Richard F. Syron's Speech at the Freddie Mac Annual Stockholders' Meeting on June 6, 2008

Prepared Remarks for Richard F. Syron
Chairman & Chief Executive Officer, Freddie Mac

Freddie Mac Annual Stockholders' Meeting
McLean, Virginia

June 6, 2008

It's good to be with you again – almost exactly a year since last year’s annual meeting.

Freddie Mac is living a kind of paradox these days. In some ways it has been the best of times for us; in some obvious ways, the worst of times. This “Tale of Two Freddies” began last year – and it included the same severe deterioration in credit and the housing markets that has affected every company in our sector. Our “best of times” included substantially remediating our accounting and internal controls, getting current in our financial reporting, driving ahead toward SEC registration and taking other needed steps forward. Becoming timely and registering with the SEC has been our focus for a long time and it’s great for everyone to finally be getting there. I want to thank all of the Freddie employees for making it happen.

This year is a similarly paradoxical story. These remain very tough times in terms of the credit overhang we face. Yet going forward, Freddie Mac is facing the best of times in terms of our market share, market opportunities, more rational pricing and expected revenue growth.

I want to explain more about these plusses and minuses – and specifically to detail why, going forward, the positive changes predominate over the negatives. We also want to leave time for your questions.

But first, let me express our profound thanks to Shaun O’Malley, who is retiring from the board after nearly seven years of exceptional service, including four and a half years as our lead director and also as non-executive chairman during the critical months from June to December 2003. Shaun’s leadership, insight and friendship have been indispensable – not only for the company but for me personally.

In a time of crisis, he brought stability; in a time of chaos, he brought clarity; in a time of great testing, he brought quiet resolve. Thanks to his efforts, your company is stronger, safer and more respected. For that I, and everyone here, owes Shaun O’Malley a debt of gratitude.

Fortunately, we anticipate that when the preliminary vote is announced in a few minutes, we will fill Shaun’s seat with Jerome Kenney, whose distinguished career has included service at Merrill Lynch both as vice chairman and as CEO of its Capital Markets Group worldwide. Our ability to continue replenishing the board with experienced executive talent of such high caliber bodes well for your company. I would put our board up against that of any other company – financial or otherwise – both as a group and individually.

Now let me turn to Freddie Mac’s business and financial performance in 2007. As I said, this was in many ways a “Tale of Two Freddie Macs” – a year in which we made great internal progress, but also in which the housing sector collapsed, the subprime crisis came to a boil, and many credit and financial markets were thrown into turmoil. Clearly, weakening house prices and punishing deterioration of credit hurt our results, along with those of other market participants. Our 2007 net losses amounted to roughly $3.1 billion on a GAAP basis. These results reflected mark-to-market losses of $8.1 billion and a higher provision for credit losses.

Last year we instituted a new non-GAAP measure called Segment Earnings, to more clearly convey results in our three lines of business. Investors have sought such a measure for several years, and it enhances both our transparency and our comparability with other financial institutions. On a Segment Earnings basis, our 2007 earnings were a positive $2.1 billion – but down from $3.9 billion on this basis for 2006. This decline was consistent with our increased provisioning for credit losses as we saw credit deteriorate.

We know we have to do better, even in the most adverse market environment. So let me sketch for you some of the steps we have taken with the guidance and support of our board:

1. We will be registered with the SEC in the near future; our financial reporting is timely and current; and we completed our major remediation of internal controls. These are major strides taking us down the right road: that of a typical, transparent company.
   
   
2. We have significantly improved and simplified our accounting, thanks in large part to our Chief Financial Officer, Buddy Piszel, and his team. Because of these enhancements, our accounting today is more transparent; more comparable to our peers; and provides more consistency in the treatment of our capital.
   
   
3. We have raised prices and tightened credit terms, both significantly. These steps were essential, and they came only after the most careful consideration. At the same time, we have continued to subsidize our affordable business.
   
   
4. We have acted prudently and decisively to protect and bolster our capital. Late in the year, we successfully raised $6 billion in a preferred stock offering. In March, as a result of our progress in remediating internal controls, OFHEO reduced our target capital surplus from 30 percent to 20 percent. Since then, we have committed to raise an additional $5.5 billion, split between preferred and common stock – at which time OFHEO will further reduce our surplus to 15 percent, with the announced intention to reduce it to 10 percent following our final satisfaction of our consent order and certain other conditions. So essentially, we will raise another $5.5 billion and we cumulatively will be getting back a similar amount of our capital cushion. Given the excellent business opportunities we are seeing, the new capital will be deployed in ways that will increase shareholder value while enabling us to stabilize and support the recovery of the housing market.
   
   
5. We kept serving our mission – providing stability, liquidity and affordability to the mortgage market – at a time when most private label participants all but abandoned it. In light of the GSEs’ effectiveness in the conventional conforming market, Congress and the Administration asked us to take on additional duties in such areas as subprime, foreclosure prevention, and the jumbo mortgage market in high-cost areas. This confirmed what had become clear: there is greater understanding than there has been in years that the GSEs are essential for the long-term health of the U.S. housing market.

Those are just some of the key things we’ve done and changes we have made to respond to this historic housing downturn. The result was a 1Q 2008 GAAP loss of $151 million – not a profit, I’m the first to note, but a clear turn in the right direction.

We believe our 2008 results will be better than 2007 – and that in the current “Tale of Two Freddies” that I described, the “best of times” in terms of our revenue growth and profitability are yet to come.

That doesn’t mean we are ignoring the negatives: credit continues to weaken; our provision is growing; and we are keeping a very close eye on falling house prices. But we believe this will be manageable for three reasons. First, we have already reflected in our results more than $7 billion in anticipation of future losses, through the combined effect of our reserve and credit-related mark-to-market items. Second, our overall asset quality continues to be among the best in the industry – with a mortgage portfolio which, compared to our competitors, is low in loan-to-value, low in holdings of exotic loans, high in regional diversification and high in credit quality. Third, the revenue engine of our business is showing more horsepower than it has in years, thanks to the volumes, appropriate pricing for risk and investment spread opportunities we are seeing.

Specifically, as we indicated in our first quarter conference call, for full year 2008, based on current growth opportunities and credit conditions, we would expect to achieve:

• 15 – 20 percent revenue growth from our guarantee business; and

• strong growth in net interest income.

• On the credit side, we also expect to see an increase in our 2008 provision
  to approximately $5 - $6 billion.

The bottom line is, while our credit costs are increasing in this tough environment, we believe they are manageable under any realistic scenario – and mitigated by our revenue growth going forward. We are confident we will have both the earnings power and the capital we need to thrive as this market recovers.

As for our mission, Freddie Mac is meeting our expanded challenges head on. For example, we more than doubled our commitment to buy $20 billion in consumer-friendly mortgages that provide better choices for subprime borrowers. We worked out almost 1,000 mortgages a week in 2007 – more than twice as many loans as we were forced to foreclose. And it took only about 60 days after passage of the Economic Stimulus Act for consumers to start to feel significant benefits from Freddie Mac’s participation in the conforming jumbo market.

Internally we have made essential strides, but this company has a lot of hard work left to do. For example, we need to be more cost-efficient; to improve our security performance; and to strengthen our securitization business overall. And we must never cease to integrate risk management into the fiber of our decisionmaking.

Let me wrap up with an assessment of our position. Here is my candid review of how we’ve done. Any such assessment must begin with the right question: namely, what are our objectives?

Our most valuable asset by far is the charter – protecting it and allowing us to use it to meet our vital housing mission is Job One. To do that, remediation has been our top focus in recent years: repairing our accounting, internal controls and material weaknesses. By doing so, we were able to successfully negotiate a reduction in our target capital surplus from 30 to 20 percent, and we’re looking forward to further reductions on the way to 10 percent.

The next objective is ensuring the long-term benefits of the charter for our shareholders. That’s a task we’re focused on now.

Looking back, we successfully upgraded our accounting, financial reporting and internal controls. In dealing with the deterioration in credit, we fared better than others, but still suffered – no surprise for a company whose charter limits it to housing.

I know you are not satisfied with Freddie Mac or your investment in this company – and neither am I. Your senior management will not be satisfied until you, our owners, have received a fair return for the capital you have invested, the risks you have borne, the patience you have shown.

Meanwhile, we thank you for your support of this enterprise. We have an unparalleled opportunity today to grow and build shareholder value simply by doing our job. We know the nation needs us, and we are confident the markets will reward us. And as Freddie Mac’s turnaround gains momentum, we are committed to ensuring that you, our owners, will be duly rewarded as well. After all, it is your private capital that enables us to serve our GSE mission in the first place.

So thank you again for investing in Freddie Mac. We appreciate your being here.