Leland C. Brendsel
Chairman and CEO
Freddie Mac
Salomon Smith Barney Financial Services Conference
New York, New York
January 29, 2002
Good morning. It is a pleasure to be here today. I always appreciate
the opportunity to talk about Freddie Mac.
2001 was a great year for Freddie Mac. We financed homes for a
record 3 million families. Our earnings rose 24 percent to hit a
company record for the eleventh consecutive year.
2001 also was a great year for the nation's housing market. Mortgage
originations topped $1.8 trillion, behind record home sales and
1.6 million housing starts. The latest numbers for December continue
to reflect the strength in the housing sector of the economy.
Last year demonstrated that Freddie Mac's success in serving America's
homebuyers and renters, and our ability to deliver strong financial
results, go hand in hand. We cannot achieve one without the other.
Today, I want to share with you the outlook for Freddie Mac's future.
I believe that we are in a strong position to continue our growth
and to maintain our role as the cornerstone of America's housing
finance system.
- First, we have a solid foundation - our market and financial
positions are strong.
- Second, we participate in a large market—the U.S. residential
mortgage debt market—that is expected to continue its strong,
consistent growth.
- Third, Freddie Mac has built several unique core capabilities
that will continue to propel our growth and enable us to grow
faster than the underlying mortgage market.
These factors give us excellent prospects for growing earnings,
for maintaining our strong financial position and for creating shareholder
value. Let me discuss each of these, beginning with our solid foundation
in the market.
Solid Foundation
For 30 years, since Freddie Mac was chartered in 1970, we have
worked to lower costs, to make it easier for families to get a mortgage
loan of their choice and in the process to help over 30 million
families own homes. By providing an uninterrupted supply of low-cost
mortgage money, Freddie Mac has helped make the U.S. housing finance
system the envy of the world and a pillar of the U.S. economy.
Never was Freddie Mac's commitment to financing housing in America
more evident than in 2001 - a year in which our nation renewed its
focus on family, and the core value of one's home was reinforced
after September 11.
Freddie Mac financed a record number of first-time homebuyers in
2001. And we set records in providing mortgage credit for both the
purchase and the refinancing of a home. The support we provided
to the market also sustained a strong housing sector and helped
buffer a weakening national economy.
Underlying this performance is a record of solid earnings growth.
Over the past ten years, Freddie Mac's earnings per share have grown
an average of 19 percent annually.
Freddie Mac delivered consistent double-digit earnings growth over
the past decade, despite volatility in interest rates and economic
downturns. We've generated this exceptional growth while carefully
managing both credit and interest-rate risk - the two principal
risks of investing in and funding mortgage loans. This was never
as evident as in 2001, a year of heightened volatility and market
dislocation.
As we start 2002, Freddie Mac's financial position is rock-solid.
Interest-rate and credit risk are at very low levels, and all elements
are in place for us to deliver solid growth in the future.
The future growth opportunities we will have begin with the mortgage
market we serve and the growth in that market.
Mortgage Market Growth
Freddie Mac is at the center of the U.S. residential mortgage
market.
U.S. mortgage debt outstanding currently is about $6 trillion.
This market has grown every year since World War II, including times
of economic boom and bust. In 2001, mortgage debt outstanding grew
10 percent, even while the economy slowed.
It's tough to find a better market than the one Freddie Mac participates
in. And it keeps getting better. In fact, during this decade, I
expect the growth rate of mortgage debt outstanding to be between
7 and 9 percent per year.
Mortgage debt will grow because more families will becomes homeowners;
they will continue to buy larger homes with more amenities; and
they will finance a greater share of their homes' value.
The nation's homeownership rate currently stands at about 68 percent.
Given this, I expect it to rise above 70 percent by the end of the
decade. The greatest increase will come from increased homeownership
among minority and immigrant households. I am impressed by survey
after survey that shows the desire to own a home. One recent survey
showed that immigrants are three times more likely to make homebuying
their highest priority.
Rising home prices will also drive increases in mortgage debt outstanding.
Nationwide, home prices have increased every year for the last half
century. I expect this to continue into the 21st century. Between
larger homes and inflation, home prices will grow 4 to 5 percent
per year over the next decade.
Finally, mortgage debt outstanding will grow as families finance
more of their homes' value. We expect large numbers of first-time
buyers, who typically borrow more of their homes' value. In addition,
consumers will continue to view mortgage credit as the lowest-cost
way to meet their borrowing needs, compared to other types of consumer
credit.
Clearly, Freddie Mac is at the center of a market that is exceptionally
well positioned for sustaining strong, stable growth. Seven to 9
percent average annual growth means that mortgage debt outstanding
will double to $12 trillion by 2010 from the $6 trillion today.
Unique Core Business Capabilities
Freddie Mac's strong financial position and growth in our market
are only part of our future success. Freddie Mac brings to this
market unique core business capabilities that we believe will enable
us to grow faster than the market.
For example, Freddie Mac's reliable access to low-cost funds enables
us to provide competitive bids for mortgages, even during periods
of market disruption.
Freddie Mac is steadfast in our pursuit of a steady supply of low-cost
funds. We pioneered mortgage-backed securities and we were instrumental
in developing the market for callable debt - both important vehicles
for financing long-term fixed-rate mortgages. Now we continue to
find ways to reduce funding costs by broadening and deepening the
universe of investors in all our securities - including our Reference
BillsSM and Notes, callable debt and other option-embedded instruments.
Our security offerings are large, liquid and high quality. They
fit perfectly with the investment requirements of an ever-broadening
array of investors - domestic and abroad. Five years ago only about
5 to 10 percent of our debt was distributed overseas. Now it's more
than 35 percent. And I expect it to continue to increase. Indeed,
I regularly travel overseas to help introduce the Freddie Mac name
to more investors.
Freddie Mac's reliable access to low-cost funds gives us a competitive
edge in the mortgage market, and we expect this advantage to be
even greater tomorrow.
Freddie Mac also is an expert in managing credit and interest-rate
risk. This core competency will enable us to continue to manage
the risk of funding residential mortgages and also to increase our
share of the mortgage market.
Our singular focus on residential mortgages, access to over 20
years of mortgage information and team of mortgage professionals
give us unparalleled expertise in understanding this asset class.
They also give us an edge in making mortgage investment decisions
and helping us design and pursue the best hedging strategies.
Our performance is a testament to our risk management and discipline.
Freddie Mac's earnings have grown through a variety of very challenging
interest-rate environments, including the recent one.
Our ability to effectively manage interest-rate risk in the future
is supported by the growing variety of techniques available to us
and the growth of the global derivatives market, which now exceeds
$100 trillion. The choices available to us will provide ongoing
flexibility in executing our interest-rate risk management strategies.
Our expertise in understanding and managing mortgage credit risk
continues to grow and drive innovations. For example, the Loan Prospector®
automated underwriting system Freddie Mac introduced in 1995 has
now become an integral part of how mortgages are originated and
underwritten. It has revolutionized how mortgages are made. Enhancements
to this system are expanding our reach into the mortgage market
and helping us continue to carefully control credit costs.
This expertise also puts us in an optimal position to decide when
to take on credit risk and when to lay it off with others, which
we do frequently. This expertise is why Freddie Mac's credit performance
consistently leads the industry.
The broad scope of Freddie Mac's operations also positions us for
growth.
The size of our business offers tremendous economies of scale and
operating efficiencies.
Freddie Mac's administrative expenses are about 8 basis points of
our $1 trillion total portfolio. And we generate about one and a
half million dollars of revenue per employee. Both figures are superior
to almost every other major participant in the mortgage market.
In addition, Freddie Mac maintains a continuous presence in the
mortgage market, standing between thousands of lenders and thousands
of debt and mortgage investors. This gives us unique information
and access to mortgage loans and financing opportunities at all
times in all markets.
Freddie Mac's efficient capital structure is also important in
positioning us to capture a greater share of the mortgage market.
Freddie Mac is in one line of business - investing in mortgages
on people's homes. This is one reason why it is relatively easy
to understand the risks of Freddie Mac and why it is possible to
design a risk-based capital standard for us. Mortgages are high-quality
assets, backed by homeowner equity. We use credit enhancements and
other hedging instruments to distribute much of the remaining risk
to others. Our capital requirements assure that we only hold capital
against the risks that we retain. We have a very efficient capital
structure that enables us to effectively compete for mortgage assets
in the market and maintain our position as a premier, low-cost funder
of residential mortgage credit.
These unique capabilities - reliable access to low-cost funds,
expert risk management, the scope of our operations and our efficient
capital structure - are real; they are important; and they are sustainable.
Each gives Freddie Mac a strong position in competing for and winning
mortgage assets. Collectively they are an extremely powerful force
for growth above and beyond the 7 to 9 percent growth in the mortgage
market.
There is plenty of room for us to grow our business.
Freddie Mac's retained mortgage portfolio, the business that manages
interest-rate risk, accounts for about two-thirds of our earnings.
This business is only about 9 percent of mortgage debt outstanding,
despite its rapid growth over the past decade. Our strong core capabilities
in this area put us in an excellent position to increase our share
of this higher-margin business over time. A 9 percent share of a
market growing at about 8 percent is an attractive opportunity.
Freddie Mac's credit business also is an opportunity to capture
increasing share. In this business, called our securitization business,
in which we manage credit risk on mortgages, we have about 19 percent
of the market. By bringing low-cost financing to new sectors of
the mortgage market and lowering the cost of mortgage money through
technology, we expect significant growth here as well.
In addition to growing the number of loans we purchase, we are
positioned to increase our revenue earned on the loans we purchase.
In conclusion, as we look ahead to the first decade of the 21st
century, Freddie Mac is positioned to continue to fulfill our mission
and build shareholder value. Freddie Mac plays a fundamental role
in the nation's housing finance system.
Our financial position is rock-solid.
We are in a market that is expected to grow 7 to 9 percent per
year over this decade.
Our unique core capabilities are driving Freddie Mac's growth higher
than the growth in the market and providing opportunities to grow
our revenues.
Freddie Mac has extraordinary opportunity in the years ahead. Few
major financial services companies can match our record of translating
opportunity into results.
I want to thank you for your interest in Freddie Mac. I want to
thank the investors here for your commitment and confidence in us.
We will continue to seek to earn that confidence.
I would be pleased to answer any questions.
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