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For Immediate Release December
01,
2005
FREDDIE MAC INCREASES COMMON STOCK DIVIDEND BY 34 PERCENT$0.12 Increase is Third in Two Years; Company Also Provides Financial and Business Performance Update for the Third Quarter of 2005
McLean, VA – The board of directors of Freddie Mac (NYSE:FRE) today declared a $0.47 per share quarterly dividend on the company's voting common stock, a $0.12, or 34 percent, increase in the quarterly dividend. In addition, the company provided an update on financial trends and business performance for the third quarter of 2005. The common stock dividend action is the third increase in two years, with a cumulative dividend increase of approximately 81 percent since December 2003. "Today's dividend announcement reflects our strong capital position and demonstrates our increasing confidence in Freddie Mac's long-term business prospects," said Richard F. Syron, Freddie Mac's chairman and chief executive officer. "We continue to work hard to serve our housing mission, generate value for shareholders, improve our position in the mortgage market and complete our return to timely financial reporting." Details on the common stock dividend increase and the board's additional action today declaring quarterly dividends on the company's preferred stock are provided below. THIRD QUARTER FINANCIAL AND BUSINESS PERFORMANCE "Today's market update provides investors with important information about our third quarter performance while we continue building out our infrastructure and fixing our internal controls," said Martin F. Baumann, Freddie Mac executive vice president – Finance and chief financial officer. "We are focused on improving our financial reporting through our additional control efforts and initiating '34 Act registration with the SEC in 2006." Capital Position Through the third quarter of 2005, the company has continued to maintain a strong capital position. The company's estimated minimum capital surplus at September 30, 2005, was approximately $12.0 billion and its estimated surplus in excess of the 30-percent target surplus was approximately $4.7 billion. In accordance with its monthly reporting requirements, the company submitted its capital report to its financial regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), estimating regulatory core capital at September 30, 2005, of $36.3 billion, compared to $36.1 billion at June 30, 2005. This reported increase reflects estimated net income for the third quarter of approximately $600 million, including the effect of after-tax estimated losses of approximately $190 million related to Hurricanes Katrina and Rita, the approximately $220 million downward revision to first-half net income announced on November 8, 2005, and the payment of common and preferred stock dividends. Estimated net income for the first nine months of 2005 was approximately $2.1 billion (which includes the approximately $190 million hurricane-related charge), compared to $2.6 billion for the first nine months of 2004. These financial results are likely to change as a result of subsequent events, as well as any potential adjustments that might arise from final management reviews, analyses and controls testing, and any such changes could be material. At the time the company releases full financial results for the third quarter and first nine months of 2005, it will submit to OFHEO amended minimum capital reports for March, June and September of 2005, including estimates of capital surpluses. Subject to these qualifications, the company currently expects to report net interest income and margin for the third quarter of 2005 that are relatively flat compared to the second quarter of 2005. As previously advised, for full-year 2005 management continues to expect to report net interest income materially lower than that reported for full-year 2004, primarily due to compression in net interest margins on the existing portfolio and lower nominal margins on floating-rate mortgage-related security purchases. However, management continues to expect the decrease in year-over-year net interest income to be significantly offset by decreased losses in non-interest income (loss), primarily due to lower fair value losses on derivative instruments not in qualifying hedge relationships. Excluding charges related to Hurricanes Katrina and Rita, the company expects to report non-interest expense for the third quarter of 2005 that is relatively flat compared to the third quarter of 2004. Management believes the company is on track to meet its objective in 2005 of keeping administrative expenses, which are a component of non-interest expense, relatively flat compared to 2004. As discussed in its release dated November 8, 2005, the company continues to remediate weaknesses in its internal controls. As previously announced, the company will release full third quarter financial results upon the completion of additional controls-related work intended to provide greater assurance on the accuracy of financial reports. Fair Value Results Subject to the qualifications noted above, the company currently expects to report that the fair value of net assets attributable to common stockholders, before capital transactions, increased by approximately $0.8 billion during the first nine months of 2005. The company expects to report that, during the third quarter of 2005, it experienced a decline in the fair value of net assets attributable to common stockholders, before capital transactions, primarily due to a widening in mortgage-to-debt option-adjusted spreads, which had the effect of decreasing the fair value of the company's retained portfolio assets relative to its outstanding debt securities. The company also expects to report that the fair value of net assets attributable to common stockholders was approximately $26.9 billion as of September 30, 2005. While the widening of mortgage-to-debt option-adjusted spreads decreases the fair value of the company's existing net assets, management expects that a continuation of the recent widening trend would likely present the company with a broader range of attractive mortgage purchase opportunities in the future. As previously discussed, looking beyond 2005, management's long-term expectation is to generate returns on the average fair value of net assets attributable to common stockholders, before capital transactions, in the low- to mid-teens, although period-to-period returns may fluctuate substantially due to market conditions. Business Results and Trends The unpaid principal balance (UPB) of the company's retained portfolio has grown to approximately $678 billion as of October 31, 2005, an annualized growth rate of 4.6 percent. The company currently expects to report retained portfolio growth (in terms of UPB) for 2005 above five percent. The primary driver of growth in 2005 has been purchases of non-agency adjustable-rate mortgage-related securities. The company expects to maintain a disciplined approach and for its purchase activity to result in net growth only when such growth would meet both its mission and return objectives. The UPB of the company's portfolio of guaranteed mortgage participation certificates (PCs) and structured mortgage securities issued has grown to approximately $1,297 billion as of October 31, 2005, an annualized growth rate of 8.7 percent. The company currently expects to report growth (in terms of UPB) for 2005 in its guaranteed PCs and structured securities issued of approximately ten percent. The higher expected growth in 2005, compared to growth of approximately four percent in 2004, is due in part to the company's successful efforts to increase market share. The company estimates its share of government sponsored enterprise mortgage securitizations at approximately 44 percent year-to-date in 2005, compared to 41 percent for full-year 2004. Interest-Rate Risk Management The company's interest-rate risk remains low. For the first nine months of 2005, Portfolio Market Value Sensitivity (PMVS) and duration gap averaged one percent and zero months, respectively. PMVS was two percent in January and has been one percent in every subsequent month in 2005 through October. Duration gap has averaged zero months for every month in 2005 through October. Credit-Risk Management Estimated credit-related expenses (which are the sum of the provision for credit losses and real estate owned operations expense) excluding the effects of Hurricanes Katrina and Rita were down for the third quarter of 2005 compared to the third quarter of 2004. Estimated net charge-offs for the third quarter of 2005 were down compared to the third quarter of 2004. As of September 30, 2005, the total single-family delinquency rate was 59 basis points, compared to 73 basis points as of September 30, 2004. Internal Controls/Financial Reporting Update As previously disclosed, management has devoted substantial financial and personnel resources to improving Freddie Mac's internal controls and continues to remediate weaknesses in controls over financial reporting. To provide greater assurance over the reliability of the company's financial reports, management is accelerating a number of previously planned control initiatives into the fourth quarter of 2005. These initiatives primarily involve performing detailed control reviews of automated systems and applications that management had planned to review in 2006 in order to identify and remediate any control weaknesses. Management is also accelerating and expanding various analytical review procedures to provide greater assurance around the accuracy of the company's financial reports. The company's objective is to release fourth quarter and full-year 2005 results and to begin filing timely, GAAP-compliant monthly capital reports with its regulator, OFHEO, no later than the end of March 2006. The company expects that its plan for beginning the registration process with the Securities and Exchange Commission (SEC) will not be significantly changed by the control initiatives noted above. CAPITAL ACTIONS As noted above, the company's board of directors today declared a $0.47 per share quarterly dividend on the company's voting common stock, a $0.12 per share increase (or a $0.48 per share increase on an annualized basis), bringing the annualized dividend to $1.88 per share. The company also declared quarterly dividends on its preferred stock as noted in the table below. The fourth quarter common and preferred stock dividends will be payable on December 30, 2005, to stockholders of record as of December 12, 2005.
Freddie Mac management will host a conference call discussing today's announcement at 4:30 p.m. Eastern Time today. Domestic investors should call 1-888-428-4474 and international investors can access the call at 1-612-332-0634. The conference call will be webcast live on Freddie Mac's Web site. During the call, chief financial officer Martin F. Baumann will be referring to a slide presentation that will be posted on the Web site shortly before commencement of the conference call. Freddie Mac encourages you to have this presentation available so that you can better follow Mr. Baumann's remarks during the call. A telephone recording of this conference call will be available continuously beginning at approximately 9:00 p.m. Eastern Time on December 1, 2005, until midnight on December 15, 2005. To access this recording in the United States, call 1-800-475-6701 and use access code 805718. Outside of the United States, call 1-320-365-3844 and use access code 805718. The information in this press release and additional information will be included in an Information Statement Supplement dated December 1, 2005, which will be posted on the Investor Relations page of the company's Web site. ADDITIONAL INFORMATION Additional information about Freddie Mac and its business is also set forth in its Information Statement dated June 14, 2005, and related Information Statement Supplements, which are available on the Investor Relations page of its Web site at www.FreddieMac.com/investors. Freddie Mac encourages all investors and interested members of the public to review these materials for a more complete understanding of its financial results and related company disclosures. Freddie Mac's press releases sometimes contain forward-looking statements pertaining to management's current expectations as to its future business plans, results of operations and/or financial condition. Management's expectations for the company's future necessarily involve a number of assumptions and estimates, and various factors could cause actual results to differ materially from these expectations. These assumptions and factors are discussed in the company's Information Statement dated June 14, 2005, and its Information Statement Supplements dated August 31, 2005, and October 4, 2005 and November 8, 2005, which are available on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors. Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and nearly four million renters in America. ###
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