1. Freddie Mac – Past, Present, Future GIOA March 26, 2009 David Isaac Director, Agency Trading Jeana Curro Director, MBS Strategy

2. 1 Table of Contents SectionPage I II III IV Freddie Mac Overview FHLMC Debt Issuance FHLMC MBS Basics Recent Developments and the Implications for FHLMC 2 10 25 30 VThe Future of Freddie Mac 45

3. SECTION 1 FHLMC Overview

4. 3 How Freddie Works “A primary purpose is to provide stability in the secondary market for home mortgages including mortgages securing housing for low and moderate income families. This can be accomplished through both portfolio purchasing and selling activities, as well as through the securitization of home mortgages.” 1 U.S. Residential Mortgage Market Mortgage Investments Mortgage Securitization Freddie Mac Global Capital Markets Mortgage-backed Securities Debt Securities 1 House of Representatives report on FIRREA, No. 54, 101 st Congress, 1 st Session, Part 3 at 2 (1989).

5. 4 Dual Mandate  Mortgage Purchase & Credit Guarantee (majority of business) – Funding Advantages  Portfolio Investment – Debt Issued to Finance

6. 5 Freddie Mac – Timeline 1970-2007  1938: The Federal National Mortgage Association, also known as Fannie Mae, was founded as government sponsored enterprise to provide liquidity to the mortgage market  1968: Fannie Mae was converted into a private corporation  1970: The Federal Home Loan Mortgage Corporation, also known Freddie Mac, was founded to end Fannie Mae’s monopoly of the secondary mortgage market  1971: Freddie Mac introduced first mortgage-related security  2003: Freddie Mac admitted it understated $5 billion of earnings – fined $125 million by SEC  2004: Alan Greenspan warns of Fannie/Freddie risk to U.S. financial system due to rapid growth  August 2007: Subprime mortgages trigger the current financial market crisis

7. 6 Freddie Mac – Timeline 2008-2009  January 2008: GSEs portfolios come under scrutiny  July 2008: Sovereign Debt buyers (foreign gov’ts) express worries about GSE paper  July 30, 2008: Housing Recovery Act of 2008 (GSE Bill) – Creates Federal Housing Finance Authority (FHFA) – Congress gives treasury broad powers to recapitalize GSE’s – Temporary access to Short Term Credit Facility  August 2008: GSE’s report higher than expected writedowns – capital base called into question – Freddie Mac began selling mortgages from portfolio to raise cash – shares plunge – rumors of rescue  September 7, 2008: Freddie Mac & Fannie Mae placed in conservatorship – Three objective : Market Stability, Market Availability, Taxpayer Protection  February 2009: CEO David Moffet Resigns / Treasury Line of Credit doubled  March 11, 2009: John Koskinen named Interim CEO

8. 7 What Happens Next…  Moral Hazard – is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.  Too Big to Fail  Guarantee approximately 50% of U.S. Mortgages (with Fannie)  Freddie/Fannie Obligations approximately $5.4 Trillion (~40% of U.S. economy) – Concerns about debt -Foreign & Domestic Investors

9. 8 How did it come to this?  Squeezed by dual mandate/dual masters  Housing Prices fell & Foreclosures grew  Huge losses from Mortgage Defaults  Calculation of Capital Cushion  Regulator and Companies felt they were sufficient – Government Standard versus Risk-Based Capital Standard  Value of Tax Credits – June 2008 - $37 billion of capital / $18.4 billion in tax credits  Capital/Asset Ratio  Freddie/Fannie 1.2%– other financial institutions 3%  Problems raising capital (August 2008)  Market psychology became more important than fundamentals

10. 9 Conservatorship  The Director of the Federal Housing Finance Agency (FHFA) placed Freddie Mac and Fannie Mae in conservatorship in order to restore the balance between the GSEs’ safety and soundness and mission (September 8 th, 2008) – Primary mission of the GSEs now to proactively work to increase the availability of mortgage finance, including consideration of mortgage affordability  FHFA is the Conservator for both GSEs – The Conservator assumed all powers of the Boards, management and shareholders – Appointed new CEO to lead each GSE & reconstituted their board of directors – Stated that the GSEs will continue business as usual during the conservatorship  FHFA has indicated that the conservatorship goals include: – Restoring confidence in the GSEs – Enhancing the GSEs’ capacity to fulfill their missions – Mitigating the systemic risk that has contributed to market instability  GSE’s conservatorship will end when plan to restore the GSEs to a “safe and solvent” condition is complete

11. SECTION 2 Freddie Mac Debt Issuance

12. 11 Freddie Mac’s Debt Products Source: Freddie Mac. Data as of February 28, 2009. Outstanding ($ Bn)

13. 12 Freddie Mac Issuance Tables Source: Freddie Mac, RBS

14. 13 Recent Agency spread performance Source: Freddie Mac, UBS. Bear Stearns

15. 14 Freddie Mac’s Debt Maturity Profile Note: Outstanding balance using par amounts. Source: Freddie Mac. Data as of February 28, 2009.

16. 15 Short Term Debt  Rapid Portfolio Growth Period – Portfolio expansion to $900 Billion (from $800 Billion in early 2007) – Short end offers most flexibility  Expansion of Discount Note Window – Reverse Inquiry – No Overnight Program > will print of reverse  Numerous new investors – Looking to beat T-bill rates  Average 15-20 billion per week – 10% in auctions (previously 20%)  Funding advantage in short end – Prudently trying to term-out

17. 16 LIBOR spreads across the curve Source: Bloomberg, UBS.

18. 17 Importance of Callable Debt to Freddie Mac & Investors  Callables provide a critical source of convexity – Counterparty exposure management  Natural hedge to Freddie Mac’s investment portfolio duration profile  Callables can be used to customize yield curve exposure / express a view on volatility – Focused on accommodating investor requests for specific callable structures, i.e., issuing into demand or reverse inquiry  Callables offer enhanced yield over comparable bullet securities without compromising portfolio credit quality Freddie Mac Investors

19. 18 Callables & Floaters  Steady attempt to term out debt issuance – Take burden of Short Term Issuance – Improved access  Massive Amount called in December 2008 – Rate improvement  American Callables “sticky”  The Return of Super-Sized Callables  3month Locks vs 1year Locks  Increased interest in Floaters

20. 19 Callable debt yield enhancement over bullet securities Source: Freddie Mac / Tradeweb / UBS

21. 20 Reference Note Diversity of Capital Note: Data reflects orders placed in our US$ Reference Notes® securities syndicated bond deals. Source: Freddie Mac. Data for the 12 months ended February 28, 2009. Geographical regionInvestor type

22. 21 Geographic regionInvestor type Note: Data reflects 6-month moving average of orders placed in our US$ Reference Notes® securities syndicated bond deals. Source: Freddie Mac. Data as of January 31, 2009. Decreased Foreign Demand > Increased Domestic

23. 22 Primary dealer balance sheets are constrained Dealer inventory of Agency debtDealer inventory by product type Source: Federal Reserve Bank of New York. Data as of February 11, 2009.

24. 23 Agencies vs. FDIC Freddie MacFDIC Guaranteed Bank Paper Funding  Unlimited secured short-term borrowing facility through Treasury  Up to $200 billion of preferred capital available from Treasury if liabilities exceed assets 1  FDIC has unlimited borrowing authority at Treasury  FDIC guarantee on participating institutions’ debt Expiration  Short-term borrowing facility reverts to $2.25 billion on December 31, 2009  $200 billion under the preferred capital agreement is indefinite in duration 1  FDIC borrowing reverts to $30 billion on December 31, 2009  Valid on debt issued from now until October 31 2009, with maturities up until December 2012 Structural Considerations  Agency securities are authorized investments for local entities and banks in addition to Treasuries  New instrument with no precedence hence some investors still appear to be in the process of getting approvals Diversification  Traditional investors already hold a large pool of Agencies  Attractive for investors looking to diversify from Agencies Transparency / Liquidity  Calendar based  Typical bid/offer is 2-3 bps  Typical Syndicate involves 3 leads, 6+ Cos, 4+ selling group members  Ad hoc  Typical bid/offer is 5-10 bps  Typical Syndicate limited in size and scope Repo  Easy to repo and levels are uniform  DTC: 10-15 wider than GSCC Flexibility  Offer tailored, flexible investment and maturity dates and size  Less flexible maturity structure, only to 3.5 yr maturity New Supply through Dec ‘09  Over $1 trillion of short-term debt maturing for Freddie Mac, Fannie Mae & Home Loan Banks combined  Maximum of approximately $1.4 trillion of debt could be guaranteed by the FDIC Sources: Freddie Mac, Barclays Capital, Morgan Stanley and FDIC.

25. 24 Bullets & Sub-debt  Reference Notes: $16.5 bn in 2009 – $10 bn 3yr in February – Spreads driven by supply, short term wider, long term tighter (denominator effect)  Sub-debt outstanding $4.388bn  Three issues: – 5.875% 3/11 – 5% 12/18  Mandatory interest deferral features if capital fell below certain thresholds  Those provisions have been suspended during conservatorship  Under Treasury Senior Preferred Stock Purchase Agreement: – "…These agreements will protect the senior and subordinated debt and the mortgage backed securities of the GSEs."  Bottom line: as long as Freddie Mac is in conservatorship, they can draw on the government to pay principal and interest on subordinated debt.

26. SECTION 3 FHLMC MBS Basics

27. 26 US Mortgage Securities Are the Largest Fixed Income Sector Source: Securities Industry and Financial Markets Association as of September 30, 2008.

28. 27 US Mortgage Market: 62% of Mortgages are Securitized

29. 28 Agencies are Dominant Issuer of MBS

30. 29 Freddie Mac’s Mortgage Products  Gold PCs - Pass-through securities representing an undivided interest in a pool of residential mortgages. Gold PCs  Giant PCs - Single class pass-through securities that are created by consolidating smaller PCs into larger Giant PCs. Giant PCs  ARM PCs - Mortgage-backed securities representing an undivided interest in a pool of residential adjustable-rate mortgages (ARMs). ARM PCs  REMICs - Customized mortgage structures created from mortgage pass-through securities by redistributing cash flows to cater to a variety of market demands. REMICs  Reference REMICs® - Offer a structured alternative to a traditional 30- or 15-year mortgage- backed security and built on the success of Freddie Mac's guaranteed maturity class (GMC) product. Reference REMICs®  Strips - Formed from Giant PCs of either Freddie Mac Gold PCs or GNMA certificates and generally represent the Interest-Only (IO) and Principal-Only (PO) cash flow components of a pool. Strips  Multifamily PCs - Securities backed by structures with five or more units designed principally for residential use. Multifamily PCs

31. SECTION 4 Recent Developments and the Implications for FHLMC

32. 31 Actions  Preferred Stock Program  Buyback programs (Treasury and Federal Reserve)  Mortgage Cramdown Legislation  Making Home Affordable Actions Against Foreclosures

33. 32 GSE-related government actions  Treasury actions:  Entered into a Senior Preferred Stock Purchase Agreement with each GSE – $200 billion for each GSE for an indefinite time period – Received $13.8 billion on November 24, 2008 – Request to Treasury to draw an additional $31 billion in aid (3/12/09)  Created a GSE Credit Facility – Short-term facility available to Freddie, Fannie & the FHL Banks at LIBOR +50 – Facility available until December 31, 2009  Announced an MBS Purchase Program – Purchase GSE MBS in the open market ($106.9 billion as of 2/26/09) – Program will expire on December 31, 2009

34. 33 GSE-related government actions (cont’d)  Federal Reserve Actions: resumed purchases of Agency securities for its System Open Market Account (SOMA) for the first time since 1981 – Fed announced purchase of $100B GSE Debt and $500B MBS debt – Net purchase: $49 billion of Agency and $237 billion of Agency MBS (3/18/09) – 2/26/09 Fed began purchasing the MBS roll – “The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.” Federal Open Market Committee, January 28, 2009 – Expanded program on 3/18/09 – Fed will purchase an additional 100B Agy Debt, and 750B MBS by this year, for a combined amt of 200B Agy Debt and 1.25T MBS – Fed announced purchase of $300B UST (concentrated in 2-10yr sector)

35. 34 Fed Purchases of Agency Debt Source: Federal Reserve Bank of New York. Data as of March 24, 2009.

36. 35 Fed Purchases of Agency Mortgage-Backed Securities Source: Federal Reserve Bank of New York.

37. 36 Need to Curb Foreclosures  Mortgage Foreclosures are at an all-time high (3.3%, Mortgage Bankers Association)  Later vintages have higher delinquency rates than earlier vintages Alt-A — 60D+ Delinquencies (Fixed Rate)Prime — 60D+ Delinquencies (Fixed Rate) 0 5 10 15 20 25 1357911131517192123252729 Age in Months 60+ Delinquencies % 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0 1 2 3 4 5 6 1357911131517192123252729 Age in Months 60+ Delinquencies % 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: CPRCDR

38. 37 Freddie Mac: Small Share of Delinquent Loans Source: Freddie Mac.

39. 38 1. The Looming Threat of Mortgage Cramdowns  Bill proposing several modifications to the US Bankruptcy Code  The key issue: Cramdowns – allowing bankruptcy judges to modify the rate, term and principal balance of first lien mortgage loans on primary residences to make the mortgage affordable for the homeowner.  The Bill was passed by the house on March 5, 2009 (234-191), awaiting Senate approval  UBS estimate: 50% chance the bill will pass. – It is likely that more restrictive amendments will be made (i.e., applicable only to subprime borrowers)

40. 39 The Effects of Mortgage Cramdowns  The Largest Potential Impact: A Tsunami of Chapter 13 Bankruptcy Filings – “Strategic Filing” or declaring bankruptcy as a way to reduce principal – RealtyTrac estimates 3.0 million foreclosures for 2009. UBS estimates that with the passage of cramdown legislation, 1/3 of the 3 million — or 1 million additional Ch13 filings— will seek to file bankruptcy and have their mortgage modified. Previously our estimate was 330,000 for 2009.  Recently added “Good Faith Clause” to prevent Strategic Filing

41. 40 Subsequent Effects of Mortgage Cramdowns  Fannie and Freddie absorb losses on their owned or guaranteed portfolios – These losses are ultimately backstopped by the taxpayers. – This will NOT directly effect the bondholder, as the Agency guarantees principal  Private label MBS – depends on the language in the documents. Most losses absorbed “pro-rata”  Mortgage rates and required down payments are likely to increase – Completely against Government intentions to lower Mortgage rates

42. 41 2. Making Home Affordable  The Obama Administration’s plan to get the housing market “back on track” to provide relief for homeowners, via either refinancing at a lower rate or modifying the terms of the loan.  Goals of the plan:  To make mortgages more affordable  Help prevent the destructive impact of foreclosures on families, communities, and the national economy  http://www.financialstability.gov/makinghomeaffordable/ http://www.financialstability.gov/makinghomeaffordable/  Two main tenets: Refinance and Loan Modification

43. 42 Home Affordable Refi- Freddie Mac Relief Refinance Mortgage  “Freddie Mac’s participation in this program demonstrates our commitment and the commitment of our Servicers/Sellers, to assist Borrowers who are current on their mortgage payments. Freddie Mac Relief Refinance Mortgages offer these Borrowers the ability to refinance to improve their financial situation when home values have declined or where there has been limited credit availability in the market.” – Freddie Mac Bulletin, 3/4/09  Key Takeaway: on loans where GSEs already have the risk, borrowers with up to 105% LTV can refinance.  Borrower must be current  Obama administration estimates this will help 4-5 million homeowners.  New mortgage will be fixed, ARMs are becoming obsolete.

44. 43 Home Affordable Loan Modification  Eligibility Requirements:  owner-occupied borrowers  Need not be current  Unpaid principal ≤ $729,750  Does NOT need to be owned/securitized by Fannie or Freddie  Modifications: lowering interest rate, extending the term, forbearing principal, or forgiving principal altogether (last alternative unlikely).  Obama Administration estimates 3-4 million borrowers will qualify.  However, servicers not required (but given incentive) to participate. Special incentive is given to modify current borrowers.

45. 44  The Treasury is increasing its Preferred Stock Purchase Agreement to $200 Billion each for Fannie Mae and Freddie Mac (originally $100 B)  Treasury will continue Mortgage Backed Securities Purchases.  Treasury will increase the size of the GSE’s retained portfolio by $50B to $900B. Final Implication of MHA: Restore Confidence in GSEs

46. SECTION 5 The Future of Freddie Mac

47. 46 Freddie Mac Q4 Results  Reported Q4 2008 net loss of $23.9 billion; (FNMA $25.2 billion)  Due to Non-Agency Mortgage holdings – Subprime, Alt-A, includes Option ARMs – Attribute losses to “significant recent sustained deterioration in the performance of the underlying collateral of these securities and the lack of confidence in the credit enhancements provided by the monoline insurers.  However, both GSEs stopped buying subprime and Alt-A MBS in 2007  Freddie intends to hold the securities Sources: Freddie Mac, Fannie Mae, Inside MBS & ABS.

48. 47 – Break up into smaller pieces – to eliminate the “too big to fail risk” – A move toward privatization; a “Sallie Mae” plan put into place that would secure all outstanding senior GSE debt. Such a plan would occur over a very long period of time (10 to 15 years) – Loss of implicit government backing – Questions about viability – Similar to GNMA & FHA – Focus on homeownership mission – Downside: more susceptible to political pressures & pork barrel project – Debt Ceiling The Future of Freddie Mac – Can tap private markets while operating under regulations to meet public need – Ability to invest for their own portfolio – limited or eliminated – Preservation of “Buyer of Last Resort” status thought to be important as private securitizers disappeared – Would be governed by a rate setting commission with goal of making mortgages more widely available – Could be the best way to resolve the inherent conflict between public purpose and shareholder profits – Economics are compelling – Truly Become “Too Big to Fail” – Unlikely in short term Fannie/Freddie Merger Sell ‘em Off Utility Model Nationalization

49. 48 Key Takeaways  Unlikely that Freddie will leave Conservatorship any time soon  Act of Congress – not conservatorship – can change government charter  Potential additional increase in UST backstop  GSE’s being used to jumpstart the housing sector  Current Key objectives: Market Stability/Market Liquidity/Taxpayer Protection  Support for public mission of helping low-income Americans purchase home remains strong  GSE Debt will continue to be supported by the US Government  10% portfolio reduction per year (still 500+mm after 5 years)

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