Mike May's Speech at the Freddie Mac Multifamily Leadership Conference on September 27, 2007

Prepared Remarks for Mike May
Senior Vice President of Multifamily Sourcing

Freddie Mac
Freddie Mac Multifamily Leadership Conference
Park City, Utah
September 27, 2007

This is a great time for Freddie Mac to demonstrate our lasting value in multifamily.

While other markets are being squeezed by a credit crunch, the markets we support remain stable and liquid. Our bids are consistent. Our spreads are still favorable. Our executions remain reliable. We are taking deals re-traded or dropped by others. We continue to support affordable housing. Our portfolio quality remains strong. And our volumes are way, way up.

So right now, life is pretty darn good.

A Tough Experience

But the sky has not always been this sunny and bright for us. From a competitive standpoint, it wasn't too long ago that we were totally getting hammered.

At the beginning of the year, we thought that credit and pricing had gone too far, and we drew a line. We were not fully prepared to leverage the capital markets by providing conduit-style terms and executions. And we were too slow in our basic processes. As a result, our business suffered. Volumes fell. Long-time customers took their business elsewhere. And our market share circled the drain.

Now, I thought the market was just plain wrong in how it was pricing for risk. To me, the market had become as frothy as a Starbucks latte. But at some point, you really cannot argue with Mr. Market. And so we went back to our labs and developed some flexibility on credit. Although we won some business, we were not really much of a market force.

My low-point came last Spring, when I visited one of our regional offices. I asked, "How is the market?" One person said, "We don't know because we haven't done a deal in weeks." "Not a single deal! My God!"

That's when I thought I was going to die. And just as I pictured my own demise, the market changed. And changed big time.

The subprime meltdown from residential spread into multifamily. The CDO market dried up. CMBS spreads widened out considerably. Subordination levels went up. Investors backed out of deals. Conduits left the market en masse. And lenders and borrowers turned to Freddie for help.

And suddenly, our business picked up. A lot. In fact, in August, we had our biggest month ever for rate locks: 210 loans worth a whopping $3.8 billion! That’s an annual run rate of $46 billion on a book that normally runs one-third of that amount. And now, we have a new problem: we simply have more business than we can easily process.

Lessons from the Credit Crunch

From the fog covering the market, one fact emerges clearly: The multifamily market is profoundly different now.

This industry is learning that it is affected more by swings in other markets, such as residential. After all, with global investing, once investors change their views on risk in one market, they tend to do the same in all their markets.

Another difference: This market is more vulnerable to fundamental flaws in structured finance; and it is highly dependent on key structures such as CDOs. As The Wall Street Journal has pointed out, rather than being an efficient means to spread risk, securitization has been exploited to invite more risk into the system.

More broadly, the industry is learning the powerful impact of fear, and how it can take over market fundamentals. For instance, without knowing the full extent of losses, a rational re-pricing of risk has turned into a full-blown credit crunch.

Clearly, this is a different market. And the question for Freddie Mac and our customers is: what do we do about it?

Our Game Plan for Growth

In recent weeks, we have sat down at Freddie to ask that very question. And, I must admit, that one thing stuck in my mind. And that was the near-death experience we suffered earlier this year. Frankly, we never want to be in that position again.

We have made gains recently. That's for sure. But given the strong fundamentals of this market, we have to think that the conduits will be back at some point, in some fashion. And when they do, we have to be prepared to hold onto our gains. And that's what we are going to do.

We will work to hold on to customers that stayed with us during the tough times…ones that have returned to doing business with us…and new customers that now realize we provide timely, reliable and consistent executions, not sluggish government bureaucracy.

Indeed, to use a farming analogy, we are going to make as much hay as possible while the sun is shining:

We will protect our business by adjusting credit and pricing to properly reflect the risks in the transaction.
We will grow market share by focusing on customers.
We will enhance our portfolio execution and the flexibility it offers.
And to sustain our momentum, we will build out our own capital-markets execution. And do it in a way that provides more flexibility than the competition.

In short, Freddie will be a strong business that excels in all markets segments, with all types of customers, through all market cycles. And this is the plan we are executing.

Addressing Immediate Issues

What, exactly, are we doing?

First, to safeguard our business and provide liquidity in a chaotic market, we are being rational and transparent with pricing.

While others have run for the hills, we have held our ground and honored our quotes. When we had to raise prices, we have communicated clearly to you. We have not tried to capture every last ounce of profit. Instead, we have looked to create goodwill that can last. As pricing continues to move, you can expect us to act in a similar fashion. This way, you're aware of our position, and can plan accordingly.

Next, we are capitalizing on the market opportunity before us: chiefly, a volume surge in our business. You're depending on us more now, and we want to support you. Currently, we have manpower and capacity issues. And so, we have developed outsourcing relationships for certain steps in loan processing. And we have reallocated staff to assist customers with current deals.

By definition, reallocation means that we are slowing down longer-term initiatives. To be clear, we are delaying the expansion of our small-loan program. We still plan to pursue this market once we have addressed this volume surge.

Building A Longer-Term Business

Of course, more bodies alone won't make us succeed. That's why we are also enhancing our core business of portfolio execution. Improving our process. Launching new products. And generally making it easier to work with us.

For example, to get quotes to you faster, we have improved the Early-Rate Lock process. Lowering the good-faith deposit on immediate-delivery deals. Reducing the amount of information we require. Automating more steps. And bringing decision-making closer to the points of transaction.

We have launched new products as well. New Acq-Rehab and Upgrade products to help borrowers reposition their properties in a changing market. Taking the benefits of our Streamlined Refi product – such as a financial incentive for portfolio retention, and the ability to close loans faster – and extending these features to acquisition deals.

With our Targeted Affordable lenders, we are making delegated underwriting more the rule than the exception. And we have completed the work to offer a new credit-tranching product that allows a lender to expand the credit box by sharing risk with us.

Now, all that represents a lot of progress. And from a business perspective, we could probably call it a day and say, "Good job." But we cannot be that short sighted. Instead, we need to look down the road, to when the market recovers and competitors reemerge.

And so, we are completing the build out of an alternate business model. Our goal is to buy a wider range of risks, and then leverage our investment position to provide better executions and more flexibility to borrowers.

During the past year, we have dabbled with alternate executions, with deals involving other capital-market providers. All this work has been leading up to a new offering from us: A full capital-markets execution, which we expect to be in market during 2008.

By structuring a conduit-style transaction, we will have the ability to create a hybrid execution – one that balances the needs of the borrowers with our rights as the primary investor. For instance, through our investment position, we can improve the borrower experience in areas such as supplemental financing, assumptions, prepayment terms and insurance waivers.

When it comes to our alternative business model, think of it as a hybrid providing conduit-style executions with Freddie Mac portfolio flexibility. Now, that's a dynamite combination.

Conclusion

But whether it is our portfolio business or alternate executions, one thing will remain the same: The Freddie Mac commitment to reliability, consistency and quality of service.

If we learned anything from these past months, it is that relationships are not just another commodity. They have tangible value beyond the next quote. There is a certain confidence that comes with a business partner that is committed to the same markets as you. One that doesn't cut and run when conditions change. One that makes customer satisfaction a priority, not a waste of money.

And that's why this is a great time for Freddie Mac. We are now in position to pull out all the stops to support our customers, and build a business you can rely on for the long run. We still have our challenges. But we are working towards one main goal: When the next market cycle kicks in, I want Freddie Mac customers to come out the winners.

And that's the lasting value of Freddie Mac.