortgage-related securities.
We recognize the fair value of our contractual right to receive guarantee fees as a Guarantee asset at the inception of an
executed guarantee. Additionally, we recognize a Guarantee obligation at the greater of (a) fair value or (b) the contingent
liability amount required by SFAS No. 5, ""Accounting For Contingencies,'' or SFAS 5, to be recognized at inception of an
executed guarantee. Similar to transfers of PCs and Structured Securities that qualify as sales, that portion of our estimated
guarantee liability that relates to our non-contingent obligation to stand ready to perform under a PC guarantee is
recognized as Guarantee obligation, while that portion of such estimated guarantee liability that relates to our contingent
obligation to make payments under our guarantee is recognized for consolidated balance sheet purposes as Reserve for
guarantee losses on Participation CertiÑcates. Further, credit enhancements received in connection with Guarantor Swaps
and other similar exchange transactions of PCs are measured at fair value and recognized as follows: (a) pool insurance is
recognized as an Other asset; (b) recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap
transactions are recognized as Other assets; and (c) primary mortgage insurance is recognized at inception as a component
of the recognized Guarantee obligation.
Because Guarantee asset, Guarantee obligation 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 our consolidated
balance sheet as a component of Guarantee obligation and are hereinafter referred to as ""Deferred Guarantee Income''.
Net negative diÅerences between Guarantee asset, Guarantee obligation 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. Additionally, cash payments that are made or received in connection with Buy-Ups
101
Freddie Mac
and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee Income. Likewise, Credit Fees that we
receive at inception are also recognized as adjustments of recognized Deferred Guarantee Income.
With regard to PCs that we issue through our MultiLender Swap Program, we account for a portion of such transactions
in the same manner as transfers described above that are accounted for as sales. The remaining portion of such PC issuances
are accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Swap program.
Concerning Structured Securities that we issue to third parties in exchange for PCs and non- Freddie Mac mortgage-
related securities, we do not recognize any incremental Guarantee asset or Guarantee obligation on such transactions.
Rather, we defer and amortize into income on a straight-line basis that portion of the transaction fee that we receive on such
transactions that relates to the estimated fair value of our future administrative responsibilities for issued Structured
Securities. In cases where we retain portions of Structured Securities issued in such transactions, a portion of the received
transaction fee is deferred as a carrying value adjustment of retained Structured Securities. The balance of transaction fees
received, which relates to compensation earned in connection with structuring-related services rendered by us to third
parties, is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.
Purchases of PCs or Structured Securities
The purchase of a PC or Structured Security prompts the extinguishment of the corresponding, recognized Guarantee
obligation. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the related
unamortized balance of Deferred Guarantee Income.
We de-recognize an extinguished Guarantee obligation against earnings as a component of Gains (losses) on
investment activity. Correspondingly, the recognized Guarantee asset is reclassiÑed on our consolidated balance sheets as a
component of Participation CertiÑcate residuals, at fair value, or PC Residuals.
The unamortized balance of Deferred Guarantee Income is 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 No. 91, ""Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases,'' or SFAS 91, using the eÅective interest method.
Subsequent Measurement of Recognized Guarantee-Related Assets and Liabilities
Deferred Guarantee Income
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.
Recognized Guarantee Asset
We generally account for a Guarantee asset like a debt instrument classiÑed as trading under SFAS 115. As such, all
changes in the fair value of recognized Guarantee asset are reÖected in earnings as a component of Gains (losses) on
Guarantee asset. 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.
Recognized Guarantee Obligation
We subsequently amortize the recognized Guarantee obligation into earnings in proportion to the rate of the unpaid
principal balance decline of securitized mortgage loans. Periodic amortization of a recognized Guarantee obligation is
reÖected in earnings as a component of Income on Guarantee obligation. The subsequent measurement of our contingent
obligation to make guarantee payments is further discussed below in ""Reserves for Losses on Mortgage Loans Held-for-
Investment and Losses on PCs''.
Recognized Credit Enhancements
Credit enhancements that are separately recognized as Other assets are amortized into earnings as Non-interest
expense. Such assets are 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, whichever is shorter. Recurring insurance premiums are
recorded at the amount paid and amortized over their contractual life and, if provided quarterly, then the amortization period
is three months.
PC Residuals
PC residuals relate to certain PCs or Structured Securities held by us as investments and represent the fair value of the
expected future cash Öows associated with the guarantee contracts (including cash Öows related to Management and
guarantee fees and our Guarantee obligation) that are inherent within such securities.
102
Freddie Mac
We recognize a PC residual in connection with PCs or Structured Securities held by us that (a) were previously
transferred to third parties as part of transactions that were accounted for either as sales or in a manner described above for
Guarantor Swap transactions (such that a Guarantee asset and Guarantee obligation was previously established for held
PCs or Structured Securities), (b) were formed from mortgage loans purchased through our Cash Window (""Cash Window
Purchases'') and that were never transferred to third parties, (c) were purchased by us from third parties in contemplation
of the related issuance of such PCs through the Guarantor Swap 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 or as part of a
guarantee transaction that was accounted for like Guarantor Swaps as described above.
Like a recognized Guarantee asset, 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 were transferred to
third parties and for which a Guarantee asset and Guarantee obligation was recognized are accounted for like debt securities
that are classiÑed as trading. 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 accounted for like debt securities that are classiÑed as available-
for-sale.
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, or AOCI, a component
of Stockholders' equity. All cash received over the life of the underlying loans with respect to the Guarantee asset
component of the PC residuals is reÖected in earnings as a component of Net interest income.
Due to Participation CertiÑcate Investors
Timing diÅerences between our 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 result in the liability Due to Participation CertiÑcate investors. In those cases, the PC balance is not reduced
for payments of principal received from seller/servicers in a given month until the Ñrst day of the next month and we do not
release the cash received (principal and interest) to the PC investor until the Ñfteenth day of that next month. We generally
invest the principal and interest amounts we receive in short-term investments from the time the cash is received until the
time we pay the PC investor. Interest income resulting from investment of principal and interest payments from
seller/servicers is reported in interest income.
For unscheduled principal prepayments, these timing diÅerences result in an expense accrual upon prepayment of the
underlying mortgage. This is because the related PCs continue to bear interest due 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 period. The expense recognized upon prepayment is reported in
Interest expense Ì Due to Participation CertiÑcate investors. We report PC coupon interest amounts relating to our
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 us 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 us that relate to our investment in PCs are reported as
a reduction to our investment in PCs on the consolidated balance sheets.
Mortgage Loans
Mortgage loans that we may sell are classiÑed as held-for-sale. If we decide to retain a loan, the loan is transferred to the
held-for-investment portfolio. Loans transferred to the held-for-investment portfolio are transferred at lower of cost or
market. Lower-of-cost-or-market valuation adjustments relating to these loans are treated as basis adjustments and are
subsequently amortized into interest income over the period held. We recognize interest on mortgage loans on an accrual
basis, except when we believe the collection of principal or interest is doubtful.
Held-for-sale mortgages are reported at lower-of-cost-or-market, on a portfolio basis, with losses reported in Gains
(losses) on investment activity. Premiums and discounts on loans classiÑed as held-for-sale are not amortized during the
period that such loans are classiÑed as held-for-sale. For a description of how we determine the fair value of our held-for-sale
mortgage loans, see ""NOTE 16: FAIR VALUE DISCLOSURES.''
Mortgage loans that we have 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 (including
premiums and discounts). These deferred items are amortized into interest income over the estimated lives of the
mortgages using the eÅective interest method. We use actual prepayment experience and estimates of future prepayments to
103
Freddie Mac
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.
Reserves for Losses on Mortgage Loans Held-for-Investment and Losses on PCs
We maintain a Reserve for losses on mortgage loans held-for-investment to provide for credit losses inherent in that
portfolio. We also maintain a Reserve for guarantee losses on Participation CertiÑcates or Structured Securities held by third
parties. 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 for credit losses. Decreases in loan loss reserves are reÖected through either (a) charging-oÅ
such balances (net of recoveries) when realized losses are recorded or (b) a reduction in the Provision for credit losses.
Loan loss reserves are also recorded upon the sale of PCs and Structured Securities for which losses were incurred on
the underlying mortgage loans while we held such securities. We recognize incurred losses 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; (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 Ì We estimate credit losses on homogeneous pools of single-family loans using statisti-
cally-based models that evaluate a variety of factors. 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 impaired single-family loans at the balance sheet date, we determine the point within
the range of probable losses that represents the best estimate of losses. The factors used to estimate losses include the year
of loan origination, geographic location, actual and estimated amounts for loss severity trends for similar loans, default
experience, proceeds from credit enhancements, pre-foreclosure real estate taxes and insurance, and estimated costs should
the underlying property ultimately be foreclosed upon and sold.
We frequently validate and update the models and factors to capture changes in actual loss experience, as well as
changes in underwriting practices and in our loss mitigation strategies. We also consider 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, the 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, while adverse trends in
these factors produce a reserve requirement toward the higher end of the range. We then adjust the level of loan loss
reserves to the level required based on our best assessment of these factors.
Multifamily loan portfolio Ì We estimate credit losses on the multifamily loan portfolio based on all available
evidence, including adequacy of third-party credit enhancements, evaluation of the repayment prospects, and fair value of
collateral underlying the individual loans. The review of the repayment prospects and value of collateral underlying
individual loans is based on property-speciÑc and market-level risk characteristics including apartment vacancy rates,
apartment rental rates, and property sales information. 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 our impaired loan population (""troubled debt restructurings''), (b) serious
delinquencies and (c) nonaccrual loans. Serious delinquencies are those single-family loans that are 90 days or more past
due or in foreclosure, and multifamily loans that are more than 60 days but less than 90 days past due. This category also
includes multifamily loans that are 90 days or more past due but where principal and interest are being paid to us 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 90 days or more 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 delinquent, interest income is accrued; however, we establish reserves for all accrued but uncollected
interest on all single-family loans we hold that are greater than 90 days delinquent. Prior to 2005, we established a reserve for
104
Freddie Mac
all single-family accrued interest we deemed uncollectible using internal statistically based models, which estimated accrued
but uncollectible interest. We report 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 troubled debt restructurings.
Multifamily impaired loans are deÑned as performing and non-performing troubled debt restructurings, 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.
We have the option to purchase mortgage loans out of PC pools under certain circumstances, such as to resolve an
existing or impending delinquency or default. Our general practice is to purchase the mortgage loans out of pools after the
loans are 120 days delinquent. These loans are recorded on our consolidated balance sheets at fair value.
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 and the loans are subsequently accounted for as troubled debt restructurings. For mortgages that are foreclosed
upon and thus transferred to Real estate owned, net, or REO, or are 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. For
transfers to REO, 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 of the mortgage (including accrued
interest). REO gains and losses subsequent to foreclosure are included in REO operations income (expense).
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as ""available-for-sale''
or ""trading.'' We currently do not classify any securities as ""held-to-maturity'' although we 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 we determine the fair value of securities.
We record forward purchases and sales of securities that are speciÑcally exempt from the requirements of ""Accounting
for Derivative Instruments and Hedging Activities,'' or 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 the contractual
settlement date with a corresponding commitment recorded on the trade date.
We often retain Structured Securities created through resecuritizations of mortgage-related securities held by us. The
new Structured Securities we acquire in these transactions are classiÑed as available-for-sale or trading based upon the
predominant classiÑcation of the mortgage-related security collateral we contributed.
For most of our investments in securities, interest income is recognized using the retrospective eÅective interest method.
Deferred items, including premiums, discounts and other basis adjustments, are amortized into interest income over the
estimated lives of the securities. We use actual prepayment experience and estimates of future prepayments to determine the
constant yield needed to apply the eÅective interest method. We recalculate 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 securities investments, interest income is recognized using the prospective eÅective interest method. We
speciÑcally apply this accounting to beneÑcial interests in securitized Ñnancial assets that (a) 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
strips) or (b) are not of high credit quality at the acquisition date. We recognize as interest income (over the life of these
securities) the excess of all estimated cash Öows attributable to these interests over their principal amount using the
eÅective yield method. We update our estimates of expected cash Öows periodically and recognize changes in calculated
eÅective yield on a prospective basis.
We periodically review securities for potential impairment. We consider a number of factors, including whether the fair
value of a security is less than its amortized cost, the severity of the decline in fair value, credit ratings and the length of time
the investment has been in an unrealized loss position. We also recognize impairment when qualitative factors indicate that
105
Freddie Mac
we may not recover the unrealized loss. When evaluating these factors, we consider our intent and ability to hold the
investment until a point in time at which recovery of the unrealized loss 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. Based on the new cost basis, the adjusted deferred amounts
related to the impaired security are amortized over the security's remaining life in a prospective manner consistent with the
amount and timing of the future estimated cash Öows. The security cost basis is not changed for subsequent recoveries in
fair value. For certain securities meeting the criteria of (a) and (b) in the preceding paragraph, other-than-temporary
impairment is 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. We use the speciÑc identiÑcation method for determining the cost of a
security in computing the gain or loss.
Repurchase and Resale Agreements
We enter into repurchase and resale agreements primarily as an investor or to Ñnance our security positions. Such
transactions are accounted for as purchases and sales when the transferor relinquishes control over transferred securities and
as secured Ñnancings when the transferor does not relinquish control. Our policy is to take possession of securities purchased
under agreements to resell and reverse dollar roll transactions.
Debt Securities Issued
Debt securities that we issue 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 contractual life of the related indebtedness. The balance of deferred items remaining when debt is extinguished
prior to its contractual maturity is reÖected in earnings in the period of extinguishment as a component of Gains (losses) on
debt retirement. Prior to 2005, for callable debt, deferred items were amortized over the period during which the related
indebtedness was expected to be outstanding and changes in the expected life were 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. Amortization of premiums, discounts and issuance costs begins at the time of debt issuance.
Premiums, discounts and hedging-related basis adjustments are reported as a component of Debt securities, net. 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 translation gains or losses are reported in Non-
interest income (loss) Ì Other income.
Contemporaneous transfers of cash between us 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 any 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.
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 or 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 unrealized gain position are reported as Derivative assets, at fair value. Similarly,
derivatives in a net unrealized loss position are reported as Derivative liabilities, at fair value.
Currently, the majority of our 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, fair value gains and losses are
reported as Gains (losses) on investment activity in the consolidated statements of income.
Subject to certain qualifying conditions, we may designate a derivative as either a hedge of the cash Öows of a variable-
rate instrument or forecasted transaction, referred to as a cash Öow hedge; a hedge of the fair value of a Ñxed-rate
106
Freddie Mac
instrument, referred to as a fair value hedge; or a foreign-currency fair value or cash Öow hedge, referred to as a foreign-
currency hedge. In order to be designated as an accounting hedge, the derivative must 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, we report changes in the fair value of these instruments in AOCI to the
extent the hedge is eÅective. The remaining ineÅective portion is reported as Hedge accounting gains (losses). In general,
we recognize the associated amounts reported in AOCI as Net interest income during the period or periods in which the
hedged item 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 basis adjustments to the assets held which are
amortized in earnings as interest income using the eÅective interest method and, for assets sold, as Gains (losses) on
investment activity.
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 we expect 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, we report 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.
Any diÅerence between these two amounts results in ineÅectiveness recognized in the income statement. 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 interest method. If a derivative no longer qualiÑes as a cash Öow or fair value hedge, we discontinue hedge
accounting prospectively. We continue to carry the derivative on the consolidated balance sheets at fair value and record
further fair value gains and losses as Derivative gains (losses) in our consolidated statements of income 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.
Real Estate Owned
REO is carried at the lower of cost or market, net of estimated disposition costs. Amounts we expect 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 market adjustment to the basis of the properties. Any gains and losses on REO
dispositions are included in REO operations income (expense).
Income Taxes
We use the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, ""Accounting for
Income Taxes.'' Under this 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 our management. Reserves are recorded for income tax contingencies 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 as
well as the tax eÅects of the cumulative eÅect of changes in accounting principles.
107
Freddie Mac
Stock-Based Compensation
We record compensation expense equal to the estimated fair value of the stock-based compensation on the grant date,
which is generally the eÅective date of the grant, amortized on a straight-line basis over the vesting period. The vesting
period is generally three to Ñve years for options, restricted stock and restricted stock units and three months for the
Employee Stock Purchase Plan, or ESPP. The recorded compensation expense is oÅset by an adjustment to Additional paid-
in capital in our consolidated balance sheets.
The fair value of options to purchase shares of our 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 an estimate of the
expected life of the option, the market value of the underlying stock, expected volatility, expected dividend yield, and the
risk-free interest rate for the expected life of the option. The fair value of restricted stock and restricted stock unit awards is
based on the fair value of our common stock on the grant date.
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). We generally expect to settle our stock-based compensation awards in shares. In limited cases an award may
be cash-settled upon a contingent event such as involuntary termination. These awards are accounted for as an equity award
until the contingency becomes probable of occurring, then the award is reclassiÑed from equity to liability. Such liabilities
are initially measured at intrinsic value with changes in intrinsic value recognized as an adjustment to Salaries and
employee beneÑts.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), ""Share-Based Payment,'' or SFAS 123(R).
SFAS 123(R) requires companies to measure and record compensation expense for share-based payments based on the
instruments' fair value reduced by expected forfeitures. The adoption of the revision to this statement did not have a material
impact on our Ñnancial position or results of operations.
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 net issuance of additional common shares pursuant to certain of our stock-
based compensation plans that could potentially dilute earnings per common share.
Comprehensive Income
Comprehensive income 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 stockholders. We deÑne comprehensive income as consisting 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
We have one business segment for Ñnancial reporting purposes under SFAS No. 131, ""Disclosures About Segments of
an Enterprise and Related Information,'' or SFAS 131, for all periods presented in the consolidated Ñnancial statements.
Recently Issued Accounting Standards, Not Yet Adopted
Accounting for Certain Hybrid Instruments Ì In February 2006, the FASB issued SFAS No. 155, ""Accounting for
Certain Hybrid Financial Instruments,'' or SFAS 155. This statement amends SFAS No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' or SFAS 133, and SFAS No. 140. The objective of this statement is to simplify the
accounting for certain hybrid Ñnancial instruments, permitting fair value measurement for any hybrid Ñnancial instrument
with an embedded derivative that otherwise would require bifurcation. In addition, this statement establishes a requirement
to evaluate interests in securitized Ñnancial assets to identify instruments that are freestanding derivatives or that are hybrid
Ñnancial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 is eÅective for all Ñnancial
instruments acquired or issued after the beginning of an entity's Ñrst Ñscal year that begins after September 15, 2006. Since
SFAS 155 is to be adopted prospectively, it will not result in a cumulative eÅect of a change in accounting principle. We are
presently assessing which instruments will be aÅected and how other potential accounting standards may interact with
SFAS 155. With respect to mortgage-related security purchases beginning in 2007, this standard could require us to account
for these securities, or a portion of these securities, by recognizing changes in fair values in current earnings.
Determining Variability in Applying FASB Interpretation No. 46(R) Ì In April 2006, the FASB issued FASB StaÅ
Position No. FSP FIN 46(R)-6, ""Determining the Variability to Be Considered in Applying FASB Interpretation
108
Freddie Mac
No. 46(R),'' or FSP FIN 46(R)-6. FSP FIN 46(R)-6 addresses how a reporting enterprise should determine the
variability to be considered in applying FASB Interpretation No. 46 (revised December 2003) ""Consolidation of Variable
Interest Entities,'' or FIN 46(R). It requires the variability to be considered to be based on the design of the entity. This
statement is eÅective for us beginning July 1, 2006. We do not expect the adoption of FSP FIN 46(R)-6 to be material to
our Ñnancial condition or results of operations.
NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS
Securitization Transactions Executed By Us
As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' we issue two types of
mortgage-related securities: PCs and Structured Securities.
Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities as of December 31, 2005
and 2004.
Table 2.1 Ì Guaranteed PCs and Structured Securities Issued Based on Unpaid Principal Balances(1)(2)
December 31,
2005
2004
(in millions)
Guaranteed PCs and Structured Securities Issued:
Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 974,200
361,324
Held in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Guaranteed PCs and Structured Securities issued(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,335,524
$ 852,270
356,698
$1,208,968
(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 subsequent pass-through of payments to PC
investors, 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) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' we guarantee certain mortgage-related securities issued by third parties.
(4) Guaranteed PCs and Structured Securities exclude $961,776 million and $723,429 million at December 31, 2005 and 2004, respectively, of Structured
Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured Securities do not increase our
credit-related exposure and consist of single-class and multiclass Structured Securities backed by PCs, REMICs and principal-only strips. The
notional balance of interest-only strips of $132,883 million and $105,703 million at December 31, 2005 and 2004, 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 where
the holder has the option to exchange the security tranches for other pre-deÑned security tranches. These tranches and classes collectively totaled
$1,495,501 million and $1,097,336 million at December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, approximately 92 percent and 87 percent, respectively, of issued PCs and Structured
Securities (excluding securities we issued that are backed by Ginnie Mae CertiÑcates or non-agency mortgage-related
securities and other securities issued by third-parties that we guaranteed) had a corresponding Guarantee asset, Guarantee
obligation or PC residual recognized on our consolidated balance sheets. The percentage of these PCs and Structured
Securities that had a corresponding Guarantee asset, Guarantee obligation or PC residual due to the adoption of FIN 45
accounting on January 1, 2003 was 50 percent and 40 percent, at December 31, 2005 and 2004, respectively. At
December 31, 2005 and 2004, 93 percent and 89 percent, respectively, of PCs and Structured Securities held by third parties
had a related Guarantee asset and Guarantee obligation established.
Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales
We recognized net pre-tax gains of approximately $364 million, $356 million and $711 million for the years ended
December 31, 2005, 2004 and 2003, respectively, on transfers of PCs and Structured Securities that were accounted for as
sales under SFAS 125/140.
In connection with the derivation of such gains (losses) upon sale prior to October 1, 2005, we had consistently applied
a methodology for determining the order in which to record extinguishments of unamortized deferred guarantee income,
buy-down fees and credit fees as adjustments to the carrying value of the repurchased securities. Beginning October 1, 2005,
we changed our method for determining gains (losses) upon the re-sale of PCs and Structured Securities related to
unamortized deferred guarantee income, buy-down fees and credit fees. Our methodology is now to apply a speciÑc
identiÑcation method of associating the extinguished deferred guarantee income, buy-down fees and credit fees to the
speciÑc portions of purchased PCs and Structured Securities and to relieve those carrying value adjustments through the
gains (losses) when the speciÑc portion of the PC or Structured Security is re-sold. This change in accounting principle was
facilitated by system changes that now allow us to apply and track the extinguished carrying value adjustments to the
speciÑc portions of the purchased PCs and Structured Securities.
109
Freddie Mac
Valuation of Recognized Guarantee Asset, Guarantee Obligation and PC Residuals
Recognized Guarantee asset
EÅective January 1, 2005, we enhanced our approach for estimating the fair value of the Guarantee asset to make
greater use of third-party market data. For approximately 70 percent of the Guarantee asset, the new valuation approach
involves obtaining dealer quotes on proxy securities with collateral similar to aggregated characteristics of our portfolio,
eÅectively equating the Guarantee asset with current, or ""spot,'' market values for excess servicing interest-only, or IO,
securities, which trade at a discount to trust IO security prices. We consider excess servicing securities to be comparable to
the Guarantee asset, in that they represent an IO-like income stream, have less liquidity than trust IO securities and do not
have matching principal-only securities. The remaining 30 percent of the Guarantee asset, which relates to underlying loan
products for which comparable market prices are not readily available, is valued using an expected cash Öow approach with
market input assumptions extracted from the dealer quotes provided on the more liquid products, reduced by an estimated
liquidity discount.
For periods prior to January 1, 2005, we calculated the Guarantee asset fair value using an expected cash Öow approach.
SpeciÑcally, Monte Carlo projections were used to forecast Guarantee asset-related future cash Öows. The forecasted cash
Öows were then discounted using factors that were derived from modeled forward interest rates for each scenario path, to
which we then applied a trailing average option-adjusted spread of up to 24 months that was based on trust IO security
prices.
Recognized Guarantee obligation
EÅective January 1, 2005, we enhanced our approach for estimating the fair value of the Guarantee obligation to make
greater use of third-party market data. We concluded that the structured credit market has evolved to the point where we
can now look to that market for fair value discovery. We have divided our Guarantee obligation portfolio into three primary
components: performing loans, non-performing loans and manufactured housing. For each component, we have developed a
speciÑc valuation approach for capturing its unique characteristics.
For performing loans, our enhanced approach uses the capital markets to obtain estimated subordination levels based on
rating agency models and dealer price quotes on proxy securities with collateral characteristics matched to our portfolio to
value the expected credit losses and the risk premium for unexpected losses related to our guarantee portfolio (which is
predominantly prime mortgages) to reduce our reliance on internal models. We segmented the portfolio into distinct loan
cohorts to diÅerentiate between product types, coupon rate, seasoning, and interests retained by us versus those held by
third parties. We use our models to adjust the dealer quotes as appropriate, including an adjustment to remove the price
eÅects of interest rate risks not relevant to the credit loss estimation from the quoted dealer prices.
Since typical structured securitizations of single-family collateral only include performing loans, we developed a
separate method for estimating the fair value of the Guarantee obligation for non-performing loans. For loans that are
extremely delinquent and have been purchased out of pools, we obtained dealer indications that reÖect their non-performing
status. To value delinquent loans remaining in PCs, we start with the market driven performing loan and non-performing
whole loan values and use empirically observed delinquency transition rates to interpolate the appropriate values in each
phase of delinquency (i.e., 30 days, 60 days, 90 days).
We evaluated market sources to determine the appropriate credit costs associated with the Guarantee obligation for the
manufactured housing portfolio, which we estimated for purposes of our valuation approach to be approximately two percent
of our total guarantee portfolio, but approximately 20 percent of the fair value of the Guarantee obligation, and determined
that there is limited price discovery in the market. As a result, we used our judgment to develop an alternative approach for
estimating the incremental credit costs associated with the manufactured housing portfolio. SpeciÑcally, we calculated the
ratio of realized credit losses for performing loans and manufactured housing loans to determine a loss history ratio. We
then applied the loss history ratio to market implied performing loan Guarantee obligation fair value estimates to calculate
the implied credit costs for the manufactured housing portfolio. This approach grounds the Guarantee obligation related to
manufactured housing in performing loan market prices, while adjusting for the loss history reÖected in empirical data. We
undertook a similar process for estimating the fair value of seriously delinquent manufactured housing loans. We then
benchmarked our performing loan Guarantee obligation fair value estimate by obtaining a range of price indications that
corroborated the reasonableness of our estimate through discussions with leading market participants, including third-party
dealers and mortgage insurance companies. The changes to the credit components of the Guarantee obligation necessitated
a change to the approach used to estimate the costs associated with administering the collection and distribution of
payments on the mortgage loans underlying a PC. Finally, we use our models to estimate the present value of net cash Öows
related to security program cycles. This estimate is included in the Guarantee obligation valuation.
110
Freddie Mac
For periods prior to January 1, 2005, the Guarantee obligation fair value was calculated using internal models to
estimate future cash Öows using a Monte Carlo simulation. The components of estimated cash Öows associated with the
Guarantee obligation included estimates of expected future credit losses using statistically based models that were
benchmarked periodically to the non-conforming loan, or jumbo, securitization market. For all periods our estimates
included costs to administer the collection and distribution of payments on the mortgage loans underlying a PC and
considered net cash Öows due to security program cycles.
Recognized PC residuals
The fair value of recognized PC residuals is determined in a manner that is consistent with the approach described
above for the recognized Guarantee asset and Guarantee obligation.
Key assumptions used in the valuation of the Guarantee asset
Table 2.2 summarizes the key assumptions associated with the fair value measurements of the recognized Guarantee
asset. The assumptions included in this table for 2004 and 2003 relate to those used in our internal models to measure the
fair value of the Guarantee asset for single-family loans at the time of securitization and the subsequent fair value
measurements, which occurred throughout each year. For 2005, the fair values at the time of securitization and the
subsequent fair value measurements were estimated using third party information. The assumptions included in this table for
2005 are those implied by our fair value estimates, with the Internal Rates of Return, or IRRs, adjusted where necessary to
align our internal models with estimated fair values determined using third party information. Prepayment rates are
presented as implied by our internal models and have not been similarly adjusted.
Table 2.2 Ì Key Assumptions Utilized in Fair Value Measurements of the Guarantee Asset
Valuation Assumptions for the Guarantee Asset
Internal rates of return(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.8% - 13.8%
Prepayment rates(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.6% - 59.8%
Range(3)
Mean(4)
Range(3)
Mean(4)
Range(3)
Mean(4)
8.7% (1.4)% - 13.6%
17.2% 6.9% - 58.6%
6.7% 4.5% - 15.1%
19.1% 8.0% - 62.9%
9.4%
23.3%
2005
2004
2003
(1) The IRRs reported above represent a duration-weighted average of the discount rates used to value the recognized Guarantee asset. In 2004 and 2003,
such rates were derived by determining a single rate that equated (a) the simple average of future cash Öows of the Guarantee asset for each Loan
Group with that of (b) the calculated fair value of the Guarantee asset for each Loan Group. In 2005, the IRRs represent a duration-weighted
average of the discount rates as adjusted to align with our estimated fair values. Negative IRRs can occur when suÇciently large negative option-
adjusted spreads are applied to LIBOR. When we calibrate our modeled discounted cash Öows to the traded price of an IO 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.
(2) 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.
(3) The lowest value in each presented range represents the Ñrst percentile IRRs and prepayment rates throughout 2005, 2004 and 2003. Likewise, the
highest value in each range represents the 99th percentile IRRs and prepayment rates throughout 2005, 2004 and 2003.
(4) Reported values represent the weighted average value of all IRRs and prepayment rates throughout the 2005, 2004 and 2003 periods.
Weighted average lives of the Guarantee asset during 2005, 2004 and 2003 ranged between 1.6 and 8.9 years, 1.2 and
8.7 years, and 1.0 and 8.5 years, respectively, while the average derived weighted average lives of the Guarantee asset for the
same periods were 5.1, 5.3 and 4.8 years, respectively. Such derived weighted average lives are reÖective of prepayment
speed assumptions cited in Table 2.2 above.
At December 31, 2005, the fair value of the recognized Guarantee asset was based upon a valuation approach that
incorporates market-based information. In order to report the hypothetical sensitivity of the carrying value of the Guarantee
asset to changes in key assumptions, we used internal models to approximate their reported carrying values. We then
measured the hypothetical impact of changes in key assumptions using our models to estimate the potential view of fair
value the market might have in response to those changes. In our models, the assumed Internal Rates of Return were
adjusted to calibrate our model results with the reported carrying value. The sensitivity analysis in Table 2.3 illustrates
hypothetical adverse changes in the fair value of the Guarantee asset for changes in key assumptions at December 31, 2005.
Table 2.3 Ì Sensitivity Analysis of the Guarantee Asset
Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005
GA(1)
(dollars in millions)
$4,938
9.2%
$ (184)
$ (354)
15.5%
$ (212)
$ (404)
(1) At December 31, 2005, our Guarantee asset totaled $5,083 million on our consolidated balance sheet and of that amount, approximately $145 million
(or approximately 3 percent), relates to PCs backed by multifamily mortgage loans. The sensitivity analysis presented in Table 2.3 relates solely to the
Guarantee asset associated with PCs backed by single-family mortgage loans.
111
Freddie Mac
Valuation of Other Retained Interests
Other retained interests include securities that were issued by us as part of a resecuritization transaction for which sale
accounting was applied. The majority of these securities is classiÑed as available-for-sale. The fair value of Other retained
interests is generally based on independent price quotations obtained from third-party pricing services or dealer marks.
In order to report the hypothetical sensitivity of the carrying value of Other retained interests, we used internal models
calibrated to the fair values. The sensitivity analysis in Table 2.4 illustrates hypothetical adverse changes in the fair value of
Other retained interests for changes in key assumptions based on these models.
Table 2.4 Ì Sensitivity Analysis of Other Retained Interests
Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests
Table 2.5 below summarizes cash Öows on retained interests.
Table 2.5 Ì Details of Cash Flows
December 31, 2005
(dollars in millions)
$124,939
5.4%
$ (4,470)
$ (8,656)
11.3%
(85)
(164)
$
$
2005
Year Ended December 31,
2004
(in millions)
2003
Cash Öows from:
Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Öows received on the Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Retained Interests principal and interest(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of delinquent or foreclosed loans(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$152,662
$86,326
$ 1,086
$ 1,270
$25,611
$ 28,439
$(4,373) $ (4,931)
$347,874
$
891
$ 35,975
$ (5,822)
(1) Represents contractual guarantee-related cash Öows received by us in connection with the recognized Guarantee asset.
(2) Excludes cash Öows related to retained interests held in the portfolio of our Securities Sales and Trading Group, or SS&TG, business unit which ceased
operations in the fourth quarter of 2004. Such cash Öows were not material.
(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.
NOTE 3: VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be variable interest entities, or VIEs. These VIEs include
low-income housing tax credit partnerships, certain Structured Securities transactions and a mortgage reinsurance company.
In addition, we buy 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. Our investments in these securities do not represent a signiÑcant variable interest in the
securitization trusts. Further, we invest in securitization entities that are qualifying special purpose entities which are not
subject to consolidation because of our inability to unilaterally liquidate or change the qualifying special purpose entity. See
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Consolidation and Equity Method of
Accounting'' for further information regarding the consolidation practices of our VIEs.
Low-Income Housing Tax Credit Partnerships
We invest 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, we realize a return on our 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 2005. At December 31, 2005 and 2004, we did not guarantee any obligations of these partnerships and our exposure was
limited to the amount of our investments. At December 31, 2005 and 2004, we were the primary beneÑciary of investments
in six and Ñve low-income housing tax credit partnerships, respectively, and we consolidated these investments. The
investors in the obligations of the consolidated low-income housing tax credit partnerships have recourse only to the assets of
those VIEs and do not have recourse to us.
112
Freddie Mac
Asset-Backed Investment Trusts
We invest in a variety of mortgage and 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. These trusts act as vehicles to allow originators to securitize 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. 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. At December 31, 2005 and 2004, we were not the primary
beneÑciary of any asset-backed investment trusts.
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 trusts issue
various senior interests, subordinated interests or both. We guarantee and purchase certain of the senior interests.
Simultaneous with this guarantee and purchase, we issue and guarantee 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. At December 31, 2005 and 2004, we were not the primary
beneÑciary of any T-Series transactions.
Consolidated VIEs
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
December 31,
2005
2004
(in millions)
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets of consolidated VIEs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 45
167
$212
$ 51
170
$221
VIEs Not Consolidated
Low-Income Housing Tax Credit Partnerships
At December 31, 2005 and 2004, we had unconsolidated investments in 168 and 149 low-income housing tax credit
partnerships, respectively, in which we had a signiÑcant variable interest. The size of these partnerships at December 31,
2005 and 2004, as measured in total assets, was $8.1 billion and $6.7 billion, respectively. These partnerships are accounted
for using the equity method, as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''
As a limited partner, our maximum exposure to loss equals the undiscounted book value of our equity investment. At
December 31, 2005 and 2004, our maximum exposure to loss on unconsolidated low-income housing tax credit partnerships,
in which we had a signiÑcant variable interest, was $3.7 billion and $3.1 billion, respectively.
Asset-Backed Investment Trusts
At December 31, 2005, we no longer had a signiÑcant variable interest in any trusts related to non-mortgage-related,
asset-backed securities. At December 31, 2004, we had investments in three trusts related to non-mortgage-related, asset-
backed securities in which we had a signiÑcant variable interest. These investments had been made between 2000 and 2004
and were typically senior interests rated A1 and P1 by Standard & Poor's, or S&P, and Moody's, respectively. These
ratings are the short-term equivalent of between A and AAA in typical long-term rating scales. These trusts had total assets
at December 31, 2004 of $12.8 billion. As an investor, our maximum exposure to loss consisted of the book value of our
investment. At December 31, 2004, our maximum exposure to loss on non-mortgage-related, asset-backed investment
trusts, in which we had a signiÑcant variable interest, was approximately $3.4 billion.
Structured Securities Ì T-Series Transactions
At both December 31, 2005 and 2004, we had investments or guarantees related to two T-Series transactions in which
we had a signiÑcant variable interest. Our involvement in these two T-Series transactions began in 1996 and 2002,
respectively. The size of these two transactions at December 31, 2005 and 2004, as measured in total assets, was
$105 million and $170 million, respectively. At December 31, 2005 and 2004, our maximum exposure to loss on these
113
Freddie Mac
T-Series transactions, in which we had a signiÑcant variable interest, was $88 million and $147 million, respectively,
consisting of the book value of our investments plus incremental guarantees of the senior interests that are held by third
parties.
Principal and Interest Guarantees of PCs and Structured Securities
NOTE 4: FINANCIAL GUARANTEES
We guarantee the payment of principal and interest on the PCs and Structured Securities we issue that are held by third
parties. At December 31, 2005 and 2004, the maximum potential amount of future payments under these guarantees is
approximately the amount of the total unpaid principal balance of our PCs and Structured Securities held by third parties
which was $974 billion and $852 billion, respectively. However, the actual amount of future payments under these
guarantees will be determined by the performance of the mortgage loans that underlie these PCs and Structured Securities.
During 2005 and 2004, we guaranteed $397.9 billion and $365.1 billion, respectively, of PCs and Structured Securities
to third parties. Upon completion of the transfer of PCs or Structured Securities to third parties, we recognize the initial fair
value of our obligation to make guarantee payments. The accounting methods for our guarantees of PCs and Structured
Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'' At
December 31, 2005 and 2004, we had a recognized Guarantee obligation on the consolidated balance sheets of $5.5 billion
and $4.1 billion, respectively, which included $1.8 billion and $1.4 billion, respectively, of Deferred Guarantee Income. In
addition, we have a Reserve for guarantee losses on Participation CertiÑcates that totals $295 million and $150 million at
December 31, 2005 and 2004, respectively, for incurred credit losses that were recognized in conjunction with PCs and
Structured Securities held by third parties. The balance of PCs and Structured Securities held by third parties also includes
securities issued by third parties that we guarantee totaling $6.6 billion and $6.8 billion at December 31, 2005 and 2004,
respectively. Details of these guarantees are as follows:
‚ Multifamily: We guarantee multifamily housing revenue bonds totaling $5.8 billion and $5.0 billion at
December 31, 2005 and 2004, respectively, via two principal forms. First, we provide 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, we provide a guarantee of principal and interest on
multifamily mortgage loans that are originated and held by state and municipal housing Ñnance agencies to
support tax-exempt multifamily housing revenue bonds.
‚ Single-family: We guarantee single-family mortgage loans held by third parties totaling $0.8 billon and
$1.8 billion at December 31, 2005 and 2004, respectively.
As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we also provide a commitment
to advance funds, commonly referred to as ""liquidity guarantees,'' totaling $5.7 billion and $5.1 billion at December 31,
2005 and 2004, 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 us to secure such
funding until such time as the securities could be remarketed. We have not made any payments to date under these liquidity
guarantees.
Generally, the contractual terms of our 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 term due to the prepayment characteristics of
the mortgage-related assets that back PCs and Structured Securities. We do not expect the maximum potential interest
payments we would be required to make associated with these guarantees to signiÑcantly exceed 120 days of interest at the
certiÑcate rate, given that we generally begin a process to purchase the defaulted mortgages when they have been delinquent
for 120 consecutive days.
At December 31, 2005 and 2004, in connection with PCs or Structured Securities backed by single-family mortgage
loans, we had maximum coverage totaling $27.5 billion and $27.2 billion, respectively, in primary mortgage insurance,
$3.6 billion and $3.5 billion, respectively, in pool insurance and other credit enhancements and $5.6 billion and $4.1 billion,
respectively, in recourse to lenders. In addition, at December 31, 2005 and 2004, $1.9 billion and $2.6 billion, respectively, of
outstanding Structured Securities related to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the
U.S. government. With respect to PCs and Structured Securities backed by multifamily mortgage loans, we had maximum
combined credit enhancements totaling $7.3 billion and $9.1 billion at December 31, 2005 and 2004, respectively. At
December 31, 2005 and 2004, our recorded balance of credit enhancements on our consolidated balance sheets was
$420 million and $295 million, respectively.
114
Freddie Mac
Guarantees of Stated Final Maturity of Issued Structured Securities
We commonly issue 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, we may sponsor an auction of the underlying assets. To the extent that auction proceeds
are insuÇcient to cover unpaid principal amounts due to investors in such Structured Securities, we are obligated to fund
such principal. Such guarantees of stated Ñnal maturity are accounted for as derivative instruments.
At December 31, 2005 and 2004, the maximum potential amount of payments we could be required to make under
guarantees of stated Ñnal maturity of issued Structured Securities was $11.7 billion and $9.0 billion, respectively, which
represents the outstanding unpaid principal balance of the underlying mortgage loans. At December 31, 2005 and 2004, the
total fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.
IndemniÑcations
In connection with various business transactions, we provide 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 our
maximum exposure under these indemniÑcation arrangements since in many cases there are no stated or notional amounts
included in the indemniÑcation clauses. However, no claim for indemniÑcation pursuant to these provisions has been made.
At December 31, 2005, our assessment is that the risk of such claim for indemniÑcation is 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. We have not recorded any liabilities related to these
indemniÑcations in our consolidated balance sheets at December 31, 2005 and 2004 because we do not expect material
amounts to be paid under these agreements.
Other Guarantees
We have guaranteed the performance of interest-rate swap contracts in two circumstances. First, as part of a
resecuritization transaction, we transferred certain swaps and related assets to a third party. We guaranteed that interest
income generated from the assets would be suÇcient to cover the required payments under the interest-rate swap contracts.
Second, we guaranteed that a borrower would perform under an interest-rate swap contract linked to a customer's variable-
rate mortgage. The maximum remaining terms of any of these guarantees at both December 31, 2005 and 2004 was
29 years; however, the actual terms may be signiÑcantly less than the contractual terms because the mortgage loans
underlying the swaps are prepayable. The maximum potential amount of future undiscounted payments under the guarantees
was $717 million and $591 million at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the total
fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.
During 2005, we issued written call options with a notional amount of $25 million with respect to PCs issued by us. The
maximum amount of future payments under these call options is unlimited. The fair value of these options recorded on our
consolidated balance sheet at December 31, 2005 was not material. We did not issue written options on our PCs in 2004.
We provide guarantees to reimburse servicers for premiums paid to acquire servicing in situations where we require the
original seller to repurchase the loan and the original seller is unable to perform under its separate servicing agreement to
reimburse the servicer for those servicing premiums. Our servicing-related premium guarantees are payable according to a
vesting schedule for up to Ñve years from the date of purchase of servicing rights. The maximum potential amount of future
payments under these servicing-related premium guarantees was $54 million and $113 million at December 31, 2005 and
2004, respectively. We have not established a liability on our consolidated balance sheets at December 31, 2005 and 2004
because we do not expect material amounts to be paid under these arrangements.
115
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 securities.
Table 5.1 Ì Available-For-Sale Securities
December 31, 2005
Retained portfolio
Mortgage-related securities issued by:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in millions)
Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $354,573
43,784
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,085
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
231,693
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,022
642,157
Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
30,712
5,835
5,764
42,311
Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $684,468
December 31, 2004
Retained portfolio
Mortgage-related securities issued by:
Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $348,034
58,922
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,677
166,738
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8,751
584,122
Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,668
8,098
29,766
Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $613,888
$1,848
389
33
692
272
3,234
22
Ì
Ì
22
$3,256
$5,506
950
86
1,700
301
8,543
120
Ì
120
$8,663
$(4,974)
(867)
(3)
(1,029)
(53)
(6,926)
$351,447
43,306
1,115
231,356
11,241
638,465
(156)
(12)
Ì
(168)
$(7,094)
30,578
5,823
5,764
42,165
$680,630
$(1,438)
(353)
(1)
(380)
(32)
(2,204)
$352,102
59,519
1,762
168,058
9,020
590,461
(55)
(1)
(56)
$(2,260)
21,733
8,097
29,830
$620,291
Table 5.2 shows the fair value of available-for-sale securities in a gross unrealized loss position at December 31, 2005,
and how long they have been in that position.
Table 5.2 Ì Available-For-Sale Securities in a Gross Unrealized Loss Position
December 31, 2005
Retained portfolio
Less than 12 months
Gross
Unrealized
Losses
Fair Value
12 months or Greater
Gross
Unrealized
Losses
Fair Value
Total
Gross
Unrealized
Losses
Fair Value
(in millions)
Mortgage-related securities issued by:
Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $158,235
12,084
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
111
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55,213
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,186
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227,829
$(1,975) $ 93,056
19,918
25
13,859
860
127,718
(182)
(3)
(627)
(32)
(2,819)
$(2,999) $251,291
32,002
136
69,072
3,046
355,547
(685)
Ì
(402)
(21)
(4,107)
$(4,974)
(867)
(3)
(1,029)
(53)
(6,926)
Cash and investments portfolio
Non-mortgage related securities:
Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,715
1,207
12,922
Total available-for-sale securities in a gross unrealized loss position ÏÏÏÏÏÏ $240,751
(78)
(12)
(90)
5,485
Ì
5,485
$(2,909) $133,203
(78)
Ì
(78)
17,200
1,207
18,407
$(4,185) $373,954
(156)
(12)
(168)
$(7,094)
At December 31, 2005, gross unrealized losses on available-for-sale securities were $(7,094) million, or approximately
2 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 85,000 individual lots representing approximately 16,000 separate securities. We
116
Freddie Mac
routinely purchase multiple lots of individual securities at diÅerent times and at diÅerent costs. We determine gross
unrealized gains and gross unrealized losses by speciÑcally identifying investment positions at the lot level; therefore, some of
the lots we hold for a single security may be in an unrealized gain position while other lots for that security are in an
unrealized loss position, depending upon the amortized cost of the speciÑc lot.
We have the ability and intent to hold the available-for-sale securities in an unrealized loss position for a period of time
suÇcient to recover all unrealized losses. Based on our ability and intent to hold the available-for-sale securities and our
consideration of other factors described below, we have concluded that the impairment of these securities is temporary.
‚ Freddie Mac securities. The unrealized losses on our securities are primarily a result of movements in interest
rates. Since we guarantee the payment of principal and interest on these securities, we review the estimated
credit exposure of the mortgages underlying these securities in evaluating potential impairment. The extent and
duration of the decline in fair value relative to the amortized cost have met our criteria that are used to indicate
that the impairment of these securities is temporary.
‚ 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 met our criteria
that are used to indicate that the impairment of these securities is temporary and no other facts or
circumstances existed to suggest that the decline was not temporary. The issuer guarantees related to these
securities have led us to conclude that any credit risk is minimal.
‚ Other securities in the Retained portfolio and Asset-backed securities in the Cash and Investment portfolio.
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 met our criteria that are used to indicate that the impairment of these securities is
temporary. The vast majority of these securities are investment grade (i.e., rated BBB¿ or better on a S&P
equivalent scale).
Table 5.3 below illustrates the gross realized gains and gross realized losses received from the sale of available-for-sale
securities.
Table 5.3 Ì Gross Realized Gains and Gross Realized Losses on Available-For-Sale Securities
Gross realized gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross realized (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net realized gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
(in millions)
$ 787
2003
$ 1,903
$ 891
(345)
$ 546
(203)
$ 584
(1,077)
826
$
117
Freddie Mac
Table 5.4 summarizes, by major security type, the remaining contractual maturities and weighted average yield of
available-for-sale securities at December 31, 2005.
Table 5.4 Ì Maturities and Weighted Average Yield of Available-For-Sale Securities
December 31, 2005
Retained portfolio
Total mortgage-related securities(2)
Amortized Cost
Fair Value Average Yield(1)
Weighted
(dollars in millions)
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
22
3,565
13,078
625,492
$642,157
$
22
3,609
13,227
621,607
$638,465
5.80%
5.35
5.73
4.94
4.96
Cash and investments portfolio
Non-mortgage-related securities:
Asset-backed securities(2)
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
3
21,466
7,132
2,111
30,712
$
3
21,369
7,095
2,111
30,578
Obligations of states and political subdivisions
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
95
1,163
82
4,495
5,835
5,764
Ì
Ì
Ì
5,764
95
1,153
82
4,493
5,823
5,764
Ì
Ì
Ì
5,764
Total non-mortgage-related securities
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total available-for-sale securities for Retained portfolio and Cash and investments portfolio
Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,862
22,629
7,214
6,606
$ 42,311
$
5,884
26,194
20,292
632,098
$684,468
5,862
22,522
7,177
6,604
$ 42,165
$ 5,884
26,131
20,404
628,211
$680,630
4.29
4.12
4.16
4.42
4.15
3.13
3.07
3.40
3.71
3.57
3.67
Ì
Ì
Ì
3.67
3.66
4.07
4.16
3.94
4.01
3.67
4.24
5.17
4.93
4.90
(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 2005 (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 on the unpaid principal balances of impaired securities.
(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.
118
Freddie Mac
Table 5.5 presents the changes in AOCI, net of taxes, related to available-for-sale securities. The Net unrealized
holding (losses), net of tax, represents the net fair value adjustments recorded on available-for-sale securities throughout the
year, after the eÅects of our statutory tax rate of 35 percent. The Net reclassiÑcation adjustment for net realized (gains), net
of tax, represents the amount of those fair value adjustments, after the eÅects of our 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
Year Ended December 31,
2004
(in millions)
$ 6,349
(1,709)
(301)
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(2,485) $ 4,339
Beginning balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,339
(6,707)
(117)
Net unrealized holding (losses), net of tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net reclassiÑcation adjustment for net realized (gains), net of tax(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
$12,217
(5,770)
(98)
$ 6,349
2003
(1) Net of tax (beneÑt) of $(3,611) million, $(920) million and $(3,107) million for the years ended December 31, 2005, 2004 and 2003, respectively.
(2) Net of tax (expense) of $(63) million, $(162) million and $(53) million for the years ended December 31, 2005, 2004 and 2003, respectively.
(3) Includes the reversal of previously recorded unrealized losses that have been recognized as impairment losses on available-for-sale securities of
$234 million, $72 million and $438 million, net of taxes, for the years ended December 31, 2005, 2004 and 2003, respectively.
Table 5.6 summarizes the estimated fair values by major security type for trading securities held in our Retained
portfolio.
Table 5.6 Ì Trading Securities in the Retained Portfolio
December 31,
2005
2004
(in millions)
Retained portfolio
Mortgage-related securities issued by:
Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total trading securities in the Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$8,156
534
204
$8,894
$11,398
385
59
$11,842
The net unrealized holding losses on trading securities we still hold that have been recognized in earnings for the years
ended December 31, 2005, 2004 and 2003 were $(261) million, $(240) million and $(402) million, respectively.
Collateral Pledged
Collateral Pledged to Freddie Mac
Our counterparties are required to pledge collateral for reverse repurchase transactions and most interest-rate swap
agreements, after giving consideration to collateral posting thresholds generally related to a counterparty's credit rating. Even
though it is our practice not to repledge assets held as collateral, based on master agreements a portion of the collateral may
be repledged. At December 31, 2005, we did not have collateral in the form of securities pledged to and held by us under
secured lending transactions and interest-rate swap agreements. At December 31, 2004, the fair value amount of collateral
pledged to and held by us, in the form of securities, was $466 million, of which approximately $3 million was available for
repledging.
Collateral Pledged by Freddie Mac
We are also required to pledge collateral for margin requirements with third-party custodians in connection with secured
Ñnancings, interest-rate swap agreements, futures and daily trade activities with some counterparties. We pledge collateral
to meet these requirements upon a demand by the respective counterparty. Based on agreements with our custodians, some
collateral may be permitted by contract to be repledged by the custodian. Table 5.7 summarizes all securities pledged as
collateral by us, including assets that the secured party may repledge and those that may not be repledged.
119
Freddie Mac
Table 5.7 Ì Collateral in the Form of Securities Pledged
Securities pledged with ability for secured party to repledge (parenthetically disclosed on our consolidated balance
sheets)
Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities pledged without ability for secured party to repledge
Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets pledged ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
2004
(in millions)
$168
161
$329
$194
221
$415
We maintain separate loan loss reserves for mortgage loans in the Retained portfolio that we classify as held-for-
investment and for credit-related losses associated with certain mortgage loans that underlie guaranteed PCs and Structured
Securities held by third parties.
NOTE 6: LOAN LOSS RESERVES
Table 6.1 summarizes loan loss reserve activity during 2005, 2004 and 2003.
Table 6.1 Ì Detail of Loan Loss Reserves
2005
Year-Ended December 31,
2004
2003
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
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for change in accounting(2) ÏÏÏÏÏÏÏÏÏ
Transfers-out(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 114
106
(294)
185
Ì
Ì
8
$ 119
$150
145
Ì
Ì
Ì
(11)
11
$295
$ 264
251
(294)
185
Ì
(11)
19
$ 414
$ 174
111
(300)
160
Ì
Ì
(31)
$ 114
(in millions)
$125
32
Ì
Ì
Ì
(20)
13
$150
$ 299
143
(300)
160
Ì
(20)
(18)
$ 264
$ 177
76
(224)
145
Ì
Ì
Ì
$ 174
$ 88
(81)
Ì
Ì
110
(11)
19
$125
Total Loan
Loss
Reserves
$ 265
(5)
(224)
145
110
(11)
19
$ 299
(1) It is our 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.
(2) On January 1, 2003, $110 million of the recognized Guarantee obligation that was attributable to estimated incurred losses on outstanding PCs or
Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(3) 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.
(4) Represents the portion of the Guarantee obligation 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 amount
includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004, respectively, 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,'' 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 $398 million, $261 million and $289 million at December 31, 2005, 2004 and 2003, respectively. Our
recorded investment in impaired loans and the related valuation allowance are summarized in Table 6.2.
Table 6.2 Ì Impaired Loans(1)
2005
December 31,
2004
2003
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
Recorded
SpeciÑc
Investment(2) Reserve
Net
Investment
(in millions)
Impaired loans having:
Related-valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
No related-valuation allowance(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
54
2,536
$2,590
$(16)
Ì
$(16)
$
38
2,536
$2,574
$
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
(1) Single-family impaired loans include performing and non-performing troubled debt restructurings. Multifamily impaired loans are deÑned as
performing and non-performing troubled debt restructurings, loans that are 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 troubled debt restructuring loans.
120
Freddie Mac
For the years ended December 31, 2005, 2004 and 2003, the average recorded investment in impaired loans was
$2,601 million, $2,311 million and $2,330 million, respectively. The increase in impaired loans in 2005 is primarily due to
Hurricane Katrina.
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 $24 million,
$13 million and $16 million for the years ended December 31, 2005, 2004 and 2003, respectively. For single-family
performing and non-performing loans, we recognize interest income on an accrual basis and establish reserves for estimated
accrued but uncollectible interest for these loans at the consolidated balance sheet dates. Gross interest income on impaired
single-family loans totaled $149 million, $157 million and $160 million for the years ended December 31, 2005, 2004 and
2003, respectively.
Delinquency Rates
Table 6.3 summarizes the delinquency rates for our 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,
2005, 2004 and 2003.
Table 6.3 Ì Delinquency Performance(1)
December 31,
2004
2003
2005
Delinquencies, end of period:
Single-family:(2)
Non-credit-enhanced portfolio:
Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,037
0.30%
0.24%
0.27%
19,691
21,063
Credit-enhanced portfolio:
Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,000
2.46%
2.75%
2.96%
54,913
66,283
Total portfolio:
Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,037
0.69%
0.73%
0.86%
74,604
87,346
Multifamily:(3)
Total portfolio:
Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net carrying value of delinquent loans (in millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Ì%
2
0.06%
35
$
0.05%
24
$
(1) Based on mortgage loans in the Retained portfolio and Total Guaranteed PCs and Structured Securities Issues, excluding that portion of Structured
Securities backed by Ginnie Mae CertiÑcates.
(2) Based on the number of mortgage loans 90 days or more delinquent or in foreclosure.
(3) Based on net carrying value of mortgage loans 60 days or more delinquent.
NOTE 7: REAL ESTATE OWNED
We obtain REO properties when we are the highest bidder at foreclosure sales of properties that collateralize non-
performing single-family and multifamily mortgage loans owned by us. Upon acquiring single-family properties, we establish
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, we may operate them with third-party property-
management Ñrms for a period to stabilize value and then sell the properties through commercial real estate brokers. For
each of the years ended December 31, 2005, 2004 and 2003, the weighted average holding period for our disposed REO
properties was less than one year. Table 7.1 provides a summary of our REO activity.
Table 7.1 Ì Real Estate Owned
Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
670
1,663
(1,422)
911
1,641
(1,685)
867
1,390
(1,513)
744
REO,
Gross
Valuation
Allowance
(in millions)
$ (76)
(93)
53
(116)
(95)
85
(126)
(78)
89
$(115)
REO,
Net
$
$
594
1,570
(1,369)
795
1,546
(1,600)
741
1,312
(1,424)
629
We recognized losses of $67 million, $67 million and $50 million on REO dispositions for the years ended December 31,
2005, 2004 and 2003, respectively, which are included in REO operations income (expense).
121
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, 2005 and 2004 for debt securities,
as well as subordinated borrowings.
Table 8.1 Ì Total Debt Securities, Net
2005
Balance,
Net(1)
December 31,
2004
Balance,
EÅective
Rate(2)
Net(1)
(dollars in millions)
EÅective
Rate(2)
Senior debt, due within one year:
Short-term debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $192,713
95,819
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
288,532
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.02% $196,639
3.42
85,664
282,303
3.82
454,627
Senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,633
Subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior and subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
460,260
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $748,792
4.64
6.15
4.66
443,772
5,622
449,394
$731,697
2.05%
3.33
2.44
4.36
6.15
4.38
(1) Includes unamortized discounts and premiums, and 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.
We Ñnance 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 Reference Bills» securities and discount notes, paying only principal at maturity. Reference Bills» securities,
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 we sell 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.
Table 8.2 provides additional information related to our debt securities due within one year.
Table 8.2 Ì Senior Debt, Due Within One Year
2005
Balance,
Net(1)
Par Value
December 31,
EÅective Rate(2)
Par Value
(dollars in millions)
2004
Balance,
Net(1)
EÅective Rate(2)
Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $183,357 $181,468
Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,032
Securities sold under agreements to repurchase and Federal
2,035
450
funds purchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8,768
Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5)
Hedging-related basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
192,713
Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
95,819
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $290,174 $288,532
450
8,736
N/A
194,578
95,596
4.00%
4.17
$181,071 $180,198
162
162
4.26
4.30
N/A
4.02
3.42
3.82
Ì
16,279
N/A
197,512
83,625
Ì
16,279
Ì
196,639
85,664
$281,137 $282,303
2.04%
2.51
Ì
2.24
N/A
2.05
3.33
2.44
(1) Represents par value, net of associated discounts or premiums. Swap collateral obligations include the related accrued interest payable.
(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.
122
Freddie Mac
Senior and Subordinated Debt, Due After One Year
Table 8.3 summarizes our Senior and subordinated debt, due after one year at December 31, 2005 and 2004.
Table 8.3 Ì Senior and Subordinated Debt, Due After One Year
December 31,
2005
Contractual
Balance,
Maturity(1) Par Value Net(2)
Interest
Rates
2004
Balance,
Par Value Net(2)
Interest
Rates
(dollars in millions)
Senior debt, due after one year:(3)
Fixed-rate:
Medium-term Notes Ì Callable(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2035 $182,251 $182,173 2.00% - 7.91% $181,094 $180,957 1.63% - 8.05%
8,587 1.00% - 7.69%
Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2028
167,622 1.88% - 7.00%
U.S. dollar Reference Notes» securities Ì Non-callableÏÏÏÏÏÏ 2007 - 2032
4Reference Notes» securities Ì Non-callableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2014
28,967 3.50% - 5.75%
8,574
171,962 2.38% - 7.00% 167,836
29,035
19,927
172,551
25,528
19,936 1.00% - 7.69%
25,478 3.50% - 5.75%
Variable-rate:
Medium-term Notes Ì Callable(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2030
Medium-term Notes Ì Non-callable(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2026
Zero-coupon:
28,709
5,809
28,709
5,858
Various
Various
33,033
1,183
33,041
1,207
Various
Various
Medium-term Notes Ì CallableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2035
Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2034
Foreign-currency-related and hedging-related basis adjustments ÏÏÏ
Total senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
39,939
9,598
N/A
484,312
7,675
5,287
7,549
454,627
Ì%
Ì%
35,903
5,528
N/A
462,186
7,078
1,968
14,345
443,772
Ì%
Ì%
Subordinated debt, due after one year:
Fixed-rate(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2011 - 2016
Zero coupon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total senior and subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏ
2019
5,564
332
5,896
83
5,633
$490,208 $460,260
5,550 5.25% - 8.25%
5,547 5.25% - 8.25%
Ì%
Ì%
5,564
332
5,896
75
5,622
$468,082 $449,394
(1) Represents contractual maturities at December 31, 2005.
(2) Represents par value 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 securities and FreddieNotes» securities of $11,805 million and $11,850 million at December 31, 2005 and 2004,
respectively. These debt instruments represent Medium-term Notes that permit persons acting on behalf of deceased beneÑcial owners to require us to
repay principal prior to the contractual maturity date.
(5) Includes callable Estate NotesSM securities and FreddieNotes» securities of $6,987 million and $6,142 million at December 31, 2005 and 2004,
respectively. See related footnote (4) above concerning the nature of these debt instruments.
(6) Includes Medium-term Notes of $800 million at December 31, 2005 and 2004, 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 percent of the principal amount plus accrued
interest.
(7) Balance, Net includes callable subordinated debt of $3,493 million and $3,491 million at December 31, 2005 and 2004, respectively.
A portion of our long-term debt is callable. Callable debt gives us 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 contractual maturities of long-term debt securities (including current portion of long-term
debt) and subordinated borrowings outstanding at December 31, 2005, assuming callable debt is paid at contractual
maturity.
Table 8.4 Ì Senior and Subordinated Debt, Due After One Year (including current portion of long-term debt)
Annual Maturities
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net discounts, premiums and foreign-currency-related and hedging-related basis adjustments(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior and subordinated debt, due after one year, including current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractual
Maturity(1)(2)
(in millions)
$ 95,596
106,696
72,125
47,348
52,249
211,790
585,804
(29,725)
$556,079
(1) Represents par value of long-term debt securities and subordinated borrowings.
(2) For debt denominated in a currency other than the U.S. dollar, the par value is based on the exchange rate at the date of the debt issuance. Subsequent
changes in exchange rates are reÖected in Net discounts, premiums and foreign-currency-related and hedging-related basis adjustments.
We record gains and losses on debt repurchases that are accounted for as debt extinguishments based on the diÅerence
between the principal amount of the debt securities repurchased (adjusted for deferred premiums, discounts and hedging
gains and losses) and proceeds paid and the write-oÅ of related deferred debt issuance costs. We recognized a pre-tax gain
of $206 million and pre-tax losses of $(327) million and $(1,775) million on the repurchase of approximately $11.7 billion,
$14.5 billion and $27.3 billion in principal amount of debt outstanding in 2005, 2004 and 2003, respectively.
123
Freddie Mac
NOTE 9: STOCKHOLDERS' EQUITY
Preferred Stock
During 2005 and 2004, we completed no preferred stock oÅerings. All 17 classes of preferred stock outstanding at
December 31, 2005 have a par value of $1 per share. We have 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 our preferred stock outstanding at December 31, 2005.
Table 9.1 Ì Preferred Stock
Issue Date
Shares
Authorized
Shares
Outstanding
Total Par
Value
Redemption
Price per
Share
Total
Outstanding
Balance(1)
Redeemable
On or After(2)
NYSE
Symbol(3)
(in millions, except redemption price per share)
1996 Variable-rate(4) ÏÏÏ
6.14% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1998 Variable-rate(6) ÏÏÏ
5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.3% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.79% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1999 Variable-rate(7) ÏÏÏ
2001 Variable-rate(8) ÏÏÏ
2001 Variable-rate(9) ÏÏÏ
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 Variable-rate(10)ÏÏÏ
5.7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
April 26, 1996
June 3, 1997
October 27, 1997
March 23, 1998
September 23 and 29, 1998
September 23, 1998
October 28, 1998
March 19, 1999
July 21, 1999
November 5, 1999
January 26, 2001
March 23, 2001
March 23, 2001
May 30, 2001
May 30, 2001
October 30, 2001
January 29, 2002
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
June 30, 2002
October 27, 1998
March 31, 2003
September 30, 2003
September 30, 2003
October 30, 2000
March 31, 2004
June 30, 2009
December 31, 2004
March 31, 2003
March 31, 2003
March 31, 2011
June 30, 2006
June 30, 2003
December 31, 2006
March 31, 2007
FRE.prB
FRE.prD
(5)
FRE.prF
FRE.prG
FRE.prH
(5)
(5)
FRE.prK
FRE.prL
FRE.prM
FRE.prN
FRE.prO
FRE.prP
FRE.prQ
FRE.prR
(5)
(1) Amounts stated at redemption value.
(2) As long as the capital monitoring framework established by the OÇce of Federal Housing Enterprise Oversight, or 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, or NYSE, unless otherwise noted.
(4) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1 percent divided by 1.377, and is capped at 9.00 percent.
(5) Not listed on any exchange.
(6) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1 percent divided by 1.377, and is capped at 7.50 percent.
(7) Dividend rate resets on January 1 every Ñve years after January 1, 2005 based on a Ñve-year Constant Maturity Treasury, or CMT, rate, and 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 12-month LIBOR 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.
Stock Repurchase and Issuance Programs
On October 5, 2005, our board of directors authorized us to repurchase up to $2 billion of outstanding shares of our
common stock, all of which remained available for repurchase at December 31, 2005, and to issue up to $2 billion of non-
cumulative, perpetual preferred stock, in each case, from time to time depending on market conditions and other factors.
Completion of the authorized capital transactions will have no material impact on our regulatory minimum capital surplus,
including the 30 percent mandatory target set in January 2004 by OFHEO. In accordance with the existing capital
monitoring framework established by OFHEO in January 2004, we obtained OFHEO's approval for this common stock
repurchase. The repurchase authorization replaces all unused repurchase authority remaining under the common stock
repurchase plan approved by our board of directors in September 1997.
Regulatory Capital Standards
NOTE 10: REGULATORY CAPITAL
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or GSE Act, established minimum,
critical and risk-based capital standards for us.
Those standards determine the amounts of Core capital and Total capital that we must maintain to meet regulatory
capital requirements. Core capital consists of the par value of outstanding common stock (common stock issued less
124
Freddie Mac
common stock held in treasury), the par value of outstanding non-cumulative perpetual preferred stock, additional paid-in
capital and retained earnings, as determined in accordance with GAAP. 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.
Minimum Capital
The minimum capital standard requires us to hold an amount of Core capital that is generally equal to the sum of
2.50 percent of aggregate on-balance sheet assets and approximately 0.45 percent of the sum of outstanding mortgage-related
securities we guaranteed and other aggregate oÅ-balance sheet obligations. As discussed below, in 2004 OFHEO
implemented a framework for monitoring our capital adequacy, which includes a mandatory target capital surplus of
30 percent over the minimum capital requirement.
Critical Capital
The critical capital standard requires us to hold an amount of Core capital that is generally equal to the sum of
1.25 percent of aggregate on-balance sheet assets and approximately 0.25 percent of the sum of outstanding mortgage-related
securities we guaranteed and other aggregate oÅ-balance sheet obligations.
Risk-Based Capital
The risk-based capital standard requires the application of a stress test to determine the amount of Total capital that we
must hold to absorb projected losses resulting from adverse interest-rate and credit-risk conditions speciÑed by the GSE Act
and adds 30 percent additional capital to provide for management and operations risk. The adverse interest-rate conditions
prescribed by the GSE Act include one scenario 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 risk component of the stress
tests simulates the performance of our mortgage portfolio based on loss rates for a benchmark region. The criteria for the
benchmark region are established by the GSE Act and are intended to capture the credit-loss experience of the region that
experienced the highest historical rates of default and severity of mortgage losses for two consecutive origination years.
ClassiÑcation
OFHEO monitors our performance with respect to the three regulatory capital standards by classifying our capital
adequacy not less than quarterly.
To be classiÑed as ""adequately capitalized,'' we must meet both the risk-based and minimum capital standards. If we
fail to meet the risk-based capital standard, we cannot be classiÑed higher than ""undercapitalized.'' If we fail to meet the
minimum capital requirement but exceed the critical capital requirement, we cannot be classiÑed higher than ""signiÑcantly
undercapitalized.'' If we fail to meet the critical capital standard, we must be classiÑed as ""critically undercapitalized.'' In
addition, OFHEO has discretion to reduce our capital classiÑcation by one level if OFHEO determines that we are engaging
in conduct OFHEO did not approve that could result in a rapid depletion of Core capital or determines that the value of
property subject to mortgage loans we hold or guarantee has decreased signiÑcantly.
When we are classiÑed as adequately capitalized, we generally can pay a dividend on our common or preferred stock or
make other capital distributions (which includes common stock repurchases and preferred stock redemptions) without prior
OFHEO approval so long as the payment would not decrease Total capital to an amount less than our risk-based capital
requirement and would not decrease our Core capital to an amount less than our minimum capital requirement.
If we were classiÑed as undercapitalized, we would be prohibited from making a capital distribution that would decrease
our Core capital to an amount less than our minimum capital requirement. We also would be required to submit a capital
restoration plan for OFHEO approval, which could adversely aÅect our ability to make capital distributions.
If we were classiÑed as signiÑcantly undercapitalized, we would be able to make a capital distribution only if OFHEO
determined that the distribution satisÑed certain statutory standards. Under these circumstances, we would be prohibited
from making any capital distribution that would decrease our Core capital to less than the critical capital level, and
OFHEO also could take action to limit our growth, require us to acquire new capital or restrict us from activities that create
excessive risk. We also would be required to submit a capital restoration plan for OFHEO approval, which could adversely
aÅect our ability to make capital distributions.
If we were classiÑed as critically undercapitalized, OFHEO would be required to appoint a conservator for us unless
OFHEO made a written Ñnding that it should not do so and the Secretary of the Treasury concurred in that determination.
Performance Against Regulatory Capital Standards
OFHEO has never classiÑed us as other than ""adequately capitalized,'' the highest possible classiÑcation, reÖecting our
consistent compliance with the minimum, critical and risk-based capital requirements.
125
Freddie Mac
Table 10.1 summarizes our regulatory capital requirements and surpluses.
Table 10.1 Ì Regulatory Capital Requirements(1)
Minimum capital requirement(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum capital surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital requirement(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical capital surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital requirement(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-based capital surplus(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
2004
(in millions)
$25,010
35,964
10,954
$12,782
35,964
23,182
$11,282
36,781
25,499
$24,131
35,009
10,878
$12,308
35,009
22,701
$11,108
34,691
23,583
(1) OFHEO is the authoritative source of the capital calculations that underlie our capital classiÑcations.
(2) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.
(3) Amounts for 2005 and 2004 are those calculated by OFHEO prior to the issuance of our 2005 and 2004 Ñnancial results.
Factors that could adversely aÅect the adequacy of our regulatory capital for future periods include declines in GAAP
income; increases in our risk proÑle; changes in the economic environment, such as large interest-rate or implied volatility
moves or house-price declines; changes in option-adjusted spreads; legislative or regulatory action that could increase
capital requirements or changes in or adoption of new accounting standards such as SFAS 155. See ""NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Ì Recently Issued Accounting Standards, Not Yet Adopted'' for more
information regarding SFAS 155. In particular, interest-rate levels or implied volatility can aÅect the amount of our Core
capital, even if we were 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. Changes in option-adjusted spreads can
also aÅect the amount of our Core capital, because option-adjusted spreads are a factor in the valuation of our guaranteed
mortgage portfolio.
Subordinated Debt Commitment
In October 2000, we announced our voluntary adoption of a series of commitments designed to enhance market
discipline, liquidity and capital. In September 2005, we entered into a written agreement with OFHEO that updated those
commitments and set forth a process for implementing them. Under the terms of this agreement, we committed to issue
qualifying subordinated debt for public secondary market trading and rated by no less than two nationally recognized
statistical rating organizations in a quantity such that the sum of Total capital plus the outstanding balance of qualifying
subordinated debt will equal or exceed the sum of 0.45 percent of outstanding guaranteed PCs and Structured Securities
and 4 percent of on-balance sheet assets at the end of each quarter. Qualifying subordinated debt is deÑned as subordinated
debt that contains a deferral of interest payments for up to Ñve years if our Core capital falls below 125 percent of our
critical capital requirement or our Core capital falls below our minimum capital requirement and pursuant to our request,
the Secretary of the Treasury exercises discretionary authority to purchase our obligations under Section 306(c) of our
charter. Qualifying subordinated debt will be discounted for the purposes of this commitment as it approaches maturity with
one-Ñfth of the outstanding amount excluded each year during the instrument's last Ñve years before maturity. When the
remaining maturity is less than one year, the instrument is entirely excluded.
Table 10.2 summarizes our compliance with our subordinated debt commitment.
Table 10.2 Ì Subordinated Debt Commitment
Total on-balance sheet assets and guaranteed PCs and Structured Securities outstanding target(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital plus qualifying subordinated debt(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005
(in millions)
$36,633
41,831
5,198
(1) Equals the sum of 0.45 percent of outstanding guaranteed PCs and Structured Securities and 4 percent of on-balance sheet assets.
(2) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.
Regulatory Capital Monitoring Framework
In a letter dated January 28, 2004, OFHEO created a framework for monitoring our capital due to our higher
operational risk, including our inability to produce timely Ñnancial statements in accordance with GAAP. The letter directed
that we maintain a mandatory target capital surplus of 30 percent over our minimum capital requirement, subject to certain
conditions and variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of
certain capital transactions.
126
Freddie Mac
Our failure to meet the mandatory target capital surplus would result in an OFHEO inquiry regarding the reason for
such failure. If OFHEO were to determine that we had acted unreasonably regarding our compliance with the framework,
as set forth in OFHEO's letter, OFHEO could seek to require us to submit a remedial plan or take other remedial steps.
In addition, under this framework, 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 must also 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.
This framework will remain in eÅect until the Director of OFHEO determines that it should be modiÑed or expire.
OFHEO's letter indicated that this determination would consider our resumption of timely Ñnancial and regulatory reporting
that complies with GAAP, among other factors.
Table 10.3 summarizes our compliance with the mandatory target capital surplus portion of OFHEO's capital
monitoring framework.
Table 10.3 Ì Mandatory Target Capital Surplus
December 31,
2005
2004
(in millions)
Minimum capital requirement plus 30% add-on(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$32,513
35,964
3,451
$31,370
35,009
3,639
(1) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.
NOTE 11: STOCK-BASED COMPENSATION
We have three stock-based compensation plans under which grants are currently being made: (i) the Employee Stock
Purchase Plan, or ESPP, as amended and restated in 2004; (ii) the 2004 Stock Compensation Plan, or 2004 Employee Plan;
and (iii) the 1995 Directors' Stock Compensation Plan, or 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 Compensation Plan, or 1995 Employee Plan. We collectively refer 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 us as treasury stock, shares purchased by us
in the open market or authorized but previously unissued shares. At December 31, 2005, our stock-based awards consisted
of stock options, restricted stock units and restricted stock. Such awards, discussed below, are generally forfeitable for at
least one year after the grant date, with vesting provisions contingent upon service requirements.
‚ Stock options granted allow for the purchase of our common stock at an exercise price equal to the fair market value
of our 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 commencing on the grant date. Stock options granted by us include dividend
equivalent rights.
On November 30, 2005, the Compensation and Human Resources Committee of our board of directors approved a
change in the manner in which dividend equivalents are paid out on certain stock option awards. This change
aÅected all stock options outstanding at December 31, 2005 and unvested at December 31, 2004 (aÅected stock
options) and was made to bring the awards into operational and documentary compliance with Internal Revenue
Code Section 409A. In 2006, we made a lump sum payment for all previously accrued dividend equivalents to
grantees holding aÅected stock options at December 31, 2005. With the change, dividend equivalents on aÅected
stock options are paid when and as dividends on common stock are declared. In addition, dividend equivalent rights
will no longer be granted in connection with awards of stock options to grantees. For options not aÅected by the
change approved on November 30, 2005, the dividend equivalent right provides option holders 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 grant date.
‚ A restricted stock unit entitles the grantee to receive one share of common stock at a speciÑed future date. Restricted
stock units do not have voting rights, but do have dividend equivalent rights, which are (a) paid to restricted stock
127
Freddie Mac
unit holders who are employees as and when dividends on common stock are declared or (b) which are accrued as
additional restricted stock units for non-employee directors.
‚ 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 at the time of grant.
ESPP: We have established a stockholder-approved ESPP, which was amended and restated as of January 1, 2005,
that is qualiÑed under Internal Revenue Code Section 423. Under the ESPP, substantially all full-time and part-time
employees that choose to participate in the ESPP have the option to purchase shares of common stock at speciÑed dates,
with an annual maximum market value of $20,000 per employee as determined on the subscription (grant) date. The
purchase price is equal to 85 percent of the lower of the average price (average of the daily high and low prices) of the stock
on the subscription date or the average price of the stock on the purchase (exercise) date.
On November 4, 2004, stockholders approved the amendment and restatement of the ESPP eÅective as of January 1,
2005. The restated ESPP authorized granting 3.6 million shares in addition to the 3.2 million shares remaining under the
former ESPP. At December 31, 2005, the maximum number of shares of common stock authorized for grant to employees,
including those additional shares granted in accordance with the amended and restated ESPP, totaled 6.8 million shares, of
which approximately 0.2 million shares had been issued and approximately 6.6 million shares remained available for grant.
At December 31, 2005, 2004 and 2003, no options were exercisable under the ESPP, as the options outstanding at year-end
become exercisable subsequent to year-end, and are exercised or forfeited during the subsequent year.
2004 Employee Plan: Under the stockholder-approved 2004 Employee Plan, we may grant employees stock-based
awards, including stock options, restricted stock units and restricted stock. In addition, we have the right to impose
performance conditions with respect to these awards. Under the 2004 Employee Plan, employees may also be granted stock
appreciation rights; however, at December 31, 2005, no stock appreciation rights had been granted under the 2004
Employee Plan. At December 31, 2005, the maximum number of shares of common stock authorized for grant to employees
in accordance with the 2004 Employee Plan totaled 13.8 million shares, of which approximately 1.8 million shares had been
issued and approximately 12.0 million shares remained available for grant.
Directors' Plan: Under the stockholder-approved Directors' Plan, which was amended and restated in 1998, we are
permitted to grant to non-employee directors stock options, restricted stock units and restricted stock. At December 31,
2005, the maximum number of shares of common stock authorized for grant to directors in accordance with the Directors'
Plan totaled 2.4 million shares, of which approximately 0.8 million shares had been issued and approximately 1.6 million
shares remained available for grant.
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, Employee Plans and Directors' Plan.
Table 11.1 provides a summary of activity related to the option to purchase stock under the ESPP.
Table 11.1 Ì ESPP Activity
2005
Year Ended December 31,
2004
2003
Options to
Purchase
Stock
Weighted
Average Exercise
Price
Options to
Purchase
Stock
Weighted
Average Exercise
Price
Options to
Purchase
Stock
Weighted
Average Exercise
Price
Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
60,416
258,061
(239,873)
(17,020)
61,584
$56.83
53.58
52.78
53.22
52.16
65,257
250,899
(244,625)
(11,115)
60,416
$48.08
53.40
50.53
50.77
56.83
1,000,370
145,866
(355,485)
(725,494)
65,257
$52.27
44.16
41.76
43.02
48.08
Weighted-average fair value of options
granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
11.56
$
11.23
$
10.72
128
Freddie Mac
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
Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options exercisable at year-end ÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average fair value of options
2005
Year Ended December 31,
2004
2003
Stock
Options
7,627,941
1,199,586
(1,563,477)
(570,366)
6,693,684
3,590,168
Weighted
Average
Exercise Price
$52.94
62.80
43.55
61.17
56.20
52.14
Stock
Options
8,656,340
1,343,554
(1,861,617)
(510,336)
7,627,941
4,018,666
Weighted
Average
Exercise Price
$46.89
61.09
29.06
58.84
52.94
47.46
Stock
Options
9,231,105
1,216,442
(1,052,156)
(739,051)
8,656,340
4,755,640
Weighted
Average
Exercise Price
$44.21
53.28
23.12
57.18
46.89
38.23
granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
26.84
$
25.04
$
21.84
Table 11.3 provides a summary of activity related to restricted stock and restricted stock units under the Employee
Plans and the Directors' Plan.
Table 11.3 Ì Employee Plans and Directors' Plan Restricted Stock and Restricted Stock Unit Activity
2005
Year Ended December 31,
2004
2003
Restricted
Stock
Restricted Stock
Units
Restricted
Stock
Restricted Stock
Units
Restricted
Stock
Restricted Stock
Units
Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lapse of restrictionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
164,781
Ì
(79,961)
(15,118)
69,702
1,624,628
838,576
(659,946)
(329,075)
1,474,183
566,635
Ì
(240,514)
(161,340)
164,781
1,295,722
698,587
(145,340)
(224,341)
1,624,628
1,089,327
Ì
(381,103)
(141,589)
566,635
359,227
1,146,164
(114,240)
(95,429)
1,295,722
Weighted-average fair value of awards granted
during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
62.68
$
62.97
$
55.01
(1) Restricted stock units granted under the Employee Plans were 831,730, 673,720 and 1,143,810 in 2005, 2004 and 2003, respectively. Restricted stock
units granted under the Directors' Plan were 6,846, 24,867 and 2,354 in 2005, 2004 and 2003, respectively.
Table 11.4 provides additional information for stock options outstanding under the Employee Plans and the Directors'
Plan at December 31, 2005 by range of exercise prices.
Table 11.4 Ì Employee Plans and Directors' Plan Stock Options Outstanding
Range of Exercise Prices
Outstanding at
December 31, 2005
Options Outstanding
Weighted Average
Remaining Contract
Life in Years
Options Exercisable
Weighted
Average
Exercise Price
Exercisable at
December 31, 2005
Weighted
Average
Exercise Price
$15.00 - 24.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25.00 - 34.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35.00 - 44.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45.00 - 54.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55.00 - 64.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
65.00 - 68.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15.00 - 68.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
235,040
266,550
703,326
1,145,870
3,595,381
747,517
6,693,684
0.4
1.4
4.0
5.8
7.3
5.3
6.0
$20.90
34.27
41.57
51.23
62.21
67.59
56.20
235,040
266,550
703,326
553,125
1,300,868
531,259
3,590,168
$20.90
34.27
41.57
49.37
62.01
67.65
52.14
Table 11.5 summarizes the weighted-average assumptions used in determining the fair values of options granted under
our stock-based compensation plans using a Black-Scholes option pricing model. Estimates used to determine the weighted-
average assumptions noted in the table below are determined as follows: (i) the expected dividend yield is based on the
most recent dividend announcement relative to the grant date and the stock price at the grant date, (ii) the expected
129
Freddie Mac
volatility is based on the historical volatility of the stock over a time period equal to the expected life and (iii) the expected
life is based on historical option exercise trends.
Table 11.5 Ì Weighted Average Assumptions Used to Determine the Fair Value of Options
Employee Stock Purchase Plan
2004
2003
2005
Employee Plans and Directors' Plan
2003
2004
2005
Expected dividend yield(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.15%
3 months
19.7%
3.20%
1.85%
3 months
17.8%
1.33%
2.01%
3 months
35.0%
0.95%
Ì
7.4 years
30.0%
4.23%
Ì
7.0 years
31.5%
3.55%
Ì
7.0 years
32.0%
3.40%
(1) The value of the dividend equivalent feature of options for the Employee Plans and Directors' Plan was incorporated into the Black-Scholes model by
using an expected dividend yield of zero percent. To account for a modiÑcation of stock options on November 30, 2005, the dividend equivalent feature
of aÅected stock options for the Employee Plans and Directors' Plan was valued separately. Other assumptions used to value the aÅected stock
options were as follows: (i) expected dividend yield of 2.96 percent, (ii) expected life of 5.1 years, (iii) expected volatility of 25.4 percent, and
(iv) risk-free interest rate of 4.34 percent.
Compensation Expense: Compensation expense related to stock-based compensation plans recorded in Salaries and
employee beneÑts was $69 million, $59 million and $65 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
We use derivatives to conduct our risk management activities. We principally use the following types of derivatives:
NOTE 12: DERIVATIVES
‚ LIBOR-based interest-rate swaps;
‚ LIBOR- and Treasury-based options (including swaptions);
‚ LIBOR- and Treasury-based exchange-traded futures; and
‚ Foreign-currency swaps.
Our derivative portfolio also includes certain forward purchase and sale commitments and other contractual agreements
including (a) credit risk sharing agreements where we remit and receive payments based upon the default performance of
certain mortgage loans; (b) swap guarantee derivatives where we guarantee the sponsor's or the borrower's performance as
a counterparty on certain interest-rate swaps; and (c) a prepayment management agreement (which was terminated
eÅective December 31, 2005) in which we were partially compensated for the adverse impacts caused by disproportionately
higher mortgage prepayments on certain mortgage pools.
Hedging Activity
Derivative instruments are reported at their fair value, generally netted by counterparty (provided that a legally
enforceable master netting agreement exists), as either Derivative assets, at fair value, or Derivative liabilities, at fair value,
on the consolidated balance sheets. See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' for
further information related to our derivative counterparties.
No Hedge Designation
At December 31, 2005 and 2004, most of our derivative portfolio was not designated in hedge accounting relationships.
We report changes in the fair value of derivatives not in hedge accounting relationships as Derivative gains (losses) on the
consolidated statements of income. For derivatives that are not designated in hedge accounting relationships, any associated
interest received or paid is recognized on an accrual basis and recorded in Derivative gains (losses) on the consolidated
statements of income.
EÅective at 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 hedged
item shared risk exposure requirement and hedge eÅectiveness assessment as required by SFAS 133. Consequently, we
discontinued hedge accounting treatment for these relationships for Ñnancial reporting purposes at that time, 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. 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. EÅective at the
beginning of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward
purchase commitments and the majority of our new commitments to forward sell mortgage-related securities.
Fair Value Hedges
Fair value hedges represent hedges of exposure to foreign-currency Öuctuations and changes in the fair value of a
recognized liability. We primarily use interest-rate swaps and foreign-currency swaps to hedge against the changes in fair
value of Ñxed-rate debt due to changes in benchmark interest rates, either LIBOR or the Euro Interbank OÅered Rate, or
130
Freddie Mac
Euribor, or foreign-currency Öuctuations, or a combination of both. During 2005 and 2004, these derivatives in fair value
hedge relationships were executed to manage interest-rate risk or foreign-currency risk at an individual debt instrument level.
In 2004, these derivatives in fair value hedge relationships were also used to manage interest-rate risk at an aggregate
portfolio level. Derivatives executed to manage interest-rate risk at an aggregate portfolio level were linked to speciÑc debt
positions for hedge accounting purposes. We frequently reset the amount of Ñxed-rate debt being hedged in order to
maintain highly eÅective accounting hedges. 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.
Alternatively, when derivatives are executed for speciÑc debt instruments, redesignation is not necessary to maintain highly
eÅective accounting hedges. Derivatives used to manage interest-rate risk at an aggregate portfolio level were moved to no
hedge designation eÅective November 1, 2004 as part of the voluntary discontinuance of hedge accounting treatment, as
discussed above.
For a derivative in a fair value hedge relationship, we report changes in the fair value of the derivative as Hedge
accounting gains (losses) on the consolidated statements of income along with the oÅsetting changes in the fair value of the
hedged item attributable to the risk being hedged. Any diÅerences arising from fair value changes that are not exactly oÅset
result in hedge ineÅectiveness. 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 of hedge ineÅectiveness.
Table 12.1 summarizes certain gains (losses) recognized related to our hedge accounting categories.
Table 12.1 Ì Hedge Accounting Categories Information
Year Ended December 31,
2004
2003
2005
(in millions)
Fair value hedges
Hedge ineÅectiveness recognized in Hedge accounting gains (losses) Ì pre-tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22
Cash Öow hedges
Hedge ineÅectiveness recognized in Hedge accounting gains (losses) Ì pre-tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Net pre-tax gains (losses) resulting from the determination that it was probable that forecasted transactions would
not occurÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(25)
$742
$697
1
2
(53)
29
(1) No amounts have been excluded from the assessment of eÅectiveness.
Cash Flow Hedges
Cash Öow hedges represent hedges of exposure to the variability in the cash Öows of a variable-rate or foreign-currency
denominated instrument or relate to a forecasted transaction. We use interest-rate swaps, 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 of changes in fair
value is reported as Hedge accounting gains (losses) on the consolidated statements of income. As shown in Table 12.2
below, the total AOCI, net of taxes, related to cash Öow hedge relationships was a loss of $(6,287) million at December 31,
2005, primarily composed of deferred net losses on closed cash Öow hedges. 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.
Over the next 12 months, we estimate that approximately $1,280 million of deferred losses in AOCI, net of taxes, will be
reclassiÑed into earnings. The maximum remaining length of time over which we have hedged the exposure related to the
variability in future cash Öows on forecasted transactions, primarily forecasted debt issuances, is 28 years. However, over
90 percent of the AOCI, net of taxes, balance at December 31, 2005 relating to cash Öow hedges is linked to 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.
Table 12.2 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Öow hedges. Net change
in fair value related to cash Öow hedging activities, net of tax, represents the net change in the fair value of the derivatives
that were designated as cash Öow hedges, after the eÅects of our statutory tax rate of 35 percent, to the extent the hedges
were eÅective. Net reclassiÑcations of losses to earnings, net of tax, represent the AOCI amount, after the eÅects of our
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.
131
Freddie Mac
Table 12.2 Ì AOCI, Net of Taxes, Related to Cash Flow Hedge Relationships
Beginning balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in fair value related to cash Öow hedging activities, net of tax (beneÑt) expense of $27,
$(1,089) and $(352), respectively(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net reclassiÑcations of losses to earnings, net of tax beneÑt of $855, $1,042 and $1,450, respectively(2) ÏÏÏ
Ending balance(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
(in millions)
$(7,924) $(7,837) $(9,877)
2003
50
1,587
(2,021)
1,934
$(6,287) $(7,924) $(7,837)
(653)
2,693
(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) Includes the accrual of periodic cash settlements for derivatives designated in cash Öow hedge relationships.
NOTE 13: LEGAL CONTINGENCIES
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. We are frequently involved, directly or indirectly, in litigation involving mortgage
foreclosures. From time to time, we are also 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 typically 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 subject to various other legal proceedings, including regulatory investigations and administrative and civil
litigation, arising from the restatement of our 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''). We established a reserve in accordance with SFAS 5 of $75 million in the
second quarter of 2003 for this loss contingency. In the Ñrst quarter of 2005, we recorded a $339 million expense related to
our litigation reserves for legal settlements including our settlement of the securities class action lawsuits and the
shareholder derivative lawsuits discussed below. We continue to believe that an additional loss is probable in connection
with the remaining legal proceedings related to the restatement. Litigation and claims resolution are subject to many
uncertainties and are not susceptible to accurate prediction. It is not possible for us to reasonably estimate the upper end of
the range of any additional losses that might result from the adverse resolution of any of the remaining legal proceedings and
such losses could be greater than our current reserves.
SEC Investigation.
In June 2003, the SEC initiated a formal investigation of us in connection with the restatement.
On August 18, 2004, we announced that we had received a ""Wells Notice'' from the staÅ of the SEC. The Wells Notice
advised us that the SEC staÅ is considering recommending that the SEC initiate a civil injunctive action against us 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 Sections 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. We
continue to cooperate fully with the SEC's investigation as we evaluate our response to the Wells Notice.
Securities Class Action Lawsuits.
In June 2003, and thereafter, securities class action lawsuits were brought in three
separate federal district courts against us 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 in the U.S. District
Court for the Southern District of New York. In essence, the plaintiÅs in the consolidated action claimed that the
defendants improperly managed earnings to create a misleading impression of steady earnings by Freddie Mac. PlaintiÅs
further alleged that the defendants engaged in a number of improper transactions that violated GAAP and that they made
false and misleading statements regarding our Ñnancial status. The complaint covered the period from June 15, 1999
through June 6, 2003.
On April 20, 2006, we announced an agreement in principle to settle the securities class action lawsuits, as well as the
shareholder derivative actions described below. The settlement of these actions includes a cash payment of $410 million,
including the application of expected net insurance proceeds. The settlement does not include any admission of wrongdoing
by the company. The parties have completed and Ñled with the court the necessary settlement documents and are awaiting
preliminary court approval. However, no assurances can be made that the court will approve the settlement or its terms in
the form and substance negotiated among the parties.
132
Freddie Mac
Shareholder Derivative Lawsuits. Two shareholder derivative lawsuits were Ñled during 2003 against us and certain
former and current executives and, in one of the suits, members of our 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,
we 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. Subsequently, the Sadowsky
plaintiÅ sent a demand notice to us and on March 4, 2005, Ñled a new complaint in an action in the same court.
On May 13, 2005, the Sadowsky plaintiÅ Ñled an amended complaint that was purportedly brought on our behalf (as a
nominal defendant) as a derivative action by a purported shareholder to recover damages we allegedly suÅered in
connection with certain events underlying the restatement. The defendants in the action included former oÇcers, ten current
Directors, ten former Directors, and Ñve counterparties to transactions we executed. The plaintiÅ alleged claims for breach
of Ñduciary duties, indemniÑcation, waste of corporate assets, unjust enrichment, and aiding and abetting breach of Ñduciary
duties.
As described above, we announced on April 20, 2006, an agreement in principle to settle both shareholder derivative
actions. The settlement of these cases was based in part on corporate governance reforms we instituted under our current
management. The parties have completed and Ñled with the court the necessary settlement documents and are awaiting
preliminary court approval. However, no assurances can be made that the court will approve the settlement or its terms in the
form and substance negotiated among the parties.
ERISA Lawsuits. Two class action lawsuits were Ñled in 2003 in the U.S. District Court for the Southern District of
Ohio against us, certain individuals, and our Retirement Committee alleging violations of the Employee Retirement Income
Security Act, or ERISA. Both actions were consolidated and transferred to the same judge in New York who is handling
the securities and derivative lawsuits described above and are still pending.
Department of Labor Investigation.
In July 2003, the Department of Labor, or DOL, began an investigation of our
Thrift/401(k) Savings Plan in relation to the restatement. On December 28, 2005, we and five former members of our
Retirement Committee entered into an agreement with the DOL that extended the period for DOL to commence an action until
December 28, 2006. The investigation is still pending and we continue to cooperate fully with the DOL.
OFHEO Proceedings.
In June 2003, OFHEO commenced a special investigation of the company in connection with
the restatement. On December 9, 2003, Freddie Mac and OFHEO entered into a consent order and settlement that
concluded OFHEO's investigation of the company. Under the terms of the consent order, we 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, we made no admission regarding
any wrongdoing or any asserted or implied Ñndings.
In December 2003, OFHEO Ñled administrative notices of charges against us and Messrs. Brendsel and Clarke, two of
our former executive oÇcers. In its charge against us, OFHEO sought to have us take certain actions in connection with
these individuals' salaries and compensation as well as their termination status with the company. 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 clearly setting forth the factual and
legal bases for the charges and satisfying several other requirements identiÑed by the judge. On June 24, 2005 OFHEO Ñled
its second amended notice of charges against Messrs. Brendsel and Clarke. The parties are also engaged in the discovery
phase of the case.
On September 9, 2005, we entered into a stipulated consent order with OFHEO to settle the administrative notice of
charges against us. Under the terms of the consent order, we agreed to produce certain documents and make available any
current employees that OFHEO requests to interview in connection with its ongoing administrative actions against
Messrs. Brendsel and Clarke, and to take certain additional steps following the administrative actions against the former
oÇcers in accordance with any Ñnal order resulting in those actions. The text of this consent order and a related production
agreement are available on OFHEO's website at www.ofheo.gov. In agreeing to the consent order, we made no admission
regarding any wrongdoing or any asserted or implied Ñndings. Based on the consent order, OFHEO has dismissed the
administrative notice of charges against us.
133
Freddie Mac
U.S. Attorney's Investigation.
In June 2003, the U.S. Attorney's OÇce in Alexandria, Virginia commenced an
investigation of us surrounding the restatement. We will continue to cooperate with the U.S. Attorney's OÇce if and as
requested.
Antitrust Lawsuits. We and Fannie Mae were named in a consolidated lawsuit alleging that both companies conspired
to establish and maintain artiÑcially high guarantee fees. The complaint covers the period January 1, 2001 to the present and
asserts a variety of claims under federal and state antitrust laws, as well as claims under consumer-protection and similar
state laws. The plaintiÅs seek injunctive relief, unspeciÑed damages (including treble damages with respect to the antitrust
claims and punitive damages with respect to some of the state claims) and other forms of relief. We Ñled a motion to
dismiss the action and are awaiting a ruling from the court. At present, it is not possible for us to predict the probable
outcome of the consolidated lawsuit or any potential impact on our business, Ñnancial condition or results of operations.
Other Inquiries. We receive inquiries from the Internal Revenue Service, or IRS, in connection with its regular audits
of our tax returns for prior years, some of which relate to matters connected with the restatement. We continue to respond to
these inquiries. See ""NOTE 14: INCOME TAXES'' for more information.
FEC Investigation.
In March 2004, we provided certain information to the Federal Election Commission, or FEC,
concerning compliance with federal election laws. The FEC conducted an investigation into this matter and, on April 18,
2006, we announced we had entered into a conciliation agreement with the FEC. Under the terms of the conciliation
agreement, we agreed to pay a civil penalty of $3.8 million and to cease and desist from engaging in activities that violate
speciÑed provisions of the Federal Election Campaign Act relating to prohibitions on the use of corporate resources for
political fundraising. This amount was recorded in the 2005 consolidated statements of income as a component of Other
expense.
We are exempt from state and local income taxes. Table 14.1 presents the components of our provision for income
NOTE 14: INCOME TAXES
taxes.
Table 14.1 Ì Provision for Income Taxes
Current tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,819
Deferred tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,452)
(346)
Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 367
$ 790
Table 14.2 summarizes our deferred tax assets and liabilities.
Table 14.2 Ì Deferred Tax Assets and (Liabilities)
2005
Year Ended December 31,
2004
(in millions)
$1,136
2003
$1,465
737
$2,202
December 31,
2005
2004
(in millions)
Deferred tax assets:
Deferred fees related to securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,779
61
Credit related items and reserve for loan lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee compensation and beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
168
4,724
Cash Öow hedge deferrals and unrealized (gains) losses related to available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
39
6,771
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax liabilities:
Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis diÅerences related to derivative instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(3,765)
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net deferred tax assets and (liabilities) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,006
(1,679)
(307)
(1,779)
Ì
$ 1,612
5
166
1,930
Ì
3,713
(1,961)
(502)
(2,478)
(43)
(4,984)
$(1,271)
Included in deferred taxes is the tax eÅect on the (a) net unrealized (gains) losses on available-for-sale securities and
(b) net (gains) losses related to derivatives designated in cash Öow hedge relationships, which are both reported in AOCI,
net of taxes and (c) cumulative eÅect of change in accounting principles.
We have not established a valuation allowance against our deferred tax assets at December 31, 2005 or 2004, because
we have determined that it is more likely than not that all such tax assets will be realized in the future.
134
Freddie Mac
Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate for 2005, 2004 and 2003.
Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate
Year Ended December 31,
2004
2003
2005
Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Penalties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35.0% 35.0%
(4.7)
(8.7)
(7.3)
(14.3)
(2.0)
1.9
Ì
0.1
0.4
0.2
14.4% 21.2%
35.0%
(2.1)
(3.0)
0.4
1.0
0.1
31.4%
Impact of tax issues. The IRS has a policy to examine the income tax returns of large corporate taxpayers, including
us, generally every year. We believe that an adequate provision has been made for contingencies related to all income taxes
and related interest and potential penalties in accordance with SFAS 5. However, the ultimate outcome of these tax
contingencies could result in a tax beneÑt or tax provision that could be material to our quarterly or annual results of
operations. We do not believe that liabilities arising from these matters, if any, will have a material adverse eÅect on our
consolidated Ñnancial condition.
Tax Years 1985 through 1990. We are currently in litigation in the U.S. Tax Court, or Court, to contest income tax
deÑciencies asserted by the IRS for years 1985 through 1990. The principal matters in controversy in the case involve
questions of tax law as applied to our 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 we
had entered into the respective arrangements; and
‚ Customer Relationships. Our business relationships with a substantial number of mortgage originating
institutions that sold mortgages to us on a regular basis.
Tax Court Rulings. On September 4, 2003 and September 29, 2003, the Court decided favorably for us on two
preliminary motions involving questions of law in the case. On September 4, the Court ruled favorably for us on the question
whether our 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 us on the question whether, as
a matter of law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this case, we 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. In
November 2005, the Court ruled favorably on another less signiÑcant issue 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, we still had to 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 was completed in early June
2005. We are awaiting the Court's decision.
In view of the favorable rulings in September 2003 described above, we recorded in 2002 a reduction in our tax reserves
in the amount of $155 million. If the IRS were to appeal the Court decisions and an adverse ruling resulted, we may
reconsider our reserves related to this matter.
If our tax position on the customer relationship amortization issue described above is upheld through the legal process,
we will be able to recognize tax beneÑts not previously recorded that could be material in the quarter during which they are
recognized. However, we are unable to provide assurances that any such tax beneÑts will be realized.
Tax Years 1991 through 1993. The IRS examination of our federal income tax returns for the years 1991 through
1993 has been completed. In 2002, we Ñled a petition in the Court to contest the deÑciencies asserted by the IRS in a
Statutory Notice of deÑciency. 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
our Management and guarantee income.
Tax Years 1994 through 1997.
In 2002, the IRS completed its examination of our federal income tax returns for the
years 1994 through 1997. In October 2005 we Ñled a Petition in the Court to contest tax deÑciencies asserted by the IRS for
these years. The principal matter in controversy, other than the same questions at issue in the 1985 through 1993 cases
described above, involves the character of losses on dispositions of mortgage-related securities.
135
Freddie Mac
Tax Treatment of REITs.
In February 1997, we 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, we believed that
the dividend payments by the REITs to holders of the REITs' step-down preferred stock were fully tax deductible. We
entered into a closing agreement with the IRS that resolved issues related to the tax treatment of dividends paid on the step-
down preferred stock. We and the IRS agreed that we will only be entitled to deductions attributable to the step-down
preferred stock transactions as if we had borrowed directly from the REITs' preferred shareholders. As a result of this
closing agreement, we recorded a reduction in tax reserves of $94 million in 2004. See ""NOTE 18: MINORITY
INTERESTS'' for more information concerning the REITs.
Tax Years 1998 through 2002. This examination cycle includes the years for which we have restated our Ñnancial
statements. The IRS has completed its regular examination of our 1998 through 2002 tax returns, but could raise additional
issues. As a result of the regular examination, the principal matter in controversy, other than the same questions at issue in
the 1985 through 1997 cases described above, involves questions of timing and potential penalties regarding our tax
accounting method for certain hedging transactions. We believe the risk of loss due to the assertion of penalties by the IRS
related to our tax accounting methods is remote. As to the questions of timing, we believe that an adequate provision has
been made for contingencies related to income taxes and related interest.
Tax Treatment of Paired Swap Transactions.
In August and September of 2001, we entered into a series of nine sets
of paired swap transactions. We reported and paid tax treating each pair of those swap transactions as a single integrated
transaction for federal income tax purposes. Two additional swaps were executed in November 2001. Although the facts
and circumstances surrounding these swaps were diÅerent from the earlier swaps, we also reported and paid tax treating
these swaps as a single integrated transaction for federal income tax purposes. The IRS examination report did not assert a
tax deÑciency related to any of these paired swap transactions.
DeÑned BeneÑt Plans
NOTE 15: EMPLOYEE BENEFITS
We maintain a tax-qualiÑed deÑned beneÑt pension plan, or Pension Plan, covering substantially all of our employees.
Pension Plan beneÑts are based on an employee's years of service and highest average compensation, up to legal plan limits,
over any consecutive 36 months of employment. Pension Plan assets are held in trust and the investments consist primarily
of funds comprised of listed stocks and corporate bonds. In addition to our Pension Plan, we maintain a nonqualiÑed,
unfunded deÑned beneÑt pension plan for our oÇcers, referred to as our non-qualiÑed pension plan. The related retirement
beneÑts for our nonqualiÑed pension plan are paid from our general assets. These nonqualiÑed and qualiÑed deÑned beneÑt
pension plans are collectively referred to as deÑned beneÑt pension plans.
We maintain a deÑned beneÑt postretirement health care plan, or Retiree Health Plan, that generally provides
postretirement health care beneÑts on a contributory basis to retired employees age 55 or older who rendered at least 10 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. Our Retiree
Health Plan is currently unfunded and the beneÑts are paid from our general assets. This plan and our deÑned beneÑt
pension plans are collectively referred to as deÑned beneÑt plans.
For Ñnancial reporting purposes, we use a September 30 valuation measurement date for all of our deÑned beneÑt plans.
We are required to accrue the estimated cost of retiree beneÑts as employees render the services necessary to earn their
pension and postretirement health beneÑts. Our pension and postretirement health care costs related to these deÑned beneÑt
plans for 2005, 2004 and 2003 presented in the following tables were calculated using assumptions as of September 30,
2004, 2003 and 2002, respectively. The funded status of our deÑned beneÑt plans for 2005, 2004 and 2003 presented in the
following tables was calculated using assumptions as of September 30, 2005, 2004 and 2003, respectively.
136
Freddie Mac
Table 15.1 below shows the changes in our projected beneÑt obligations and fair value of plan assets using a
September 30 valuation measurement date for amounts recognized on our consolidated balance sheets at December 31, 2005
and 2004, respectively.
Table 15.1 Ì DeÑned BeneÑt Plan Obligation and Funded Status
Pension BeneÑts
Postretirement
Health BeneÑts
2005
2004
2005
2004
(in millions)
Change in Projected BeneÑt Obligation:
Projected beneÑt obligation at October 1 (prior year)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Projected beneÑt obligation at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in Fair Value of Plan Assets:
Fair value of plan assets at October 1 (prior year) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funded Status:
Funded status at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Initial unrecognized net transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 385
27
22
28
(5)
457
260
29
49
(5)
333
(124)
125
1
Ì
2
$
$ 339
24
20
6
(4)
385
229
22
13
(4)
260
(125)
112
1
1
$ (11)
$ 102
9
6
(6)
(1)
110
$ 102
10
6
(15)
(1)
102
(110)
31
(5)
Ì
$ (84)
(102)
40
(6)
Ì
$ (68)
Amounts Recognized on our Consolidated Balance Sheets:
Other assets:
Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 28
1
$ Ì
6
$ Ì
Ì
$ Ì
Ì
Other liabilities:
Accrued beneÑt liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(28)
(25)
(84)
(68)
AOCI:
Minimum pension liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
1
2
8
$ (11)
Ì
$ (84)
Ì
$ (68)
The change in the minimum pension liability recognized in AOCI, net of taxes, was a $7 million decrease for the year
ended December 31, 2005, and a $2 million decrease for the year ended December 31, 2004. The accumulated beneÑt
obligation for all deÑned beneÑt pension plans was $316 million and $282 million at September 30, 2005 and 2004,
respectively. The accumulated beneÑt obligation represents the actuarial present value of future expected beneÑts, assuming
current salary levels remain in eÅect.
Table 15.2 provides additional information for our deÑned beneÑt pension plans. The aggregate accumulated beneÑt
obligation and fair value of plan assets are disclosed as of September 30, 2005, with the projected beneÑt obligation included
for illustrative purposes.
Table 15.2 Ì Additional Information for DeÑned BeneÑt Pension Plans
Projected beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets over (under) accumulated beneÑt obligation ÏÏÏ
$416
$333
288
$ 45
$ 41
$ Ì
28
$(28)
Pension
Plan
2005
Non-qualiÑed
Pension Plans
Pension
Plan
Total
(in millions)
$457
$356
$333
316
$ 17
$260
262
$ (2)
2004
Non-qualiÑed
Pension Plans
$ 29
$ Ì
20
$(20)
Total
$385
$260
282
$(22)
137
Freddie Mac
The measurement of our beneÑt obligations includes assumptions about the rate of future compensation increases
included in Table 15.3 below.
Table 15.3 Ì Weighted Average Assumptions Used to Determine Projected and Accumulated BeneÑt Obligations
Pension BeneÑts
September 30,
2005
2004
Postretirement
Health BeneÑts
September 30,
2004
2005
Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of future compensation increase(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75% 5.75% 5.75% 5.75%
5.10% to 6.50% 4.50
Ì
Ì
(1) For the 2005 plan year for our deÑned beneÑt pension plans, we reÑned our assumptions used to determine our beneÑt obligations to include the
dispersion of compensation from a Öat rate to an age-graded rate.
Table 15.4 presents the components of the net periodic beneÑt costs with respect to pensions and postretirement health
beneÑts for the years ended December 31, 2005, 2004 and 2003. Net periodic beneÑt costs are included in Salaries and
employee beneÑts on our consolidated statements of income.
Table 15.4 Ì Net Periodic BeneÑt Cost Detail
Pension BeneÑts
Year Ended December 31,
2003
2004
2005
Postretirement
Health BeneÑts
Year Ended December 31,
2004
2005
2003
Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recognized net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net periodic beneÑt costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 27
22
(18)
5
1
$ 37
$ 24
20
(16)
7
Ì
$ 35
(in millions)
$ 9
6
Ì
3
(1)
$17
$ 16
16
(12)
3
Ì
$ 23
$10
6
Ì
5
(1)
$20
$ 6
3
Ì
2
(1)
$10
Table 15.5 Ì Weighted Average Assumptions Used to Determine Net Periodic BeneÑt Cost
Pension BeneÑts
Year Ended December 31,
2003
2004
2005
Postretirement
Health BeneÑts
Year Ended December 31,
2004
2005
2003
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected long-term rate of return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75% 6.00% 7.00%
4.50
4.50
7.00
7.00
4.50
7.25
5.75%
Ì
Ì
6.00%
Ì
Ì
7.00%
Ì
Ì
For the 2005 beneÑt obligations, we determined the discount rate using a yield curve consisting of spot interest rates at
half-year increments for each of the next 30 years, developed with pricing and yield information from high-quality bonds.
The future beneÑt plan cash Öows were then matched to the appropriate spot rates and discounted back to the
measurement date. Finally, a single equivalent discount rate was calculated that, when applied to the same cash Öows, results
in the same present value of the cash Öows as of the measurement date. In 2004 and 2003, we used the Moody's Aa
Corporate Bond Rate Index as a basis for selecting the discount rate shown in Table 15.5. The eÅect of the change in our
estimate of the discount rate was not material.
The expected long-term rate of return on plan assets was estimated using a portfolio return calculator model. The model
considered the historical returns and the future expectations for returns for each asset class in our deÑned beneÑt plans in
conjunction with our target investment allocation to arrive at the expected rate of return.
The assumed health care cost trend rates used in measuring the accumulated postretirement beneÑt obligation as of
September 30, 2005 are 11 percent in 2006, gradually declining to an ultimate rate of 5 percent in 2011 and remaining at that
level thereafter.
Table 15.6 sets forth the eÅect on the accumulated postretirement beneÑt obligation for health care beneÑts as of
September 30, 2005, and the sum of the service cost and interest cost components of the net periodic postretirement 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 our Retiree Health Plan
One Percent
Increase
One Percent
Decrease
(in millions)
EÅect on the accumulated postretirement beneÑt obligation for health care beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect on the service and interest cost components of the net periodic postretirement health beneÑt costs ÏÏÏÏÏÏÏÏ
$25
4
$(19)
(3)
138
Freddie Mac
Plan Assets
Table 15.7 sets forth our Pension Plan weighted average asset allocations, based on fair value, at September 30, 2005
and 2004, and target allocation by asset category.
Table 15.7 Ì Pension Plan Assets by Category
Asset Category
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Target
Allocation
65%
35
Ì
100%
Plan Assets at
September 30,
2005
2004
55.9%
29.4
14.7
100.0%
61.2%
34.0
4.8
100.0%
(1) Consists of cash contributions made on September 30, 2005 and 2004, respectively, which were not fully invested by September 30th of that year.
The Pension Plan's retirement committee had Ñduciary responsibility for establishing and overseeing our Pension Plan's
investment policies and objectives. The Pension Plan's retirement committee reviewed the appropriateness of our Pension
Plan's investment strategy on an ongoing basis. Our Pension Plan employed a total return investment approach whereby a
diversiÑed blend of equities and Ñxed income investments is 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 characteristics, such as business and
Ñnancial characteristics, demographics, and actuarial and company funding policies. Furthermore, equity investments are
diversiÑed across U.S. and non-U.S. listed companies with small and large capitalizations. 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 our securities at September 30, 2005 and 2004.
DeÑned BeneÑt Pension Plan Contributions
Our general practice is to contribute to our 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. On
September 30, 2005, we made a tax-deductible contribution of $48 million to our Pension Plan. We currently believe that
under applicable law, no minimum contribution will be required for 2006. However, in 2006, we expect to contribute
approximately $20 million to our Pension Plan and an additional amount yet to be determined. Any contributions to our
Retiree Health Plan and non-qualiÑed pension plan will be in the form of beneÑt payments as these plans are required to be
unfunded.
Estimated Future BeneÑt Payments
Table 15.8 sets forth estimated future beneÑt payments expected to be paid for our deÑned beneÑt plans. The expected
beneÑts are based on the same assumptions used to measure our beneÑt obligation at September 30, 2005.
Table 15.8 Ì Estimated Future BeneÑt Payments
Pension BeneÑts
Postretirement
Health BeneÑts
(in millions)
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Years 2011-2015ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5
6
6
8
9
84
$ 1
2
2
2
3
22
DeÑned Contribution Plans
Our Thrift/401(k) Savings Plan, or Savings Plan, is a tax-qualiÑed deÑned contribution pension plan oÅered to all
eligible employees. Employees are permitted to contribute from 1 percent to 25 percent of their eligible compensation to the
Savings Plan, subject to limits set by the Internal Revenue Code. We match employees' contributions up to 6 percent of
their eligible compensation per pay period; the percentage matched depends upon the employee's length of service.
Employee contributions and our matching contributions are immediately vested. In addition, we have discretionary authority
to make additional contributions to our Savings Plan that are allocated uniformly on behalf of each eligible employee, based
on the employee's eligible compensation. Employees become vested in our discretionary contributions after 5 years of
service. We also maintain a non-qualiÑed deÑned contribution plan for our oÇcers, designed to make up for beneÑts lost due
to limitations on eligible compensation imposed by the Internal Revenue Code and to make up for deferrals of eligible
compensation under our Executive Deferred Compensation Plan. We incurred costs of $31 million, $29 million and
139
Freddie Mac
$28 million for the years ended December 31, 2005, 2004 and 2003, respectively, related to these plans. These expenses were
included in Salaries and employee beneÑts on our consolidated statements of income.
See ""NOTE 13: LEGAL CONTINGENCIES'' for more information regarding civil litigation and a Department of
Labor investigation of our Savings Plan in relation to our restatement.
Executive Deferred Compensation Plan
Our Executive Deferred Compensation Plan is an unfunded, non-qualiÑed plan that allows certain key employees to
elect to defer substantially all or a portion of their annual salary and cash bonus, and certain key management employees to
defer the settlement of restricted stock units received from us, as well as substantially all or 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. During 2005, we amended the plan to modify certain provisions to comply with Internal
Revenue Code Section 409A as a result of the issuance of proposed regulations and other guidance. Distributions are paid
from our general assets. We record 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. We recognize 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.
NOTE 16: FAIR VALUE DISCLOSURES
The supplemental consolidated fair value balance sheets in Table 16.1 present our estimates of the fair value of our
recorded Ñnancial assets and liabilities and oÅ-balance sheet Ñnancial instruments at December 31, 2005 and 2004. Our
consolidated fair value balance sheets include the estimated fair values of Ñnancial instruments recorded in our
consolidated balance sheets prepared in accordance with GAAP, as well as oÅ-balance sheet Ñnancial instruments that
represent our assets or liabilities that are not recorded in our GAAP consolidated balance sheets. These oÅ-balance sheet
items predominantly consist of: (a) the unrecognized Guarantee asset and Guarantee obligation associated with our PCs
issued through our Guarantor Swap program prior to the implementation of FIN 45, (b) commitments to purchase
multifamily and single-family mortgage loans that will be classiÑed as held-for-investment in our GAAP consolidated
Ñnancial statements and (c) certain credit enhancements on manufactured housing asset-backed securities. The valuations
of Ñnancial instruments on our 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,'' or SFAS 107, and other relevant
pronouncements.
140
Freddie Mac
Table 16.1 Ì Consolidated Fair Value Balance Sheets(1)
December 31,
2005
2004
Carrying
Amount(2)
Fair
Value
Carrying
Amount(2)
Fair
Value
(in billions)
Assets
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-related securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee asset(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities and minority interests
Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets attributable to stockholders
Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 61.4
648.0
709.4
10.5
42.2
15.2
7.1
5.1
16.7
$806.2
$748.8
5.5
0.6
0.3
22.9
0.9
779.0
4.6
22.6
27.2
$806.2
$ 62.3
648.0
710.3
10.5
42.2
15.2
7.1
5.6
14.3
$805.2
$747.0
3.7
0.6
Ì
22.0
1.0
774.3
4.1
26.8
30.9
$805.2
$ 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
(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 the disposition of assets or settlement of liabilities may vary signiÑcantly from the fair values presented.
(2) Carrying amounts equal the amounts reported on our consolidated balance sheets prepared in accordance with GAAP.
(3) The fair value of Mortgage-related securities reported exceeds the carrying value because the fair value includes PC residuals related to some PCs held
in the Retained portfolio that are not recognized in accordance with GAAP because such PCs were issued prior to the implementation of FIN 45 in
2003. The diÅerence at December 31, 2005, rounds to zero.
(4) The fair value of the Guarantee asset reported exceeds the carrying value primarily because the fair value includes the Guarantee asset related to some
PCs held by third parties that are not recognized in accordance with GAAP because such PCs were issued prior to the implementation of FIN 45 in
2003.
(5) Fair values include estimated income taxes calculated using the 35 percent statutory rate on the diÅerence between the consolidated fair value balance
sheets net assets, including deferred taxes from the GAAP consolidated balance sheets, and the GAAP consolidated balance sheet equity attributable
to common stockholders.
Limitations
Our consolidated fair value balance sheets do not capture all elements of value that are implicit in our operations as a
going concern since our consolidated fair value balance sheets only capture the values of the current investment and
securitization portfolios. For example, our 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, our consolidated fair value
balance sheets do not capture the value associated with future growth opportunities in our investment and securitization
portfolios. Thus, the fair value of net assets attributable to stockholders presented in our consolidated fair value balance
sheets does not represent an estimate of our net realizable, liquidation or market value as a whole.
We report certain 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 carrying amounts in accordance with GAAP in our consolidated fair value balance sheets. We
believe these items do not have a signiÑcant impact on our overall fair value results. Other non-Ñnancial assets and liabilities
in our GAAP consolidated balance sheets represent deferrals of costs and revenues that are amortized in accordance with
GAAP, such as deferred debt issuance costs and deferred credit fees. Cash receipts and payments related to these items are
generally recognized in the fair value of net assets when received or paid, with no basis reÖected in the fair value balance
sheets.
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
141
Freddie Mac
available, fair value is based on internal valuation models using market data inputs or internally developed assumptions,
where appropriate.
During 2005 and 2004, our fair value results were impacted by several improvements in our approach for estimating fair
values of certain Ñnancial instruments. In the Ñrst quarter of 2005, we improved our approach for estimating the fair values
of certain Ñnancial instruments resulting in (a) a decrease in the fair value of Total net assets of approximately $0.8 billion
(after-tax) related to our guarantee-related assets and liabilities and (b) an increase in the fair value of Total net assets of
approximately $0.3 billion (after-tax) related to our multifamily whole loans, the minority interests in our consolidated
REIT subsidiaries and other Ñnancial instruments. Also, in the second quarter of 2005, we improved our approach for
estimating the fair values of certain securities we hold, which increased the fair value of Total net assets by approximately
$0.1 billion. The changes in our approach for estimating the fair values of these Ñnancial instruments are described below. In
the fourth quarter of 2004, we began using newly available market prices received from broker/dealers and third-party
pricing providers for the valuation of a greater portion of our debt instruments resulting in an increase in the fair value of
Total net assets of approximately $0.6 billion (after-tax).
The following methods and assumptions were used to estimate the fair value of assets and liabilities at December 31,
2005 and 2004.
Mortgage loans
Mortgage loans represent single-family and multifamily whole loans held in our Retained portfolio. For GAAP
purposes, we must determine the fair value of these mortgage loans to calculate lower-of-cost-or-market adjustments for
mortgages classiÑed as held-for-sale. We use this same approach when determining the fair value of whole loans, including
those held-for-investment, for fair value balance sheet purposes.
We determine the fair value of mortgage loans, excluding delinquent single-family loans purchased out of pools, based
on comparisons to actively traded mortgage-related securities with similar characteristics, with adjustments for yield, credit
and liquidity diÅerences. SpeciÑcally, we aggregate mortgage loans into pools by product type, coupon and maturity and
then convert the pools into notional mortgage-related securities based on their speciÑc characteristics. We then calculate fair
values for these notional mortgage-related securities using the process that is described in ""Mortgage-related securities.''
Part of the adjustments for yield, credit and liquidity diÅerences represent an implied guarantee fee. To accomplish this,
the fair value of the single-family whole loans, excluding delinquent single-family loans purchased out of pools, includes an
adjustment representing the estimated present value of the additional cash Öows on the mortgage coupon 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 we expect to retain. 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 for both single-family and multifamily whole loans is also net of the related credit and other
components inherent in our 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'' 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.
Beginning in 2005, we reÑned the fair value estimates of multifamily whole loans by incorporating additional
information and guidance from active market participants into the pricing of notional mortgage-related securities. In
addition, beginning in 2005, for single-family whole loans that are extremely delinquent and have been purchased out of
pools, we obtained dealer indications on aggregated groups of similar loans that reÖect their current performance status.
These market price indications reÖect the estimated present value of all cash Öows related to the whole loans, including
expected credit losses and recoveries.
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 our GAAP consolidated balance sheets. Mortgage-related securities
consist of securities issued by us, 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
142
Freddie Mac
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, our 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 us and reported in the mortgage-related
securities line item. PC residuals are reported at fair value on our consolidated balance sheets. Fair value for PC residuals is
estimated in the same manner as described for the Guarantee asset and the Guarantee obligation 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 our derivative counterparties. Given
that these assets are short-term in nature with limited market value volatility, the carrying amount on our GAAP
consolidated balance sheets is deemed to be a reasonable approximation of fair value.
Investments
At December 31, 2005 and 2004, Investments consists solely of non-mortgage-related securities, which are reported at
fair value on our consolidated balance sheets. During 2004, Investments also 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 our consolidated balance sheets. We ceased 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.
The fair values of those Investments were 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 our GAAP consolidated
balance sheets is deemed to be a reasonable approximation of fair value.
Guarantee asset
At December 31, 2005 and 2004, we had a Guarantee asset on our GAAP consolidated balance sheets for
approximately 93 percent and 89 percent, respectively, of PCs and Structured Securities held by third parties. For more
information regarding the accounting for the Guarantee asset related to PCs and Structured Securities, see ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''
For fair value balance sheet purposes, the Guarantee asset is reÖected for all PCs and Structured Securities held by
third parties and is valued using the same method as used for GAAP fair value purposes. For a description of how we
determine the fair value of our Guarantee asset, see ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN
MORTGAGE-RELATED ASSETS.''
Derivative assets
Derivative assets, at fair value largely consists of interest-rate swaps, option-based derivatives, futures, and forward
purchase and sale commitments that we account for as derivatives, which are reÖected at fair value on our 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 variable-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. Our fair value of derivatives is not adjusted for expected credit losses because we obtain
collateral from most counterparties typically within one business day of the daily market value calculation and substantially
all of our credit risk arises from counterparties with investment-grade credit ratings of A¿ or above.
143
Freddie Mac
Other assets
Other assets consists of accrued interest and other receivables, investments in qualiÑed LIHTC partnerships that are
eligible for federal tax credits, credit enhancement contracts related to PCs and Structured Securities (pool insurance and
recourse and/or indemniÑcation agreements), Ñnancial guarantee contracts for additional credit enhancements on certain
manufactured housing asset-backed securities, REO, 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, we believe the carrying amount on our GAAP
consolidated balance sheets is a reasonable approximation of their fair values. Our investments in LIHTC partnerships,
reported as consolidated entities or equity method investments in the GAAP Ñnancial statements, are not within the scope of
SFAS 107 disclosure requirements. However, we present the fair value of these investments in Other assets. 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 enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or
indemniÑcation agreements), fair value is estimated using an expected cash Öow approach, and is intended to reÖect the
estimated amount that a third party would be willing to pay for the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet date based on current market conditions; on our GAAP
consolidated balance sheets, these contracts are initially recorded at fair value at inception, then amortized to expense.
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 our 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 our market-based estimate. On our GAAP
consolidated Ñnancial statements, these contracts are recognized as realized.
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 and property, plant and equipment. For the majority of these non-Ñnancial assets in Other
assets, we use the carrying amounts from our GAAP consolidated balance sheets as the reported values on our consolidated
fair value balance sheets, without any adjustment. These assets represent an insigniÑcant portion of our GAAP consolidated
balance sheets, and any change in their fair value would not be a meaningful part of our fair value of net assets business
results. Certain non-Ñnancial assets in Other assets on our GAAP consolidated balance sheets are assigned a zero value on
our consolidated fair value balance sheets. This treatment is applied to deferred items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes for consolidated fair value balance sheets purposes to include estimated
income taxes on the diÅerence between our consolidated fair value balance sheets net assets, including deferred taxes from
the GAAP consolidated balance sheets, and our GAAP consolidated balance sheets equity attributable to common
stockholders. To the extent the adjusted deferred taxes are a net asset, this amount is included in Other assets. If the
adjusted deferred taxes are a net liability, this amount is included in Other liabilities.
Total debt securities, net
Total debt securities, net represents short-term and long-term debt used to Ñnance our 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, we began using newly available market prices received from
broker/dealers and reliable third-party pricing services 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.
Guarantee obligation
We did not establish a Guarantee obligation for GAAP purposes for PCs and Structured Securities held by third parties
that were issued through our Guarantor Swap program prior to adoption of FIN 45. In addition, after it is initially recorded
at fair value the Guarantee obligation is not subsequently carried at fair value for GAAP purposes. For fair value balance
sheet purposes, the Guarantee obligation reÖects the fair value of our Guarantee obligation on all PCs held by third parties.
Additionally, for fair value balance sheet purposes, the Guarantee obligation is valued using the same method as used for
GAAP to determine its initial fair value. For information concerning our valuation approach and accounting policies related
144
Freddie Mac
to guarantee-related credit losses, see ""NOTE 1: SUMMARY OF SIGNIFICANT 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 our GAAP consolidated
balance sheets represents loan loss reserves for oÅ-balance sheet PCs in accordance with GAAP that are not already
accounted for under SFAS 125/140. This line item has no basis in our consolidated fair value balance sheets, because the
estimated fair value of all expected default losses is included in the Guarantee obligation reported on our 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. We believe 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. Furthermore, certain deferred items reported as Other
liabilities on our GAAP consolidated balance sheets are assigned zero value on our consolidated fair value balance sheets,
such as deferred credit fees. Also, as discussed in ""Other assets,'' Other liabilities may include a deferred tax liability
adjusted for fair value balance sheet purposes.
Minority interests in consolidated subsidiaries
Minority interests in consolidated subsidiaries primarily represent preferred stock interests that third parties hold in our
two majority-owned REIT subsidiaries. In accordance with GAAP, we consolidated the REITs. The preferred stock
interests are not within the scope of SFAS 107 disclosure requirements. However, we present the fair value of these interests
in our fair value balance sheets. The fair value of the third-party minority interests in these REITs was based on the
estimated value of the underlying REIT preferred stock we determined based on a valuation model. In 2005, we improved
our fair value estimates to reÖect observed market activity.
Net assets attributable to preferred stockholders
To determine the preferred stock fair value, we use a market-based approach incorporating quoted dealer prices.
Net assets attributable to common stockholders
Net assets attributable to common stockholders is equal to the diÅerence between the fair value of total assets and the
sum of total liabilities and minority interests reported on our consolidated fair value balance sheets, less the fair value of net
assets attributable to preferred stockholders.
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 us
or that are collateral for PCs and Structured Securities, excluding:
‚ $2,021 million and $3,015 million of mortgage-related securities issued by Ginnie Mae that back Structured
Securities at December 31, 2005 and 2004, respectively, because these securities do not expose us to meaningful
amounts of credit risk;
‚ $44,626 million and $59,715 million of agency mortgage-related securities at December 31, 2005 and 2004,
respectively, because these securities do not expose us to meaningful amounts of credit risk; and
‚ $242,586 million and $175,163 million of non-agency mortgage-related securities held in the Retained portfolio
at December 31, 2005 and 2004, respectively, because geographic information regarding these securities is not
available. With respect to these securities, we look to third party credit enhancements (e.g., bond insurance) or
other credit enhancements resulting from the securitization structure supporting such securities (e.g., subordina-
tion levels) as a primary means of managing credit risk.
See ""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for more information
about the securities we hold.
145
Freddie Mac
Table 17.1 Ì Concentration of Credit Risk
December 31,
2005
2004
Amount(1)
Percentage
Amount(1)(2)
Percentage
(dollars in millions)
By Region(3)
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 340,960
326,952
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
304,378
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
247,494
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
175,200
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,394,984
By State
California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 182,178
86,988
Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
72,986
IllinoisÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
71,998
New York ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
980,834
All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,394,984
24%
23
22
18
13
100%
13%
6
5
5
71
100%
$ 306,281
296,390
280,618
223,921
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%
(1) Calculated as Total mortgage portfolio less Structured Securities backed by Ginnie Mae CertiÑcates as well as agency and non-agency mortgage-
related securities held in the Retained portfolio.
(2) Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast. The 2004 results were changed to conform with 2005
presentation.
(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,
VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,
CO, KS, LA, MO, NE, NM, OK, TX, WY).
Mortgage Lenders
A signiÑcant portion of our single-family mortgage purchase volume is generated from several key mortgage lenders that
have entered into special business arrangements with us. These individually negotiated arrangements generally involve a
lender's commitment to sell a high proportion of its conforming mortgage origination volume to us. During 2005, three
mortgage lenders each accounted for 10 percent or more of our mortgage purchase volume and in the aggregate they
accounted for approximately 47 percent of this volume. These three lenders are among the largest mortgage loan originators
in the United States. We are exposed to the risk that we could lose purchase volume to the extent these arrangements are
terminated or modiÑed without replacement from other lenders.
Derivative Portfolio
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to conÑrm that they
continue to meet our internal standards. We assign internal ratings, credit, capital and trading limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or events aÅecting an individual counterparty occur.
Derivative Counterparties. Our use of derivatives exposes us to counterparty credit risk, which arises from the
possibility that the derivative counterparty will not be able to meet its contractual obligations. 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. Over-the-
counter, or OTC, derivatives, however, expose us to counterparty credit risk because transactions are executed and settled
between us and the counterparty. Our use of OTC interest-rate swaps, option-based derivatives and foreign-currency swaps
is subject to 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. 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. Bilateral collateral agreements are in place for the majority of our counterparties. Collateral posting thresholds
are 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. Collateral is typically transferred within one business day based on the
146
Freddie Mac
values of the related derivatives. This time lag in posting collateral can aÅect our net uncollateralized exposure to derivative
counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities, our PCs and
Structured Securities or our debt 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.
Our uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based derivatives and foreign-
currency swaps, after applying netting agreements and collateral, was $190 million and $601 million at December 31, 2005
and 2004, respectively. In the event that all of our counterparties for these derivatives were to have defaulted simultaneously
on December 31, 2005, our maximum loss for accounting purposes would have been approximately $190 million.
Our exposure to counterparties for OTC forward purchase and sale commitments treated as derivatives was $35 million
and $40 million at December 31, 2005 and 2004, respectively. 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, the exposure to our OTC commitments counterparties is uncollateralized. Similar to counterparties for our 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.
NOTE 18: MINORITY INTERESTS
The equity and net earnings attributable to the minority stockholder interests in consolidated subsidiaries are reported
on our consolidated balance sheets as Minority interests in consolidated subsidiaries and on our consolidated statements of
income as Minority interests in earnings of consolidated subsidiaries. The majority of the balances in these accounts relate
to our two majority-owned REITs.
In February 1997, we formed two majority-owned REIT subsidiaries funded through the issuance of common stock
(99.9 percent of which is held by us) 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 December 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 our consolidated balance sheets totaled $934 million and $1,488 million at December 31, 2005
and 2004, respectively.
On November 10, 2005, we oÅered to purchase for cash any and all of the outstanding shares of the outstanding step-
down preferred stock, of which $142 million was purchased between the oÅer date and December 31, 2005. The preferred
stock continues to be redeemable by the REITs under certain circumstances described in the preferred stock oÅering
documents as a ""tax event redemption.'' See ""NOTE 14: INCOME TAXES'' for more information concerning the REITs.
NOTE 19: EARNINGS PER COMMON SHARE
Basic earnings per common share are computed as Net income available to common stockholders divided by 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 Weighted average common shares outstanding-diluted for the period, which
consider the eÅect of dilutive common equivalent shares outstanding. 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. See
""NOTE 11: STOCK-BASED COMPENSATION'' for additional information. Net income available to common stock-
holders is not aÅected by dilutive potential common shares for the years ended December 31, 2005, 2004 and 2003. For the
years ended December 31, 2005, 2004 and 2003, there are approximately 1,929,000, 2,239,000 and 1,581,000 of dilutive
common equivalent shares outstanding that could potentially dilute earnings per common share, based on the treasury stock
method.
Options to purchase 2.3 million, 2.4 million and 3.4 million shares of common stock were excluded from the
computation of Diluted earnings per common share at December 31, 2005, 2004 and 2003, respectively, because the options'
exercise price exceeded the average market price of the common stock for the years ended December 31, 2005, 2004 and
2003, respectively.
147
Freddie Mac
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
CONTROLS AND PROCEDURES
See ""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting'' for a
description of our material weaknesses and other deÑciencies.
DIRECTORS AND EXECUTIVE OFFICERS
Information regarding our Directors and Executive OÇcers is set forth under ""Proposal 1: Election of Directors Ì
Nominees for Election'' and ""Executive OÇcers'' of our Proxy Statement for our annual meeting of stockholders to be held
on September 8, 2006, and is incorporated herein by reference. Additional information concerning our Audit Committee
may be found under the caption ""Corporate Governance Ì Audit Committee Financial Expert'' in our Proxy Statement.
We also provide information regarding our Section 16 compliance under ""Section 16(a) BeneÑcial Ownership Reporting'' in
our Proxy Statement, incorporated by reference herein.
148
Freddie Mac
BOARD OF DIRECTORS (as of June 1, 2006)(1)
Eugene M. McQuade
President and Chief Operating OÇcer
Freddie Mac
McLean, Virginia
Shaun F. O'Malley (Lead Director)A, B, D
Chairman Emeritus
Price Waterhouse LLP
An accounting and consulting Ñrm
Philadelphia, Pennsylvania
JeÅrey M. PeekC, E
Chairman and Chief Executive OÇcer
CIT Group, Inc.
A provider of commercial and consumer Ñnance solutions
New York, New York
Ronald F. PoeB, D, E
President
Ronald F. Poe & Associates
A private real estate investment Ñrm
White Plains, New York
Stephen A. RossA, C, D
Professor
Massachusetts Institute of Technology
Cambridge, Massachusetts
William J. TurnerA, C
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. AlexanderC, E
Independent Consultant
Monarch Beach, California
GeoÅrey T. BoisiB, D, E
Chairman and Senior Partner
Roundtable Investment Partners LLC
A private investment management Ñrm
New York, New York
Michelle EnglerB, E
Trustee
JNL Investor Series Trust and JNL Series Trust
and Member of Board of Managers
JNL/NY Variable Funds
Each an investment company
Lansing, Michigan
Richard Karl GoeltzA, C, D
Retired Vice Chairman and Chief Financial OÇcer
American Express Company
A Ñnancial services company
New York, New York
Thomas S. JohnsonA, B
Retired Chairman and Chief Executive OÇcer
GreenPoint Financial Corp.
A Ñnancial services company
New York, New York
William M. Lewis, Jr.C, E
Managing Director and Co-Chairman
of Investment Banking
Lazard Ltd.
An investment banking company
New York, New York
Committees A Audit
B Compensation and Human Resources
C Finance and Capital Deployment
D Governance, Nominating and Risk Oversight
E Mission and Sourcing
(1) Our 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, 2006.
149
Freddie Mac
EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the section titled ""Executive Compensation'' of our
Proxy Statement and is incorporated by reference into this Information Statement. Information regarding compensation of
our board of directors is set forth under the section titled ""Proposal 1: Election of Directors Ì Board Compensation'' and
information concerning members of the Compensation and Human Resources Committee is set forth under ""Propo-
sal 1: Election of Directors Ì Compensation Committee Interlocks and Insider Participation'' of our Proxy Statement,
incorporated by reference herein.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
Table 52 provides information about our common stock that may be issued upon the exercise of options, warrants and
rights under our existing equity compensation plans at December 31, 2005. Our stockholders have approved the ESPP, the
2004 Employee Plan, the 1995 Employee Plan and the Directors' Plan.
Table 52 Ì Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity compensation plans not approved by stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(a)
Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
8,229,451(1)
None
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
$46.10(2)
N/A
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reÖected in
column (a))
20,159,506(3)
None
(1) Includes 1,474,183 restricted stock units issued under the Directors' Plan and the Employee Plans and options to purchase up to 61,584 shares under
the ESPP, which are issuable in connection with the oÅering period ended on January 31, 2006.
(2) For the purpose of calculating this amount, the restricted stock units are assigned an exercise price of zero.
(3) Consists of 12,005,314 shares, 6,597,276 shares and 1,556,916 shares available for issuance under the 2004 Employee Plan, the ESPP and Directors'
Plan, respectively.
Security Ownership of Management
Information regarding the beneÑcial ownership of our common stock by each of our directors, each director nominee,
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, Executive OÇcers and Greater than 5% Holders'' of our Proxy Statement
for our annual meeting of stockholders to be held on September 8, 2006 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 certain beneÑcial owners is set forth under the
section titled ""Corporate Governance Ì Stock Ownership by Directors, Executive OÇcers and Greater than 5% Holders''
of our Proxy Statement for our annual meeting of stockholders to be held on September 8, 2006 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 September 8, 2006 and is incorporated by reference into this Information Statement.
PRINCIPAL ACCOUNTING 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 September 8, 2006 and is incorporated by reference into this Information Statement.
150
Freddie Mac
I, Richard F. Syron, certify that:
1. I have reviewed this Information Statement of Freddie Mac;
CERTIFICATION*
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 28, 2006
Richard F. Syron
Chairman and Chief Executive OÇcer
I, Eugene M. McQuade, certify that:
1. I have reviewed this Information Statement of Freddie Mac;
CERTIFICATION*
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 28, 2006
Eugene M. McQuade
President and Chief Operating OÇcer
* For a detailed discussion of our progress with respect to our internal control over Ñnancial reporting and disclosure controls and procedures, see ""RISK
MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''
151
Freddie Mac
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
2005
2004
2003
2002
2001
(dollars in millions)
Net income before cumulative eÅect of changes in accounting principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,189 $ 2,937 $ 4,816
Add:
$10,090
$ 3,115
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,202
157
26,509
5
Ì
Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,557 $30,429 $33,689
790
129
26,566
6
1
367
96
29,899
6
Ì
Fixed charges:
Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,899 $26,566 $26,509
5
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Ñxed charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,905 $26,573 $26,514
Ratio of earnings to Ñxed charges(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6
Ì
1.15
1.09
1.27
6
1
4,713
184
26,876
5
1
$41,869
$26,876
5
1
$26,882
1,339
208
27,577
5
1
$32,245
$27,577
5
1
$27,583
1.56
1.17
(1) 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
Net income before cumulative eÅect of changes in accounting principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,189 $ 2,937 $ 4,816
Add:
$10,090
$ 3,115
Year Ended December 31,
2005
2004
2003
2002
2001
(dollars in millions)
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,202
157
26,509
5
Ì
Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,557 $30,429 $33,689
367
96
29,899
6
Ì
790
129
26,566
6
1
Fixed charges:
Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,899 $26,566 $26,509
5
Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
315
Total Ñxed charges including preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,166 $26,839 $26,829
Ratio of earnings to combined Ñxed charges and preferred stock dividends(2) ÏÏÏÏÏÏÏÏÏÏ
6
Ì
261
6
1
266
1.13
1.08
1.26
4,713
184
26,876
5
1
$41,869
$26,876
5
1
351
$27,233
1,339
208
27,577
5
1
$32,245
$27,577
5
1
310
$27,893
1.54
1.16
(1) Preferred stock dividends represent pre-tax earnings required to cover any preferred stock dividend requirements using our eÅective tax rate for the
relevant periods.
(2) 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.
152
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
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:
September 8, 2006
9:00 a.m. eastern time
8000 Jones Branch Drive
McLean, Virginia 22102
Proxy materials will be mailed to stockholders of record in
accordance with Freddie Mac's bylaws and New York
Stock Exchange requirements.
DIVIDEND PAYMENTS
Approved by Freddie Mac's board of directors, dividends
on the company's common stock and non-cumulative pre-
ferred stock in 2005 and the Ñrst six months of 2006 were
or are expected to be paid on:
March 31, 2005
June 30, 2005
September 29, 2005
December 29, 2005
March 31, 2006
June 30, 2006
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 six months of 2006
are expected to be paid on or about:
September 30, 2006
December 31, 2006
153
Freddie Mac
We are providing this index of acronyms used in this Information Statement for the convenience of the reader. All of
INDEX OF ACRONYMS
the acronyms listed below are deÑned at their Ñrst use in this document.
AOCI
ARM
CMBS
CMT
DOL
EITF
ERISA
ESPP
Euribor
Fannie Mae
FASB
FEC
FHA
FICO
FIN
FSP
GAAP
Ginnie Mae
GSE
GSE Act
HUD
IO
IRR
IRS
LIBOR
LIHTC
LTV
MD&A
NPV
NYSE
OAS
OFHEO
OTC
PC
PCAOB
PMVS
PMVS-L
PMVS-YC
PwC
REIT
REMIC
REO
RHS
S&P
SEC
SFAS
SS&TG
TBA
VA
VIE
Accumulated other comprehensive income (loss), net of taxes
Adjustable-rate mortgage
Commercial mortgage-backed securities
Constant Maturity Treasury
Department of Labor
Emerging Issues Task Force
Employee Retirement Income Security Act
Employee Stock Purchase Plan
Euro Interbank OÅered Rate
Federal National Mortgage Association
Financial Accounting Standards Board
Federal Election Commission
Federal Housing Administration
Credit scores initially developed by Fair, Issac and Co., Inc.
Financial Accounting Standards Board Interpretation
Financial Accounting Standards Board StaÅ Position
U.S. generally accepted accounting principles
Government National Mortgage Association
Government-sponsored enterprise
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992
Department of Housing and Urban Development
Interest only
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
Option-Adjusted Spread
OÇce of Federal Housing Enterprise Oversight
Over-the-Counter
Mortgage Participation CertiÑcate
Public Company Accounting Oversight Board
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
Standard & Poor's
Securities and Exchange Commission
Statement of Financial Accounting Standards
Securities Sales and Trading Group
To Be Announced
Department of Veterans AÅairs
Variable interest entity
154
Freddie Mac
8200 Jones Branch Drive, McLean, Virginia 22102 n www.FreddieMac.com