David Glenn
Vice Chairman and President
Freddie Mac
Prepared Remarks for the Sanford Bernstein Conference
June 6, 2001
Good afternoon! It's a pleasure to be with you. I want to express
my thanks and appreciation to Sanford Bernstein-and to Jonathan
Gray in particular-for inviting Freddie Mac to be here.
With me is Joe Amato, Freddie Mac's VP and head of Shareholder
Relations.
Today, I want to talk about Freddie Mac's outstanding track record
and our business model, which sustains our comparative advantage
in the mortgage finance marketplace. I would also like to discuss
the current political environment…and the broad, bipartisan
support we have from legislators and policymakers.
All told, I'm confident you'll see that Freddie Mac is well-positioned
for strong growth for the near-term…and for the future.
Let me start with our performance.
A Legacy of Strong Performance
Congress created Freddie Mac in 1970, to help make the dream of
decent, accessible housing a reality for all Americans. We do that
by linking the nation's mortgage markets to the world's capital
markets, ensuring that borrowers have a reliable source of low-cost
mortgage money. Since our inception, we have provided affordable
home financing for more than 27 million American families.
Since our inception 30 years ago, we have achieved an unbroken
record of profitability. In the past decade alone, our earnings
per share have grown at a compound rate of nearly 20 percent.
And we have achieved consistent earnings growth, regardless of
changing interest-rate and credit conditions. This is a record that
is simply outstanding.
This year, we're building further on that record. Operating earnings
per share grew 19 percent in the first quarter.
And we have already revised upward our outlook for the year. We
expect 2001 to be an excellent year with strong, high-quality earnings
growth.
A Model for Success
The foundation of this record is our business model. It is the
means by which we compete in the marketplace…and it is the
basis for our future growth.
There are three fundamental components to our business model: low-cost
funding, risk management expertise and efficient capital management.
With respect to the first component, low-cost funding, Freddie
Mac is essentially a wholesale finance company that competes on
the basis of low financing costs. To ensure we have the lowest possible
financing costs, we consistently strive to improve our access to
the capital markets, and to enhance the liquidity, predictability
and transparency of our securities. The result is unparalleled access
to low-cost financing and a sustainable, comparative advantage.
We have two primary financing vehicles, mortgage-backed securities
and debt, which are issued in a variety of markets and maturities
and with varying features. The sheer volume of our huge financing
responsibilities enables us to offer premium liquidity in all of
the markets in which we participate. For example, the size and liquidity
of the mortgage-backed securities market is second only to the U.S.
Treasury market.
Freddie Mac pioneered the mortgage-backed securities market by
creating both single-class and multi-class mortgage-backed securities,
and our net amount of mortgage securities outstanding currently
totals nearly $600 billion.
In the last few years, significant investor interest in our debt
securities has expanded our access to low-cost funds and strengthened
our competitive advantage. The growing global debt market, coupled
with the decline in U.S. Treasury issuance, has created very significant
opportunities for us. In 1998, we responded to a worldwide need
for Treasury-like instruments by launching our Reference brand of
Bonds, Notes, and Bills.
Since then, global investors have propelled our Reference program
forward. We now sell one-third of our Reference Notes and Bonds
to international investors, whereas three years ago we sold less
than 5 percent of our debt overseas. And last year we opened up
new markets for our debt when we introduced Euro-denominated Reference
Notes.
In a little more than three years, Freddie Mac has raised more
than $170 billion for America's homeowners, at very attractive costs,
through our Reference program.
Our debt's increasing prominence worldwide, combined with innovations
like web-based debt auctions, will further improve our funding costs
relative to other investors. As a result, we expect to enhance our
already strong competitive position as a natural investor in, and
holder of, mortgages.
We use our financing strengths to compete for… and to win…mortgage
assets. This keeps costs low for America's homeowners…but exposes
us to two types of risk-credit and interest-rate risk-so superior
risk management is the second component of Freddie Mac's business
model.
In our securitization business, Freddie Mac effectively distributes
credit risk through private mortgage insurance, pool insurance,
recourse and other structures that protect our loan portfolio from
economic downturns. We also pioneered state-of-the-art automated
underwriting and loss mitigation tools that have become mortgage
industry standards.
Freddie Mac's Loan Prospector harnesses two decades of mortgage
data to better tie underwriting decisions to credit performance,
making it the premier risk management tool in the industry. More
than 80 percent of the loans we buy are now going through our Loan
Prospector tools, or closely calibrated equivalents. These and related
servicing tools, along with a strong economy, have contributed to
a loan portfolio with a historical low of 1 basis point of credit
losses.
Effective interest-rate risk management is just as essential to
our business model, so Freddie Mac has also developed world-class
capabilities in that area. For the mortgages we retain in our portfolio,
we minimize interest-rate uncertainty by actively intermediating
much of the risk through callable debt and derivatives, which effectively
distributes that portion of the risk to third parties.
With our systems and experienced people, we're driving toward real-time
knowledge of our interest-rate risk position. This gives us the
confidence to step in aggressively when markets are volatile and
opportunities for quality assets are abundant. As examples, Freddie
Mac took full advantage of the profitable opportunities created
by market turmoil during the fall of 1998, and again during the
first quarter of this year, and rapidly grew our portfolio. And
we expect to continue to improve these capabilities going forward,
which will further strengthen our advantages in volatile markets.
The third component of our business model is efficient capital
management.
By intermediating both credit and interest-rate risks to third
parties, our business lays off a substantial portion of risk associated
with the assets we hold. As a result, we deploy capital only against
the risks we do incur, enabling us to compete with an extremely
efficient capital structure.
Freddie Mac has always been a leader in risk disclosure. We now
have leading-edge interest-rate and credit-risk disclosures. This
will enable you to monitor how well-structured we are relative to
the assets we hold.
In addition to being capital efficient, we maintain a capital management
discipline that focuses on long-term value creation.
We raise and deploy capital when the returns justify that capital.
Investment opportunities have been strong during the early part
of this year, so we've focused on buying quality assets that will
pay solid dividends for years to come. During other times, when
profitable growth opportunities are not as abundant, we will return
capital by repurchasing shares.
The three components of Freddie Mac's business model-low-cost financing,
effective intermediation and management of risk, and efficient capital
management-ensure that we will continue delivering strong value
for homebuyers and shareholders alike. They also enable us to expand
housing opportunities, grow the mortgage markets we serve and build
broad support for our role.
Broad Bipartisan Support
I want to elaborate on this last point because it's important in
understanding the special attention often paid to us by legislators
and regulators. Freddie Mac is one of the few companies that have
the privilege of being chartered by Congress. We're in the business
of financing homes in America, where a large proportion of households
aspire to own their own home.
Given the importance of housing to our nation from an economic,
social and, of course, political perspective, ongoing congressional
and regulatory oversight are natural and appropriate. And they provide
an opportunity for us to tell our story.
The discussions and debate over the past year have led to a consensus
on several important issues:
- First, Freddie Mac is fulfilling its housing mission by delivering
low-cost financing to America's homebuyers.
- Second, Freddie Mac is vital to the U.S. housing system.
- Finally, Freddie Mac is financially safe and sound.
In fact, the only issue subject to ongoing discussions is that
we have a strong, credible regulator-and on this, we agree!
And as long as we do our job well, the many benefits we deliver
to America's families will maintain the confidence of legislators
in Freddie Mac.
With an effective business model and broad bipartisan support in
Congress, we are well-positioned for a future that offers significant
growth opportunities. I'll conclude by briefly reviewing those opportunities.
Our market-the market for housing finance-is one of the largest
in our economy, and one of the very few that's always growing. Since
records have been kept, U.S. mortgage debt outstanding has risen
every year, regardless of economic conditions. And it's expected
to more than double in size this decade to about $11 trillion…an
expected increase of more than $5 trillion.
With mortgage debt outstanding growing between 7 percent and 9
percent over the long term, we have a healthy baseline for growth.
And as our core market grows, we're also pursuing opportunities
to increase our share of that market.
Increased precision with automated underwriting, combined with
effective loss mitigation techniques, will enable us to penetrate
new market segments, such as subprime.
And our commitment to low-cost financing and greater access to
homeownership should enable us to increase our total share of the
mortgage market…from 17 percent currently to about 20 percent
over the next few years.
In addition, as our financing costs improve relative to other funded
investors, significant growth potential exists for our retained
portfolio business. Currently, it's only 8 percent of the mortgage
market.
Clearly, we are confident about our prospects for solid growth
in a healthy, growing market.
Conclusion
To summarize…Freddie Mac is a highly efficient intermediary
that fulfills a vital role in America's housing finance system.
By delivering low-cost financing to America's homebuyers, we maintain
broad, bipartisan support.
By consistently expanding our access to low-cost funding, by intermediating
and managing mortgage risk with world-class capabilities, and by
allocating our capital in an efficient manner, we generate strong
results and enhance our comparative advantage in the mortgage finance
marketplace.
By doing all of this, we are poised to continue to capitalize on
the enormous growth opportunities being presented by the market
for residential housing finance.
I am confident that Freddie Mac will extend our record of strong
earnings and returns this year…and for years to come.
Thank you for giving me the opportunity to speak with you today.
|
