INFORMATION STATEMENT

AND

ANNUAL REPORT TO STOCKHOLDERS

For the Ñscal year ended December 31, 2004

Freddie Mac is a stockholder-owned, government-sponsored enterprise, or GSE, established by Congress

to provide a continuous Öow of funds for residential mortgages. We perform this function primarily by buying

and guaranteeing residential mortgage loans and mortgage-related securities, which we Ñnance by issuing

mortgage-related securities, debt securities and equity securities. Our securities are not required to be

registered under the Securities Act of 1933 or the Securities Exchange Act of 1934 and we are not currently

required to Ñle periodic reports with the Securities and Exchange Commission under the Exchange Act.

However, we are committed to the voluntary registration of our common stock under the Exchange Act,

which we expect to complete after we return to timely Ñnancial reporting. We alone are responsible for making

payments on our securities. Neither the U.S. nor any agency or instrumentality of the U.S. other than Freddie

Mac is obligated to fund our mortgage purchase or Ñnancing activities or to guarantee our securities or other

obligations.

The publication of this Information Statement and Annual Report, or Information Statement, has been

delayed as a result of the ongoing controls remediation and systems re-engineering and development necessary

to return to timely Ñnancial reporting following the previous revision and restatement of our Ñnancial results

for 2002, 2001 and 2000. For more details, see ""EXPLANATORY NOTE.''

This Information Statement contains important Ñnancial and other information about Freddie Mac. This

Information Statement will be supplemented periodically. All available supplements should be read together

with this Information Statement. We also provide information about the securities we issue in the OÅering

Circular for each securities program and any supplement for each particular oÅering. You can obtain copies of

the Information Statement, OÅering Circulars, all available supplements, Ñnancial reports and other similar

information by visiting our Internet website (www.FreddieMac.com) or by writing or calling us at:

Freddie Mac

Investor Relations Department

Mailstop D4O

1551 Park Run Drive

McLean, Virginia 22102-3110

Telephone: 571-382-4732 or 1-800-FREDDIE (800-373-3343)

shareholder@freddiemac.com

Our principal oÇces are located at 8200 Jones Branch Drive, McLean, Virginia 22102

(telephone: 703-903-2000).

THIS INFORMATION STATEMENT IS DATED JUNE 14, 2005
TABLE OF CONTENTS

Page

BOARD OF DIRECTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1

EXPLANATORY NOTE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

BUSINESSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

MARKET PRICE FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ÏÏÏÏÏÏÏÏÏ 16

FORWARD-LOOKING STATEMENTSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17

SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

EXECUTIVE SUMMARY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

CRITICAL ACCOUNTING POLICIES AND ESTIMATES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

CONSOLIDATED RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35

CONSOLIDATED BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66

AVERAGE CONSOLIDATED BALANCE SHEETS AND RATE/VOLUME

 ANALYSISÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74

CONSOLIDATED FAIR VALUE BALANCE SHEETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76

VOLUME STATISTICS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79

LIQUIDITY AND CAPITAL RESOURCES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83

OFF-BALANCE SHEET ARRANGEMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92

RISK MANAGEMENT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95

Risk Oversight ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95

Operational Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95

Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99

Credit Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115

QUARTERLY SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 136

SUBSEQUENT ACCOUNTING REVISIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 136

ADDITIONAL INFORMATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137

VOLUNTARY COMMITMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ÏÏÏÏÏÏÏÏ 141

DIRECTORS AND EXECUTIVE OFFICERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 224

EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227

INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS, OFFICERS

AND EMPLOYEES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227

PRINCIPAL ACCOUNTANT FEES AND SERVICES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227

CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228

RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED

FIXED CHARGES AND PREFERRED STOCK DIVIDENDSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229

INDEX OF ACRONYMSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231

Freddie Mac

i
BOARD OF DIRECTORS (as of June 1, 2005)*

Richard F. Syron John B. McCoy**

Chairman and Chief Executive OÇcer Retired Chairman and Chief Executive OÇcer

Freddie Mac Bank One Corporation

McLean, Virginia A Ñnancial services company

Columbus, Ohio Barbara T. Alexander

Eugene M. McQuade Independent Consultant

Monarch Beach, California President and Chief Operating OÇcer

Freddie Mac

GeoÅrey T. Boisi McLean, Virginia

Chairman and Senior Partner Shaun F. O'Malley (Lead Director) Roundtable Investment Partners LLC Chairman Emeritus

A private investment management Ñrm Price Waterhouse LLP

New York, New York An accounting and consulting Ñrm

Michelle Engler Philadelphia, Pennsylvania

Trustee Ronald F. Poe

JNL Investor Series Trust and JNL Series Trust President

and Member of Board of Managers Ronald F. Poe & Associates

JNL Variable Funds A private real estate investment Ñrm

Each an investment company White Plains, New York

Lansing, Michigan Stephen A. Ross

Professor Richard Karl Goeltz

Massachusetts Institute of Technology Retired Vice Chairman and Chief Financial OÇcer Cambridge, Massachusetts American Express Company

A Ñnancial services company William J. Turner

New York, New York Manager

Signature Capital, Inc. Thomas S. Johnson A venture capital investment Ñrm Retired Chairman and Chief Executive OÇcer Portland, Maine

GreenPoint Financial Corp.

A Ñnancial services company

New York, New York

William M. Lewis, Jr.

Managing Director and Co-Chairman

of Investment Banking

Lazard Ltd

An investment banking company

New York, New York

* Freddie Mac's enabling legislation establishes the membership of the Board of Directors at 18 directors: 13 directors elected by the

stockholders and 5 directors appointed by the President of the United States. Prior to our March 31, 2004 Annual Meeting, the OÇce

of Counsel to the President informed us that the President did not intend to reappoint any of his then-current presidential appointees.

Consequently, each of their terms as presidential appointees ended on the date of that annual meeting. No new appointees have been

named by the President as of June 1, 2005.

** As previously announced, Mr. McCoy will not stand for re-election at our stockholders' meeting to be held on July 15, 2005.

Freddie Mac

1
EXPLANATORY NOTE

This Information Statement contains forward-looking statements regarding our current expectations and

objectives for Ñnancial reporting, future business plans, results of operations, Ñnancial condition and trends and

other matters that could aÅect our business. Forward-looking statements do not relate to historical matters

and involve known and unknown risks, uncertainties and other factors, including those listed in the section

titled ""FORWARD-LOOKING STATEMENTS.'' Such statements are made as of the date of this

Information Statement and we undertake no obligation to publicly update any forward-looking statement to

reÖect events or circumstances after the date of this Information Statement, or to reÖect the occurrence of

unanticipated events.

The publication of this Information Statement has been delayed as a result of the ongoing controls

remediation and systems re-engineering and development necessary to return to timely Ñnancial reporting.

Although we are working to address the operational weaknesses that are contributing to our current inability to

release Ñnancial results on a timely basis, uncertainty regarding the expected success, scope and timing of

these activities remains. See ""MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS, or MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Sources of Operational Risks.''

Our current objective is to provide Ñnancial results for Ñrst and second quarter 2005 by August 31, 2005

and for third quarter 2005 by mid-November 2005. In addition, our current objective is to provide Ñnancial

results for fourth quarter and full-year 2005, including the timely Ñling of a minimum capital report with our

regulator, the OÇce of Federal Housing Enterprise Oversight, or OFHEO, that complies with U.S. generally

accepted accounting principles, or GAAP, at the end of January 2006. In 2004 and continuing into 2005, we

have focused on our controls and systems remediation eÅorts to address the material weaknesses and other

deÑciencies in our internal controls over Ñnancial reporting. We expect to continue to make signiÑcant

progress in developing and building a fully capable systems infrastructure. This infrastructure will facilitate our

return to timely Ñnancial reporting, enabling us to fulÑll our commitment to register our common stock with

the Securities and Exchange Commission, or SEC, under the Exchange Act. We anticipate Ñling our Form 10

registration statement with the SEC in the second quarter of 2006 and becoming an SEC reporting company

as soon as possible thereafter.

Although we have made signiÑcant progress during 2004 and the Ñrst Ñve months of 2005, signiÑcant

systems revisions are still required for us to return to timely Ñnancial reporting as a result of our adoption of

revised and new accounting policies in recent years. We face continuing challenges because of the prior

deÑciencies in our accounting infrastructure and the operational complexities caused by the volume of revised

and new accounting policies that we have adopted.

Systems improvements to date have enabled us to move to a one-step Ñnancial close process in 2005, a

signiÑcant improvement over the two-step process used for the production of 2003 and 2004 results that

involved the ""remeasurement'' of preliminary Ñnancial Ñgures. We continue, however, to rely extensively on

substantial validation and analytical review procedures to verify that the Ñnancial results produced by our

recently implemented systems comply with GAAP.

This Information Statement and the certiÑcations by our Chief Executive OÇcer and Chief Financial

OÇcer, which are based on the certiÑcations required of SEC registrants as to the accuracy and completeness

of the information and the fair presentation of the consolidated Ñnancial statements and other Ñnancial

information in periodic reports, do not address our internal controls over Ñnancial reporting or our disclosure

controls and procedures because a comprehensive evaluation of the eÅectiveness of these controls and

procedures was not performed as of December 31, 2004. See ""MD&A Ì RISK MANAGEMENT Ì

Operational Risks Ì Sources of Operational Risks'' for additional information regarding our internal control

weaknesses and remediation eÅorts.

Freddie Mac

2
BUSINESS

Overview

Freddie Mac is a stockholder-owned Ñnancial services company chartered by Congress on July 24, 1970

under the Federal Home Loan Mortgage Corporation Act, as amended, which we refer to as the Freddie Mac

Act or our charter. At December 31, 2004, we had total assets of $795.3 billion, total liabilities and minority

interests of $763.9 billion, and total stockholders' equity of $31.4 billion. At May 13, 2005, we had 5,064 fulltime and 153 part-time employees. Our principal oÇces are located in McLean, Virginia. We have additional

oÇces in Washington, D.C.; Reston, Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; New York,

New York; and Woodland Hills, California.

We fulÑll the requirements of our charter by purchasing residential mortgage loans and mortgage-related

securities from mortgage lenders and securities dealers and by providing our credit guarantee of payment of

principal and interest for residential mortgages originated by mortgage lenders. Through our credit guarantee

activities, we securitize mortgage loans by issuing undivided interests in pools of purchased mortgages, which

are called Mortgage Participation CertiÑcates, or PCs, to third-party investors. We also resecuritize mortgagerelated securities that are issued by us or the Government National Mortgage Association, or Ginnie Mae, as

well as non-agency entities. Securities issued through our resecuritization activities are referred to as

Structured Securities. For further information concerning our mortgage purchase and securities issuance

activity and the composition of our Retained portfolio, see ""MD&A Ì OUR RETAINED AND TOTAL

MORTGAGE PORTFOLIOS'' and ""MD&A Ì VOLUME STATISTICS.''

For more than three decades, we have been one of the largest participants in the U.S. residential

mortgage market. The residential mortgage market consists of a primary mortgage market that links

homebuyers and lenders and a secondary mortgage market that links lenders and investors. We purchase

mortgage loans that Ñnance homes in every geographic region of the U.S., including U.S. territories (Puerto

Rico, Guam, U.S. Virgin Islands). By providing liquidity and eÇciency in the secondary mortgage market, we

reduce the cost of homeownership and rental housing and improve the quality of life by making the American

dream of access to a decent and aÅordable home possible.

In the primary market, residential mortgage lenders originate or provide mortgages to homebuyers. These

lenders include mortgage banking companies, commercial banks, savings banks, savings and loan associations,

credit unions and state and local housing Ñnance agencies. Lenders may choose to replenish their supply of

lending capital by selling the mortgage loans they originate into the secondary mortgage market.

We compete in the secondary mortgage market with the Federal National Mortgage Association, or

Fannie Mae, and other Ñnancial institutions that retain or securitize mortgages, such as banks, dealers and

thrift institutions, and the Federal Home Loan Banks. We compete, primarily on the basis of price, products,

structure and service, by buying and selling mortgages in the form of whole loans (i.e., mortgage loans that

have not been securitized) and mortgage-related securities. We also compete for low-cost debt funding with

Fannie Mae, the Federal Home Loan Banks and other institutions that hold mortgage portfolios. Competition

from these entities can vary with economic, Ñnancial market and regulatory environments.

We compete in the large and growing mortgage debt market. Total U.S. residential mortgage debt was

$8.7 trillion as of December 31, 2004, according to reports from the Federal Reserve System. In relation to

this market, our Total mortgage portfolio was $1.5 trillion as of December 31, 2004. See further discussion of

our mortgage portfolio holdings in ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS.'' Total residential mortgage debt outstanding in the U.S. grew at an annual rate of 13 percent in both

2003 and 2004. We expect economic and demographic trends will continue to increase the total amount of

mortgage debt outstanding, though at a slower rate than in the past few years. The share of the mortgage debt

market attributed to Fannie Mae and us, however, has declined recently due to the increasing proportion of

adjustable rate mortgages, or ARMs, and other non-traditional mortgage products originated. Banks have

tended to retain these mortgages rather than sell them to the GSEs. In addition, there has been strong demand

for mortgages in general by other investors, particularly banks.

Freddie Mac

3
Availability of Documents

Our Information Statements, Supplements and other Ñnancial disclosure documents are available free of

charge on our website at www.FreddieMac.com. (We are providing this Internet address solely for the

information of interested persons. We do not intend this Internet address to be an active link and are not using

references to this Internet address here or elsewhere in this Information Statement to incorporate additional

information into this Information Statement.) Our corporate governance guidelines, codes of conduct for

employees and members of the Board of Directors (and any amendments or waivers that would be required to

be disclosed), and the charters of the Board's Ñve standing committees (i.e., the Audit, Compensation and

Human Resources, Finance and Capital Deployment, Governance and Nominating, and Mission and

Sourcing Committees) are also available on our website. Printed copies of these documents may be obtained

upon request.

Information About Business Segments

We have determined that we had one business segment for the periods presented in this Information

Statement.

Our Charter and Mission

Our charter serves as the foundation of our business, forms the framework for our business activities,

shapes the products we bring to market and drives the services we provide to the nation's housing and

mortgage industry. Our mission is to provide liquidity, stability and aÅordability in the residential mortgage

markets. We accomplish this by securitizing mortgages and by purchasing mortgages and mortgage-related

securities to hold in our own portfolio.

SpeciÑcally, our statutory purposes are:

‚ to provide stability in the secondary market for residential mortgages;

‚ to respond appropriately to the private capital market;

‚ to provide ongoing assistance to the secondary market for residential mortgages (including mortgages

on housing for low- and moderate-income families involving a reasonable economic return that may be

less than the return received on other activities) by increasing the liquidity of mortgage investments

and improving the distribution of investment capital available for residential mortgage Ñnancing; and

‚ to promote access to mortgage credit throughout the U.S. (including central cities, rural areas and

other underserved areas) by increasing the liquidity of mortgage investments and improving the

distribution of investment capital available for residential mortgage Ñnancing.

Our charter also provides us with special attributes such as:

‚ exemption from Securities Act and Exchange Act securities registration requirements (although we

are subject to the antifraud provisions of those laws and are committed to the voluntary registration of

our common stock with the SEC under the Exchange Act);

‚ favorable treatment of our securities under various legal investment laws and other regulations;

‚ access to the Federal Reserve Banks' book-entry system, which provides book-entry issuance, transfer,

payment and settlement for our mortgage-related and debt securities;

‚ discretionary authority of the Secretary of the Treasury to purchase obligations we issue up to a

maximum of $2.25 billion principal balance outstanding at any one time; and

‚ exemption from state and local taxes, except tax on real property that we own.

Freddie Mac

4
Loans Eligible for Purchase under Our Charter

Conforming Loan Limits

Our charter places a dollar amount cap on the size of the original principal balance of each single-family

mortgage loan we purchase, referred to as the conforming loan limit. The conforming loan limit is established

annually pursuant to a procedure prescribed by OFHEO. Table 1 presents a summary of the conforming loan

limits for 2005, 2004 and 2003.

Table 1 Ì Conforming Loan Limits(1)(2)

EÅective as of January 1,

2005 2004 2003

First-lien conventional, single-family mortgage loan limits:

One-family residence(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $359,650 $333,700 $322,700

Two-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $460,400 $427,150 $413,100

Three-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $556,500 $516,300 $499,300

Four-family residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $691,600 $641,650 $620,500

(1) The dollar limits shown are those eÅective January 1st through December 31st of each calendar year.

(2) The applicable conforming loan limits are 50 percent higher for mortgages secured by properties in Alaska, Guam, Hawaii and the

U.S. Virgin Islands.

(3) The conforming loan limit for second-lien mortgages on one-family residences is 50 percent of the limit for Ñrst-lien mortgages on

such residences. When both Ñrst- and second-lien mortgages are purchased, the total amount purchased may not exceed the

applicable conforming Ñrst-lien limit.

Loan-to-Value Ratios and Credit Enhancements

Conventional mortgages are mortgages that are not guaranteed or insured by any agency or instrumentality of the U.S. government. Our charter prohibits us from purchasing Ñrst-lien conventional, single-family

mortgages if the unpaid principal balance at the time of purchase exceeds 80 percent of the value of the

property securing the mortgage, unless we have one or more of the following credit protections:

‚ mortgage insurance from an approved mortgage insurer that covers at least the portion of the mortgage

balance that exceeds 80 percent of the property's value;

‚ a seller's agreement to repurchase or replace (for periods and under conditions as we may determine)

any mortgage in default; or

‚ retention by the seller of at least a ten percent participation interest in the mortgages.

The loan-to-value ratio, or LTV, restriction does not apply to multifamily mortgages or to mortgages

insured by the Federal Housing Administration, or FHA, or the Rural Housing Service, or RHS, or partially

guaranteed by the Department of Veterans AÅairs, or VA.

Loan Quality

Under our charter we must limit our mortgage purchase and resecuritization activities, so far as

practicable, to mortgages that are of a quality, type and class that generally meet the purchase standards of

private institutional mortgage investors. This means the mortgage loans we purchase must be readily

marketable to institutional mortgage investors.

We design our mortgage loan underwriting guidelines to assess the creditworthiness of the borrower and

the borrower's capacity to fulÑll the obligations of the mortgage. We continuously review these guidelines to

ensure their eÅectiveness in order to address the changing needs of the marketplace so that more borrowers

can access mortgage Ñnancing. In some circumstances, we grant waivers or variances from our guidelines.

We also seek to distribute our guidelines through the most eÇcient means possible, including using Loan

Prospector», our automated underwriting service. While the ultimate responsibility for a lending decision rests

with the lender, Loan Prospector» provides our lender customers with a quick assessment of a loan's eligibility

for our purchase.

Freddie Mac

5
Business Activities

We connect Main Street Ì the residential mortgage market Ì to Wall Street Ì dealers and investors Ì

through our mortgage purchase, credit guarantee and portfolio investment activities.

Our customers are predominantly lenders in the primary mortgage market. Our activity in the secondary

mortgage market supports a continuous Öow of funds to the primary market, which leads to consumer beneÑts

in the form of a steady Öow of low-cost mortgage funding. This Öow of funds helps moderate cyclical swings in

the housing market, redistributes the Öow of mortgage funds regionally throughout the U.S. and provides for

the availability of mortgage funds at all times. In addition, the supply of cash made available to lenders

through this process lowers mortgage rates, making homeownership aÅordable for more families and

individuals.

Single-Family Mortgages. Lending institutions extend mortgage loans directly to their customers who

wish to purchase or reÑnance a home. Often, lenders look to us to purchase those mortgage loans from them,

replenishing the supply of money for lending. We purchase single-family mortgage loans, which are secured by

one- to four-family properties, mainly from mortgage bankers, dealers, insurance companies and federally

insured Ñnancial institutions.

The types of single-family mortgage loans we purchase typically include 30-year, 20-year, 15-year and

10-year Ñxed-rate mortgages, initial interest-only mortgages, ARMs and balloon/reset mortgages. The

substantial majority of the mortgage loans we purchase are conventional mortgages. However, we purchase

some mortgages that are fully insured by the FHA or the RHS, and some mortgages that are partially

guaranteed by the VA. Single-family mortgage loans generally are subject to our internal credit policies and

credit, appraisal, underwriting and other purchase policies and guidelines as set forth in our Single-Family

Seller/Servicer Guide.

A signiÑcant portion of our single-family mortgage purchase volume is generated from several large

mortgage lenders. During 2004, Wells Fargo Home Mortgage, Inc., Chase Home Finance LLC, ABN Amro

Mortgage Group, Inc. and National City Mortgage Co. accounted for approximately 63 percent of our

mortgage purchase volume. Wells Fargo was the largest source and accounted for approximately 33 percent of

our mortgage purchase volume during 2004, while Chase Home Finance LLC, our second largest source,

accounted for approximately 14 percent of our mortgage purchase volume.

As the mortgage industry has been consolidating, we and our competitors have been seeking business

from a decreasing number of key lenders. We are exposed to the risk that we will lose signiÑcant business

volume and will be unable to replace this business if one or more of our key lenders chooses to reduce

signiÑcantly the volume of mortgages it delivers to us or ceases to exist because of a merger or an acquisition.

The loss of business from any one of our key lenders could adversely aÅect our market share, our revenues, the

use of our technology by participants in the mortgage market and the performance of our mortgage-related

securities. We are actively working to diversify our customer base and thus reduce the potential impact of

losing a key customer. We believe that we would be able to recover from a signiÑcant decrease in, or loss of,

business volume from one or more of our largest customers through such means as strengthening our

relationships with other major lenders and servicers or modifying our business strategies.

Multifamily Mortgages. We purchase multifamily mortgages, which are secured by structures with Ñve

or more units designed principally for residential use, from approved mortgage lenders. These lenders include

federally insured Ñnancial institutions, mortgage bankers, investment bankers and insurance companies. These

mortgages have terms generally ranging from Ñve to thirty years. Our multifamily mortgage products, services

and initiatives are designed primarily to Ñnance rental housing aÅordable to low- and moderate-income

families.

We have established multifamily mortgage credit, appraisal and underwriting guidelines as set forth in

our internal credit policies and our Multifamily Seller/Servicer Guide. We may modify these guidelines or

grant waivers for some multifamily mortgages, including mortgages on properties that have favorable debt

coverage or loan-to-value ratios (a) that we consider to have superior management, (b) that are located where

the demand for rental housing is strong, (c) that serve our aÅordable housing mission, or (d) for which we are

seeking to match competitive bids by other lenders.

Freddie Mac

6
Credit Guarantee Activities

The following discussion summarizes our credit guarantee activities.

Guarantees of PCs. One of the means by which we fund purchases of mortgage loans is through the use

of securitization-based Ñnancing. We issue PCs that represent undivided interests in the mortgage loans we

purchase and which, in some cases, we sell to investors for cash. However, most of our credit guarantee

activity occurs through mortgage swap transactions in which a mortgage lender or other seller delivers

mortgages to us in exchange for our PCs. Our customers may choose to hold these PCs in their portfolios or

sell them to other investors. We guarantee the payment of principal and interest on all PCs. Our guarantee

increases the marketability of our PCs, providing additional liquidity to the marketplace.

Guarantees Issued Through Resecuritization. Our credit guarantee activities also involve the resecuritization of mortgage-related securities. In the resecuritization process, we issue securities representing

undivided interests in PCs and certain other types of mortgage-related securities. In general, we issue the

following two types of Structured Securities:

‚ Single-Class Structured Securities. We issue single-class Structured Securities backed by PCs and

by non-Freddie Mac mortgage-related securities, including Ginnie Mae CertiÑcates.

‚ Multi-Class Structured Securities. We issue multi-class Structured Securities that divide the cash

Öows of the underlying PCs, Ginnie Mae CertiÑcates and other mortgage-related securities into two or

more classes that meet the investment criteria and portfolio needs of diÅerent types of investors. Our

principal multi-class Structured Securities activity is the issuance and sale of securities that qualify for

tax treatment as Real Estate Mortgage Investment Conduits, or REMICs. Structured Securities

backed by non-agency mortgage-related securities are also referred to as multi-class Structured

Securities for purposes of this report.

The non-agency mortgage-related securities may be backed by mortgages originated using underwriting

standards that diÅer from our normal criteria; however, most of these securities are signiÑcantly creditenhanced at issuance. By issuing Structured Securities backed by these securities, we seek to provide liquidity

to alternative segments of the mortgage market. See ""MD&A Ì RISK MANAGEMENT Ì Credit

Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Portfolio DiversiÑcation''

for more information concerning the additional credit risk related to these transactions.

We commonly transfer Structured Securities to third parties in exchange for either cash or the collateral

underlying the Structured Securities (e.g., mortgage-related securities that third-party securities dealers

deliver to us).

Guarantees on Non-Freddie Mac-Issued Securities or Loan Portfolios. We also provide guarantees of the

payment of principal and interest on tax-exempt multifamily housing revenue bonds that support pass-through

certiÑcates issued by third parties. These housing revenue bonds are collateralized by mortgage loans on lowand moderate-income multifamily housing projects. In addition, we guarantee the payment of principal and

interest related to low- and moderate-income multifamily mortgage loans that are originated and held by state

and municipal housing Ñnance agencies to support tax-exempt multifamily housing revenue bonds. For more

information see ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' Ì ""Table 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based on Unpaid

Principal Balances.''

The To-Be-Announced Market

In connection with our credit guarantee activities, we issue PCs that represent pools of mortgages with

similar characteristics Ì such as PCs relating to a pool of 30-year, fully amortizing Ñxed-rate mortgages with

mortgage coupons within a speciÑed range. Because these PCs are generally homogeneous and are issued in

high volume, they are highly liquid and trade on a ""generic'' basis, also referred to as trading in the To-BeAnnounced, or TBA, market. A TBA trade represents a contract for the purchase or sale of PCs to be

delivered at a future date; however, the speciÑc PCs that will be delivered to fulÑll the trade obligation, and

Freddie Mac

7
thus the speciÑc characteristics of the mortgages underlying those PCs, are not known (i.e., not ""announced'')

at the time of the trade, but only subsequently when the trade is to be settled.

While the majority of TBA trades are performed manually, with purchases and sales occurring through

direct contact between or among the parties to the trade, dealers often trade as anonymous participants

through an inter-dealer broker or electronic trading system.

Purchases and sales of TBA-eligible PCs occur daily. Prices are generally quoted and accepted based only

upon the name of the issuer (e.g., Freddie Mac), the type of PC (e.g., 30-year Ñxed rate), the coupon of the

PC, the quantity and the settlement month. Each type of TBA trade has a single designated settlement date in

each month, and 48 hours before the settlement date the parties identify the speciÑc PCs to be delivered to

fulÑll the TBA trade obligation. During 2004 and 2003, we issued approximately $272.2 billion and $564.3

billion, respectively, of PCs that were eligible to be delivered to settle TBA trades, representing approximately

76 percent and 80 percent, respectively, of our total PC issuances.

Lenders use the TBA market to hedge the risk of changes in the fair value of mortgage loans caused by

Öuctuations in mortgage interest rates that occur after the lender ""locks'' a mortgage interest rate with a

borrower, but before the mortgage loan is originated. When a lender locks in a rate for a borrower, the lender

may sell PCs in the TBA market for delivery at a future date. After the lender originates the mortgages, it

delivers the mortgages to us in a swap transaction and receives PCs in return. Those PCs can then be used to

settle the TBA trade, or the lender can settle the trade with any of our other existing PCs that meet the

generic terms of the trade.

We use the TBA market to manage cash purchase transactions. When a lender commits to deliver

mortgages to us in exchange for cash at a speciÑed price, we may sell PCs in the TBA market for delivery at a

future date. By using the TBA market, we can manage the risk of Öuctuations in interest rates by locking in

the price at which we will sell the PCs that will ultimately be formed from the mortgages we purchase from

lenders in cash transactions.

The use of the TBA market increases the liquidity of mortgage investments and improves the distribution

of investment capital available for residential mortgage Ñnancing, thereby helping us to accomplish our

statutory mission.

Portfolio Investment Activities

We purchase mortgage loans and mortgage-related securities (including PCs and Structured Securities

we previously issued to third parties) and hold them in our Retained portfolio for investment purposes. We

Ñnance these purchases by issuing short-, medium- and long-term debt and subordinated debt and equity

securities. Our purchases of mortgage loans and mortgage-related securities replenish the sources of capital

available for mortgage lending to consumers.

Our Retained portfolio is managed through a disciplined strategy of long-term capital deployment. We

apply our mortgage market expertise to support our asset selection while managing our credit and interest-rate

risk. We invest in agency securities, non-agency mortgage-related securities and whole mortgage loans.

Agency securities are mortgage-related securities issued by GSEs or governmental agencies.

We manage interest-rate risk and reduce the funding cost of the debt we issue by:

‚ issuing a mixture of debt of various maturities, either callable (that is, redeemable at our option at one

or more times before its scheduled maturity) or non-callable;

‚ using a variety of derivatives; and

‚ restructuring mortgage-related securities cash Öows and retaining a portion of these restructured cash

Öows in the form of Structured Securities.

See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more

information.

Freddie Mac

8
Mortgage Security Performance and Other Market Support Activities

We support the liquidity and depth of the market for PCs through various activities, including:

‚ educating dealers and investors about the merits of trading and investing in PCs;

‚ purchasing and selling PCs and other mortgage-related securities through the Retained portfolio; and

‚ introducing new mortgage-related securities products and initiatives.

We may increase, reduce or discontinue these or other related activities at any time, which could aÅect

the liquidity and depth of the market for PCs. We support the execution of our credit guarantee business by

adjusting our guarantee fee. For example, if the price performance of, and demand for, our PCs is not

comparable to Fannie Mae securities on future mortgage deliveries by sellers, we may use market-adjusted

pricing where we provide guarantee fee price adjustments to partially oÅset weaknesses in prevailing security

prices and increase the competitiveness of our credit guarantee business. The use of such market-adjusted

pricing could have a material adverse eÅect on the proÑtability of our new credit guarantee business over its

life.

Our strategies to support PC price performance include the purchase and sale by our Retained portfolio

of TBA PCs and other agency securities, including Fannie Mae securities. While some purchases of PCs may

result in an expected return on equity substantially below our normal thresholds, this strategy is not currently

expected to have a material eÅect on the overall performance of our Retained portfolio. Depending upon

market conditions, including the relative prices and relative supply of and demand for PCs and comparable

Fannie Mae securities, there may be substantial variability in any period in the total amount of securities we

purchase or sell for our Retained portfolio in accordance with this strategy.

In the fourth quarter of 2004, as part of our eÅort to realign our business around our mission and core

business, we ceased our PC market making and support activities accomplished through our Securities Sales

& Trading Group business unit and our external Money Manager program. For more information, see

""CONSOLIDATED RESULTS OF OPERATION Ì Net Interest Income'' and ""NOTE 5: RETAINED

PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to our consolidated Ñnancial

statements.

Predatory Lending

We have instituted anti-predatory lending policies designed to prevent the purchase or assignment of

mortgage loans with unacceptable terms or conditions or resulting from unacceptable practices. In accordance

with these policies, the following mortgages are not eligible for purchase:

‚ mortgages originated with single-premium credit insurance;

‚ mortgages with terms that exceed either the annual percentage rate or the points and fees threshold

under the Home Ownership and Equity Protection Act of 1994;

‚ subprime mortgages with prepayment penalty terms that exceed three years; or

‚ prime mortgages, and subprime mortgages originated on or after August 1, 2004, that required the

borrower to submit to arbitration.

In addition, we require the third parties who service the loans we hold in our Retained portfolio and the

loans underlying our PCs and Structured Securities to report all borrower credit information, including

monthly mortgage payments, to all credit bureau and reporting agencies. Several states have enacted laws

aimed at predatory lending practices, generally with regard to loans exceeding thresholds based on annual

percentage rates or Ñnancing costs. For some states, the high-cost home loan thresholds are deÑned by statutes

that trigger state law liabilities for subsequent purchasers or assignees of such loans that may be more

signiÑcant than liabilities imposed upon such purchasers or assignees under the Home Ownership and Equity

Protection Act. Currently, we do not purchase such ""high-cost home loans'' in the states of Arkansas,

Georgia, Illinois, Indiana, Kentucky, Maine, Massachusetts, Nevada, New Jersey, New Mexico, New York

and Oklahoma. We continue to assess newly enacted and proposed state laws to determine our policies with

respect to the purchase of loans aÅected by those laws.

Freddie Mac

9
Regulatory and Governmental Matters

HUD

The U.S. Department of Housing and Urban Development, or HUD, has general regulatory power over

us. HUD's oversight to date has focused on housing goals, fair lending and new program approval.

Housing Goals

The GSEs are subject to aÅordable housing goals set by HUD. The goals are targeted to low- and

moderate-income families, very low-income families and low-income families living in low-income areas, and

families living in HUD-deÑned underserved areas. The HUD goals, which are set as a percent of total

purchases, have risen steadily since they became permanent in 1995.

If the Secretary of HUD were to Ñnd that we failed, or that there was a substantial probability that we

would fail, to meet any housing goal and that achievement of the housing goal was or is feasible, the Secretary

could require us to submit a housing plan. The housing plan would describe the actions we will take to achieve

the goal in the future. HUD also has the authority to issue a cease and desist order and to assess civil money

penalties against us in the event that we fail to submit a required housing plan or fail to make a good faith

eÅort to comply with a plan approved by HUD.

We have reported to HUD that we achieved each of the aÅordable housing goals in 2004 and 2003. Our

purchases, as reported to HUD, are set forth in Table 2 below.

Table 2 Ì Prior Period Housing Goals and Results(1)

Year Ended December 31,

2004 2003

Goal Result Goal Result

Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% 54% 50% 51%

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 34 31 33

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 24 20 20

Multifamily special aÅordable volume target (dollars in billions) ÏÏÏÏÏ $2.11 $9.83 $2.11 $8.00

(1) An individual mortgage may qualify for more than one of the goals. Each of the goal percentages and each of our percentage results is

determined independently and cannot be aggregated to determine a percentage of total purchases that qualiÑes for these goals.

On May 4, 2004 and August 3, 2004, we received letters from HUD requesting information pertaining to

certain transactions entered into in calendar years 2001, 2002 and 2003. As part of the information request,

HUD asked us to describe how each identiÑed transaction complied with HUD's rules for counting units

Ñnanced toward the housing goals in these years. We fully complied with these requests for information.

Following its review, HUD determined that we failed to meet our underserved areas goal of 31 percent for

2002 by 1,222 units (or approximately 0.03 percent). Because this shortfall occurred in 2002 and we exceeded

the underserved areas goal in 2003 by approximately 95,000 units (or 1.7 percent), HUD did not require us to

submit a housing plan as a result of missing the 2002 underserved areas goal. We are engaged in ongoing

discussions with HUD regarding certain interpretive issues relating to the treatment of our mortgage

purchases under the housing goals. If these discussions result in additional guidance from HUD that requires

us to modify our reporting of housing goal results, we will make any necessary adjustments at the appropriate

time.

EÅective January 1, 2005, HUD established new and increasing aÅordable housing goal levels for the

GSEs for the years 2005 through 2008, as summarized in ""Table 3 Ì Current and Future Housing Goals for

2005, 2006, 2007 and 2008'' below. In addition, HUD established three new home purchase subgoals for

mortgages that Ñnance purchases of single-family, owner-occupied properties located in metropolitan areas

(reÑnanced mortgages are excluded). Finally, the existing dollar-based target for multifamily mortgage

purchases increased to $3.92 billion, based on HUD's established formula setting the goal as the average of the

previous three years' volume. In total, beginning in 2005 and continuing through 2008, we are required to

achieve six diÅerent and increasing HUD goals and subgoals and a higher multifamily dollar-based target, as

summarized in Table 3 below.

Freddie Mac

10
Table 3 Ì Current and Future Housing Goals(1) for 2005, 2006, 2007 and 2008

Current and Future Housing Goals for 2005, 2006, 2007 and 2008

Housing Goals Levels

2005 Goal 2006 Goal 2007 Goal 2008 Goal

Low and moderate- income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52% 53% 55% 56%

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 38 38 39

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 23 25 27

Multifamily special aÅordable volume target (dollars in

billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3.92 $3.92 $3.92 $3.92

Home Purchase Subgoals

2005 Goal 2006 Goal 2007 Goal 2008 Goal

Low and moderate- income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45% 46% 47% 47%

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 33 33 34

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 17 18 18

(1) An individual mortgage may qualify for more than one of the goals. Each of the goal percentages is determined independently and

cannot be aggregated to determine a percentage of total purchases that qualiÑes for these goals.

We believe that meeting these goals and subgoals will be challenging and there can be no assurance that

we will meet all of them in 2005 or beyond. We are making signiÑcant eÅorts to meet the new goals and

subgoals through adjustments to our mortgage sourcing and purchase strategies, including changes to our

underwriting guidelines and expanded and targeted initiatives to reach underserved populations.

Our strategies to meet the new goals and subgoals may result in the purchase of loans that oÅer lower

expected returns on our investment and are likely to increase our exposure to potential credit losses. Increasing

the concentration of our purchases of goal-eligible loans also may require us to forego other purchase

opportunities that we would expect to be more proÑtable. If our current eÅorts to meet the new goals and

subgoals prove to be insuÇcient, we may need to take additional steps that could lead to a signiÑcant reduction

of service to portions of the conventional conforming mortgage market, and also a reduction in our

proÑtability.

We view the purchase of mortgage loans beneÑting low- and moderate-income families and neighborhoods as a principal part of our mission and business, and remain committed to fulÑlling the needs of these

borrowers and markets.

Fair Lending

Our mortgage purchase activities are subject to federal anti-discrimination laws. In addition, the Federal

Housing Enterprises Financial Safety and Soundness Act of 1992, or the GSE Act, requires the Secretary of

HUD to adopt regulations prohibiting discriminatory practices in our mortgage purchase activities and

periodically to review and comment on our underwriting and appraisal guidelines for consistency with the Fair

Housing Act and the fair housing provisions of the GSE Act. The GSE Act also requires the Secretary of

HUD to direct that we:

‚ submit data to HUD to assist it in investigating whether a mortgage lender with which we do

business has failed to comply with the Fair Housing Act or the Equal Credit Opportunity Act; and

‚ undertake remedial actions, including suspension, probation, reprimand or settlement, against

lenders that are found to have engaged in discriminatory lending practices in violation of the Fair

Housing Act or Equal Credit Opportunity Act pursuant to a Ñnal adjudication and after

opportunity for an administrative hearing.

Freddie Mac

11
New Program Approval

Under the GSE Act, we must obtain the approval of the Secretary of HUD for any new program for the

purchasing, servicing, selling, lending on the security of or otherwise dealing in conventional mortgages that:

‚ is signiÑcantly diÅerent from programs that were previously approved under the GSE Act or that

were approved or engaged in before the date the GSE Act was enacted; or

‚ represents an expansion, of the dollar volume or number of mortgages or securities involved, of

programs above limits expressly contained in any prior approval.

HUD has issued regulations implementing the new program approval authority granted under the GSE

Act. The Secretary of HUD is required to approve any new program unless the Secretary determines that the

new program is not authorized under the Freddie Mac Act or that the program is not in the public interest.

OFHEO

Regulation of our Ñnancial safety and soundness is vested in OFHEO. Organizationally, OFHEO is

located within HUD; however, it operates independently of the Secretary of HUD in most respects. Among

other regulations relating to safety and soundness, OFHEO implements, monitors, and enforces capital

standards that apply to us. In addition, OFHEO conducts comprehensive examinations of our operations.

OFHEO's regulatory capital requirements include a ratio-based minimum capital requirement and a riskbased capital requirement designed to ensure that we maintain suÇcient capital to survive a sustained severe

downturn in the economic environment. OFHEO is required to classify our capital adequacy at least quarterly.

OFHEO has never classiÑed us as other than ""adequately capitalized,'' the highest possible classiÑcation.

If we were classiÑed as less than adequately capitalized, our ability to pay dividends on common or

preferred stock could be restricted. Also, without prior written approval from OFHEO, we may not make any

dividend payment on common or preferred stock if, after paying such dividend, we would fail to meet our

minimum capital or risk-based capital requirements. For additional information about our regulatory capital

requirements, see ""NOTE 10: REGULATORY CAPITAL'' to the consolidated Ñnancial statements.

On January 29, 2004, OFHEO announced the creation of a framework for monitoring our capital due to

the temporarily higher operational risks arising from our current inability to produce timely Ñnancial

statements in accordance with GAAP. The framework includes a target capital surplus of 30 percent of our

minimum capital requirement, subject to certain conditions and variations; weekly monitoring; and prior

approval of certain capital transactions, to verify that appropriate levels of capital are maintained. While

OFHEO's framework includes weekly monitoring and imposes restrictions on share repurchases and other

capital activities, we do not expect it to adversely aÅect our ability to grow in most scenarios. For additional

information about the OFHEO target capital surplus framework, see ""NOTE 10: REGULATORY CAPITAL'' to the consolidated Ñnancial statements.

Treasury

Under the Freddie Mac Act, the Secretary of the Treasury has approval authority over all of our

issuances of notes, debentures and substantially identical types of unsecured debt obligations (including the

interest rates and maturities on these securities), as well as new types of mortgage-related securities issued

subsequent to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

The Secretary of the Treasury has historically performed this debt securities approval function by coordinating

GSE debt oÅerings with Treasury funding activities.

SEC

While we are exempt from the Securities Act and Exchange Act securities registration requirements, we

are dedicated to fulÑlling our commitment to register our common stock under the Exchange Act. Once this

process is complete, we will be subject to the Ñnancial reporting requirements applicable to registrants under

the Exchange Act, including Ñling with the SEC annual reports on Form 10-K, quarterly reports on

Form 10-Q and current reports on Form 8-K. We anticipate Ñling our Exchange Act registration statement

with the SEC in the second quarter of 2006 and becoming an SEC reporting company as soon as possible

thereafter.

Freddie Mac

12
In addition, OFHEO has issued a supplemental disclosure regulation that will obligate us to submit proxy

statements and insider transaction reports to the SEC in accordance with rules promulgated under the

Exchange Act. Our securities continue to be exempt from the securities oÅering registration requirements of

the Securities Act and certain other provisions of the federal securities laws.

GSE Regulatory Oversight Legislation

We face an uncertain regulatory environment in light of legislative reforms currently being discussed. We

strongly support enactment of regulatory oversight legislation that ensures our regulator has authority to

conduct eÅective oversight. We believe appropriate regulatory oversight legislation would strengthen market

conÑdence and promote our mission. In our view, a strong regulator that values housing, capital requirements

tied to risk, and legislative provisions that maintain our GSE status are among the key elements of appropriate

GSE regulatory oversight legislation. We will continue to work with the Congress, the Administration and

other interested parties toward enacting such legislation.

Both the Senate and the House of Representatives have indicated that they will consider GSE regulatory

oversight legislation during the current session of Congress. Separate bills concerning regulatory oversight are

under consideration in the Senate and the House of Representatives, and others are likely to be introduced,

that address key elements of the GSE's business and regulation including regulatory structure, capital

standards, receivership, scope of GSE activities, aÅordable housing goals, portfolio growth and expanded

regulatory oversight over GSE oÇcers and directors.

We currently generate a signiÑcant portion of our net income through our portfolio investment activities.

Legislative provisions now under consideration would give our regulator substantial authority to regulate the

amount and composition of our portfolio investments and would enable the regulator to require substantial

reductions in those investments. Additional provisions under consideration would increase the regulator's

authority to require us to maintain higher capital levels and to approve new programs and business activities,

and would modify our aÅordable housing goals and require that a speciÑed percentage of our proÑts be placed

in a fund to support aÅordable housing.

It is also possible that the enactment of legislative provisions that go beyond the key elements identiÑed

above could further erode or eliminate the special abilities and responsibilities set forth in our charter that

make it possible for us to pursue our mission eÅectively. The enactment into law of the various legislative

provisions under consideration, depending on their Ñnal terms and on how they were applied by our regulator

within the scope of its authority, could have a material adverse eÅect on Freddie Mac's future earnings, stock

price and shareholder returns, ability to fulÑll its mission, and ability to recruit and retain qualiÑed oÇcers and

directors.

While we continue to work toward enactment of appropriate GSE regulatory oversight legislation, we

cannot predict the prospects for the enactment, timing or content of any legislation or its impact on our

Ñnancial prospects.

Other Regulatory Matters

Our business activities may be aÅected by a variety of legislative and regulatory actions related to the

activities of banks, savings institutions, insurance companies, securities dealers and other regulated entities

that comprise a signiÑcant part of our customer base. Among the legislative and regulatory provisions

applicable to these entities are capital requirements for federally insured depository institutions and regulated

bank holding companies. For example, the Basel Committee on Banking Supervision, composed of representatives of certain central banks and bank supervisors, has developed a new set of risk-based capital standards for

banking organizations. The U.S. banking regulators have stated their intent to propose new capital standards

for certain banking organizations that would incorporate the new risk-based capital standards into existing

requirements. If Ñnal rules adopted by the U.S. banking regulators revise the capital treatment of mortgage

assets, decisions by U.S. banking organizations about whether to hold or sell such assets could be aÅected.

However, the contents and timing of any Ñnal rules remain uncertain, as does the manner in which U.S.

banking organizations may respond to them.

Legislative or regulatory provisions that create or remove incentives for these entities either to sell

mortgage loans to us or to purchase our securities, could have a material eÅect on our business results.

Freddie Mac

13
PROPERTIES

We own a 75 percent interest in a limited partnership that owns our principal oÇces, consisting of four

oÇce buildings in McLean, Virginia that comprise approximately 1.2 million square feet. We occupy the

headquarters complex under a long-term lease from the partnership. We also lease other oÇce space in

McLean, Virginia; Washington, D.C.; Reston, Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas;

New York, New York; and Woodland Hills, California.

LEGAL PROCEEDINGS

We are involved as a party to a variety of legal proceedings arising from time to time in the ordinary

course of business including, among other things, contractual disputes, personal injury claims, employmentrelated litigation and other legal proceedings incidental to our business.

Furthermore, we are frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. We also are involved in proceedings arising from our termination of a seller/servicer's eligibility to sell

mortgages to, and service mortgages for, us. In these cases, the former seller/servicer sometimes seeks

damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes

sued in connection with the origination or servicing of mortgages. These suits generally involve claims alleging

wrongful actions of seller/servicers. Our contracts with our seller/servicers generally provide for them to

indemnify us against liability arising from their wrongful actions.

We are also subject to various legal proceedings, including regulatory investigations and administrative

and civil litigation, arising from the restatement. These proceedings include class action and stockholder

derivative lawsuits, administrative enforcement proceedings commenced by OFHEO, and investigations by

the SEC, Department of Labor, the U.S. Attorney's oÇce and the FEC. Recently, we have been named in

multiple lawsuits alleging violations of federal and state antitrust laws and state consumer protection laws in

connection with the setting of our guarantee fees.

Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate

prediction. For additional information on these proceedings, see ""NOTE 13: LEGAL CONTINGENCIES''

and ""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements.

Freddie Mac

14
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following matters were presented for stockholder vote at the November 4, 2004 Annual Meeting of

Stockholders: (a) election of 13 members to our Board of Directors, each for a term ending on the date of the

next annual meeting of our stockholders; (b) ratiÑcation of the appointment of PricewaterhouseCoopers LLP

as our independent auditors for 2004; (c) approval of the 2004 Stock Compensation Plan; and (d) approval of

the Amended and Restated Employee Stock Purchase Plan. Of the 689,544,489 shares of common stock

outstanding on the record date for the meeting, 602,265,372 shares were present in person or by proxy at the

meeting. As shown in Table 4 below, the following persons were elected to our Board of Directors at the

meeting by the respective votes indicated:

Table 4 Ì Submission of Matters to a Vote of Security Holders

Votes For Votes Withheld

Barbara T. AlexanderÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 588,912,902 13,352,470

GeoÅrey T. Boisi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 589,092,865 13,172,507

Michelle Engler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 556,672,196 45,593,176

Richard Karl Goeltz ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 588,955,520 13,309,852

Thomas S. Johnson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 569,820,155 32,445,217

William M. Lewis, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 589,119,835 13,145,537

John B. McCoy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 566,411,920 35,853,452

Eugene M. McQuade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 585,483,822 16,781,550

Shaun F. O'MalleyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 570,164,908 32,100,464

Ronald F. PoeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 566,582,087 35,683,285

Stephen A. RossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 571,402,848 30,862,524

Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 578,824,360 23,441,012

William J. TurnerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 569,823,326 32,442,046

The appointment of PricewaterhouseCoopers LLP was ratiÑed at the meeting by the following votes:

Votes for Votes Against Abstentions

597,300,503 1,572,056 3,392,813

The 2004 Stock Compensation Plan was approved at the meeting by the following votes:

Votes for Votes Against Abstentions

444,307,818 47,005,047 4,459,507

The Amended and Restated Employee Stock Purchase Plan was approved at the meeting by the

following votes:

Votes for Votes Against Abstentions

466,370,480 25,541,493 3,860,399

No matters were submitted to stockholders from November 5, 2004 through the date of this Information

Statement.

Freddie Mac

15
MARKET PRICE FOR THE COMPANY'S

COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock, par value $0.21 per share, is listed on the New York Stock Exchange, or NYSE, and

the PaciÑc Stock Exchange under the symbol FRE. From time to time, our common stock may be admitted to

unlisted trading status on other national securities exchanges. Put and call options on our common stock are

traded on U.S. options exchanges. As of December 31, 2004, there were 690,606,185 shares outstanding of our

common stock.

Table 5 sets forth the high and low sale prices of our common stock for the periods indicated.

Table 5 Ì Quarterly Common Stock Information

Sale Prices(1)

High Low

2005 Quarter Ended

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $73.91 $59.74

2004 Quarter Ended

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $74.20 $64.15

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.50 61.73

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.62 56.45

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65.15 57.60

2003 Quarter Ended

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59.75 $52.65

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56.04 47.35

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61.40 46.48

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.78 49.53

(1) The principal market is the NYSE, and prices are based on the Composite Tape.

As of May 23, 2005, the closing price for our common stock was $64.52 per share. As part of a stock

repurchase plan approved by our Board of Directors, we are authorized to repurchase our common stock in an

amount up to Ñve percent of our shares outstanding as of September 5, 1997, which was approximately

34 million shares. At December 31, 2004, approximately 13 million common shares remained available for

repurchase under this plan. We did not repurchase any common stock during 2004 or the Ñrst Ñve months of

2005, and we do not expect to engage in share repurchases until after we are timely in our Ñnancial reporting.

See ""BUSINESS Ì Regulatory and Governmental Matters Ì OFHEO'' for more information.

Dividends

Table 6 sets forth the cash dividend per common share that we have declared for the periods indicated.

Table 6 Ì Dividends Per Common Share

Regular Cash

Dividend Per Share

2005 Quarter Ended

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.35

2004 Quarter Ended

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.30

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30

2003 Quarter Ended

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.26

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26

We have historically paid dividends to our stockholders in each quarter. Our Board of Directors intends to

continue declaring dividends quarterly, but further dividends will depend upon our capital position, earnings

and growth prospects and other factors our Board of Directors considers relevant to our payment of dividends

and the declaration of speciÑc dividends. See ""NOTE 10: REGULATORY CAPITAL'' to the consolidated

Freddie Mac

16
Ñnancial statements for additional information regarding dividend payments and ""NOTE 9: STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements for additional information regarding our preferred

stock dividend payments.

Holders

As of May 13, 2005, we had approximately 2,500 common stockholders of record.

Securities Authorized for Issuance under Equity Compensation Plans

Table 7 provides information about our common stock that may be issued upon the exercise of options,

warrants and rights under our existing equity compensation plans as of December 31, 2004. Our stockholders

have approved the Amended and Restated Employee Stock Purchase Plan, the 2004 Stock Compensation

Plan and the 1995 Directors' Stock Compensation Plan, as amended and restated in 1998.

Table 7 Ì Securities Authorized for Issuance under Equity Compensation Plans

(c)

(a) Number of securities

Number of securities remaining available for

that may be issued (b) future issuance under

upon exercise Weighted-average equity compensation

of outstanding exercise price of plans (excluding

options, warrants outstanding options, securities reÖected in

Plan Category and rights warrants and rights column (a))

Equity compensation plans approved by

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,312,985(1) $43.73(2) 17,720,244(3)

Equity compensation plans not approved by

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None N/A None

(1) Includes 1,624,628 restricted stock units, or RSUs, issued under the 1995 Directors' Stock Compensation Plan and the 1995 and

2004 Stock Compensation Plans and options to purchase 60,416 shares under the Amended and Restated Employee Stock Purchase

Plan.

(2) For the purpose of calculating this amount, the restricted stock units are assigned an exercise price of zero.

(3) Consists of12,910,468 shares, 3,237,149 shares and 1,572,627 shares available for issuance under the 2004 Stock Compensation

Plan, the Amended and Restated Employee Stock Purchase Plan, and the 1995 Directors' Stock Compensation Plan, as amended

and restated in 1998, respectively.

NYSE Corporate Governance Listing Standards

On November 30, 2004, our Chief Executive OÇcer submitted to the NYSE the certiÑcation required by

Section 303A.12(a) of the NYSE Listed Company Manual regarding our compliance with the NYSE's

corporate governance listing standards.

FORWARD-LOOKING STATEMENTS

We regularly communicate information concerning our business activities to investors, securities analysts,

the news media and others as part of our normal operations. Some of these communications include ""forwardlooking statements'' pertaining to our current expectations about our objectives for Ñnancial reporting, future

business plans, results of operations, Ñnancial condition and trends. Forward-looking statements are typically

accompanied by, and identiÑed with, terms such as ""estimates,'' ""continue,'' ""ongoing,'' ""anticipates,''

""believes,'' ""expects,'' ""intends,'' ""plans,'' ""endeavors,'' ""future,'' ""seeks,'' ""potential,'' ""objectives,'' ""goal,''

""will,'' ""may,'' ""might,'' ""should,'' ""could,'' ""would,'' ""likely'' and similar phrases. This Information

Statement includes forward-looking statements. These statements are not historical facts, but rather represent

our expectations based on current information, plans, estimates and projections. Forward-looking statements

involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. You

should be careful about relying on any forward-looking statements. You should also consider all risks,

uncertainties and other factors described in this Information Statement in considering any forward-looking

statements. Factors that could cause actual results to diÅer materially from the expectations expressed in these

and other forward-looking statements by management include, among others:

‚ Changes in applicable legislative or regulatory requirements, including our Congressional charter,

aÅordable housing goals, or regulatory capital requirements (including the temporary 30 percent target

capital surplus imposed on us by OFHEO in January 2004), the exercise or assertion of regulatory or

Freddie Mac

17
administrative authority beyond current practice, or the enactment of proposed legislation (in whole or

in part) discussed in ""BUSINESS Ì Regulatory and Governmental Matters Ì GSE Regulatory

Oversight Legislation;''

‚ Actions by governmental entities, securities rating agencies or others that could adversely aÅect the

supply or cost of equity capital or debt Ñnancing available to us;

‚ Our ability to eÅectively and timely implement the remediation plan undertaken as a result of the

restatement of our consolidated Ñnancial statements and the consent order entered into with OFHEO,

including particular initiatives relating to technical infrastructure and controls over Ñnancial reporting;

‚ Our ability to identify, manage, mitigate and/or remedy internal control weaknesses and deÑciencies

and other risks;

‚ Developments in, outcomes of, impacts of, and costs, expenses, settlements and judgments related to

regulatory investigations and civil litigation in which we are involved;

‚ Political conditions and related actions by the U.S. or abroad, which may adversely aÅect our

businesses and economic conditions as a whole;

‚ Changes in our strategies for and results of credit loss mitigation, interest-rate and other market risk

management activities and investment activities;

‚ Our ability to implement changes, developments and/or impacts of new, pending or existing

accounting standards, including the timely development of supporting systems;

‚ Changes in pricing or valuation methodologies, models, assumptions and/or estimates;

‚ The degree to which our business and Ñnancial forecasting methods accurately predict actual results

and our ability to implement business processing improvements;

‚ Volatility of reported results due to changes in fair value of certain instruments or assets;

‚ Changes in, and volatility of, the general economy, including interest rates, housing prices and

employment rates;

‚ The availability of debt Ñnancing and equity capital in suÇcient quantity and at attractive rates to

support continued growth in our retained portfolio, to reÑnance maturing debt and to meet regulatory

capital requirements;

‚ The availability of derivative Ñnancial instruments (such as options and interest-rate and currency

swaps) from acceptable counterparties of the types and in the quantities needed for investment funding

and risk management purposes;

‚ The rate of growth in total outstanding U.S. residential mortgage debt and the size of the U.S.

residential mortgage market;

‚ The possibility of further concentration of mortgage loan sourcing in a smaller number of originators;

‚ Preferences of originators in selling into the secondary market. See ""BUSINESS Ì Regulatory and

Governmental Matters Ì Other Regulatory Matters'' for additional information;

‚ Borrower preferences for Ñxed-rate mortgages or ARMs;

‚ Investor preferences for mortgage loans and mortgage-related and debt securities versus other

investments;

‚ Competition and liquidity in the market for mortgage-related and debt securities;

‚ Changes in foreign exchange rates;

‚ SigniÑcant business disruptions resulting from acts of war or terrorism;

‚ The occurrence of a major natural or other disaster in geographic areas in which portions of our total

mortgage portfolio are concentrated; and

‚ Our ability to eÅectively manage these and other risks.

We undertake no obligation to update these forward-looking statements to reÖect events or circumstances

after the date of this Information Statement, or to reÖect the occurrence of unanticipated events.

Freddie Mac

18
SELECTED FINANCIAL DATA(1)

At or for the Year Ended December 31,

2004 2003 2002 2001 2000

(dollars in millions, except share-related amounts)

Income Statement Data

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,137 $ 9,498 $ 9,525 $ 7,448 $ 3,758

Non-interest income (loss)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,039) (244) 7,154 (1,591) 2,656

Income before cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,937 4,816 10,090 3,115 3,666

Cumulative eÅect of change in accounting principles, net

of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 43 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $ 10,090 $ 3,158 $ 3,666

Earnings per common share before cumulative eÅect of

change in accounting principles, net of taxes

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96 $ 6.69 $ 14.22 $ 4.19 $ 5.04

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.94 6.68 14.17 4.17 5.01

Earnings per common share after cumulative eÅect of

change in accounting principles, net of taxes

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96 $ 6.69 $ 14.22 $ 4.25 $ 5.04

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.94 6.68 14.17 4.23 5.01

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.20 $ 1.04 $ 0.88 $ 0.80 $ 0.68

Weighted average common shares outstanding (in

thousands)

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 689,282 687,094 692,727 692,603 692,097

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 691,521 688,675 695,116 695,973 695,307

Balance Sheet Data

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 795,284 $ 803,449 $ 752,249 $ 641,100 $462,803

Senior debt securities, net due within one year ÏÏÏÏÏÏÏÏÏÏ 282,303 295,262 244,429 264,227 183,374

Senior debt securities, net due after one year ÏÏÏÏÏÏÏÏÏÏÏ 443,772 438,738 415,662 311,013 244,732

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,622 5,613 5,605 3,128 144

Miscellaneous liabilities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,662 30,420 52,914 40,489 14,252

Minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏ 1,509 1,929 2,309 2,619 2,944

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,416 31,487 31,330 19,624 17,357

Portfolio Balances(4)

Retained portfolio (unpaid principal balances)(5) ÏÏÏÏÏÏÏÏ $ 652,936 $ 645,466 $ 567,272 $ 497,639 $392,298

Total PCs issued and Structured Securities (unpaid

principal balances)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,208,968 1,162,068 1,090,624 961,511 838,323

Total mortgage portfolio (unpaid principal balances)ÏÏÏÏÏ 1,505,206 1,414,399 1,316,609 1,150,723 975,612

Ratios

Return on average assets(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.4% 0.6% 1.4% 0.6% 0.9%

Return on common equity(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.2 17.2 47.2 20.2 39.0

Return on total equity(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.3 15.3 39.6 17.1 30.2

Dividend payout ratio on common stock(10)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.7 15.6 6.2 18.9 13.6

Equity to assets ratio(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.9 4.0 3.7 3.4 2.9

(1) EÅective January 1, 2003, we adopted the provisions of the Financial Accounting Standards Board, or FASB, Interpretation No. 45, ""Guarantor's Accounting and

Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' or FIN 45, and FASB StaÅ Position 45-2, ""Whether FASB

Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' or

Provides Support for Subsequently Accounting for a Guarantor's Liability at Fair Value,'' or FIN 45-2. We also adopted the provisions of Statement of Financial

Accounting Standards, or SFAS, No. 133, ""Accounting for Derivative Instruments and Hedging Activities,'' or SFAS 133, and the provisions of Emerging Issues

Task Force No. 99-20, ""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in Securitized Financial Assets,'' or

EITF 99-20 as of January 1, 2001 and April 1, 2001, respectively. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our

consolidated Ñnancial statements for more information.

(2) Non-interest income (loss) was increased by $11 million and $9 million for 2001 and 2000, respectively, to conform to the 2004 presentation.

(3) Includes Due to Participation CertiÑcate investors, Accrued interest payable, Guarantee obligation for Participation CertiÑcates, Derivative liabilities, at fair value,

Reserve for guarantee losses on Participation CertiÑcates and Other liabilities.

(4) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(5) The Retained portfolio presented in our consolidated balance sheets diÅers from the Retained portfolio on this table because the consolidated balance sheets

caption includes valuation adjustments (e.g., fair value adjustments for securities classiÑed as available-for-sale and trading and the Reserve for losses on mortgage

loans held-for-investment) and deferred balances (e.g., premiums and discounts). See ""Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances

to the Consolidated Balance Sheets'' in ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' for more information.

(6) Represents PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities and other credit guarantees of mortgage loans held by third

parties. The balances are based on the underlying collateral, which ultimately aÅects the principal amount of PCs, Structured Securities and other credit guarantees

of mortgage loans held by third parties.

(7) Ratio computed as Net income divided by the simple average of beginning and ending Total assets.

(8) Ratio computed as Net income available to common stockholders divided by the simple average of beginning and ending Stockholders' equity, net of Preferred

stock (at redemption value).

(9) Ratio computed as Net income divided by the simple average of beginning and ending Stockholders' equity.

(10) Ratio computed as Common stock dividends declared divided by Net income available to common stockholders.

(11) Ratio computed as the simple average of beginning and ending Stockholders' equity divided by the simple average of beginning and ending Total assets.

Freddie Mac

19
MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion that follows includes forward-looking statements describing results and trends for business

performance metrics during the Ñrst part of 2005, as well as our outlook for certain metrics for the full year

ending December 31, 2005. Actual results will depend on a number of factors such as changes in interest rates

and other market conditions and may diÅer from the outlook discussed below. See ""FORWARD-LOOKING

STATEMENTS'' for a list of such factors.

EXECUTIVE SUMMARY

Overview

We generate revenue from two primary sources: management and guarantee income from our credit

guarantee activities and net interest income from our portfolio investment activities.

Management and guarantee income represents the fee we charge mortgage originators or servicers to

guarantee the payment of principal and interest. This fee is compensation for:

‚ Guaranteeing the payment of principal and interest to security holders; and

‚ Costs incurred in administering payments on these securities.

Net interest income is primarily the diÅerence between interest income earned on mortgages and

mortgage-related assets and interest expense owed on debt. To manage the interest-rate and other market risks

associated with funding portfolio investments and to reduce Ñnancing costs, we enter into interest-rate swaps,

options and other derivatives. Although we believe the derivative transactions we execute are eÅective in

managing interest-rate risk from an economic perspective, they may signiÑcantly aÅect, and increase the

volatility of, our reported earnings. This is particularly the case where the derivative is not accounted for in a

hedge accounting relationship, because the fair value gains and losses on such transactions are recorded on our

consolidated statements of income in Non-interest income (loss) without the oÅsetting change in the value of

the economically hedged risk being recognized in earnings.

In addition to management and guarantee income and net interest income, we generate revenue from feebased activities. For instance, we earn fees associated with servicing and technology-related programs,

including Loan Prospector» (our automated underwriting system).

Summary of Our 2004 Financial Results

GAAP Results

Our Net income was $2.9 billion for 2004, a decrease of 39 percent from $4.8 billion for 2003. Diluted

earnings per common share were $3.94 for 2004, a decrease of 41 percent from Diluted earnings per common

share of $6.68 for 2003. The decrease in net income for 2004 was primarily due to losses in Derivative gains

(losses), a component of Non-interest income (loss), related to derivative instruments not in qualifying hedge

accounting relationships. However, these derivatives continued to be an eÅective component of our risk

management activities. Changes in the level and volatility of interest rates have resulted in signiÑcant periodto-period volatility in our reported net income. It is important to note that while our reported net income under

GAAP was volatile, our interest-rate risk remained low as demonstrated by the low levels of our portfolio

market value sensitivity, or PMVS, and duration gap throughout 2004, which are discussed more fully in

""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Measurement of Interest-Rate

Risk.''

Net interest income was $9.1 billion in 2004, compared to $9.5 billion in 2003. Net interest yield

decreased to 124 basis points in 2004 from 130 basis points in 2003 on a fully taxable-equivalent basis. The

decline in 2004 net interest yield was attributable to lower yields on assets acquired in 2004 and runoÅ of

higher-yielding assets, partially oÅset by a decrease in average debt funding yields, lower derivative-related

expenses associated with derivatives in qualifying hedge accounting relationships and lower interest expense

Freddie Mac

20
related to amounts due to holders of PCs and Structured Securities. Net derivative-related interest expense

declined primarily because we moved a signiÑcant amount of pay-Ñxed swaps to no-hedge designation

eÅective at the beginning of the second quarter of 2004 and the related interest expense on these contracts was

recognized as a component of Non-interest income (loss) in periods following the move to no-hedge

designation.

For 2005, we expect to report Net interest income materially lower than that reported for 2004, primarily

due to compression in net interest margins on our existing portfolio and lower nominal margins on Öoating-rate

mortgage-related security purchases. However, we expect this decrease to be signiÑcantly oÅset by decreased

losses in Non-interest income (loss), assuming current forward rates are realized.

Management and guarantee income, which is a component of Non-interest income (loss) on the

consolidated statements of income, was $1.4 billion in 2004, compared to $1.7 billion in 2003. The total

management and guarantee income rate recognized in 2004 was 17.5 basis points, compared to 23.3 basis

points in 2003. Management and guarantee income consists of the guarantee fee on outstanding PCs and

Structured Securities and certain pre-2003 fees that seller/servicers paid to us at the time of securitization

that are amortized into Management and guarantee income over the estimated life of the PC. The decrease in

the total Management and guarantee income rate in 2004 was driven by a decrease in the amortization of the

pre-2003 deferred fees and a decrease in the average contractual guarantee fee rate on outstanding PCs,

partially oÅset by higher levels of outstanding PCs.

Non-interest income (loss), excluding Management and guarantee income, totaled ($4.4) billion in

2004, compared to ($1.9) billion in 2003. The increase in the loss compared to 2003 was primarily due to net

losses on derivative instruments not in qualifying hedge accounting relationships in 2004 of ($4.5) billion,

compared to a net gain of $39 million in 2003. The loss in 2004 was partly attributable to a decline in swap

rates during 2004, which resulted in losses on our pay-Ñxed swap portfolio. In addition, there were net losses

on our call and put swaptions as the fair value of these positions was aÅected by changes in swap rates and the

decline in implied volatilities of interest rates during the year. However, these derivatives continued to be an

eÅective component of our risk management activities. The net loss on our derivatives not in hedge accounting

relationships also included higher net losses related to the accrual of periodic settlements, primarily because

we moved a signiÑcant amount of pay-Ñxed swaps to no hedge designation eÅective at the beginning of the

second quarter of 2004. The accrual of periodic settlements on these pay-Ñxed swaps was recognized as a

component of Derivative gains (losses) in periods following the move to no hedge designation, rather than as a

component of Net interest income. Non-interest income (loss) also reÖected smaller net losses on investment

activity of ($348) million in 2004, compared to net losses of ($1.1) billion in 2003 and lower losses on debt

retirements of ($327) million in 2004, compared to losses of ($1.8) billion in 2003.

Non-interest expense totaled $2.4 billion in 2004, compared to $2.2 billion in 2003. Non-interest expense

includes Administrative expenses, which totaled $1.6 billion in 2004 compared to $1.2 billion in 2003. During

2004, we continued to incur signiÑcant Administrative expenses related to our on-going eÅorts to return to

timely Ñnancial reporting. Our objective in 2005 is to keep Administrative expenses relatively Öat compared to

2004. In addition, in 2005, we expect credit losses to increase from their recent levels, but to be low relative to

historic levels.

Total stockholders' equity decreased to $31.4 billion at December 31, 2004 from $31.5 billion at

December 31, 2003. The net decrease was attributable to a decrease in Accumulated other comprehensive

income (loss), net of taxes, or AOCI, partially oÅset by an increase in Retained earnings. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Total Stockholders' Equity'' for more information.

Fair Value Balance Sheet Results

We believe fair value measures provide an important view of our business economics and risks because

fair value takes a consistent approach to the representation of all Ñnancial assets and liabilities, rather than an

approach that combines historical cost and fair value techniques, as is the case with our GAAP-basis

consolidated Ñnancial statements. The fair value balance sheet is an important component of our risk

management processes as we use daily estimates of the changes in fair value to calculate our PMVS and

duration gap measures.

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21
At December 31, 2004, the fair value of net assets (net of tax eÅect) was $30.9 billion, a $3.6 billion, or

13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to

common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets

attributable to preferred stockholders) was $26.8 billion, a $3.9 billion, or 17 percent, increase from

December 31, 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. The fair value of net assets

attributable to common stockholders, before common dividends and capital transactions, increased by

$4.7 billion, or 21 percent, from December 31, 2003, a return that exceeds our long-term expectations.

Capital

We have submitted to OFHEO amended minimum capital reports for 2004, including estimates of our

capital surpluses. Based on these estimates, we believe that we were in compliance with OFHEO's regulatory

capital requirements throughout the year. The estimated minimum capital surplus at December 31, 2004, as

reported to OFHEO in our amended minimum capital reports, was approximately $10.9 billion. Our estimated

surplus in excess of the 30 percent target surplus at December 31, 2004 was approximately $3.6 billion. Our

surplus over the risk-based capital requirement was approximately $23.6 billion at December 31, 2004. We

currently expect to be able to maintain a surplus over our regulatory capital requirements across a wide range

of market conditions.

Freddie Mac

22
OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS

Our Total mortgage portfolio includes the unpaid principal balances of mortgages and mortgage-related

securities held in our Retained portfolio and the unpaid principal balances of PCs and Structured Securities

held by third parties; PCs and Structured Securities held by third parties are considered outstanding and are

not included on our consolidated balance sheets. Table 8 provides information about our Total mortgage

portfolio as of December 31, 2004 and 2003 based on unpaid principal balances. For purposes of Table 8, the

unpaid principal balances reÖect all PCs issued and only that portion of Structured Securities that is backed by

non-Freddie Mac mortgage-related securities as of December 31, 2004 and 2003. The unpaid principal

balances of Structured Securities that directly or indirectly relate to issued PCs are excluded because such

amounts are included in the amounts reported in Table 8 that relate to issued PCs.

Table 8 Ì Freddie Mac's Total Mortgage Portfolio Based on Unpaid Principal Balances(1)(2)

As of December 31,

2004 2003

% of % of

Total Total

Dollars in Mortgage Dollars in Mortgage

Millions Portfolio Millions Portfolio

Outstanding PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏ $ 852,270 56% $ 752,164 53%

Retained portfolio:

PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 356,698 24 393,135 28

Non-Freddie Mac mortgage-related securities:

Agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,715 4 77,289 6

Non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏ 175,163 12 114,772 8

Total non-Freddie Mac mortgage-related securities ÏÏ 234,878 16 192,061 14

Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 591,576 40 585,196 42

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,360 4 60,270 4

Total Retained portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 652,936 44 645,466 46

PCs and Structured Securities in the Cash and

investments portfolio(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 16,769 1

Total mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,505,206 100% $1,414,399 100%

(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2) Due to timing diÅerences in our receipt of principal and interest payments from mortgage servicers and the subsequent pass-through

of payments to PC investors, the unpaid principal balances of the underlying mortgage loans do not always equal the unpaid principal

balance of issued PCs and Structured Securities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors'' to the consolidated Ñnancial statements for more information.

(3) The Retained portfolio presented in this table diÅers from the Retained portfolio presented in our consolidated balance sheets

because the amounts presented in our consolidated balance sheets include valuation adjustments (e.g., fair value adjustments for

securities classiÑed as available-for-sale and trading and the Reserve for losses on mortgage loans held-for-investment) and deferred

balances (e.g., premiums and discounts). ""Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances to the

Consolidated Balance Sheets'' provides a reconciliation of the Retained portfolio amounts shown in this table to the amounts shown

under such caption in accordance with GAAP on our consolidated balance sheets.

(4) Represents PCs and Structured Securities we held in connection with PC market-making and support activities, which are reÖected

in Investments on our consolidated balance sheets. In the fourth quarter of 2004, we ceased our PC market-making and support

activities accomplished through our Securities Sales & Trading Group business unit and our external Money Manager program.

For a discussion of purchases into the Total mortgage portfolio, see ""VOLUME STATISTICS.''

Freddie Mac

23
Table 9 Ì Reconciliation of Retained Portfolio Unpaid Principal Balances to the Consolidated Balance

Sheets

December 31,

2004 2003

(dollars in millions)

Mortgage loans in the Retained portfolio:

Unpaid principal balances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,360 $ 60,270

Unamortized premiums, discounts, deferred fees and other basis adjustments(1) 74 64

Less: Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114) (174)

Mortgage loans, net of reserve per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,320 60,160

Mortgage-related securities in the Retained portfolio:(2)

Unpaid principal balances(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 591,576 585,196

Unamortized premiums, discounts, deferred fees and other basis adjustments(5) 3,965 4,729

Net unrealized gains on mortgage-related securities, pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,762 9,601

Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 845 671

Mortgage-related securities per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 603,148 600,197

Total Retained portfolio per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $664,468 $660,357

(1) Other basis adjustments include lower-of-cost-or-market valuation adjustments for loans held-for-sale and basis adjustments related

to purchase commitment hedging activities. Basis adjustments are modiÑcations to the carrying value of these mortgage loans.

(2) Includes PCs, Structured Securities and non-Freddie Mac mortgage-related securities.

(3) Includes other-than-temporary credit-related impairments attributable to certain securities. Impairments to unpaid principal

balances are recorded in certain circumstances when the fair value declines below the amortized cost basis of a security.

(4) Consists of PCs and Structured Securities and Total non-Freddie Mac mortgage-related securities held in the Retained portfolio. See

""Table 8 Ì Freddie Mac's Total Mortgage Portfolio Based on Unpaid Principal Balances'' for more information.

(5) Other basis adjustments are related to (a) hedging activities for the purchase of securities, (b) certain impairments related to

interest-only securities and (c) the extinguishment ofthe net positive diÅerence between Guarantee assets, Guarantee obligations

and credit enhancement-related assets recognized at the inception of an executed Guarantor Swap that correspond to PCs and

Structured Securities that we purchase.

Freddie Mac

24
Table 10 provides further detail regarding both issued and outstanding PCs and Other Structured

Securities.

Table 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based on

Unpaid Principal Balances

December 31, 2004

PCs and Structured PCs and Structured

PCs and Structured Securities in Cash Securities Outstanding Total PCs and

Securities in and Investments (held by Structured Securities

Retained Portfolio Portfolio(4) third parties) Issued

(dollars in millions)

PCs and Structured Securities:

Single-class(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $219,794 $ Ì $454,396 $ 674,190

Multi-class(2)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 136,904 Ì 390,636 527,540

Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 7,238 7,238

Total PCs and Structured

Securities(6)(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $356,698 $ Ì $852,270 $1,208,968

December 31, 2003

PCs and Structured PCs and Structured

PCs and Structured Securities in Cash Securities Outstanding Total PCs and

Securities in and Investments (held by Structured Securities

Retained Portfolio Portfolio(4) third parties) Issued

(dollars in millions)

PCs and Structured Securities:

Single-class(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $269,442 $15,970 $397,009 $ 682,421

Multi-class(2)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 123,693 799 347,833 472,325

Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 7,322 7,322

Total PCs and Structured

Securities(6)(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $393,135 $16,769 $752,164 $1,162,068

(1) Includes PCs that do not back Structured Securities and single-class Structured Securities backed by PCs and Ginnie Mae

CertiÑcates.

(2) Includes that portion ofmulti-class Structured Securities that are backed by PCs and non-agency mortgage-related securities. Also

includes multi-class Structured Securities backed by Ginnie Mae CertiÑcates.

(3) Excludes $43,419 million and $42,692 million at December 31, 2004 and 2003, respectively, of total multi-class Structured Securities

where we have resecuritized other already issued Structured Securities.

(4) Represents PCs and Structured Securities held by us in connection with PC market-making and support activities, which are

reÖected in Investments on our consolidated balance sheets. We ceased our PC market making and support activities accomplished

through our Securities Sales & Trading Group business unit and our external Money Manager program during the fourth quarter

of 2004.

(5) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES'' to the consolidated Ñnancial statements, these amounts

include:

‚ $5,432 million and $5,044 million at December 31, 2004 and 2003, respectively, that pertain to our guarantee of the payment

of principal and interest on (a) multifamily mortgage loans that are originated and held by state and municipal housing

Ñnance agencies to support tax-exempt multifamily housing revenue bonds, (b) tax-exempt multifamily housing revenue

bonds that support pass-through certiÑcates issued by third parties, and (c) Freddie Mac pass-through certiÑcates which are

backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans; and

‚ $1,806 million and $2,278 million at December 31, 2004 and 2003, respectively, of single-family mortgage loans held by third

parties for which we provided a credit guarantee.

(6) PCs and Structured Securities exclude $723,429 million and $637,491 million at December 31, 2004 and 2003, respectively, of

Structured Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured

Securities, which do not increase our credit related exposure, consist of single-class Structured Securities backed by PCs, REMICs,

and principal-only strips. The notional balances of interest-only strips of $105,703 million and $91,192 million at December 31, 2004

and 2003, respectively, are excluded because this table is based on unpaid principal balances. Also excluded are modiÑable and

combinable REMIC tranches and Interest and Principal classes, which collectively totaled $1,097,336 million and $988,600 million

at December 31, 2004 and 2003, respectively, where the holder has the option to exchange the security tranches for other pre-deÑned

security tranches. See ""BUSINESS Ì Credit Guarantee Activities'' for more information on Structured Securities.

(7) Includes $3,015 million and $4,729 million of Structured Securities backed by Ginnie Mae CertiÑcates at December 31, 2004 and

2003, respectively.

Freddie Mac

25
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The notes to the consolidated Ñnancial statements contain a summary of our signiÑcant accounting

policies, including a discussion of recently issued accounting pronouncements. Certain of these policies, as

well as estimates we make, are critical to the presentation of our Ñnancial condition since they are particularly

sensitive to our judgment and are highly complex in nature. Some of these policies and estimates relate to

matters that are inherently uncertain. Actual results could diÅer from our estimates and it is possible that such

diÅerences could have a material impact on the consolidated Ñnancial statements. We have included here a

discussion of our accounting policies that we have identiÑed as being particularly critical to understanding our

consolidated Ñnancial statements. For additional information about these and other accounting policies, see

""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial

statements. We have discussed each of these critical accounting policies and the signiÑcant related estimates

with the Audit Committee of the Board of Directors.

Fair Value Measurement

The measurement of fair value is fundamental to the presentation of our Ñnancial condition and results of

operations in our consolidated Ñnancial statements. Fair value is deÑned under GAAP as the amount at which

an instrument could be exchanged in a current transaction between willing parties, other than in a forced or

liquidation sale. We record many of our Ñnancial instruments at fair value in the consolidated balance sheets,

with changes in these fair values recognized as gains and losses in the consolidated statements of income or

deferred, net of tax, in AOCI. We also prepare fair value-based consolidated balance sheets, which present our

assets and liabilities at fair value (including instruments such as debt, which are presented at amortized cost in

the GAAP-basis consolidated Ñnancial statements). Our consolidated fair value balance sheets satisfy our

disclosure requirements under SFAS No. 107, ""Disclosures about Fair Values of Financial Instruments,'' or

SFAS 107, and are a tool to communicate our Ñnancial position and results on a fair value basis. See

""CONSOLIDATED FAIR VALUE BALANCE SHEETS'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to the consolidated Ñnancial statements for more information.

Freddie Mac

26
Table 11 summarizes our assets and liabilities that are recorded at fair value in the GAAP-basis

consolidated balance sheets at December 31, 2004 and 2003.

Table 11 Ì Assets and Liabilities Recorded at Fair Value

December 31,

2004 2003

(dollars in millions)

Retained portfolio(1)

Mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $590,461 $581,326

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,842 18,200

Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 845 671

Investments

Mortgage-related securities:

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 32,817

Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (5)

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 31,228

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,314

Other assets(2)

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,257 16,180

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,516 3,686

Selected debt securities, net

Securities sold, not yet purchased, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 733

Other liabilities

Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226 357

(1) Mortgage loans classiÑed as held-for-sale are not included in this table because they are carried on the GAAP-basis consolidated

balance sheets at lower-of-cost-or-market value (i.e., not at fair value). The carrying value was $2.6 billion and $2.5 billion at

December 31, 2004 and 2003, respectively.

(2) Real estate owned is not included in this table because it is carried on the GAAP-basis consolidated balance sheets at lower-of-costor-fair value (after deduction for estimated disposition costs). The carrying value was $741 million and $795 million at December 31,

2004 and 2003, respectively.

Fair value aÅects our earnings in a variety of ways. For certain Ñnancial instruments that are carried at

fair value (such as securities and PC residuals classiÑed as trading, derivatives with no hedge designation and

guarantee assets), changes in fair value are recognized in current period earnings. These changes are classiÑed

in several captions on our consolidated statements of income, including Gains (losses) on investment activity,

Derivative gains (losses) and Gains (losses) on guarantee assets for PCs, at fair value. For certain other

Ñnancial instruments that are carried at fair value (such as securities and PC residuals classiÑed as availablefor-sale and derivatives in cash Öow hedge relationships), changes in fair value are generally deferred, net of

tax, in AOCI, a component of Stockholders' equity. The deferred gains and losses in AOCI, initially measured

at fair value, are recognized in earnings over time through amortization, sale of securities from the availablefor-sale category or impairment recognition. In addition, impairments of mortgage loans classiÑed as held-forsale are recognized in earnings through lower-of-cost-or-market valuation adjustments. Finally, certain other

amounts (such as Guarantee obligations) are initially measured at fair value, but are not remeasured at fair

value on a periodic basis. These amounts aÅect earnings over time through the amortization of these amounts

into income and extinguishment when we purchase the related PCs and Structured Securities into the

Retained portfolio.

The estimation of fair values reÖects our judgments regarding appropriate valuation methods and

assumptions. The selection of a method to estimate fair value for each type of Ñnancial instrument depends on

both the reliability and availability of relevant market data. The amount of judgment involved in estimating

the fair value of a Ñnancial instrument is aÅected by a number of factors, such as the type of instrument, the

liquidity of the markets for the instrument and the contractual characteristics of the instrument.

Freddie Mac

27
Even for instruments with a high degree of price transparency, fair value estimation involves our

application of signiÑcant, ongoing judgment. These judgments include:

‚ evaluation of the expected reliability of the estimate;

‚ reliability, timeliness and cost of alternative valuation methodologies;

‚ selection of third-party market data sources;

‚ selection of proxy instruments, as necessary; and

‚ adjustments to market-derived data to reÖect diÅerences in instruments' contractual terms.

While our general practice is to use consistent valuation methodologies over time, we periodically

evaluate our methodologies and may change them to improve our fair value estimates, to accommodate

market developments or to compensate for changes in data availability or other operational constraints.

For Ñnancial instruments with active markets and readily available market prices, we estimate fair values

based on independent price quotations obtained from third parties, including pricing services, dealer marks or

direct market observations, where available. We seek to use third-party pricing where possible. Independent

price quotations obtained from third-party pricing services are valuations estimated by an independent service

provider using market information. Dealer marks are prices that are obtained from third-party dealers that

generally make markets in the relevant products. The quoted price is an indication of the price at which the

dealer would consider transacting in normal market conditions. Market observable prices are prices that are

retrieved from sources in which market trades are executed, such as electronic trading platforms.

Certain instruments are less actively traded and, therefore, are not always able to be reliably valued based

on prices obtained from third parties. If quoted prices or market data are not available, fair value is based on

internal valuation models using market data inputs or internally developed assumptions, where appropriate.

Model-based valuations with signiÑcant market inputs are fair values that are estimated using one or more

models such as: interest rate models, prepayment models, option-adjusted spread models and/or credit

models. These models use market inputs such as interest rate curves, market volatilities and pricing spreads,

which can be validated using external sources such as third party pricing services, dealer marks and market

observable transactions. Model-based valuations without market inputs are required for products with limited

price discovery and are estimated using one or more of the models indicated or are based on our judgment and

assumptions. The use of diÅerent pricing models and assumptions could produce materially diÅerent estimates

of fair values.

The fair values for approximately 98 percent of our mortgage-related securities are based on prices

obtained from third parties or are determined using models with signiÑcant market inputs. The fair values for

the remainder of our mortgage-related securities are obtained from internal models with few or no market

inputs. The fair values for our non-mortgage-related securities are based on prices obtained from third parties,

unless their interest rates frequently reset, in which case the carrying value is presumed to be a reasonable

approximation of fair value. As few of the derivative contracts we use are listed on exchanges, the majority of

our derivative positions are valued using internally developed models that use market parameters as their basis.

Approximately 75 percent of the gross fair value of our derivatives portfolio relates to interest-rate and crosscurrency swaps that do not have embedded options. These derivatives are valued using a discounted cash Öow

model that projects future cash Öows and discounts them at the spot rate related to each cash Öow. The

remaining 25 percent of our derivatives portfolio is valued based on prices obtained from third parties or is

determined using models with signiÑcant market inputs. The fair values for all of our debt securities are based

on prices obtained from third parties or are determined using models with signiÑcant market inputs.

Some of our Ñnancial instruments are not traded in active markets. Examples include guarantee assets,

guarantee obligations and PC residuals. The fair values of these instruments are determined using internally

developed models that facilitate simulation of multiple future scenarios that may occur. Our internal models

incorporate empirical data coupled with the results of benchmarking default and capital assumptions observed

in comparable non-conforming securities market trades adjusted, as appropriate, to reÖect diÅerences in

underlying collateral and other factors. Material assumptions include:

‚ our projections of interest rates and housing prices;

‚ our expectations of prepayments, defaults and loss severity rates;

Freddie Mac

28
‚ our estimates of market-implied option-adjusted spread data into our discount rates, including the

selection of benchmark interest-only securities and the application of a trailing average optionadjusted spread assumption of up to 24 months;

‚ our projections of credit losses, inÖuenced by expectations about factors such as defaults and loss

severities; and

‚ our expectations about the estimated risk premium needed to address exposure to unexpected

increases in credit losses.

We continue to improve the controls over the valuation of Ñnancial instruments. Modeling techniques

used to estimate fair values are subject to review by an independent modeling group in our Enterprise Risk

Oversight group led by our Chief Enterprise Risk OÇcer, who reports directly to the Chief Executive OÇcer.

This group is responsible for the independent oversight and technical review of models, including evaluating

the appropriateness of models used in risk management activities and Ñnancial disclosure. We have also

established a senior management Valuation Committee, chaired by the Chief Financial OÇcer. The Valuation

Committee reviews fair value estimation methodologies, assumptions, controls and results to ensure an

eÅective process exists to provide reasonably accurate and reliable estimates for Ñnancial disclosures. To

support the Valuation Committee, we have also created a Financial Valuation Control group reporting to the

Chief Financial OÇcer with broad oversight of valuation processes. This group is responsible for performing

comprehensive price veriÑcation using an array of independently obtained information to evaluate the

reasonableness of fair value estimates and assumptions. This group is also responsible for reviewing and

approving all valuation assumptions and methods, benchmarking valuation processes against industry

practices, deÑning corporate valuation policies and standards and evaluating, on an ongoing basis, the

eÅectiveness of valuation processes and controls.

As described above, the estimation of fair value requires judgment and we may have reasonably chosen

diÅerent methodologies or assumptions in the current period. The use of diÅerent pricing methodologies and

assumptions could have produced materially diÅerent estimates of fair value in the periods currently

presented. However, we believe the fair values we estimated are reasonable based on internal reviews of

signiÑcant pricing models and methodologies as well as veriÑcation of Ñnancial instrument pricing with thirdparty broker/dealers or pricing services. Furthermore, our estimates of fair value are likely to change in future

periods to reÖect changes in market factors such as interest rates and related volatility, credit performance,

expectations about prepayment behavior and other factors. Our estimates of fair value for individual

instruments may change by material amounts, depending on market developments. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for discussion of market risks and our interest-rate

sensitivity measures, PMVS and duration gap.

Issuances and Transfers of PCs and Structured Securities

As is further discussed in ""BUSINESS,'' we issue PCs and Structured Securities to third parties in

several diÅerent ways. In general, we account for such transfers as either sales, secured borrowings or Ñnancial

guarantee transactions.

We evaluate whether transfers of PCs or Structured Securities qualify as sales based upon the

requirements of SFAS No. 140, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' and, prior to April 1, 2001, SFAS No. 125, ""Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities,'' which we collectively refer to as SFAS 125/140. If we

determine that a transfer of PCs or Structured Securities does not qualify as a sale, we account for such

transfer as a secured borrowing or as a Ñnancial guarantee transaction pursuant to the provisions of FASB

Interpretation No. 45, ""Guarantor's Accounting and Disclosure Requirements for Guarantees, Including

Indirect Guarantees of Indebtedness of Others'' (""FIN 45''). In this regard, we will account for a transfer as a

sale to the extent that we conclude that (1) assets that underlie transferred PCs or Structured Securities are

legally beyond the reach of Freddie Mac and its creditors even in the event that Freddie Mac were to become

Ñnancially insolvent, (2) a third-party buyer can freely pledge or exchange the PCs or Structured Securities

that were transferred to it and (3) Freddie Mac did not maintain eÅective control over transferred PCs or

Structured Securities through either (a) an arrangement that both entitles and obligates Freddie Mac to

repurchase or redeem transferred PCs or Structured Securities before their maturity or (b) the ability to

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unilaterally cause the holder of a transferred PC or Structured Security to return speciÑc assets (i.e., other

than through a clean up call).

If a transfer of PCs or Structured Securities qualiÑes as a sale, we recognize a gain or loss on the sale

immediately in earnings based upon the diÅerence in value between cash received, the recognized carrying

value of interests sold and the fair value of liabilities incurred upon sale. In this case, our obligation to

guarantee the payment of principal and interest on PCs and Structured Securities results in the recognition of

a guarantee asset and guarantee obligation on our consolidated balance sheets.

Many of the transfers of PCs and Structured Securities that are made to third parties do not qualify as

sales or secured borrowings, but are accounted for as Ñnancial guarantee transactions pursuant to the

provisions of FIN 45. For such transactions, we recognize at the inception of an executed guarantee a

guarantee obligation that is initially measured to be the greater of (a) fair value or (b) the contingent liability

amount required to be recognized at inception of the guarantee by SFAS No. 5, ""Accounting For

Contingencies,'' or SFAS 5. We also recognize the fair value of any consideration received on such

transactions. Positive diÅerences between the fair value of consideration expected and received, and guarantee

obligations incurred are deferred as a component of recognized guarantee obligations, while negative

diÅerences between such amounts are recognized immediately in earnings as a component of Other expense.

Table 12 summarizes securitization activity in 2004, 2003 and 2002 that relates to transfers of PCs or

Structured Securities that were accounted for as sales.

Table 12 Ì Securitization Activity Accounted for as Sales

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏ $152,662 $347,874 $241,214

Gain on saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 356 $ 711 $ 874

With respect to all transfers of PCs and Structured Securities to third parties, the measurement of

recognized guarantee assets, guarantee obligations and credit enhancement-related assets involves our best

estimate with respect to key assumptions, including expected credit losses and the exposure to credit losses

that could be greater than expected credit losses, prepayment rates, forward yield curves and discount rates.

We believe that the assumptions we made in this regard are comparable to those used by other market

participants. The use of diÅerent pricing models and assumptions could produce materially diÅerent results.

See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' to the consolidated Ñnancial statements for further discussion of methodologies and judgments we

used to determine the fair values of guarantee assets and obligations, as well as sensitivity analyses to show the

eÅects of hypothetical changes in key assumptions.

Derivative Instruments and Hedging Activities

The determination of whether a derivative qualiÑes for hedge accounting requires signiÑcant judgment

and has a signiÑcant impact on how such instruments are accounted for in our consolidated Ñnancial

statements. As described more fully in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Derivative

Gains (Losses),'' we discontinued substantially all of our cash Öow hedge accounting relationships eÅective as

of April 2, 2004, because they no longer met the hedge eÅectiveness requirements of SFAS 133, as amended

by SFAS No. 138, ""Accounting for Certain Derivative Instruments and Certain Hedging Activities'' and

SFAS No. 149 ""Amendment of Statement 133 on Derivative Instruments and Hedging Activities,'' which we

collectively refer to as SFAS 133. In addition, we voluntarily discontinued a signiÑcant portion of our fair

value hedging relationships eÅective November 1, 2004. Accordingly, the portion of our derivatives portfolio

that was designated in hedge accounting relationships was signiÑcantly reduced by the end of 2004.

Our Retained portfolio activities and our funding of these investments with a mix of short- and long-term

debt expose us to interest-rate risk and other market risks. In particular, a mortgage borrower's prepayment

option makes the timing and amount of mortgage prepayments very sensitive to changes in interest rates. The

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borrower's option exposes us to a potential mismatch in cash inÖows from the mortgage assets we purchase for

investment as compared to cash outÖows required to make payments on our debt. We manage this interestrate risk through various investment and funding activities, as well as through the use of derivatives.

We recognize all derivatives, whether designated in hedging relationships or not, at fair value as either

assets or liabilities on our consolidated balance sheets. Derivatives that are expected to be highly eÅective in

reducing the risk associated with the exposure being hedged may be designated for accounting purposes as a

hedge of:

‚ The cash Öows of a variable-rate instrument or a forecasted transaction, or a ""cash Öow hedge;''

‚ The changes in fair value of a Ñxed-rate instrument, or a ""fair value hedge;'' or

‚ Foreign currency fair value or cash Öow, or a ""foreign currency hedge.''

We report the change in fair value of derivatives that are not in hedge accounting relationships in our

consolidated statements of income in the period in which the change in value occurs. We record the change in

fair value of derivatives that are in cash Öow hedge accounting relationships, to the extent these relationships

are eÅective, as a separate component of AOCI and reclassify this amount into earnings when the earnings

eÅect of the hedged risk is recorded. We record the change in fair value of derivatives in fair value hedge

accounting relationships each period in earnings along with the change in fair value of the hedged item.

The determination of whether a derivative qualiÑes for hedge accounting requires judgment about the

application of SFAS 133. SFAS 133 requires contemporaneous documentation of our hedge relationships,

including identiÑcation of the hedged item, the hedging instrument, the nature of the hedged risk and the

method used to assess the eÅectiveness of the hedge relationship. We use statistical analysis or comparison of

the critical terms of the hedging instrument to those of the hedged item to assess the eÅectiveness of hedges.

If our documentation and assessments are not adequate, the derivative does not qualify for hedge accounting.

Hedge accounting also requires us to measure hedge ineÅectiveness and recognize it currently in

earnings. For certain cash Öow hedging relationships, we have used the hypothetical derivative method, one of

three methods acceptable under GAAP. This method requires us to develop a hypothetical derivative whose

terms match those of the hedged item and compare estimated changes in its fair value to changes in the fair

value of the hedging derivative. Development of hypothetical derivatives requires us to make certain

assumptions and estimates. The use of diÅerent assumptions and estimates could result in a materially

diÅerent amount of recorded ineÅectiveness. We believe that our assumptions and estimates used to develop

hypothetical derivatives are reasonable.

Derivatives designated as cash Öow hedges generally hedge interest-rate risk related to forecasted

issuances of debt. For these hedging relationships to qualify for hedge accounting both at inception and over

the life of the derivative, we must estimate the probable future level of certain types of debt issuances. These

estimates are based on our expectation of future funding needs and the future mix of funding sources. Our

expectations about future funding are based upon projected growth and historical activity. If these estimates

had been lower, a smaller notional amount of derivatives would have been eligible for designation as cash Öow

hedges and potentially material amounts that were deferred and reported in AOCI would have been reported

in Derivative gains (losses) in the consolidated statements of income in the period they occurred. If estimated

future fundings do not occur, or are probable of not occurring, potentially material amounts that were deferred

and reported in AOCI would be immediately recognized in Derivative gains (losses) in the consolidated

statements of income. We believe that the forecasted issuances of debt previously hedged in cash Öow hedging

relationships are suÇciently likely to occur so that we may continue recording previously deferred amounts in

AOCI.

For a more detailed description of our use of derivatives and summaries of derivative positions, see

""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Use of Derivatives and InterestRate Risk Management'' and ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements.

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Credit Losses

We maintain a Reserve for losses on mortgage loans held-for-investment to provide for credit losses

incurred related to those mortgage loans. At December 31, 2004 and 2003, the Reserve for losses on

mortgages held-for-investment was $114 million and $174 million, respectively. The Reserve for losses on

mortgage loans held-for-investment is determined pursuant to the provisions of SFAS 5 and SFAS No. 114,

""Accounting by Creditors for Impairment of a Loan Ì an Amendment of FASB Statements No. 5 and 15,''

or SFAS 114. We also maintain a Reserve for guarantee losses on Participation CertiÑcates to provide for

losses incurred on mortgages underlying PCs or Structured Securities held by third parties. At December 31,

2004 and 2003, the Reserve for guarantee losses on Participation CertiÑcates was $150 million and $125

million, respectively. The Reserve for guarantee losses on Participation CertiÑcates is determined pursuant to

the provisions of SFAS 5 and SFAS 114. The Reserve for losses on mortgage loans held-for-investment and

the Reserve for guarantee losses on Participation CertiÑcates are collectively referred to as the loan loss

reserves. Increases in loan loss reserves that relate to both mortgage loans held as a component of our

Retained portfolio as well as PCs and Structured Securities held by third parties are reÖected in earnings as a

component of the (Provision) beneÑt for credit losses. Loan loss reserves decrease when charge-oÅs of such

balances (net of recoveries) occur or when we record realized losses, which reduces our (Provision) beneÑt

for credit losses.

Loan loss reserves are also increased upon the sale of PCs and Structured Securities for which we

incurred losses on the underlying mortgage loans while such securities were held by us. From an earnings

perspective, such incurred losses are recognized as a component of Gains (losses) on investment activity

through, where applicable, (a) the subsequent measurement of corresponding PC residuals that are classiÑed

as trading (and to which such PCs or Structured Securities relate), (b) the recognition of impairment-related

losses on such securities (i.e., to the extent that such securities do not have recognized PC residual balances

associated with them that are classiÑed as trading) or (c) as a component of gain (loss) on sale of such

securities. Upon the sale of such PCs or Structured Securities, incurred losses are classiÑed on the

consolidated balance sheets as Reserve for guarantee losses on Participation CertiÑcates. See ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Recently Adopted Accounting Standards and Accounting Changes Ì Accounting for Financial Guarantees'' to the consolidated Ñnancial

statements for a discussion of the impact of newly adopted accounting standards on the loan loss reserves in

2003. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 6:

LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more information about our process

for determining the loan loss reserves.

The process for determining the level of loan loss reserves is subject to numerous estimates and

assumptions that are uncertain and require judgment. We regularly evaluate the underlying estimates and

assumptions we use when determining the loan loss reserves and update these assumptions to reÖect our own

historical experience and our current view of overall economic conditions and other relevant factors. Changes

in one or more of these underlying estimates and assumptions could have a material impact on the loan loss

reserves and the provision for credit losses. Key estimates and assumptions that could have an impact on loan

loss reserves include:

‚ loss severity trends;

‚ default experience;

‚ expected proceeds from credit enhancements;

‚ evaluation of collateral; and

‚ identiÑcation of relevant macroeconomic factors and assessment of their applications.

Our use of speciÑc estimates and assumptions is based on all available information and our knowledge

and experience in the single-family and multifamily loan markets. We exercise a signiÑcant amount of

judgment in selecting these factors and, had we made diÅerent determinations in the selection of these factors,

a materially diÅerent level of loan loss reserves could have resulted. Additionally, it is possible that, given the

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same information, others could have reached diÅerent, reasonable conclusions. However, we believe the level

of loan loss reserves is reasonable based on internal reviews of the factors and methodologies used.

Interest Income Recognition and Impairment Recognition on Investments in Securities

For most of our mortgage-related and non-mortgage-related investments, we recognize interest income

using the eÅective interest method in accordance with SFAS No. 91, ""Accounting for Nonrefundable Fees

and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,'' or SFAS 91.

Deferred items, including premiums, discounts and other basis adjustments such as changes in commitmentperiod fair value, are amortized into interest income over the estimated lives of the securities using the

retrospective eÅective interest method. Under this method, we recalculate the constant eÅective yield based

on changes in estimated prepayments. Catch-up adjustments to the unamortized balance of premiums,

discounts and other deferred items that result from applying the updated eÅective yield as if it had been in

eÅect since acquisition are recognized through interest income.

For certain other investments in mortgage-related securities and non-mortgage-related securities classiÑed as available-for-sale, interest income is recognized using the prospective eÅective interest method in

accordance with EITF 99-20. Under this method, changes in the eÅective yield are recognized as adjustments

to interest income in future periods. We speciÑcally apply such guidance to beneÑcial interests (including

undivided interests which are similar to beneÑcial interests) in securitized Ñnancial assets that:

‚ can contractually be prepaid or otherwise settled in such a way that we may not recover

substantially all of our recorded investment (such as interest-only stripped securities); or

‚ were not of high credit quality at the date that we acquired them.

We use actual prepayment experience and estimates of future prepayments to determine the constant

yield needed to apply the eÅective interest method of income recognition. In estimating future prepayments

and cash Öows, we aggregate securities by similar characteristics of their underlying collateral such as

origination date, coupon and product. For securities with structured cash Öow payments, such as Structured

Securities, we also consider the characteristics of other security classes within the same transaction structure

when estimating future prepayments and cash Öows.

Determination of the eÅective yield requires signiÑcant judgment in estimating expected prepayment

behavior, which is inherently uncertain. Estimates of future prepayments are derived from market sources and

our internal prepayment models. Our prepayment models contemplate a variety of assumptions about

borrower behavior in response to changes in interest rates and other macroeconomic factors. Judgment is

involved in making initial determinations about prepayment expectations and in changing those expectations

over time in response to changes in market conditions. The eÅects of future changes in market conditions may

be material. We believe that the above assumptions are comparable to those used by other market

participants. However, the use of diÅerent assumptions in our prepayment models could have resulted in

materially diÅerent income recognition results.

We recognize impairment losses on available-for-sale securities in our Retained portfolio and Cash and

investments portfolio when we have concluded that a decrease in the fair value of a security is other than

temporary. EITF 99-20 requires impairment recognition when there is both a decline in fair value below the

carrying amount and an adverse change in expected cash Öows. Determination of whether an adverse change

has occurred involves judgment about expected prepayments and credit events. For securities not accounted

for under EITF 99-20, we review securities for possible other-than-temporary impairment whenever the

security's fair value is less than its amortized cost. Impairment is evaluated considering a number of indicators

which include the severity of the decline in fair value, credit ratings and the length of time the investment has

been in an unrealized loss position. In addition to these indicators, we recognize impairment when qualitative

factors indicate that we may not recover the unrealized loss. When evaluating the impairment indicators and

qualitative factors, we consider our intent and ability to hold the investment until a point in time at which

recovery can be reasonably expected to occur. We apply signiÑcant judgment in determining whether

impairment loss recognition is appropriate. We believe our judgments are reasonable; however, diÅerent

judgments could have resulted in materially diÅerent impairment loss recognition. See

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""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial

statements for more information on interest income and impairment recognition on securities.

Recently Issued Accounting Pronouncements

See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated

Ñnancial statements for more information concerning our accounting policies and recently issued accounting

pronouncements that we have not yet adopted and that will likely aÅect our consolidated Ñnancial statements.

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CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations should be read in conjunction with the

notes to our consolidated Ñnancial statements.

Table 13 Ì Summary of Consolidated Results

2003 vs. 2002 2004 vs. 2003

Year Ended Year Ended December 31, December 31,

2004 2003 Change 2002 Change

(in millions, except per share amounts)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,137 $ 9,498 $ (361) $ 9,525 $ (27)

Non-interest income (loss)

Management and guarantee income ÏÏÏÏ 1,382 1,653 (271) 1,527 126

Gains (losses) on ""Guarantee asset for

Participation CertiÑcates, at fair

value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,135) (1,461) 326 (2,176) 715

Income on ""Guarantee obligation for

Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏ 732 925 (193) 592 333

Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,475) 39 (4,514) 5,302 (5,263)

Hedge accounting gains (losses) ÏÏÏÏÏÏÏ 743 644 99 187 457

Gains (losses) on investment activity ÏÏÏ (348) (1,114) 766 1,799 (2,913)

Gains (losses) on debt retirementÏÏÏÏÏÏ (327) (1,775) 1,448 (674) (1,101)

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159 352 (193) 276 76

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230 493 (263) 321 172

Total non-interest income (loss) ÏÏÏÏÏ (3,039) (244) (2,795) 7,154 (7,398)

Non-interest expense

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏ (758) (624) (134) (593) (31)

Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (588) (311) (277) (155) (156)

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (52) (8) (42) (10)

Other administrative expenses ÏÏÏÏÏÏÏÏÏ (144) (194) 50 (184) (10)

Total administrative expenses ÏÏÏÏÏ (1,550) (1,181) (369) (974) (207)

(Provision) beneÑt for credit losses ÏÏÏÏ (143) 5 (148) (122) 127

REO operations income (expense) ÏÏÏÏÏ 3 (7) 10 (4) (3)

Housing tax credit partnerships ÏÏÏÏÏÏÏÏ (281) (200) (81) (160) (40)

Minority interests in earnings of

consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏ (129) (157) 28 (184) 27

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (271) (696) 425 (432) (264)

Total non-interest expense ÏÏÏÏÏÏÏÏ (2,371) (2,236) (135) (1,876) (360)

Income before income tax expense ÏÏÏÏÏÏÏ 3,727 7,018 (3,291) 14,803 (7,785)

Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (790) (2,202) 1,412 (4,713) 2,511

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,937 4,816 (1,879) 10,090 (5,274)

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210) (216) 6 (239) 23

Net income available to common

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,727 $ 4,600 $(1,873) $ 9,851 $(5,251)

Diluted earnings per common share ÏÏÏÏÏÏ $ 3.94 $ 6.68 $ (2.74) $ 14.17 $ (7.49)

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Net Interest Income

Net interest income, or NII, our principal source of earnings, represents the diÅerence between Interest

income and Interest expense. Net interest income is aÅected by changes in the balance and contractual rates

associated with our interest-earning assets, interest-bearing liabilities and certain derivative contracts, as

adjusted for amortization of premiums, discounts, deferred hedging gains and losses and other basis

adjustments. We analyze Net interest income, and the related net interest yield, on a fully taxable-equivalent

basis to consistently reÖect income from taxable and tax-exempt investments based on a 35 percent marginal

tax rate.

Analysis of Annual Results

2004 versus 2003

Table 14 summarizes Net interest income and net interest yield for 2004 compared to 2003, and the

related analysis of the eÅect of changes in the rates and volumes of our interest-earning assets and interestbearing liabilities on the changes in Net interest income between 2004 and 2003.

Table 14 Ì Net Interest Income and Rate/Volume Analysis (2004 compared to 2003)

Year Ended December 31, Attributable to

2004 2003 Changes in(1)

Change to

Amounts Yield Amounts Yield Amounts Rate Volume

(dollars in millions)

Interest income:

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,007 6.51% $ 4,251 6.70% $ (244) $ (123) $ (121)

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,460 4.82 29,051 5.34 (591) (2,921) 2,330

Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,467 4.98 33,302 5.48 (835) (3,044) 2,209

Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,136 2.79 3,796 2.63 (660) 18 (678)

Total income on interest-earning assets ÏÏÏ 35,603 4.66 37,098 4.93 (1,495) (3,026) 1,531

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,908) (1.39) (2,785) (1.21) (123) (406) 283

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,950) (4.32) (22,083) (4.62) (867) 1,472 (2,339)

Total interest expense on debt securities ÏÏ (25,858) (3.50) (24,868) (3.52) (990) 1,066 (2,056)

Due to Participation CertiÑcate investors ÏÏÏÏÏ (708) (5.71) (1,641) (6.26) 933 133 800

Total expense on interest-bearing

liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,566) (3.54) (26,509) (3.62) (57) 1,199 (1,256)

Income (expense) related to derivatives(2) ÏÏÏÏ 100 0.01 (1,091) (0.15) 1,191 1,191 Ì

Impact of net non-interest-bearing funding ÏÏÏÏ Ì 0.07 Ì 0.10 Ì Ì Ì

Total funding of interest-earning assets ÏÏÏ (26,466) (3.46) (27,600) (3.67) 1,134 2,390 (1,256)

Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,137 1.20 9,498 1.27 (361) (636) 275

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ 267 0.03 227 0.03 40 38 2

Net interest income (fully taxable-equivalent

basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,404 1.24% $ 9,725 1.30% $ (321) $ (598) $ 277

(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.

(2) The changes in Income (expense) related to derivatives are fully attributed to rate as the derivatives have no associated principal

amounts recorded on the consolidated balance sheets.

(3) Yields may not sum due to rounding.

Net interest income on a fully taxable-equivalent basis decreased by $321 million to $9,404 million in

2004 from $9,725 million in 2003. During 2004, Interest income on Mortgage loans and Mortgage-related

securities declined by $835 million, or 3 percent. We earned lower Interest income on these investments

during 2004 compared to 2003 because we earned lower yields on newly acquired assets, primarily due to

purchases of lower-coupon non-agency mortgage-related securities (such as Öoating-rate securities that tend

to earn lower initial yields than Ñxed-rate securities), coupled with the continued liquidation of relatively

higher-coupon assets during 2004. The decline in our Retained portfolio yields during 2004 more than oÅset

the positive impact of 7 percent growth in the Retained portfolio's average unpaid principal balance. We also

earned lower interest income related to our Cash and investments portfolio during 2004 as compared to 2003.

Freddie Mac

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The average balance of this portfolio declined by 22 percent during 2004 as we ceased the PC market-making

and support activities conducted through our Securities Sales & Trading Group business unit and our external

Money Manager program during the fourth quarter of 2004. The decline in the average balance of the Cash

and investments portfolio more than oÅset a 16 basis point increase in the yield we earned on this portfolio

during 2004 as compared to 2003, due to a change in the asset mix and increases in short-term interest rates

during 2004. During the Ñrst quarter of 2004, we implemented enhancements to certain assumptions and

calculations in the amortization process for deferred fees recorded as basis adjustments on assets in our

Retained portfolio. The eÅect on Net interest income of these enhancements, which were treated as changes

in estimates, was the recognition of $86 million of additional amortization expense during the Ñrst quarter of

2004.

During 2004, Total interest expense on debt securities increased by $990 million. Interest expense related

to long-term debt increased by $867 million, or 4 percent, during 2004 as the average balance increased by

approximately $53 billion, or 11 percent, oÅsetting the beneÑt from the maturity and repurchase of higher-rate

long-term debt and the issuance of new long-term debt at lower rates. Interest expense related to short-term

debt increased by $123 million, or 4 percent, in 2004 as average short-term interest rates were higher in 2004

than 2003, partially oÅset by a 10 percent decline in the average balance of short-term debt.

Income (expense) related to derivatives improved to income of $100 million during 2004 from expense of

($1,091) million in 2003 primarily as a result of the movement of certain pay-Ñxed swaps out of hedge

accounting relationships. As discussed below, in Derivative Gains (Losses) we determined that substantially

all pay-Ñxed interest-rate swaps and certain other derivatives that previously had been in cash Öow hedge

accounting relationships no longer met hedge accounting requirements in accordance with SFAS 133,

eÅective at the beginning of the second quarter of 2004. Consequently, we discontinued hedge accounting

treatment for these relationships, resulting in pay-Ñxed swaps with a notional balance of approximately

$108 billion being moved from the cash Öow hedge designation to no hedge designation. The movement of

these pay-Ñxed swaps to no hedge designation had a signiÑcant impact on Net interest income during 2004

because the related net interest expense is no longer reported as a component of Net interest income in periods

following the move, but as a component of Derivative gains (losses). We also voluntarily discontinued hedge

accounting treatment for the majority of our receive-Ñxed interest-rate swaps eÅective November 1, 2004,

resulting in receive-Ñxed interest-rate swaps with a notional balance of approximately $50 billion being moved

from the fair value hedge designation to no hedge designation.

Our Due to Participation CertiÑcate investors interest expense decreased by $933 million as liquidation

rates on outstanding PCs and Structured Securities declined to 29 percent in 2004 from 63 percent in 2003.

For a further discussion of how the prepayments of the collateral underlying outstanding PCs aÅect Net

interest income, see ""Analysis of Quarterly Results Ì Interest expense related to amounts Due to Participation CertiÑcate investors'' below.

As discussed above, in the fourth quarter of 2004, we decided to cease the PC market-making and support

activities accomplished through our Securities Sales & Trading Group business unit and our external Money

Manager program. By the end of 2004, we had divested the trading portfolio related to these activities in the

Cash and investments portfolio. See ""NOTE 5 Ì RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to the consolidated financial statements for further information. In conjunction with

these activities, our investments in mortgage-related securities were generally hedged by entering into forward

sales of mortgage-related securities. When determining the fair value of these positions, the held investment was

valued at the current market, or spot price, while the forward sale commitment was valued at the discounted

sales, or forward price. The spot-forward difference between the trading security and the forward sale

commitment resulted in a loss in Gains (losses) on investment activities that was offset by Net interest income

on the held position. This spot-forward difference was $976 million, $981 million and $938 million in 2004, 2003

and 2002, respectively.

Net interest yield on a fully taxable-equivalent basis decreased by 6 basis points to 124 basis points in

2004 from 130 basis points in 2003, as the decline in yields on interest-earning assets exceeded the beneÑt of

lower debt funding costs. The yield on interest-earning assets declined due to the Retained portfolio's

acquisition of relatively lower-yielding assets and the liquidation of higher-coupon securities, partially oÅset by

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an improvement in the yield on the Cash and investments portfolio as short-term interest rates increased

during 2004. The yield on interest-bearing liabilities declined due to the maturity and repurchase of higher

cost long-term debt and the issuance of new long-term debt at lower rates, coupled with lower costs associated

with the amounts of interest expense Due to Participation CertiÑcate investors. This decline was partially

oÅset by higher short-term debt yields as average short-term rates were higher in 2004 as compared to 2003.

Income (expense) related to derivatives improved during 2004, as we moved a signiÑcant amount of our payÑxed swaps to no hedge designation and the related net interest expense was reported as Derivative gains

(losses) eÅective at the beginning of the second quarter of 2004 (as described above). The impact of this

movement was slightly oÅset by the movement of a signiÑcant amount of our receive-Ñxed swaps to no hedge

designation in the fourth quarter of 2004 and the recording of the related Net interest income in Derivative

gains (losses) in periods subsequent to the move.

2003 versus 2002

Table 15 summarizes Net interest income and net interest yield for 2003 as compared to 2002, and the

related analysis of the eÅect of changes in the rates and volumes of our interest-earning assets and interestbearing liabilities on the changes in Net interest income between 2003 and 2002.

Table 15 Ì Net Interest Income and Rate/Volume Analysis (2003 compared to 2002)

Year Ended December 31, Attributable to

2003 2002 Changes in(1)

Change to

Amounts Yield Amounts Yield Amounts Rate Volume

(dollars in millions)

Interest income:

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,251 6.70% $ 4,290 7.02% $ (39) $ (199) $ 160

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,051 5.34 30,039 6.39 (988) (5,330) 4,342

Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,302 5.48 34,329 6.46 (1,027) (5,529) 4,502

Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,796 2.63 4,147 3.41 (351) (718) 367

Total income on interest-earning assets ÏÏÏ 37,098 4.93 38,476 5.89 (1,378) (6,247) 4,869

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,785) (1.21) (4,303) (2.03) 1,518 1,849 (331)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,083) (4.62) (21,337) (5.24) (746) 2,725 (3,471)

Total interest expense on debt securities ÏÏ (24,868) (3.52) (25,640) (4.15) 772 4,574 (3,802)

Due to Participation CertiÑcate investors ÏÏÏÏÏ (1,641) (6.26) (1,236) (6.82) (405) 110 (515)

Total expense on interest-bearing

liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,509) (3.62) (26,876) (4.23) 367 4,684 (4,317)

Income (expense) related to derivatives(2) ÏÏÏÏ (1,091) (0.15) (2,075) (0.32) 984 984 Ì

Impact of net non-interest-bearing funding ÏÏÏÏ Ì 0.10 Ì 0.13 Ì Ì Ì

Total funding of interest-earning assets ÏÏÏ (27,600) (3.67) (28,951) (4.43) 1,351 5,668 (4,317)

Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,498 1.27 9,525 1.46 (27) (579) 552

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ 227 0.03 252 0.04 (25) 9 (34)

Net interest income (fully taxable-equivalent

basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,725 1.30% $ 9,777 1.50% $ (52) $ (570) $ 518

(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.

(2) The changes in Income (expense) related to derivatives are fully attributed to rate as the derivatives have no associated principal

amounts recorded on the consolidated balance sheets.

(3) Yields may not sum due to rounding.

Net interest income on a fully taxable-equivalent basis decreased by $52 million to $9,725 million in 2003

from $9,777 million in 2002. During 2003, interest income on mortgage-related securities declined by

$988 million, or 3 percent. The interest income generated by the 14 percent growth in the average unpaid

principal balance of the Retained portfolio was more than oÅset by the accelerated amortization of net

premiums on Retained portfolio securities, lower yields on assets acquired due to the low interest-rate

environment during 2003, and the continued liquidation of higher-yielding assets. Net interest income and net

interest yield were reduced as the yield on interest-earning assets declined at a faster rate than the cost of debt

funding during 2003. During the Ñrst quarter of 2003, we reÑned the assumptions and calculations for the

amortization of certain deferred fees recorded as basis adjustments on assets in our Retained portfolio. The

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eÅect on Net interest income of reÑning these assumptions, which was treated as a change in estimate under

GAAP, was the recognition of $31 million of additional amortization income during the Ñrst quarter of 2003.

These reÑned assumptions also aÅected Management and guarantee fee income as discussed in ""Management

and Guarantee Income'' below. Interest income related to Cash and investments declined by $351 million, or

8 percent, during 2003 as the negative impact of declining interest rates during the Ñrst half of the year was

only partially oÅset by the 19 percent increase in the average balances of Cash and investments.

The decline in short-term interest rates during the Ñrst half of 2003 was the primary factor in the

$1,518 million, or 35 percent decline in interest expense related to short-term debt for 2003. This decline was

only partially oÅset by an 8 percent increase in the average balance of short-term debt during the year. Interest

expense related to long-term debt increased by $746 million, or 3 percent, during 2003 as the average balances

of long-term debt increased by 17 percent, oÅsetting the beneÑt of issuing new debt at lower rates. We

repurchased approximately $27.3 billion of long-term debt during 2003 and issued new debt at lower average

rates in most cases. The most signiÑcant debt repurchases in 2003 occurred in the second quarter when we

repurchased an aggregate of approximately $17.1 billion of U.S. dollar and Euro-denominated debt securities,

most of which followed the announcement of changes in our senior management. We executed these

particular repurchases to support the liquidity and price performance of these securities. Gains (losses) on

debt retirement are reported as a component of Non-interest income (loss).

Interest expense related to amounts Due to investors in PCs and Structured Securities increased by

$405 million to ($1,641) million in 2003 from ($1,236) million in 2002 as prepayments on the collateral

underlying PCs and Structured Securities accelerated during the Ñrst part of 2003 in response to declining

interest rates. The liquidation rate on outstanding PCs and Structured Securities increased to 63 percent in

2003 from 47 percent in 2002. For a further discussion of how the prepayments of the collateral underlying

PCs aÅect Net interest income, see ""Analysis of Quarterly Results Ì Interest expense related to amounts Due

to Participation CertiÑcate investors.''

Income (expense) related to derivatives, which includes the accrual of periodic cash settlements on

interest-rate swap transactions accounted for as hedges and amortization of net deferred losses on closed cash

Öow hedges, improved by $984 million with expenses decreasing to ($1,091) million in 2003 from ($2,075)

million in 2002. During 2002 and into 2003, we terminated pay-Ñxed swaps to help manage the funding

mismatch caused by the decrease in the expected lives of mortgage investments and increase in the balance of

long-term debt. In 2002, the portfolio of swaps designated in hedge accounting relationships was in a net payÑxed position, which resulted in increasing interest expense as market interest rates declined.

Net interest yield on a fully taxable-equivalent basis decreased by 20 basis points to 130 basis points in

2003 from 150 basis points in 2002. For 2003, net interest yield was lower as declines in yields on interestearning assets outpaced the beneÑt of lower funding costs. The yield on interest-earning assets declined as a

result of high liquidations in the Ñrst three quarters of 2003 and the acquisition of new assets in a lower rate

environment. The yield on debt securities issued declined as the result of our long-term debt retirements,

primarily in the second quarter of 2003, and subsequent reÑnance activity, primarily decreasing our short-term

funding costs.

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Analysis of Quarterly Results

Table 16 summarizes quarterly Net interest income and net interest yield for 2004 and 2003.

Table 16 Ì Quarterly Net interest income (quarterly yields annualized)

Full year

1Q 2004 2Q 2004 3Q 2004 4Q 2004 2004

(dollars in millions)

Contractual amounts of net interest income ÏÏÏÏÏÏÏÏÏÏ $3,146 $2,897 $3,008 $2,695 $11,746

Deferred item amortization expense, net(1)

Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ (592) (62) (446) (308) (1,408)

Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ (298) (322) (366) (315) (1,301)

Amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (890) (384) (812) (623) (2,709)

Income (expense) related to derivatives

Amortization of deferred balances in AOCI, net(2) ÏÏ (367) (482) (481) (484) (1,814)

Accrual of periodic settlements of derivatives(3)

Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (427) Ì Ì Ì (427)

Receive-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 527 494 525 422 1,968

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 138 101 82 55 376

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (1) (1) Ì (3)

Accrual of periodic settlements of derivatives ÏÏÏ 237 594 606 477 1,914

Total income (expense) related to derivativesÏÏÏÏÏÏÏÏÏ (130) 112 125 (7) 100

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,126 2,625 2,321 2,065 9,137

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 63 67 74 267

Net interest income (fully taxable-equivalent basis) ÏÏÏ $2,189 $2,688 $2,388 $2,139 $ 9,404

Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏ 1.15% 1.44% 1.24% 1.13% 1.24%

Full year

1Q 2003 2Q 2003 3Q 2003 4Q 2003 2003

(dollars in millions)

Contractual amounts of net interest income ÏÏÏÏÏÏÏÏÏÏ $3,056 $3,088 $3,353 $3,493 $12,990

Deferred item amortization expense, net(1)

Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ (238) (540) (280) (364) (1,422)

Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏ (257) (241) (216) (265) (979)

Amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (495) (781) (496) (629) (2,401)

Income (expense) related to derivatives

Amortization of deferred balances in AOCI, net(2) ÏÏ (446) (363) (341) (332) (1,482)

Accrual of periodic settlements of derivatives(3)(4) ÏÏÏ 306 241 (74) (82) 391

Total income (expense) related to derivativesÏÏÏÏÏÏÏÏÏ (140) (122) (415) (414) (1,091)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,421 2,185 2,442 2,450 9,498

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 64 60 62 227

Net interest income (fully taxable-equivalent basis) ÏÏÏ $2,462 $2,249 $2,502 $2,512 $ 9,725

Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏ 1.40% 1.26% 1.27% 1.26% 1.30%

(1) Amortization relates to premiums, discounts, deferred fees and other basis adjustments. Basis adjustments are modiÑcations to the

carrying value of our Ñnancial instruments.

(2) Represents changes in fair values of derivatives in cash Öow hedge relationships that were previously deferred in AOCI and have

been reclassiÑed to earnings as the associated hedged forecasted issuances of debt and forecasted mortgage purchase transactions

aÅect earnings.

(3) ReÖects the accrual of periodic cash settlements in accordance with the contractual terms of all derivatives in qualifying hedge

accounting relationships.

(4) Data for 2003 not available at the level of detail provided for 2004.

The various drivers of Net interest income and yields are described in detail below.

Investment asset mix. The purchase, sale and liquidation of assets within the Retained portfolio and the

Cash and investments portfolio, which we collectively refer to as our portfolios, has a signiÑcant impact

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on our overall net interest yield. As the composition of the portfolios changes between higher or lower

yielding assets, the overall asset yield on these portfolios Öuctuates. Generally, during periods of relatively

low interest rates, as experienced in 2003 and 2004, the yield on portfolio assets will decline as higheryielding assets liquidate and new assets are acquired at lower rates. The composition of the Retained

portfolio and the Cash and investments portfolio is discussed later in the ""CONSOLIDATED

BALANCE SHEETS ANALYSIS.''

Amortization of premiums and discounts. When we purchase mortgage-related securities, the price we

pay for these assets generally does not equal the securities' unpaid principal balance. We pay more than

the unpaid principal balance (referred to as a premium) when the coupon on the security is greater than

the current market yield for that security. We pay less than the unpaid principal balance (referred to as a

discount) when the coupon on the security is less than the current market yield for that security.

Purchase premiums and discounts are amortized over the estimated life of the purchased assets as

adjustments to interest income based on the eÅective interest method in accordance with SFAS 91. This

method of amortization results in periodic adjustments to interest income, which are applied retrospectively to the date of purchase of the underlying mortgage-related security, when the eÅective interest-rate

changes due to diÅerences between actual and previously estimated prepayments and changes in

estimated future prepayments.

As interest rates declined during the Ñrst half of 2003, we paid higher premiums to acquire

mortgage-related securities. This resulted in a shift in the Retained portfolio to an increasing premium

position in 2003. Mortgage interest rates Öuctuated throughout 2004; however, at year end, these rates

were comparable to rates at December 31, 2003. As a result, the Retained portfolio continued to be in a

net premium position at December 31, 2004. The net balance of unamortized premiums, discounts,

deferred fees and other basis adjustments related to all mortgage-related securities in the Retained

portfolio (both those classiÑed as available-for-sale and trading) equaled $3,965 million and $4,729 million at December 31, 2004 and 2003, respectively.

Interest expense related to amounts Due to Participation CertiÑcate investors. As a result of the payment

remittance cycle associated with PCs and certain Structured Securities, interest expense related to

amounts Due to PC investors tends to increase during periods of rising prepayments and decrease during

periods of declining prepayments. We invest the proceeds from prepayments on mortgage loans

underlying PCs and Structured Securities in short-term investments until related payments are Due to

PC investors. The interest earned on these investments is reported as a component of interest income on

Cash and investments.

As described above, mortgage interest rates were relatively stable during 2004 in contrast to

declining mortgage interest rates during the Ñrst half of 2003. Consequently, the volume of liquidations

associated with outstanding PCs and Structured Securities peaked during 2003, causing interest expense

Due to Participation CertiÑcate investors to be at a higher level during 2003 compared to 2004 and 2002.

Liquidations associated with outstanding PCs and Structured Securities (excluding liquidations associated with PCs in our Cash and investment portfolio) totaled $224,283 million and $471,591 million

during 2004 and 2003, respectively.

Debt funding mix and derivatives activity. We communicate our anticipated issuances of both longterm and short-term debt securities by publishing an annual Ñnancing calendar along with periodic

updates in the form of Quarterly Funding Announcements. We consider our commitments to issue debt

securities with certain maturity characteristics as well as the maturity characteristics of our existing debt

outstanding and other funding requirements when we evaluate our existing derivative portfolio. We adjust

the composition of that derivative portfolio to manage our interest-rate risk, including the relative

duration and convexity of our assets and liabilities.

As discussed in the analysis of Net interest income results for full year 2004, we moved a signiÑcant

amount of our pay-Ñxed swaps that were previously in hedge accounting relationships to no hedge

designation eÅective at the beginning of the second quarter of 2004, and we also moved a signiÑcant

amount of our receive-Ñxed swaps to no hedge designation in the fourth quarter of 2004. For periods

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following these moves, the interest income or expense associated with these swaps is included in

Derivative gains (losses).

Due to declining interest rates in 2002 and the Ñrst half of 2003, the expected lives of assets held in

the Retained portfolio decreased, requiring us to reduce the duration of our long-term debt funding from

an asset/liability management perspective. As a result, we terminated certain pay-Ñxed swaps and

entered into receive-Ñxed swaps. Receive-Ñxed swaps eÅectively convert a Ñxed-rate debt payment into a

variable-rate payment. Conversely, a pay-Ñxed swap requires us to make a Ñxed interest payment in

exchange for a variable rate payment. In the third quarter of 2003, we entered into additional pay-Ñxed

swaps to extend the duration of our debt portfolio as interest rates increased. During 2004, our debt

securities became more heavily weighted toward long-term debt. The average balance of long-term debt

increased approximately 11 percent while the average balance of short-term debt decreased by

approximately 10 percent.

Amortization of hedging gains and losses. Historically, certain derivative contracts were in hedge

accounting relationships, which resulted in basis adjustments to hedged items. These basis adjustments

are accounted for and are similar to premiums and discounts, as described above. However, as of

December 31, 2004, the majority of our pay-Ñxed and receive-Ñxed swaps are no longer in hedge

accounting relationships, as discussed in the analysis of 2004 full-year Net interest income results above.

For more information, see ""Non-Interest Income (Loss) Ì Derivative Gains (Losses).''

Certain derivative contracts (primarily pay-Ñxed swaps) have been accounted for as cash Öow

hedges of the variability of interest payments on forecasted debt issuances, while other derivative

contracts (primarily receive-Ñxed swaps) have been accounted for as fair value hedges of existing debt. In

both cases, termination of the hedge accounting relationship, including the actions we took in 2004

related to pay-Ñxed and receive-Ñxed swaps, resulted in the associated deferred hedging gain or loss being

amortized into Net interest income over the life of the hedged item. Amortization related to terminated

cash Öow hedges is generally included in Income (expense) related to derivatives or, if the deferred gain

or loss is related to a closed cash Öow hedge linked to long-term debt, in Interest expense on long-term

debt. The amortization related to terminated fair value hedges is also included in Interest expense on

long-term debt.

The impact of these drivers on Net interest income, discussed above, during the quarterly periods of 2004

and 2003 is discussed below.

4Q04 vs. 3Q04

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

decreased $249 million and 11 basis points, respectively, during the fourth quarter of 2004 compared to the

third quarter of 2004. The decline in Net interest income was primarily due to an increase in our short-term

funding costs resulting from increases in short-term interest rates during the fourth quarter and the movement

of a signiÑcant amount of our receive-Ñxed swaps to no hedge designation in November 2004. The decline in

net interest yield was primarily related to the increase in our short-term funding costs.

3Q04 vs. 2Q04

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

decreased $300 million and 20 basis points, respectively, during the third quarter of 2004 compared to the

second quarter of 2004. The decline in Net interest income was primarily due to increased amortization

expense related to net premiums and other security-related basis adjustments as a result of a decline in longterm market interest rates from the second quarter of 2004. Additionally, our short-term funding costs

increased as a result of increases in short-term interest rates during the third quarter. The decline in net

interest yield was due to lower yields on Retained portfolio assets and an increase in short-term funding costs.

2Q04 vs. 1Q04

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

increased $499 million and 29 basis points, respectively, during the second quarter of 2004 compared to the

Ñrst quarter of 2004. The increase in Net interest income resulted from lower amortization expense related to

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net premiums and other security-related basis adjustments and the impact of moving a signiÑcant amount of

our pay-Ñxed swaps to no hedge designation, eÅective at the beginning of the second quarter. The reduction in

amortization expense related to net premiums and other security-related basis adjustments resulted from an

increase in long-term market interest rates from the Ñrst quarter of 2004. The increase in net interest yield was

driven by the reduction in amortization expense and the movement of the pay-Ñxed swaps as described above.

1Q04 vs. 4Q03

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

decreased $323 million and 11 basis points, respectively, during the Ñrst quarter of 2004 compared to the

fourth quarter of 2003. Net interest income declined as lower interest income on our interest-earning assets

and higher amortization expense related to net premiums and other security-related basis adjustments was

partially oÅset by higher interest income related to the accrual of periodic settlements on derivatives in hedge

accounting relationships. The decline in interest income on our interest-earning assets resulted primarily from

a $32 billion decline in the related average balance from the fourth quarter of 2003. The higher amortization

expense related to net premiums and other security-related basis adjustments was driven by a decline in

market interest rates from the fourth quarter of 2003. Net interest yield declined as a result of the higher

amortization expense related to net premiums and other security-related basis adjustments, partially oÅset by

the higher interest income related to the accrual of periodic settlements on derivatives in hedge accounting

relationships.

During the Ñrst quarter of 2004, we implemented enhancements to certain assumptions and calculations

in the amortization process for deferred fees recorded as basis adjustments on assets in our Retained portfolio.

The eÅect on Net interest income of these enhancements, which were treated as a change in estimate, was the

recognition of $86 million of additional amortization expense during the Ñrst quarter of 2004.

4Q03 vs. 3Q03

Net interest income, on a fully taxable-equivalent basis, increased by $10 million during the fourth

quarter of 2003 as compared to the third quarter of 2003. Net interest yield, on a fully taxable-equivalent basis,

decreased by 1 basis point for the same periods. The increase to Net interest income was due to increased

interest income recognized on the Retained portfolio as its average balance increased by 5 percent quarterover-quarter. This increase to net interest income was oÅset by increased long-term debt expense related to

the funding of the Retained portfolio growth. Net interest yield remained relatively Öat as improved funding

costs were oÅset by lower asset yields.

3Q03 vs. 2Q03

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

increased by $253 million and 1 basis point, respectively, during the third quarter of 2003 compared to the

second quarter of 2003. These increases were driven by lower amortization expense resulting from adjustments

to the amortization of the related deferred premiums in the Retained portfolio as mortgage rates and estimates

of weighted average mortgage lives increased. Net interest income also beneÑted from decreases in long-term

debt expense and net growth in the Retained portfolio. Interest expense on derivative contracts increased with

purchases of additional pay-Ñxed swaps, which were acquired in a rising rate environment and designated in

hedge accounting relationships. Net interest yield remained relatively Öat as the decline in our debt costs was

oÅset by the decline in asset yields and an increase in expense related to derivatives.

2Q03 vs. 1Q03

Net interest income and net interest yield, both of which are presented on an fully taxable-equivalent

basis, decreased by $213 million and 14 basis points, respectively, during the second quarter of 2003 compared

to the Ñrst quarter of 2003. These decreases were driven by increases in amortization expense related to

deferred premiums on mortgage investment purchases. As discussed above in ""Amortization of premiums and

discounts,'' the deferred amount related to the total Retained portfolio was in an increasing net premium

position and liquidations increased in the quarter. Also, increased liquidations on PCs outstanding generated

timing diÅerences between amounts due from servicers and amounts due to PC investors resulting in increased

interest expense. These negative eÅects were partially oÅset by lower long-term debt expense due to large debt

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retirements completed in the second quarter. Net interest yield declined as amortization expenses and lower

asset yields outpaced lower funding costs.

1Q03 vs. 4Q02

Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,

increased by $9 million and decreased by 1 basis point, respectively, during the Ñrst quarter of 2003 compared

to the fourth quarter of 2002. The increase in net interest income related to a decrease in short-term debt

expense as a result of declining interest rates and higher interest income related to derivatives due to an

increase in volume of receive-Ñxed swaps. Partially oÅsetting these increases was higher amortization expense

related to net deferred premiums on mortgage investment purchases. In addition, lower yields were recognized

on the investment portfolio as short-term rates remained low. During the Ñrst quarter of 2003, we reÑned the

assumptions and calculations for the amortization of deferred fees recorded as discounts on assets in our

Retained portfolio. The eÅect on Net interest income of reÑning these assumptions, which was treated as a

change in estimate (and which also impacted Management and guarantee income), was the recognition of

$31 million of additional amortization income during the Ñrst quarter of 2003. Although yields on assets were

declining faster than debt costs, the margin reduction was oÅset by the rate impact of lower derivative

expenses.

Non-Interest Income (Loss)

Table 17 summarizes our Non-interest income (loss) for 2004, 2003 and 2002.

Table 17 Ì Non-Interest Income (Loss)

2004 vs. 2003 2003 vs. 2002

Year Ended Year Ended December 31, December 31,

2004 2003 Change 2002 Change

(dollars in millions)

Non-interest income (loss)

Management and guarantee income ÏÏÏÏÏÏÏÏÏÏ $ 1,382 $1,653 $ (271) $ 1,527 $ 126

Gains (losses) on ""Guarantee asset for

Participation CertiÑcates, at fair value'' ÏÏÏÏÏ (1,135) (1,461) 326 (2,176) 715

Income on ""Guarantee obligation for

Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 732 925 (193) 592 333

Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,475) 39 (4,514) 5,302 (5,263)

Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 743 644 99 187 457

Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏ (348) (1,114) 766 1,799 (2,913)

Gains (losses) on debt retirementÏÏÏÏÏÏÏÏÏÏÏÏ (327) (1,775) 1,448 (674) (1,101)

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159 352 (193) 276 76

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230 493 (263) 321 172

Total non-interest income (loss) ÏÏÏÏÏÏÏÏÏ $(3,039) $ (244) $(2,795) $ 7,154 $(7,398)

Management and Guarantee Income

Management and guarantee income primarily represents the contractual guarantee fees we receive on

mortgage-related securities issued and guaranteed by us that are held by third party investors. For securities we

hold, the associated components of guarantee income are included in Net interest income. Management and

guarantee income also includes amortization of pre-2003 deferred fees, including credit fees and buy-down

fees on PCs and Structured Securities that have not been previously sold under SFAS 125/140 or that have not

been previously subject to Ñnancial guarantee accounting under FIN 45.

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Table 18 provides summary information about Management and guarantee income for 2004, 2003 and

2002. The total management and guarantee rate consists of the contractual management and guarantee fee

rate, as adjusted for amortization of certain pre-2003 deferred fees, including credit fees and buy-down fees.

Table 18 Ì Management and Guarantee Income

Year Ended December 31,

2004 2003 2002

Amount Rate Amount Rate Amount Rate

(dollars in millions, rate in basis points)

Contractual management and guarantee fees ÏÏÏÏÏÏÏÏÏ $1,303 16.5 $1,229 17.3 $1,335 19.4

Amortization of deferred fees(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 1.0 424 6.0 192 2.8

Total management and guarantee incomeÏÏÏÏÏÏÏÏÏÏÏÏ $1,382 17.5 $1,653 23.3 $1,527 22.2

Unamortized balance of credit and buy-down fees

included in Other Liabilities, at period end ÏÏÏÏÏÏÏÏ $ 215 $ 329 $ 804

(1) We reclassiÑed amounts from certain expenses related to uncollectible interest on PCs held by third parties from Management and

guarantee income to (Provision) beneÑt for credit losses to conform with the 2004 presentation. This resulted in a $15 million and an

$11 million increase in Management and guarantee income during 2003 and 2002, respectively.

(2) In accordance with SFAS 91, deferred items are amortized over the estimated lives of the underlying securities using the

retrospective eÅective interest method. This method of amortization results in periodic adjustments when the eÅective interest rate

changes due to diÅerences between actual and estimated prepayments and changes in estimated future prepayments. Catch-up

adjustments are made to the unamortized balances of the deferred items to reÖect the application of the updated eÅective yield as if

it had been in eÅect since acquisition.

Management and guarantee income decreased by $271 million, or 16 percent, to $1,382 million in 2004

from $1,653 million in 2003. This decrease in Total management and guarantee income was primarily driven

by an 81 percent decrease in amortization of pre-2003 deferred fees. Contributing to this decrease was the

eÅect of the change in our accounting treatment of certain fees beginning in 2003 and a model change

implemented in the Ñrst quarter of 2003, both of which are discussed in more detail below.

The management and guarantee rate related to the amortization of deferred fees decreased from 6.0 basis

points in 2003 to 1.0 basis point in 2004. The rate of amortization is determined based on the estimated lives of

the mortgage loans underlying our PCs using the eÅective interest method (as established by SFAS 91).

Periodic adjustments to deferred fees amortization are made to reÖect diÅerences between actual and

previously estimated mortgage prepayments and changes in estimated future prepayments. The primary

drivers of the decrease in amortization of deferred fees in 2004 were: (a) a reduction in the unamortized

balances being amortized through Management and guarantee income; (b) 2003 amortization methodology

changes; and (c) higher interest rates in 2004 resulting in longer estimated lives of the loans underlying

our PCs.

Management and guarantee income includes amortization of pre-2003 deferred fees, including credit fees

and buy-down fees on our PCs that have not previously been subject to guarantee accounting under FIN 45 or

have not previously been sold under SFAS 125/140. The existing unamortized balance of pre-2003 deferred

fees related to Outstanding PCs equaled approximately $215 million, $329 million and $804 million as of

December 31, 2004, 2003 and 2002, respectively, and will ultimately be reduced to zero over time. Beginning

in 2003, credit and buy-down fees on PCs issued through our Guarantor and MultiLender Programs have been

deferred as a component of our Guarantee obligation for Participation CertiÑcates, rather than recorded in

Other liabilities on our consolidated balance sheets as was the practice prior to 2003 before the adoption of

FIN 45. These fees are amortized into income as a component of Income on ""Guarantee obligation for

Participation CertiÑcates,'' as described more fully in ""Table 22 Ì Income on Guarantee Obligation for 2004

and 2003.'' For all periods presented, deferred balances related to credit and buy-down fees associated with PC

transactions that qualify as sales (i.e., non-Guarantor or non-MultiLender Program transactions) do not aÅect

Management and guarantee income nor Income on ""Guarantee obligation for Participation CertiÑcates.''

Instead, these deferred balances are included in the determination of the gain or loss on the sale of mortgage

loans, which we report as Gains (losses) on investment activity.

In the Ñrst quarter of 2003, we improved our methodology for estimating the expected weighted average

lives of mortgages with related deferred fees, including credit fees and buy-down fees. The improvements we

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made included enhancements to the prepayment models we use to determine the expected weighted average

lives of mortgage loans underlying our PCs, which in turn are used to calculate the recognition of deferred fees

based on the eÅective interest method. These improvements to our models were treated as a change in

estimate in accordance with Accounting Principles Board Opinion No. 20, ""Accounting Changes,'' or

APB 20, and resulted in the recognition of $110 million (1.5 basis points) of additional amortization income in

Management and guarantee income in the Ñrst quarter of 2003.

The decrease in amortization of deferred fees in 2004 as compared with 2003 also resulted from higher

mortgage interest rates in 2004 compared to 2003 and the associated impact on prepayment speeds used in our

amortization models, which increased the expected weighted average lives of outstanding PCs and slowed the

pace of amortization.

The contractual management and guarantee fee rate recognized in 2004 decreased to 16.5 basis points

compared with 17.3 basis points in 2003. The portfolio turnover we experienced in 2004 reduced our

contractual guarantee fee rates because newly issued PCs tended to have lower contractual guarantee fee rates

than the previously outstanding PCs, that were liquidated during 2004. This rate decline was partly driven by

the impact of our market adjusted pricing feature on new business purchases, which is discussed in more detail

below. Also, the contractual guarantee fee rate for 2004 declined because a greater proportion of our overall

credit guarantee compensation was received in the form of upfront fees paid to us by seller/servicers.

Beginning in 2003, these upfront fees are amortized into income as a component of Income on ""Guarantee

obligation for Participation CertiÑcates'' or are included in the determination of the gain or loss on the sale of

mortgage loans.

We expanded the use of our market adjusted pricing feature in late 2003 to oÅset the then-prevailing

weakness in prices of our PCs outstanding. This pricing provision adjusts guarantee fees upward or downward

to compensate for the strength or weakness of our PC prices relative to competing securities. This pricing

feature had an increased impact on new business guarantee fees generated in late 2003 and throughout all of

2004. Toward the end of 2004, our PC prices strengthened compared to the second half of 2003. The Ñnancial

impact of prior and current market adjusted pricing is generally recognized over the life of the PC, unless the

security is transferred to a third party in a transaction that qualiÑes as a sale under SFAS 140. Thus, the

impact will continue to be recognized in Contractual management and guarantee fees even though the prices

of our PCs have improved and similar adjustments on new purchases have decreased.

Total Management and guarantee income increased in 2003 by $126 million, or 8 percent, to

$1,653 million from $1,527 million in 2002. This increase was driven by an increase in average outstanding

PCs and an increase in the average total management and guarantee rate recognized in 2003, including

amortization of deferred fees. The total management and guarantee rate in 2003 was 23.3 basis points

compared with 22.2 basis points in 2002. The increase was driven by accelerated amortization of deferred fees,

partially oÅset by lower contractual management and guarantee fee rates on new business. Increased

amortization of deferred fees resulted from the decline in mortgage interest rates during the Ñrst half of 2003

and the related increase in mortgage prepayments, as well as the Ñrst quarter 2003 model change.

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Table 19 summarizes Management and guarantee income and rates for each quarter in 2004 and 2003.

Table 19 Ì Quarterly Management and Guarantee Income

1Q 2004 2Q 2004 3Q 2004 4Q 2004

Amount Rate Amount Rate Amount Rate Amount Rate

(dollars in millions, rate in basis points)

Contractual management and guarantee fees ÏÏÏÏÏ $320 16.7 $322 16.6 $324 16.3 $337 16.3

Amortization of deferred fees(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 3.4 (71) (3.7) 56 2.8 30 1.4

Total management and guarantee incomeÏÏÏÏÏÏÏÏ $384 20.1 $251 12.9 $380 19.1 $367 17.7

1Q 2003 2Q 2003 3Q 2003 4Q 2003

Amount Rate Amount Rate Amount Rate Amount Rate

(dollars in millions, rate in basis points)

Contractual management and guarantee fees ÏÏÏÏÏ $314 17.3 $311 17.4 $295 17.3 $309 17.1

Amortization of deferred fees(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 248 13.7 168 9.5 (55) (3.2) 63 3.5

Total management and guarantee income(2)ÏÏÏÏÏÏ $562 31.0 $479 26.9 $240 14.1 $372 20.6

(1) In accordance with SFAS 91, deferred items are amortized over the estimated lives of the underlying securities using the

retrospective eÅective interest method. This method of amortization results in periodic adjustments when the eÅective interest rate

changes due to diÅerences between actual and estimated prepayments and changes in estimated future prepayments. Catch-up

adjustments are made to the unamortized balances of the deferred items to reÖect the application of the updated eÅective yield as if

it had been in eÅect since acquisition.

(2) We reclassiÑed amounts from certain expenses related to uncollectible interest on PCs held by third parties from Management and

guarantee income to (Provision) beneÑt for credit losses to conform with the 2004 presentation. This resulted in increases of

$4 million, $3 million, $5 million and $3 million for 1Q 2003, 2Q 2003, 3Q 2003 and 4Q 2003, respectively, in Management and

guarantee income.

As described above, the total management and guarantee rate represents the contractual management

and guarantee fee rate as adjusted for amortization of pre-2003 deferred fees, including credit fees and buydown fees. The amortization component of Management and guarantee income representing the recognition of

deferred fees is based on the eÅective interest method required by SFAS 91, which requires estimating the

expected weighted average lives of mortgages with related deferred fees. The use of the eÅective interest

method requires periodic adjustments to the amortization of deferred fees. This can cause signiÑcant volatility

in quarterly income, as both a current period amortization and a cumulative catch-up adjustment are

recognized in a given period as the eÅective constant yield changes over time. This volatility is driven primarily

by variances between actual and anticipated prepayments, which aÅect the internal rate of return applied in

determining the eÅective constant yield.

4Q04 vs. 3Q04

Management and guarantee income decreased by $13 million, or 3 percent, to $367 million in the fourth

quarter of 2004 from $380 million in the third quarter of 2004. This decrease was primarily driven by a slight

increase in the 30-year mortgage rate during the fourth quarter and the associated impact on estimated

prepayment speeds used in our amortization models. This decrease was partially oÅset by an increase in

contractual management and guarantee fees, that was primarily driven by an increase in average outstanding

PCs.

3Q04 vs. 2Q04

Management and guarantee income increased by $129 million, or 51 percent, to $380 million in the third

quarter of 2004 from $251 million in the second quarter of 2004, primarily due to an increase in the

amortization of deferred fees. The change in amortization related income was driven by an approximate

53 basis point decline in the 30-year mortgage rate during the third quarter and the associated higher

estimated prepayment speeds used in our amortization models which accelerated recognition of deferred fees.

2Q04 vs. 1Q04

Management and guarantee income decreased by $133 million, or 35 percent, to $251 million in the

second quarter of 2004 from $384 million in the Ñrst quarter of 2004. This decline was driven by an

approximate 85 basis points increase in the 30-year mortgage rate during the quarter and associated slower

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estimated prepayment speeds used in our amortization models. This estimated decline in prepayment speeds

caused slower amortization and resulted in net amortization expense for the second quarter of 2004.

1Q04 vs. 4Q03

Management and guarantee income increased by $12 million, or 3 percent, to $384 million in the Ñrst

quarter of 2004 from $372 million in the fourth quarter of 2003. This increase in guarantee income was

primarily driven by an increase in average outstanding PCs that more than oÅset the decline in the contractual

guarantee fee rates caused by generally lower rates on new guarantees and the liquidation of seasoned loans

with higher guarantee fee rates.

4Q03 vs. 3Q03

Management and guarantee income increased by $132 million, or 55 percent, to $372 million in the

fourth quarter of 2003 from $240 million in the third quarter of 2003. This increase was driven primarily by an

increase in the portion of Management and guarantee income representing the amortization of deferred fees.

The change in amortization recognition was driven by a return to income amortization after the downward

adjustment made to amortization in the third quarter, together with a decrease in the expected weighted

average lives of mortgages underlying our PCs. The change in the contractual guarantee fee portion of

Management and guarantee income reÖected an increase in average outstanding PCs.

3Q03 vs. 2Q03

Management and guarantee income decreased by $239 million, or 50 percent, to $240 million in the third

quarter of 2003 from $479 million in the second quarter of 2003. This decrease was driven primarily by

amortization expenses that were recorded due to an increase of approximately 70 basis points in the 30-year

mortgage rate during the quarter. The change in the contractual guarantee fee portion of Management and

guarantee income was relatively small and reÖected the decrease in average outstanding PCs.

2Q03 vs. 1Q03

Management and guarantee income decreased by $83 million, or 15 percent, to $479 million in the

second quarter of 2003 from $562 million in the Ñrst quarter of 2003. This decrease primarily reÖects the eÅect

of the $110 million model-related adjustment made in the Ñrst quarter of 2003 discussed above. The change in

the cash Öow portion of Management and guarantee income was relatively small, reÖective of the decrease in

average outstanding PCs.

Gains (Losses) on Guarantee Asset

Gains (losses) on Guarantee asset for Participation CertiÑcates, at fair value, represents the change in

fair value of the guarantee asset. Guarantee assets are recognized in connection with transfers of PCs and

Structured Securities that are accounted for as sales under SFAS 125/140. Additionally, beginning on

January 1, 2003, we began recognizing guarantee assets for PCs issued through our Guarantor Programs and

for certain Structured Securities that we issue to third parties in exchange for non-agency mortgage-backed

securities, as well as for that portion of PCs issued through MultiLender Program transactions that are not

accounted for as sales under SFAS 125/140. This change in accounting, which was triggered by our adoption

of FIN 45, resulted in a signiÑcant increase in guarantee assets that are recognized on our consolidated balance

sheets. Consequently, the size of our guarantee asset subject to this mark to fair value adjustment was larger in

2004 and 2003 compared with 2002.

The change in fair value of the guarantee asset reÖects:

‚ The portion of cash received that is considered a return of our recorded investment in the

guarantee asset; and

‚ Changes in the fair value of expected future cash inÖows.

Factors AÅecting the Fair Value of the Guarantee Asset. With the passage of time, actual expected cash

Öows are received and are no longer included in the valuation of the guarantee asset. Cash Öows received,

which are recorded as Management and guarantee income, represent a reduction of our investment in the

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guarantee asset. As depicted in ""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for

Participation CertiÑcates, at Fair Value,'' cash Öows received on the guarantee asset are allocated between

interest income (imputed income on the asset based on the discount rate used in the calculation of the fair

value of the guarantee asset) and return of investment (the portion of actual cash Öows that represents a

reduction of the guarantee asset receivable). The realization of cash Öows results in a corresponding reduction

in the valuation of the guarantee asset.

The change in the fair value of future expected cash Öows is the second component of the change in the

guarantee asset value. The value of expected cash Öows is driven by changes in the expected interest rates and

related discount rates that aÅect the estimated life of the mortgages underlying the Outstanding PCs and

Structured Securities and other economic factors that inÖuence the amount and timing of the future cash

Öows. Changes in the estimated lives of the underlying mortgages aÅect the value of the guarantee asset

because our right to receive guarantee fees ceases when borrowers prepay the underlying mortgages.

The portion of the gains and losses on the guarantee asset attributable to these two factors is shown in

""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value,''

below. See ""Table 36 Ì Changes in Guarantee Asset for Participation CertiÑcates, at Fair Value'' in

""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Guarantee Asset for Participation CertiÑcates''

for additional information about the guarantee asset.

Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Total cash Öows received(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,086) $ (891) $ (820)

Portion of cash Öows received related to imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 257 244 259

Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (829) (647) (561)

Change in fair value of future cash ÖowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (306) (814) (1,615)

Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair

value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,135) $(1,461) $(2,176)

(1) Represents guarantee fees received on Outstanding PCs and Structured Securities issued under FAS 140 or FIN 45 for which there

is a guarantee asset established.

Losses on the guarantee asset decreased $326 million, or 22 percent, to ($1,135) million in 2004

compared to ($1,461) million in 2003 and decreased $715 million, or 33 percent, to ($1,461) million in 2003

compared to ($2,176) million in 2002. The decreased losses were primarily due to a smaller overall decline in

mortgage interest rates in 2004 compared to 2003, which tends to aÅect actual and expected prepayments.

This prepayment experience aÅects our estimation of future guarantee fee cash Öows and consequently, the

fair value of the guarantee asset. Return of investment for each year was consistent with the growth of the

outstanding PCs and Structured Securities, as shown in ""Table 8 Ì Freddie Mac's Total Mortgage Portfolio

Based on Unpaid Principal Balances'' in ""OUR RETAINED AND TOTAL MORTGAGE

PORTFOLIOS.''

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""Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates,

at Fair Value'' summarizes the 2004 and 2003 quarterly and full year gains and losses on the guarantee asset.

Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at

Fair Value

Full Year

1Q 2004 2Q 2004 3Q 2004 4Q 2004 2004

(dollars in millions)

Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (199) $ (200) $ (207) $ (223) $ (829)

Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏ (444) 771 (639) 6 (306)

Gains (losses) on ""Guarantee asset for Participation

CertiÑcates at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (643) $ 571 $ (846) $ (217) $(1,135)

Guarantee asset for Participation CertiÑcates, at fair

value, at period end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,583 $4,724 $4,184 $4,516 $ 4,516

Full Year

1Q 2003 2Q 2003 3Q 2003 4Q 2003 2003

(dollars in millions)

Return of investment in guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (153) $ (154) $ (160) $ (180) $ (647)

Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏ (415) (938) 418 121 (814)

Gains (losses) on ""Guarantee asset for Participation

CertiÑcates, at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (568) $(1,092) $ 258 $ (59) $(1,461)

Guarantee asset for Participation CertiÑcates, at fair

value, at period endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,424 $ 2,076 $3,030 $3,686 $ 3,686

For all periods presented, quarterly Öuctuations in gains (losses) on the guarantee asset were driven by

changes in interest rates that aÅected the expected lives of the mortgages underlying Outstanding PCs and

Structured Securities, our expectations of prepayments and corresponding discount rates and the return of

investment.

We experienced declines in the fair value of our guarantee asset during the Ñrst and third quarters of 2004

because the decline in 30-year mortgage interest rates increased our expectation of prepayments and reduced

the value of our guarantee asset. Conversely, increases in 30-year mortgage interest rates during the second

quarter of 2004 slowed the pace of expected prepayments and increased the fair value of the guarantee asset.

Interest rates for 30-year mortgages were relatively Öat during the fourth quarter of 2004. In the fourth

quarter, the fair value of our guarantee asset declined as we collected Management and guarantee income

related to our guarantee asset, as described above.

Through the Ñrst two quarters of 2003, our average single-family portfolio mortgage coupon rate was

signiÑcantly higher than prevailing 30-year mortgage rates, which increased our expectation of prepayments

and reduced the fair value of our guarantee asset. In the third quarter of 2003, mortgage interest rates

increased, which slowed the pace of liquidations and increased the fair value of the guarantee asset. The fourth

quarter of 2003 was primarily driven by the return of investment, as described above. Rates on 30-year

mortgages dropped slightly during the fourth quarter of 2003, which also contributed to the decline in the fair

value of the guarantee asset.

Income on Guarantee Obligation

With the adoption of FIN 45 on January 1, 2003, we changed the way we account for Income on

""Guarantee obligation for Participation CertiÑcates.'' Beginning in 2003, we began recording guarantee

obligations for PCs issued through our Guarantor Program and for certain Structured Securities that we issue

to third parties in exchange for non-agency mortgage-backed securities, as well as for that portion of PCs

issued through MultiLender Program transactions that are not accounted for as sales under SFAS 125/140.

Previously, we recorded a guarantee obligation only upon the transfer of PCs or Structured Securities that

qualiÑed for sale accounting pursuant to SFAS 125/140. (We continue to record guarantee obligations for

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50
these sales.) Consequently, the size of our guarantee obligation subject to this accounting was larger in 2004

and 2003 as compared with 2002. Compensation for this obligation is received in the form of upfront fees

(credit and buy-down fees) and contractual guarantee fees received over time. Credit and buy-down fees

received prior to 2003 were included in Other liabilities on our consolidated balance sheets and amortized into

income as a component of Management and guarantee fee income. In 2003, we began amortizing these items

and the initial recorded value of our guarantee obligation into Income on ""Guarantee obligation for

Participation CertiÑcates'' based on actual payment experience on the underlying mortgage loans, which we

refer to as the Declining Unpaid Principal Balance Method. Prior to 2003, we marked our guarantee obligation

to fair value at the end of each period.

Table 22 summarizes the income for the years ended December 31, 2004 and 2003 on guarantee

obligation. In 2002, we accounted for the guarantee obligation at fair value. See ""Table 23 Ì Attribution of

Change Ì Guarantee Obligation for 2002'' for an attribution of the changes in fair value of the guarantee

obligation in 2002.

Table 22 Ì Income on Guarantee Obligation for 2004 and 2003

Year Ended Year Ended

December 31, 2004 December 31, 2003

(dollars in millions)

Amortization income related to:

Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 128 $ 57

Initial fair value of contractual guarantee fees(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 604 868

Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏ $ 732 $ 925

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,065 $2,904

Liquidation rate for outstanding PCs and Structured Securities(2) ÏÏÏÏ 29% 63%

(1) The initial fair value of contractual guarantee fees is the equivalent of our Guarantee asset for Participation CertiÑcates, at fair value.

(2) Related to outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and

investments portfolio).

Income on ""Guarantee obligation for Participation CertiÑcates'' totaled $732 million, $925 million and

$592 million in 2004, 2003 and 2002, respectively.

In 2004, our Guarantee obligation for Participation CertiÑcates on our consolidated balance sheets

increased, but our Income on ""Guarantee obligation for Participation CertiÑcates'' decreased from $925 million to $732 million because liquidations slowed during 2004 compared to 2003. The full-year annualized

liquidation rate for our Outstanding PCs and Structured Securities was 29 percent in 2004 as compared to

63 percent in 2003, which resulted in lower amortization under the Declining Unpaid Principal Balance

Method in 2004 compared to 2003.

Amortization of credit fees and buy downs increased $71 million during 2004 due to increased balances

and a full year of amortization. See ""Table 24 Ì Quarterly and Annual Income on Guarantee Obligation for

2004 and 2003'' for more information. In 2003, an increase in the balance of guarantee obligation, combined

with a 63 percent annualized liquidation rate on outstanding PCs and Structured Securities, resulted in

$925 million of income recognized on the amortization of our guarantee obligation.

Prior to January 1, 2003, we marked our guarantee obligation to fair value through earnings and, after

that date, we began amortizing the initial balance of such guarantee obligations through Income on

""Guarantee obligation for Participation CertiÑcates'' based on the Declining Unpaid Principal Balance

Method. Accordingly, the 2002 Income on ""Guarantee obligation for Participation CertiÑcates'' must be

analyzed separately (see ""Table 23 Ì Attribution of Change Ì Guarantee Obligation for 2002'').

Table 23 summarizes the attribution of changes in the fair value of the guarantee obligation for 2002. The

guarantee obligation for 2002 was established at its initial fair value, which is determined by estimating the

amount and timing of cash Öows related to the guarantee obligation. Factors in determining the fair value of

the guarantee obligation include expectations about house price appreciation, interest rates, default rates, loan

prepayment rates and other economic factors that inÖuence expected credit losses and expected income

Freddie Mac

51
earned on mortgage principal and interest payments held in our cash and investments portfolio pending

remittance to PC investors. See ""Table 37 Ì Changes in Guarantee Obligation for Participation CertiÑcates''

in ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Guarantee Obligation for Participation CertiÑcates'' for additional information about the guarantee obligation.

Table 23 Ì Attribution of Change Ì Guarantee Obligation for 2002 (2004 and 2003 Income on Guarantee

Obligation is described in Table 22)

2002

Fair Value

(dollars in millions)

Total cash Öows paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $422

Portion of cash Öows paid related to imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (64)

Cash paid representing reduction of guarantee obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 358

Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234

Income on ""Guarantee obligation for Participation CertiÑcates''ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $592

Table 24 summarizes the 2004 and 2003 quarterly and annual income on guarantee obligation.

Table 24 Ì Quarterly and Annual Income on Guarantee Obligation for 2004 and 2003

Year Ended

1Q 2004 2Q 2004 3Q 2004 4Q 2004 December 31, 2004

(dollars in millions)

Amortization income related to:

Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏ $ 23 $ 37 $ 28 $ 40 $ 128

Initial fair value of contractual guarantee fees 128 194 129 153 604

Income on ""Guarantee obligation for

Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 151 $ 231 $ 157 $ 193 $ 732

Guarantee obligation for Participation

CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,241 $3,557 $3,727 $4,065 $4,065

Liquidation rate for Outstanding PCs and

Structured Securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30% 36% 22% 25% 29%

Year Ended

1Q 2003 2Q 2003 3Q 2003 4Q 2003 December 31, 2003

(dollars in millions)

Amortization income related to:

Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏ $ Ì $ 10 $ 25 $ 22 $ 57

Initial fair value of contractual guarantee fees 235 255 276 102 868

Income on ""Guarantee obligation for

Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 235 $ 265 $ 301 $ 124 $ 925

Guarantee obligation for Participation

CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,655 $1,956 $2,385 $2,904 $2,904

Liquidation rate for Outstanding PCs and

Structured Securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65% 81% 80% 31% 63%

(1) Related to Outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and

investments portfolio.)

Quarterly Öuctuations in Guarantee obligation for Participation CertiÑcates during 2004 and 2003 are the

result of two factors: (a) the increase in the balance of our guarantee obligation subsequent to our adoption of

FIN 45 on January 1, 2003 and (b) Öuctuations in the rate of amortization under the Declining Unpaid

Principal Balance Method, which is driven by the liquidation rate for outstanding PCs and Structured

Securities. During this period, the annualized liquidation rate reached a high of 81 percent in the second

quarter of 2003 and fell to a low of 22 percent in the third quarter of 2004.

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Derivative Gains (Losses)

Derivative gains (losses) represents the change in fair value of derivatives not accounted for in hedge

accounting relationships because the derivatives did not qualify for, or we did not elect to pursue, hedge

accounting, resulting in fair value changes being recorded to earnings. Derivative gains (losses) also includes

the accrual of periodic settlements for derivatives that are not in hedge accounting relationships. Although

derivatives are an important aspect of our management of interest-rate risk, they will generally increase the

volatility of reported net income, particularly when they are not accounted for in hedge accounting

relationships.

We generally use interest-rate swaps to mitigate contractual funding mismatches between our assets and

liabilities. A receive-Ñxed swap results in our receipt of a Ñxed interest-rate payment from our counterparty in

exchange for a variable rate payment to the counterparty. Conversely, a pay-Ñxed swap requires us to make a

Ñxed interest-rate payment in exchange for a variable rate payment. Call and put swaptions are options to

enter into receive- and pay-Ñxed interest-rate swaps, respectively. We use swaptions and other option-based

derivatives to adjust the contractual funding of our debt in response to changes in the expected lives of assets

in the Retained portfolio. Mortgage borrowers generally have the right to prepay their mortgages prior to

contractual maturity, and this prepayment option is sensitive to changes in interest rates.

Derivatives that are not in qualifying hedge accounting relationships generally increase the volatility of

reported Non-interest income (loss) because they are marked to fair value through earnings without the

oÅsetting change in value of the economically hedged exposures also being recognized in earnings. The fair

value of receive- and pay-Ñxed interest-rate swaps is primarily driven by changes in interest rates. Generally,

receive-Ñxed swaps increase in value and pay-Ñxed swaps decrease in value when interest rates decrease (and

the opposite being true when interest rates increase). The fair value of purchased call and put swaptions is

sensitive to changes in interest rates in a directionally similar manner to receive- and pay-Ñxed swaps,

respectively. Swaption values are also driven by the market's expectation of potential changes in future interest

rates (referred to as ""implied volatility''). Swaptions generally become more valuable as implied volatility

increases and less valuable as implied volatility decreases. Recognized losses on these purchased options in any

given period are limited to the premium paid to purchase the option plus any unrealized gains previously

recorded.

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Table 25 provides a summary of our derivatives by hedge accounting designation at December 31, 2003

and 2004, respectively.

Table 25 Ì Derivatives by Hedge Accounting Designation

December 31, 2003 December 31, 2004

$200

$400

$600

$800

$1,000

$1,200

Notional Amount

(dollars in billions)

$1,084

$757

$146 (13%)

$113 (15%)

$623 (82%)

$21 (3%)

$142 (13%)

$796 (74%)

No hedge designation Cash flow hedges Fair value hedges

The notional balance of our derivative portfolio declined to $756.8 billion at December 31, 2004 from

$1,083.9 billion at December 31, 2003, driven by a reduction in the notional balance of option-based

derivatives, interest-rate swaps and commitments. Several factors contributed to the reduction in the notional

amounts of our derivatives during 2004. The asset mix in the Retained portfolio has moved toward a greater

proportion of non-agency, Öoating-rate mortgage-related securities, which generally require lower interest-rate

protection than Ñxed-rate products. Also, the gradual increase in market interest rates and the Öattening of the

yield curve in 2004 have reduced the interest-rate risk of our existing Ñxed-rate investments, thereby lowering

our need for option-based derivatives to manage the related risk. During 2004, we also oÅset a portion of the

optionality risk in the Retained portfolio by increasing the amount of our callable debt outstanding.

The notional balance of option-based derivatives declined by $127.2 billion as a result of adjusting the

options portfolio for risk management purposes in response to changes in market conditions and mortgage

portfolio composition. The notional balance of interest-rate swaps declined by $108.9 billion primarily as a

result of the termination of certain oÅsetting positions prior to their contractual maturity. The notional balance

of commitments declined by $56.6 billion, primarily as the result of a reduction in commitments related to the

Cash and investments portfolio as we ceased the PC market-making and support activities conducted through

our Securities Sales & Trading Group business unit during the fourth quarter of 2004.

EÅective as of the beginning of the second quarter of 2004, we determined that substantially all pay-Ñxed

interest-rate swaps and other derivatives that previously had been in cash Öow hedge accounting relationships

no longer met the hedge accounting requirements of SFAS 133. Consequently, we discontinued hedge

accounting treatment for these relationships for Ñnancial reporting purposes at that time resulting in pay-Ñxed

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swaps with a notional balance of approximately $108 billion being moved from the cash Öow hedge designation

to no hedge designation. We also voluntarily discontinued hedge accounting treatment for a signiÑcant amount

of our receive-Ñxed interest-rate swaps eÅective November 1, 2004, resulting in receive-Ñxed interest-rate

swaps with a notional balance of approximately $50 billion being moved from a fair value hedge designation to

no hedge designation. We believe that the voluntary discontinuance of hedge accounting treatment for

receive-Ñxed swaps will assist us in addressing the period-to-period volatility of the value of our no hedge

designation derivatives, and will help us reduce the operational complexity and related control remediation

eÅorts that would otherwise be needed to ensure ongoing compliance with the requirements for obtaining and

maintaining hedge accounting treatment. We may consider implementing new hedge accounting strategies in

the future.

Table 26 provides a quarterly summary of our period-end notional amounts of receive- and pay-Ñxed

swaps by hedge accounting categories for 2004 and 2003.

Table 26 Ì Notional Amounts of Receive- and Pay-Fixed Swaps(1)

March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004

Description Notional % of Total Notional % of Total Notional % of Total Notional % of Total

(dollars in billions)

Receive-Ñxed swaps:

Fair value hedgeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $113.0 99% $ 97.6 99% $127.2 98% $58.0 69%

No hedge designation(2) ÏÏÏÏÏÏÏÏ 0.8 1 0.7 1 2.7 2 25.6 31

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $113.8 100% $ 98.3 100% $129.9 100% $83.6 100%

Pay-Ñxed swaps:

Cash Öow hedge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $107.8 78% $ Ì Ì% $ Ì Ì% $ Ì Ì%

No hedge designation(2) ÏÏÏÏÏÏÏÏ 29.7 22 156.1 100 150.1 100 95.0 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $137.5 100% $156.1 100% $150.1 100% $95.0 100%

March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003

Description Notional % of Total Notional % of Total Notional % of Total Notional % of Total

(dollars in billions)

Receive-Ñxed swaps:

Fair value hedgeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 89.1 63% $ 92.2 79% $ 81.5 72% $ 93.5 87%

No hedge designation(2) ÏÏÏÏÏÏÏÏ 52.6 37 24.0 21 31.5 28 13.8 13

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $141.7 100% $116.2 100% $113.0 100% $107.3 100%

Pay-Ñxed swaps:

Cash Öow hedge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 90.0 76% $ 98.1 62% $149.8 72% $132.0 74%

No hedge designation(2) ÏÏÏÏÏÏÏÏ 28.9 24 60.5 38 57.8 28 47.1 26

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $118.9 100% $158.6 100% $207.6 100% $179.1 100%

(1) Excludes swaps held as part of our external Money Manager program. As previously disclosed in our Information Statement

Supplement dated October 4, 2004, we ceased our PC market-making and support activities accomplished through our external

Money Manager program during the fourth quarter of 2004.

(2) For more information concerning all of our derivatives that are classiÑed as no hedge designation, see ""Table 27 Ì Derivatives Not

in Hedge Accounting Relationships.''

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Table 27 provides a quarterly and full year summary of the period-end notional amounts and gains and

losses related to swaps, swaptions and other derivatives that we used to manage interest-rate risk but were not

accounted for in hedge accounting relationships for 2004 and 2003.

Table 27 Ì Derivatives Not in Hedge Accounting Relationships

Year Ended

1Q 2004 2Q 2004 3Q 2004 4Q 2004 December 31, 2004

Derivative Derivative Derivative Derivative

Gains Gains Gains Gains Derivative Gains

Notional (Losses) Notional (Losses) Notional (Losses) Notional (Losses) (Losses)

(dollars in billions)

Call swaptions ÏÏÏÏÏ $223.5 $2.7 $226.4 $(5.0) $207.1 $ 3.1 $189.9 $(0.4) $ 0.4

Put swaptionsÏÏÏÏÏÏ 128.7 (1.2) 88.7 1.0 70.8 (1.1) 25.2 (0.1) (1.4)

Receive-Ñxed swaps 0.8 (0.1) 0.7 (0.1) 2.7 Ì 25.6 (0.2) (0.4)

Pay-Ñxed swaps ÏÏÏÏ 29.7 (1.2) 156.1 5.7 150.1 (5.0) 95.0 (0.4) (0.9)

Other(1)ÏÏÏÏÏÏÏÏÏÏÏ 442.6 0.1 379.8 (0.6) 436.3 Ì 286.8 Ì (0.5)

Subtotal ÏÏÏÏÏÏÏÏ 825.3 0.3 851.7 1.0 867.0 (3.0) 622.5 (1.1) (2.8)

Accrual of periodic

settlements:

Receive-Ñxed

swaps ÏÏÏÏÏÏÏÏ Ì Ì Ì 0.1 0.1

Pay-Ñxed swaps ÏÏ (0.2) (0.6) (0.6) (0.4) (1.8)

Subtotal ÏÏÏÏÏÏÏÏ (0.2) (0.6) (0.6) (0.3) (1.7)

Total ÏÏÏÏÏÏÏÏÏ $825.3 $0.1 $851.7 $ 0.4 $867.0 $(3.6) $622.5 $(1.4) $(4.5)

Year Ended

1Q 2003 2Q 2003 3Q 2003 4Q 2003 December 31, 2003

Derivative Derivative Derivative Derivative

Gains Gains Gains Gains Derivative Gains

Notional (Losses) Notional (Losses) Notional (Losses) Notional (Losses) (Losses)

(dollars in billions)

Call swaptions ÏÏÏÏÏ $153.4 $0.3 $167.8 $3.1 $173.8 $(3.1) $216.9 $(0.9) $(0.6)

Put swaptionsÏÏÏÏÏÏ 134.5 (0.3) 155.6 (0.3) 146.3 0.3 123.1 Ì (0.3)

Receive-Ñxed

swaps(2)ÏÏÏÏÏÏÏÏÏ 52.6 0.2 24.0 0.6 31.5 (0.5) 13.8 (0.5) (0.2)

Pay-Ñxed swaps ÏÏÏÏ 28.9 0.2 60.5 (0.4) 57.8 2.1 47.1 0.9 2.8

Other(1)(2)(3)ÏÏÏÏÏÏÏ 553.6 0.6 572.7 0.7 487.7 (1.5) 395.4 (0.5) (0.7)

Subtotal ÏÏÏÏÏÏÏÏ 923.0 1.0 980.6 3.7 897.1 (2.7) 796.3 (1.0) 1.0

Accrual of periodic

settlements ÏÏÏÏÏÏ (0.1) (0.2) (0.4) (0.3) (1.0)

Total ÏÏÏÏÏÏÏÏÏÏÏ $923.0 $0.9 $980.6 $3.5 $897.1 $(3.1) $796.3 $(1.3) $ Ì

(1) Other consists of basis swaps, certain option-based contracts, futures, foreign-currency swaps, commitments, derivatives held as part

of our external Money Manager program and other derivatives not accounted for in hedge accounting relationships, including a

prepayment management agreement and credit derivatives.

(2) We reclassiÑed the notional amounts of certain foreign-currency swaps from Receive-Ñxed swaps to Other to conform with the 2004

presentation.

(3) Subsequent to the issuance of our Information Statement dated September 24, 2004, we increased the December 31, 2003 notional

amounts of commitments and swap guarantee derivatives that are subject to the requirements of SFAS 133 and SFAS 149 and are

not in hedge accounting relationships by $200 million and $31 million, respectively. The net eÅect of these changes was an increase

to the notional amount for no hedge designation to $796.3 billion from $796.0 billion at December 31, 2003. Also, subsequent to the

issuance of our Information Statement Supplement dated March 31, 2005, we revised the notional amounts of written options and

swap guarantee derivatives that are not in hedge accounting relationships for the following periods: (a) reduced 1Q 2003 notional

amount of written options by $708 million, (b) reduced 1Q 2004 notional amount of written options by $216 million, (c) reduced 4Q

2004 notional amount of written options by $134 million and increased 4Q 2004 notional amount of swap guarantee derivatives by

$13 million. The net eÅect of these changes were decreases to the notional amounts for no hedge designation to $923.0 billion from

$923.7 billion at March 31, 2003, to $825.3 billion from $825.5 billion at March 31, 2004 and to $622.5 billion from $622.6 billion at

December 31, 2004. The net eÅect of these changes on fair value and on Derivative gains (losses) was immaterial.

Derivative gains (losses) totaled ($4,475) million, $39 million, and $5,302 million in 2004, 2003 and

2002, respectively. As discussed previously, this Ñnancial statement caption is aÅected by the change in the

fair value of derivatives as well as the accrual of periodic settlements in accordance with the contractual terms

of all derivatives not in hedge accounting relationships. There was signiÑcant volatility in the quarterly results

due to changes in the fair values of our derivatives and changes in the composition of our portfolio of

derivatives not in hedge accounting relationships. In addition, the notional balance of our pay-Ñxed swaps not

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in hedge accounting relationships increased signiÑcantly during the second quarter of 2004, and the notional

balance of our receive-Ñxed swaps not in hedge accounting relationships increased signiÑcantly during the

fourth quarter of 2004.

Changes in the fair value of our pay-Ñxed and receive-Ñxed interest-rate swaps are primarily driven by

changes in interest rates. Generally, the fair value of our interest-rate swaps is aÅected by changes in longterm spot swap rates or, if our interest-rate swaps are forward-starting, long-term forward swap rates. Forwardstarting swaps represent interest-rate swap agreements scheduled to begin on a future date. During 2004,

signiÑcant portions of our swaps not in hedge accounting relationships were forward-starting.

Both spot and forward swap rates were volatile during the year causing signiÑcant changes in the fair

values of our interest rate swaps. Generally, these rates moved in tandem, however, in the fourth quarter of

2004 forward rates declined, ending the year lower than the prior year end, whereas spot rates increased,

ending the year at roughly the same level as the prior year end.

During 2004, net losses on our pay-Ñxed swap portfolio were driven by the overall decline in forward rates.

As shown in Table 27, our pay-Ñxed swap positions experienced net gains of $5.7 billion during the second

quarter of 2004 as spot rates increased from the prior quarter end. However, our pay-Ñxed swap positions

experienced losses of ($5.0) billion in the third quarter of 2004 as spot rates decreased from the prior quarter

end. In the fourth quarter of 2004, we experienced net losses on our forward starting pay-Ñxed swaps as

forward rates declined, partially oÅset by the eÅect of an increase in spot rates which aÅect our current starting

swaps. Our receive-Ñxed swap positions, which generally lose value with increases in interest rates,

experienced net losses during 2004 related primarily to increases in spot rates during the last two months of the

fourth quarter.

In addition, during 2004, there were net losses on our call and put swaption positions as the fair values of

these positions were driven by changes in swap rates and the decline in implied volatilities of interest rates

during the year. Our net swaption position resulted in net gains during the Ñrst and third quarters of 2004

driven by gains in call swaptions due to the decline in swap rates from the prior quarter ends. Our net swaption

position resulted in net losses of ($4.0) billion during the second quarter of 2004 driven by losses in call

swaptions as swap rates increased from the prior quarter end and implied volatilities of interest rates declined.

In the fourth quarter of 2004, our net swaption position resulted in net losses as implied volatilities of interest

rates declined.

The movement of the pay-Ñxed and receive-Ñxed swaps to no hedge designation during 2004 was the

primary driver of the increase in the accrual of periodic settlements (presented in Table 27 above) recorded in

derivative gains (losses) as compared to 2003. Had these pay-Ñxed and receive-Ñxed swaps remained in hedge

accounting relationships, the related accrual of periodic settlements would have been reported as a component

of Net interest income (loss). The increase in the notional balance of our pay-Ñxed swaps not in hedge

accounting relationships contributed to the $0.4 billion increase in the net expense associated with the accrual

of periodic settlements in the second quarter of 2004 as compared to the Ñrst quarter of 2004. This expense

continued to be high in the third and fourth quarters of 2004, but began to be partially oÅset by the accrual of

periodic settlements related to the receive-Ñxed swaps, which were moved to no hedge designation during the

fourth quarter of 2004.

Derivative gains (losses) Öuctuated signiÑcantly during 2003 due to the decrease in interest rates during

the Ñrst half of 2003 versus an increase in interest rates during the third quarter of 2003. During the second

quarter of 2003, derivative gains of $3.5 billion were primarily driven by a $3.1 billion gain in the value of call

swaptions, which was due to interest rate declines during the quarter. As interest rates increased during the

third quarter of 2003, our call swaptions declined in value by ($3.1) billion and we incurred ($1.4) billion of

losses on commitments to purchase or sell mortgages and mortgage-related securities. These losses were

partially oÅset by $2.1 billion in gains on pay-Ñxed swaps.

During 2002, derivative gains (losses) were largest in the third quarter when the gains totaled $6.3 billion.

This third quarter gain in 2002 was driven by a $4.8 billion gain on call swaptions, net of losses on put

swaptions and a $1.3 billion gain on receive-Ñxed swaps, net of losses on pay-Ñxed swaps. The decrease in

interest rates in the third quarter of 2002 increased the fair value of the interest-rate swaps underlying the call

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swaptions, which combined with the increase in the implied volatility of interest rates, resulted in a signiÑcant

increase in the value of the call swaptions. While increases in implied volatility also have a favorable eÅect on

the value of put swaptions, the decrease in fair value of the underlying pay-Ñxed interest-rate swaps due to the

decrease in interest rates resulted in a net decrease in the fair value of these swaptions during 2002.

Hedge Accounting Gains (Losses)

For those derivatives that are accounted for in a hedge accounting relationship, hedge accounting

ineÅectiveness generally arises when the fair value change of a derivative Ñnancial instrument does not exactly

oÅset the fair value change of the hedged item. Our hedge accounting relationships primarily consist of

derivatives linked to either existing debt in a fair value hedge accounting relationship or the variability of

interest payments on the forecasted issuances of debt securities in a cash Öow hedge accounting relationship.

Hedge accounting gains were $743 million, $644 million and $187 million in 2004, 2003 and 2002,

respectively. Hedge ineÅectiveness in these years related primarily to our fair value hedge accounting

relationships. Hedge accounting gains (losses) will vary from period to period based on the notional amount of

derivatives accounted for in hedge accounting relationships and the extent to which diÅerences in the

characteristics or terms of the derivative and the hedged item result in fair value or cash Öow changes that are

not exactly oÅset. For example, a signiÑcant portion of derivatives in our fair value hedges is forward starting

and valued using forward rates while the hedged debt is valued using spot rates. Therefore, the diÅerence

between the spot rate and the forward rate generally produces ineÅectiveness in these fair value hedges, which

is recognized in this caption.

Gains (Losses) on Investment Activity

Gains (losses) on investment activity include gains and losses on certain assets and liabilities marked to

fair value through earnings. Also included are gains and losses related to sales, impairments and other

valuation adjustments.

Table 28 summarizes the components of Gains (losses) on investment activity for 2004, 2003 and 2002.

Table 28 Ì Gains (Losses) on Investment Activity

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Gains (losses) on trading securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,071) $(1,606) $ 921

Gains (losses) on PC residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 (144) (438)

Gains (losses) on sale of mortgage loans and available-for-sale securities(1) 793 1,551 1,958

Security impairments:

Mortgage-related interest-only security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (66) (524) (568)

Other security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (212) (82)

Total security impairments(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (126) (736) (650)

Lower-of-cost-or-market valuation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (179) 8

Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (348) $(1,114) $1,799

(1) We reclassiÑed $524 million for full year 2003 from Gains (losses) on sale of mortgage loans and available-for-sale securities to

Gains (losses) on trading securities to conform with the 2004 presentation.

(2) Includes impairments on securities classiÑed as available-for-sale and trading. Impairments relating to securities within the scope of

Emerging Issues Task Force Issue 99-20, ""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial

Interests in Securitized Financial Assets,'' are calculated and recorded for both available-for-sale and trading securities.

Gains (Losses) on Trading Securities were ($1,071) million, ($1,606) million and $921 million in 2004,

2003 and 2002, respectively. Gains (losses) on securities we hold that are classiÑed for accounting purposes as

trading represent changes in the fair value of our trading positions, which include trading securities held,

certain forward commitments to purchase or sell trading securities, and Treasury and agency debt security

""short sale'' transactions (also referred to as ""securities sold, not yet purchased'') executed for asset/liability

management purposes. Historically, our trading positions arose primarily in connection with our Securities

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Sales & Trading Group business unit, which ceased operations in the fourth quarter of 2004. To a lesser

degree, our trading positions also included certain securities held in the Retained portfolio and in the Cash and

investments portfolio. Our securities classiÑed as trading, excluding Participation CertiÑcates residuals and

guarantee assets, totaled $11.8 billion and $52.3 billion at December 31, 2004 and 2003, respectively.

Entering 2003, our trading portfolio consisted of mortgage-related securities that were in unrealized gain

positions because the average coupon rates of the securities were relatively high. The portfolio experienced

losses because these securities experienced signiÑcant prepayments during the Ñrst half of 2003 as interest

rates fell. In addition, during the third and fourth quarters of 2003 the portfolio experienced losses as rising

interest rates decreased the value of investments. In 2002, trading gains beneÑted from the decline in interest

rates during the year.

Gains (Losses) on PC Residuals were $58 million, ($144) million and ($438) million in 2004, 2003 and

2002, respectively. PC residuals relate to certain PCs and Structured Securities we hold and represent the fair

value of the future cash Öows of guarantee contracts that speciÑcally correspond to such PCs or Structured

Securities. Our estimates of the related cash Öows are impacted by several factors including changes in interest

rates, which aÅect the expected lives of the related PCs and Structured Securities, and changes in our default

experience and loss severity trends related to the underlying guarantee contracts. PC residuals that are

classiÑed as trading securities are marked to fair value as a component of Gains (losses) on investment

activity.

In 2004, we experienced a net increase in the fair value of PC residuals due to smaller decreases in

interest rates as compared to 2003 and reductions in expected default costs related to the mortgage collateral

underlying PCs held in the Retained portfolio due to continued house price appreciation. In 2003, losses on

PC residuals decreased compared with 2002 due to a smaller overall decline in mortgage interest rates

experienced during the year. In addition, the proportion of PCs and Structured Securities we held that had a

recognized PC residual associated with them increased to 72 percent in 2003 from 38 percent in 2002 due to

the adoption of FIN 45, together with an increase in the amount of Retained portfolio purchase activity.

Realization of cash Öows and decreases in interest rates, which reduced the expected lives of the associated

securities, accounted for the reported loss in 2002.

Gains (Losses) on Sale of Mortgage Loans and Available-for-Sale Securities were $793 million,

$1,551 million and $1,958 million in 2004, 2003 and 2002, respectively. Net gains declined during 2004 from

2003 levels primarily due to a decrease in the volume of transfers of PCs and Structured Securities that

qualiÑed as sales under SFAS 125/140. We issued 49 percent fewer PCs and Structured Securities (in terms

of unpaid principal balance) during 2004 than we issued during 2003, with roughly the same proportion of

these issuances resulting in a gain (loss) on sale of the underlying mortgage loans during each year.

The increased gains on the sale of mortgage loans and available-for-sale securities during 2003 compared

to 2002 were primarily attributable to the increasing volume of sales of PCs and Structured Securities in these

years, as well as sales of Treasury and agency debt securities originally purchased for asset/liability

management purposes during 2003.

Security Impairments were ($126) million, ($736) million and ($650) million in 2004, 2003 and 2002,

respectively. We record impairment losses on our investment portfolio when we have concluded that a

decrease in the fair value of a security is other than temporary. Impairment losses recognized in 2004, 2003

and 2002 were primarily related to certain investments in mortgage-related interest-only securities and

manufactured housing securities.

Impairment losses on mortgage-related interest-only securities totaled ($66) million, ($524) million and

($568) million during 2004, 2003 and 2002, respectively. GAAP requires the cost basis of a mortgage-related

interest-only security to be written down to fair value when there is both a decline in fair value below the

carrying amount and an adverse change in expected cash Öows. Decreasing interest rates cause our estimates

of the lives of these securities to shorten. As a result, the expected cash Öows from mortgage-related interestonly securities decrease along with the fair value of these securities.

Impairments related to our mortgage-related interest-only securities were lower during 2004 than in prior

years because (a) the interest-rate environment in 2004 was less volatile than in prior years, causing the fair

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value of these securities to remain more stable, (b) the carrying value of our mortgage-related interest-only

securities was reduced by impairments taken in prior years and (c) the balance subject to impairment

declined because we purchased fewer of these securities during 2004 compared to prior years. During the Ñrst

half of 2003, interest rates continued to decline from 2002 levels resulting in an increase in prepayments and,

in turn, a higher level of impairment losses than in the prior year. In 2003, interest rates decreased sharply

during the Ñrst and second quarters; as a result, the large majority of the 2003 mortgage-related interest-only

securities impairment losses were recognized in those quarters. As interest rates began to rise in the third and

fourth quarters of 2003, impairment losses recognized were greatly reduced. The large mortgage-related

interest-only security impairment losses during 2002 relate to the decline in interest rates.

Impairments recorded on non-interest-only securities totaled ($60) million, ($212) million and ($82)

million in 2004, 2003 and 2002, respectively, including impairments on manufactured housing securities

totaling ($44) million, ($208) million and ($67) million during the same periods as a result of the

comparatively low credit quality of these securities. See ""CONSOLIDATED BALANCE SHEETS

ANALYSIS Ì Cash and Investments'' for more information about our non-agency, mortgage-related

securities at December 31, 2004 and 2003. Also see ""NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES'' to our consolidated Ñnancial statements.

Lower-of-Cost-or-Market Valuation Adjustments were ($2) million, ($179) million and $8 million in

2004, 2003 and 2002, respectively. We record mortgage loans classiÑed as held-for-sale at the lower-ofamortized-cost or market valuation with changes in the valuation of our held-for-sale portfolio recorded to this

caption. Losses related to the lower of amortized cost or market value adjustments were insigniÑcant during

2004 and 2002. The sharp decline in mortgage interest rates in the second quarter of 2003 resulted in an

increase in mortgage loans purchased as the market experienced heavy reÑnancing activity. A sharp increase

in mortgage interest rates during the third quarter of 2003 reduced the value of our held-for-sale mortgage

loan portfolio, resulting in lower of amortized cost or market valuation adjustments that totaled ($178)

million.

Gains (Losses) on Debt Retirement

We record gains and losses on debt repurchases that are accounted for as extinguishments of debt based

on the diÅerence between the principal amount of the debt securities repurchased (adjusted for deferred

premiums, discounts, and hedging gains and losses) and current market prices, and the write-oÅ of related

deferred debt issuance costs.

We incurred pre-tax losses of ($327) million, ($1,775) million and ($674) million on the repurchase of

approximately $14.5 billion, $27.3 billion and $20.3 billion in principal amount of debt outstanding in 2004,

2003 and 2002, respectively. The most signiÑcant debt repurchases occurred in the second quarter of 2003,

resulting in pre-tax losses of ($1,266) million, when we repurchased an aggregate of $17.1 billion of U.S.

dollar and Euro-denominated debt securities, most of which followed the announcement of changes in our

senior management. We executed these particular repurchases to support the liquidity and price performance

of these securities. The gains (losses) on debt extinguishments include amounts previously deferred under

SFAS 133 hedge accounting related to the repurchased debt securities.

Resecuritization Fees

Resecuritization fees are revenues we earn primarily in connection with the issuance of Structured

Securities for which we make a REMIC election, where the underlying collateral is provided by third parties.

These fees are also generated in connection with the creation of interest-only and principal-only strips as well

as other Structured Securities.

Resecuritization fees totaled $159 million, $352 million and $276 million in 2004, 2003 and 2002,

respectively. A steep yield curve generally increases the value of structured cash Öows, which results in greater

value diÅerences between PCs and Structured Securities as well as a corresponding increase in the volume of

new Structured Securities being issued. As the yield curve Öattened during 2004 and investor demand for

Structured Securities decreased, we experienced a 28 percent decline in the volume of Structured Securitization activities based on unpaid principal balances compared to 2003. In addition, we decreased our average

Freddie Mac

60
fees to perform resecuritizations during 2004 in response to competitive pressures and to support the price of

our PCs, which represent most of the collateral that we resecuritize. Investors' demand for Structured

Securities remained high during 2003 and 2002 largely due to the comparatively steep yield curve during those

periods.

Other Income

Other income primarily consists of fees associated with servicing and technology-related programs,

including Loan Prospector», various fees related to multifamily loans (including application and other fees)

and various other fees received from mortgage originators and servicers. In 2004 and 2003, other income also

includes the correction of certain prior year accounting errors.

Other income totaled $230 million, $493 million and $321 million in 2004, 2003 and 2002, respectively.

Absent the Öuctuations related to the correction of certain prior year accounting errors in the Ñrst quarters of

2004 and 2003 (discussed in more detail below), Other income would have been $172 million and

$279 million in 2004 and 2003, respectively. We experienced a modest decline in fees earned associated with

Loan Prospector», our automated loan-underwriting tool, which was driven by lower usage of this tool.

In the process of reviewing our accounting policies and practices for 2004 and 2003, we identiÑed certain

errors not material to the Ñnancial statements that resulted in a cumulative net understatement of income in

previously reported periods. During 2004, we identiÑed approximately $58 million of income, net ($38 million

after-tax) of such errors aÅecting 2003 and prior periods that we recorded in the Ñrst quarter of 2004 as a

component of Other income. During 2003, we identiÑed approximately $214 million of income, net

($139 million after-tax) attributable to such errors aÅecting 2002 and prior periods that we recorded in the

Ñrst quarter of 2003 as a component of Other income.

Non-Interest Expense

Table 29 summarizes Non-interest expense for 2004, 2003 and 2002.

Table 29 Ì Non-Interest Expense

2004 vs. 2003 2003 vs. 2002

Year Ended Year Ended

December 31, December 31,

2004 2003 Change 2002 Change

(dollars in millions)

Non-interest expense

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (758) $ (624) $(134) $ (593) $ (31)

Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (588) (311) (277) (155) (156)

Occupancy expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (52) (8) (42) (10)

Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (144) (194) 50 (184) (10)

Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,550) (1,181) (369) (974) (207)

(Provision) beneÑt for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏ (143) 5 (148) (122) 127

REO operations income (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 (7) 10 (4) (3)

Housing tax credit partnershipsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (281) (200) (81) (160) (40)

Minority interests in earnings of consolidated

subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (129) (157) 28 (184) 27

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (271) (696) 425 (432) (264)

Total non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(2,371) $(2,236) $(135) $(1,876) $(360)

Administrative Expenses

Salaries and employee beneÑts, Professional services, Occupancy expense and certain other administrative expenses are collectively referred to as administrative expenses. Administrative expenses are generally

incurred to conduct daily operations and support functions. Also, other administrative expenses include

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61
amortization expense related to previously capitalized software development costs, net of reductions for

current period capitalized software development costs.

Table 30 summarizes Administrative expenses for 2004, 2003 and 2002.

Table 30 Ì Administrative Expenses

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Administrative expenses:

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 758 $ 624 $593

Professional services(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 588 311 155

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 52 42

Other administrative expenses(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 144 194 184

Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,550 $1,181 $974

(1) We reclassiÑed certain expenses from Other administrative expenses to Professional services for 2003 and 2002 to conform with the

2004 presentation.

(2) Other charitable contributions are included in Other administrative expenses for 2004, 2003 and 2002. See ""Table 31 Ì Other

Expenses'' for the special charitable contributions made in 2002.

Administrative expenses totaled $1,550 million, $1,181 million and $974 million in 2004, 2003 and 2002,

respectively. Salaries and employee beneÑts rose in each year primarily because we increased the number of

employees. In addition, employee incentive compensation costs increased by approximately $50 million in

2004 over 2003 levels as a result of the increased number of employees and eÅorts to retain key employees

during the restatement period and to attract new employees. We also incurred approximately $18 million of

employee severance and related costs and approximately $5 million of other expenses related to ceasing the

PC market making and support activities of our Securities Sales & Trading Group business unit during the

fourth quarter of 2004. The increase in Professional services expense in 2004 was primarily driven by our

ongoing Ñnancial reporting and internal control remediation activities.

The increase in Salaries and employee beneÑts, Professional services and Other administrative expenses

in 2003 compared to 2002 was primarily driven by costs associated with the restatement. During 2003, we

incurred expenses associated with the restatement totaling $172 million, which consisted of approximately

$149 million of professional services expenses due to increased accounting, auditing, consulting and legal

services; $15 million of compensation costs; and $8 million of other costs.

Other administrative expenses are presented net of certain expenses deferred relating to capitalized

software development activities. The reduction to Other administrative expenses with respect to capitalized

software development was $157 million, $79 million and $57 million in 2004, 2003 and 2002, respectively.

These amounts were oÅset by related amortization expenses and impairments of $63 million, $37 million and

$22 million in 2004, 2003 and 2002, respectively, also recorded in Other administrative expenses. Capitalized

software development costs are amortized over periods of three years or less.

(Provision) BeneÑt for Credit Losses and Real Estate Owned, or REO, Operations Income (Expense)

We collectively refer to our Reserve for losses on mortgage loans held-for-investment and Reserve for

guarantee losses on Participation CertiÑcates as our Loan Loss Reserves. The Provision for credit losses

includes our provision for losses incurred on our mortgage loans held-for-investment, which are a component

of our Retained Portfolio; our provision for incurred losses related to (1) Outstanding PCs and (2) that

portion of Structured Securities held by third parties that are backed by non-Freddie Mac mortgage-related

securities, which are oÅ-balance sheet obligations; and our provision for uncollectible interest on single-family

loans underlying PCs held by third parties. REO operations income (expense) includes certain costs associated

with the acquisition of real estate at the time of foreclosure, gains and losses on the sale of foreclosed

properties we hold, as well as the cost to hold these properties, including real estate taxes, insurance, repairs

and fees incurred to prepare the properties for sale, and a provision for valuation losses occurring between

acquisition and disposition.

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62
The (Provision) beneÑt for credit losses may be expense or income, depending on whether the Loan Loss

Reserves balance needs to be increased or decreased based on the inherent losses associated with our portfolio

at any time. The (Provision) beneÑt for credit losses increased to ($143) million in 2004 compared to a

beneÑt of $5 million in 2003. The (Provision) beneÑt for credit losses was ($122) million in 2002. The

balance of the Loan Loss Reserves totaled $264 million and $299 million at December 31, 2004 and 2003,

respectively.

The (Provision) beneÑt for credit losses increased in 2004 due to increases in the estimated incurred

losses in the single-family portfolio at December 31, 2004 compared to December 31, 2003, driven by lower

REO fair values and resulting in higher estimated losses on a per property basis in certain areas. However, this

was partially oÅset by a decrease in the estimated incurred losses in the Multifamily mortgage portfolio, driven

primarily by an increase in the estimated fair value of multifamily properties in certain areas. The beneÑt for

credit losses in 2003, as compared to the expense in 2002, resulted from loss mitigation strategies, strong house

price appreciation and recoveries in the single-family portfolio. In addition, the 2002 provision reÖected an

increase in expected losses on multifamily mortgage loans.

REO operations income (expense) totaled $3 million, ($7) million, and $(4) million in 2004, 2003 and

2002, respectively. The 2004 increase in income was largely driven by a gain of $7 million on the sale of a

multifamily property.

Our total credit losses, deÑned as ""Real estate owned operations income (expense)'' plus ""net chargeoÅs,'' rose slightly in 2004 but were still low, totaling approximately 1.1 basis points of the average Total

mortgage portfolio (after excluding non-Freddie Mac securities). In 2005 we expect credit losses to increase

from their recent levels, but to be low relative to historic levels.

Housing Tax Credit Partnerships

Housing tax credit partnerships represent our share of the losses generated from our investments in

partnerships that develop or rehabilitate low-income, multifamily rental properties. We generally hold

interests in individual partnerships for Ñfteen years. Although these partnerships generate losses, we realize a

return on our investment through reductions in Income tax expense that result from tax credits and the

deductibility of the losses. The tax credits related to our investments in these partnerships are generally

recognized over a ten-year period.

Our share of losses generated from our investment in Housing tax credit partnerships totaled ($281)

million, ($200) million and ($160) million in 2004, 2003 and 2002, respectively. The year-over-year increases

in this expense primarily reÖect our increased investment in such partnerships. The related tax beneÑts, which

are reported as a reduction in Income tax expense, totaled $378 million, $302 million and $220 million in

2004, 2003 and 2002, respectively.

Minority Interest in Earnings of Consolidated Subsidiaries

Minority interest in earnings of consolidated subsidiaries represents the earnings due to third party

investors in our consolidated subsidiaries.

Minority interest in earnings of consolidated subsidiaries totaled ($129) million, ($157) million and

($184) million in 2004, 2003 and 2002, respectively. The majority of this amount for each of 2004, 2003 and

2002 relates to dividends on the preferred stock issued by our two majority-owned real estate investment trust,

or REIT, subsidiaries. These dividends are recorded using an eÅective interest method and, therefore, will

continue to decline over time as our recorded investment in the REITs decreases.

Other Expenses

Other expenses generally include those non-administrative expenses that are direct and incremental to

revenue producing activities (e.g., Loan Prospector» Ì related expenses) or are otherwise not related to

operational support activities.

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63
Table 31 summarizes Other expenses for 2004, 2003, and 2002.

Table 31 Ì Other Expenses

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Other expenses:

OFHEO civil money penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $125 $ Ì

Loss contingency expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 75 Ì

Selected aÅordable housing transaction feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 124 Ì

Amortization of credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86 134 Ì

Realized losses on certain guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 60 Ì

Loan Prospector»-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 99 86

Special charitable contributions(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 225

Disposition of certain technology-related assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 52

Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55 79 69

Total Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $271 $696 $432

(1) Special charitable contributions represents a cash contribution to the Freddie Mac Foundation and corporate giving programs

announced in the fourth quarter of 2002. The contribution to the Freddie Mac Foundation is expected to provide operating funds for

the Foundation for six to eight years from the contribution date.

(2) We reclassiÑed certain expenses from Other administrative expenses as included in Administrative expenses (see ""Table 30 Ì

Administrative Expenses'' for additional information) to Other for 2003 and 2002 to conform with the 2004 presentation.

Total Other expenses totaled $271 million, $696 million and $432 million in 2004, 2003 and 2002,

respectively.

Total Other expenses in 2003 included two charges that totaled $200 million. First, we paid a

$125 million civil money penalty in connection with the OFHEO consent order, which was accrued in the

second quarter of 2003. Second, we recognized in the second quarter of 2003 a $75 million expense for a loss

contingency reserve related to legal proceedings arising from the restatement. See ""NOTE 13: LEGAL

CONTINGENCIES'' to our consolidated Ñnancial statements for additional information. We also entered

into certain multifamily aÅordable housing transactions during the third and fourth quarters of 2003 that

contained a number of contractual incentives, including the payment of fees totaling $124 million in the third

and fourth quarters of 2003 and $41 million in the Ñrst quarter of 2004.

Total Other expenses also include the amortization of credit enhancements, realized losses related to

certain guarantees as well as other costs associated with our ongoing activities. Beginning in 2003, credit

enhancements are included in Other assets and amortized into Other expenses over time. Amortization

expense related to credit enhancements declined $48 million in 2004 from 2003 levels primarily as a result of

declines in our liquidation rates during 2004 compared to 2003. In 2002, credit enhancements were included in

the carrying value of the guarantee asset and changes in their carrying value were included in Gains

(losses) on ""Guarantee asset for Participation CertiÑcates, at fair value.''

Beginning in 2003, due to the adoption of FIN 45, we began recording guarantee assets and guarantee

obligations at fair value at inception on (i) PCs issued through our Guarantor Program, (ii) that portion of

PCs issued through MultiLender Program transactions that did not qualify as a sale under SFAS 125/140 and

(iii) certain Structured Securities that we issue to third parties in exchange for non-agency mortgage-backed

securities. Consequently, we immediately recognize any excess of the related guarantee obligation over the

guarantee asset and Other assets (that relate to recognized credit enhancements described above) as realized

losses on certain guarantees. Such realized losses decreased $27 million to $33 million in 2004 from

$60 million in 2003 primarily as a result of interest-rate Öuctuations that aÅect our determination of the initial

fair value of the guarantee asset, credit-enhancement asset and guarantee obligation. In 2002, we did not

recognize guarantee assets and obligations related to PCs issued through our Guarantor Program or for that

portion of PCs transferred to third parties in MultiLender Program transactions that did not qualify as sales

under SFAS 125/140. Consequently, we did not recognize a similar expense in 2002.

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64
Other expenses in 2002 included special charitable contributions of $225 million representing cash

contributions to the Freddie Mac Foundation and corporate giving programs announced in the fourth quarter

of 2002. The contribution to the Freddie Mac Foundation is expected to provide operating funds for the

Foundation for six to eight years from the date of the contribution. Other charitable contributions of

approximately $6 million, $6 million, and $35 million for 2004, 2003, and 2002, respectively, are included

within Other administrative expenses.

In 2002, Other expenses includes a $52 million loss recognized in the fourth quarter of 2002 related to the

disposition of certain technology-related assets.

Income Tax Expense

Income tax expense includes (a) deferred tax expense, which represents the net change in the deferred tax

asset or liability balance during the year plus any change in a valuation allowance, and (b) current tax

expense, which represents the amount of tax currently payable to, or receivable from, a tax authority plus

amounts accrued for expected tax deÑciencies (including both tax and interest). Income tax expense excludes

the tax eÅects related to adjustments recorded to AOCI.

Income tax expense was ($790) million, ($2,202) million and ($4,713) million in 2004, 2003 and 2002,

respectively. The eÅective tax rates for 2004, 2003 and 2002 were 21 percent, 31 percent and 32 percent,

respectively. The decrease in the eÅective tax rate over the past three years, particularly in 2004, is primarily

due to the decline in pre-tax income in relation to year-over-year increases in tax credits related to our

investments in housing tax credit partnerships and interest earned on tax-exempt securities. In addition, our

eÅective tax rate for 2004 beneÑted from a $110 million reduction to our tax reserves as a result of our

reaching a closing agreement with the Internal Revenue Service, or IRS, relating to the tax treatment of

dividends paid on step-down preferred stock issued by our two REIT subsidiaries. For more information

regarding this tax reserve adjustment, see ""SUBSEQUENT ACCOUNTING REVISIONS.'' These eÅects

were partially oÅset by a non-tax deductible ($125) million OFHEO civil money penalty and a ($75) million

loss contingency reserve related to legal proceedings arising from the restatement, that were recorded in the

second quarter of 2003. Our eÅective tax rate for 2002 beneÑted from a reduction to our tax reserve related to

favorable U.S. Tax Court rulings.

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65
CONSOLIDATED BALANCE SHEETS ANALYSIS

Table 32 provides summary consolidated balance sheets at December 31, 2004 and 2003.

Table 32 Ì Summary Consolidated Balance Sheets

December 31,

2004 2003

(dollars in millions)

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $664,468 $660,357

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,280 109,078

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,257 16,180

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,516 3,686

Other items included in total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,763 14,148

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795,284 $803,449

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731,697 $739,613

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,065 2,904

Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226 357

Other items included in total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,371 27,159

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 762,359 770,033

Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,509 1,929

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,416 31,487

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795,284 $803,449

Our total assets remained relatively Öat as of December 31, 2004 compared to December 31, 2003,

declining by $8.2 billion, or 1 percent. This decrease was primarily driven by an $11.8 billion reduction in our

Cash and investments portfolio. During the same period, total liabilities, plus minority interests in consolidated

subsidiaries, decreased by $8.1 billion, which was driven by decreases in total debt securities. These and other

changes in our consolidated balance sheets are discussed below.

Retained Portfolio

The Retained portfolio includes mortgage loans and mortgage-related securities that we acquire for

investment purposes and primarily consists of PCs and Structured Securities and other agency and non-agency

mortgage-related securities.

The carrying value of the Retained portfolio increased by $4.1 billion, or 1 percent, to $664.5 billion as of

December 31, 2004 from $660.4 billion at December 31, 2003. The Retained portfolio unpaid principal

balance (which excludes premiums, discounts, deferred fees and other basis adjustments, the Reserve for

losses on mortgage loans held-for-investment, and unrealized gains or losses on mortgage-related securities

and PC residuals) increased by 1 percent during 2004. Mortgage-related investment opportunities in Ñxed-rate

products were generally not attractive in 2004. Strong demand from other investors, coupled with lower

mortgage loan originations, generally resulted in unattractive mortgage-to-debt option-adjusted spreads. While

Ñxed-rate investment opportunities were relatively less attractive than in 2003, this was mitigated by lower

liquidation rates compared to 2003 and purchases of Öoating rate, non-agency mortgage-related securities.

Freddie Mac

66
Table 33 provides additional detail regarding the mortgage loans and mortgage-related securities that

comprised our Retained portfolio at December 31, 2004 and 2003.

Table 33 Ì Credit Characteristics of Mortgages and Mortgage-Related Securities in the Retained Portfolio

December 31, 2004 December 31, 2003

% of Total % of Total

% AAA Retained % AAA Retained

Amount Rated Portfolio(1) Amount Rated Portfolio(1)

(dollars in millions)

Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,360 N/A 9% $ 60,270 N/A 9%

PCs and Structured Securities(2) ÏÏÏÏÏÏÏÏÏÏ 356,698 N/A 55 393,135 N/A 61

Non-Freddie Mac mortgage-related

securities:

Agency mortgage-related securities:(3)

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,004 N/A 9 74,529 N/A 12

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,711 N/A Ì 2,760 N/A Ì

Total agency mortgage-related

securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,715 N/A 9 77,289 N/A 12

Non-agency mortgage-related securities:(4)

Single-family and other mortgagerelated securities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 123,411 99.2% 19 72,161 99.8% 11

Commercial mortgage backed

securities(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,184 100.0 6 33,055 99.3 5

Mortgage revenue bonds(7) ÏÏÏÏÏÏÏÏÏÏÏ 9,077 71.5 2 7,772 77.1 2

Manufactured housing(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,491 33.4 Ì 1,784 42.0 Ì

Total non-agency mortgage-related

securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,163 97.4% 27 114,772 97.3% 18

Total unpaid principal balance of Retained

portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 652,936 100% 645,466 100%

Premiums, discounts, deferred fees and

other basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,039 4,793

Net unrealized gains on mortgage-related

securities, pre-taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,762 9,601

Participation CertiÑcate residuals at fair

value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 845 671

Reserve for losses on mortgage loans

held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114) (174)

Total Retained portfolio per consolidated

balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $664,468 $660,357

(1) Based on unpaid principal balance.

(2) With respect to our PCs and Structured Securities, we guarantee the payment of principal and interest and are subject to the credit

risk associated with the underlying mortgage loan collateral (or non-agency mortgage-related security collateral, where applicable).

(3) Agency mortgage-related securities are generally not separately rated by credit rating agencies, but are viewed as having a level of

credit quality at least equivalent to non-agency mortgage securities rated ""AAA'' or equivalent.

(4) Credit rating of most non-agency mortgage-related securities is designated by at least two nationally recognized credit rating

agencies.

(5) The ""other'' component of this line item consists of multifamily mortgage-related securities not structured in a commercial mortgage

backed security.

(6) Consists of pools of mortgages collateralized by multifamily, manufactured housing parks, and commercial (oÇce, retail, industrial,

and a smaller percentage of hotel or other) properties.

(7) Consists of obligations of states and political subdivisions.

(8) 43 percent and 84 percent of mortgage-related securities backed by manufactured housing were rated BBB¿ or above at

December 31, 2004 and 2003, respectively. For the same periods, 96 percent and 90 percent of these securities are supported by

credit-enhancements such as deal structure through subordination and bond insurance.

The non-agency mortgage-related securities portion of the Retained portfolio grew from December 31,

2003 to December 31, 2004 in both unpaid principal balance and as a percentage of the total Retained

portfolio. This growth is a result of the strong supply of non-agency mortgage-related securities, particularly

Öoating rate products, combined with the fact that investment opportunities in agency Ñxed-rate products have

Freddie Mac

67
not been as attractive to us because strong demand from other investors, and lower mortgage loan originations,

have generally resulted in unattractive mortgage-to-debt option-adjusted spreads.

Cash and Investments

Cash and investments include investments we acquire to manage recurring cash Öows, provide a source of

liquidity, temporarily deploy capital until the capital can be redeployed into Retained portfolio investments or

credit guarantee business opportunities and manage interest-rate risk exposure.

The carrying value of our Cash and investments portfolio decreased by $11.8 billion, or 11 percent, to

$97.3 billion at December 31, 2004 from $109.1 billion at December 31, 2003. At December 31, 2003, Cash

and investments included certain mortgage-related securities that were not included in the Retained portfolio

since they were acquired in conjunction with the PC market-making and support activities conducted through

our Securities Sales & Trading Group business unit and external Money Manager program, both of which

ceased operations during the fourth quarter of 2004. Consequently, we held no mortgage-related securities in

the Cash and investments portfolio at December 31, 2004, compared to $32.8 billion at December 31, 2003.

The Net proceeds from purchases and sales of trading securities reported in our consolidated statement of cash

Öows for 2004 of approximately $39.0 billion was primarily driven by the disposition of securities classiÑed as

trading from the Cash and investments portfolio.

Table 34 provides additional detail regarding the non-mortgage-related securities and mortgage-related

securities that comprised our Cash and investments portfolio at December 31, 2004 and 2003.

Table 34 Ì Cash and Investments

December 31, 2004 December 31, 2003

Ending % of % of

Balance at Average Portfolio A Ending Average Portfolio A

Fair Maturity Rated or Balance at Maturity Rated or

Value (Months) Better(1) Fair Value (Months) Better(1)

(dollars in millions)

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,253 G3 N/A $ 23,142 G3 N/A

Investments:

Non-mortgage-related securities:

Asset-backed securities(2) ÏÏÏÏÏÏÏÏÏÏ 21,733 N/A 100.0% 16,596 N/A 100.0%

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 4,924 36 59.8

Obligations of states and

municipalities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,097 303 99.7 9,494 323 100.0

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 150 1 100.0

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 64 55 100.0

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 99.9% 31,228 93.8%

Other non-mortgage-related securities

held for PC market-making and

support activities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,314

Other mortgage-related securities held

for PC market-making and support

activities(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 32,812

Securities purchased under agreements

to resell and Federal funds sold ÏÏÏÏÏ 32,197 G3 N/A 20,582 G3 N/A

Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $97,280 $109,078

(1) Credit ratings for most securities are designated by at least two nationally recognized credit rating agencies.

(2) Consists primarily of securities that can be prepaid prior to their contractual maturity without penalty.

(3) As previously disclosed in our Information Statement Supplement dated October 4, 2004, we ceased our PC market-making and

support activities accomplished through our Securities Sales & Trading Group business unit and our external Money Manager

program during the fourth quarter of 2004.

(4) The majority of these securities were agency mortgage-related securities.

As noted in Table 34, the balance of our total Cash and investments declined $11.8 billion during 2004.

Our Investments balance decreased $35.5 billion during 2004 due in large part to ceasing of the PC marketFreddie Mac

68
making and support activities of our Securities Sales & Trading Group business unit and the discontinuation

of our external Money Manager program. In contrast, our balances of Cash and cash equivalents and

Securities purchased under agreements to resell and Federal funds sold increased by a combined $23.7 billion

during 2004 because of the investment of a portion of the proceeds realized from liquidating the securities held

by our Securities Sales & Trading Group.

During 2004, we adjusted the investment strategy for the Cash and investments portfolio and as a result

this portfolio did not hold corporate debt securities or preferred stock at December 31, 2004.

Derivative Assets and Liabilities, at Fair Value

All derivatives are reported at fair value. For derivatives that are in cash Öow hedge accounting

relationships, the change in fair value is recorded to AOCI for the eÅective portion of the hedge and to Hedge

accounting gains (losses) for the ineÅective portion of the hedge. For derivatives that are in fair value hedge

accounting relationships, the change in fair value is recorded to Hedge accounting gains (losses), along with

the change in fair value of the hedged item. Changes in fair value of derivatives not accounted for in hedge

accounting relationships are recorded to Derivative gains (losses). We use derivatives to manage our interestrate and other market risk exposures. However, hedge accounting has not been applied to many derivative

transactions since a signiÑcant number of transactions did not meet hedge accounting requirements or we

elected not to pursue hedge accounting.

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69
Table 35 summarizes the notional balance and related fair value by product type at December 31, 2004

and 2003.

Table 35 Ì Total Derivative Portfolio

December 31,

2004 2003

Derivative Derivative

Notional or Notional or

Contractual Contractual

Amount(1) Fair Value(2) Amount(1) Fair Value(2)

(dollars in millions)

Interest-rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 95,043 $(2,879) $ 179,751 $(3,821)

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,602 2,394 107,417 1,992

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94 1 424 2

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,739 (484) 287,592 (1,827)

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 189,945 4,988 217,338 7,170

Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,175 267 123,611 2,096

Other option-based derivatives(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,981 2 20,379 28

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234,101 5,257 361,328 9,294

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,110 (33) 130,798 181

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,850 10,303 46,512 8,400

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 598,800 15,043 826,230 16,048

Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,692 Ì 152,548 Ì

Commitments(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,952 (9) 89,520 (230)

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,926 (2) 15,542 5

Swap guarantee derivatives(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 (1) 31 Ì

Total(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $756,778 $15,031 $1,083,871 $15,823

(1) Notional or contractual amounts are used to calculate the periodic amounts to be received and paid and generally do not represent

actual amounts to be exchanged or directly reÖect our exposure to institutional credit risk. Notional or contractual amounts are not

recorded as assets or liabilities in our consolidated balance sheets.

(2) The fair value by derivative type presented on this table is shown prior to netting by counterparty. The fair value of derivatives

presented on the consolidated balance sheets, however, is netted by counterparty as permitted by GAAP, and is reported in the

Derivative assets, at fair value and Derivative liabilities, at fair value captions. The fair value for futures are directly derived from

quoted market prices. Fair values of other derivatives are derived primarily from valuation models with incorporation of market-based

inputs.

(3) Primarily represents written options.

(4) Subsequent to the issuance of our Information Statement dated September 24, 2004, we increased the December 31, 2003 notional

amounts of commitments and swap guarantee derivatives that are subject to the requirements of SFAS 133 and SFAS 149 and are

not in hedge accounting relationships by $200 million and $31 million, respectively. The net eÅect of these changes was an increase

to the notional amount of our total derivative portfolio at that date to $1,083,871 million from $1,083,640 million. Also, subsequent to

the issuance of our Information Statement Supplement dated March 31, 2005, we revised the December 31, 2004 notional amounts

of written options and swap guarantee derivatives that are not in hedge accounting relationships by ($134) million and $13 million,

respectively. The net eÅect of these changes was a decrease to the notional amount of our total derivative portfolio at that date to

$756,778 million from $756,899 million. The net eÅect of these changes on fair value was immaterial.

(5) Represents certain interest-rate swaps where we have guaranteed a third party's performance under the swap. Swap guarantees

entered into after June 30, 2003 are treated as derivatives in accordance with SFAS 149. See ""RISK MANAGEMENT Ì InterestRate Risk and Other Market Risks Ì Use of Derivatives and Interest-Rate Risk Management Ì Types of Derivatives'' for more

information.

The balance of derivatives in a gain position (reported as Derivative assets, at fair value) decreased by

$0.9 billion, or 6 percent, to $15.3 billion as of December 31, 2004 from $16.2 billion as of December 31, 2003,

while the balance of derivatives in a loss position (reported as Derivative liabilities, at fair value) remained

relatively Öat at $0.2 billion and $0.4 billion as of December 31, 2004 and 2003, respectively. The carrying

value of our derivative assets and liabilities at each consolidated balance sheet date is equal to the fair value of

the derivatives that we held on those dates, which is aÅected by changes in market conditions such as the level

and expected volatility of interest rates. The composition of the derivatives we hold will change from period to

period as a result of derivative purchases, terminations prior to contractual maturity and expiration of the

derivative at its contractual maturity.

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The notional balance of our derivative portfolio declined to $756.8 billion at December 31, 2004 from

$1,083.9 billion at December 31, 2003, driven by a reduction in the notional balance of option-based

derivatives, interest-rate swaps and commitments. The following factors contributed to the reduction in the

notional amounts of our derivatives during 2004. The asset mix in the Retained portfolio has moved toward a

greater proportion of non-agency, Öoating-rate mortgage-related securities, which generally require lower

interest-rate protection than Ñxed-rate products. Also, the gradual increase in market interest rates and the

Öattening of the yield curve in 2004 has reduced the interest-rate risk of our existing Ñxed-rate investments,

thereby lowering our need for option-based derivatives to manage the related risk. During 2004, we also oÅset

the optionality risk in the Retained portfolio by increasing the amount of our callable debt outstanding.

The notional balance of option-based derivatives declined by $127.2 billion, as a result of adjusting the

option portfolio for risk management purposes in response to changes in market conditions and mortgage

portfolio composition. The notional balance of interest-rate swaps declined by $108.9 billion, as a result of the

termination of certain oÅsetting positions prior to their contractual maturity. The notional balance of

commitments declined by $56.6 billion, primarily as the result of a reduction in commitments related to the

Cash and investments portfolio as we ceased the PC market-making and support activities conducted through

our Securities Sales & Trading Group business unit and external Money Manager Program during the fourth

quarter of 2004.

As noted previously, changes in fair values either are recorded in current income or, to the extent our

accounting hedge relationships are eÅective, may be deferred in AOCI or oÅset by basis adjustments to the

related hedged item. As a result, the increases or decreases in fair value by derivative categories, described

above, will not correspond directly to Derivative gains (losses) or Hedge accounting gains (losses) on our

consolidated statements of income.

Guarantee Asset for Participation CertiÑcates

The Guarantee asset for Participation CertiÑcates represents the fair value of future cash inÖows related

to our guarantee of PCs and Structured Securities transferred to third parties in transactions that qualify as

sales under SFAS 125/140 or that were subject to the requirements of FIN 45.

The guarantee asset balances increased by $0.8 billion, or 23 percent, to $4.5 billion at December 31,

2004 from $3.7 billion at December 31, 2003. The changes in the guarantee asset balances during 2004 and

2003 are summarized in Table 36.

Table 36 Ì Changes in Guarantee Asset for Participation CertiÑcates, at Fair Value

2004 2003

(dollars in millions)

Beginning Balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,686 $2,445

Adjustment for change in accounting(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (128)

Additions, net of repurchases(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,965 2,830

Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair value''(3)ÏÏÏÏÏ (1,135) (1,461)

Ending balance, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,516 $3,686

(1) As of January 1, 2003, the fair value of those credit enhancements previously recognized as a component of guarantee assets were

reclassiÑed to Other assets.

(2) Subsequent to the issuance of our Information Statement dated September 24, 2004, we reclassiÑed $7 million from Gains

(losses) on ""Guarantee asset for Participation CertiÑcates, at fair value'' to Additions, net of repurchases.

(3) Individual guarantee assets are marked to fair value based on the related PCs or Structured Securities. Consequently, the fair value

of some guarantee assets increases, while the fair value of other guarantee assets decreases.

In 2004 and 2003, the primary business drivers aÅecting the net increase in our guarantee asset balance

were our business volumes and changes in mortgage interest rates. Additions, net of repurchases declined from

2003 primarily because we issued 49 percent fewer PCs and Structured Securities (based on unpaid principal

balances) in 2004. Gains (losses) on guarantee asset decreased from 2003 due primarily to a smaller overall

decline in mortgage interest rates. Other factors contributing to the change in the fair value of the guarantee

asset are discussed in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Net Interest Income.''

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Total Debt Securities, Net

We issue non-callable and callable short- and long-term debt securities in domestic and global capital

markets in a wide range of maturities to meet our funding needs. The balance of debt securities includes

deferred premiums, discounts and hedging gains and losses.

Total debt securities decreased by $7.9 billion, or 1 percent, to $731.7 billion at December 31, 2004 from

$739.6 billion at December 31, 2003. This decrease corresponds to the decrease in total assets during 2004.

During 2004, debt due within one year declined by $13.0 billion, partially oÅset by a $5.0 billion increase in

debt due after one year. We adjust our mix of long-term and short-term debt to reÖect our funding and

portfolio duration objectives.

Guarantee Obligation for Participation CertiÑcates

The Guarantee obligation for Participation CertiÑcates represents the unamortized balance of our

obligation to guarantee the payment of principal and interest of PCs and Structured Securities, an obligation

initially established at fair value in transactions that qualify as sales under SFAS 125/140 or that were subject

to the requirements of FIN 45.

The Guarantee obligation for Participation CertiÑcates increased by $1.2 billion to $4.1 billion as of

December 31, 2004 from $2.9 billion as of December 31, 2003. The changes in the guarantee obligation

balances during 2004 and 2003 are summarized in Table 37.

Table 37 Ì Changes in Guarantee Obligation for Participation CertiÑcates

2004 2003

(dollars in millions)

Beginning balance, at January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,904 $1,427

Adjustment for change in accounting(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (110)

Transfer-out to the loan loss reserve during the period(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13) (19)

Additions, net of repurchases:

Fair value of newly-issued guarantee obligations(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,174 1,684

Deferred gains on newly-executed guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 732 847

Amortization income related to:(4)

Credit and buy-down fees received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (128) (57)

Initial fair value of contractual guarantee fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (604) (868)

Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (732) (925)

Ending balance, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,065 $2,904

(1) Represents the reclassiÑcation of the incurred losses included in the ""Guarantee obligation for Participation CertiÑcates'' at

January 1, 2003 in conjunction with the implementation of FIN 45.

(2) Represents portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that correspond to incurred

credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates at initial recognition of a guarantee obligation.

(3) Includes the fair value of guarantee obligations that were recognized in connection with transfers of PCs and Structured Securities

that qualiÑed as sales, as well as the fair value of guarantee obligations recognized that related to PCs and Structured Securities

issued in Guarantor swaps and other similar transactions subject to FIN 45. The amount is presented net of reductions attributable to

purchases of PCs and Structured Securities.

(4) Includes amortization of deferred revenue recognized for our guarantee obligation.

In 2004 and 2003, the primary drivers aÅecting the net increase in the guarantee obligation balance were

our business volume and changes in the mortgage interest rates resulting in Öuctuations in liquidation rates

from period to period. Additions, net of repurchases declined from 2003 primarily because we issued

49 percent fewer PCs and Structured Securities in 2004 (in terms of unpaid principal balances). Amortization

of guarantee obligations increased due to lower liquidation rates in 2004 compared to 2003. Other factors

contributing to the change in the amortization of the guarantee obligation are discussed in ""CONSOLIDATED RESULTS OF OPERATIONS Ì Net Interest Income.''

Total Stockholders' Equity

Total stockholders' equity decreased by $0.1 billion to $31.4 billion at December 31, 2004 from

$31.5 billion at December 31, 2003.

Freddie Mac

72
Table 38 summarizes the components of Total stockholders' equity.

Table 38 Ì Total Stockholders' Equity

December 31,

2004 2003

(dollars in millions)

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,609 $ 4,609

Common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 152

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 873 814

Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,728 28,837

AOCI related to:

Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,339 6,349

Cash Öow hedge relationships(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,924) (7,837)

Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) (10)

Total AOCI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,593) (1,498)

Treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,353) (1,427)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $31,416 $31,487

(1) Derivatives that meet speciÑc criteria are accounted for as cash Öow hedges under SFAS 133. Changes in the eÅective portion of the

fair value of these open derivatives contracts are recorded in AOCI. Net deferred gains and losses on closed cash Öow hedges (i.e.,

where the derivative is either terminated or redesignated) are also classiÑed in AOCI, until the related forecasted transaction is

determined to be probable of not occurring or it aÅects earnings.

Retained earnings increased $1.9 billion driven by net income reduced by preferred and common stock

dividends declared. AOCI declined by $2.1 billion. AOCI consists primarily of net deferred losses on cash Öow

hedge relationships, which totaled approximately ($7.9) billion and ($7.8) billion at December 31, 2004 and

2003, respectively, and net unrealized gains related to available-for-sale securities, which totaled approximately $4.3 billion and $6.3 billion as of December 31, 2004 and 2003, respectively.

The net deferred losses on cash Öow hedge relationships are composed of the period-end mark to fair

value (net of taxes) of existing derivative contracts in cash Öow hedge relationships and balances related to

closed cash Öow hedges. As described in ""CONSOLIDATED RESULTS OF OPERATIONS Ì NonInterest Income (Loss) Ì Derivative Gains (Losses),'' we discontinued applying hedge accounting treatment

for a signiÑcant amount of our pay-Ñxed and receive-Ñxed swaps during 2004. As a result, the December 31,

2004 balance in AOCI is primarily composed of deferred losses related to closed cash Öow hedge relationships

that will be amortized into Income (expense) related to derivatives, a component of Net interest income, over

time. Fluctuations in prevailing market interest rates will have no impact on the balance of AOCI relating to

closed cash Öow hedges. We estimate that approximately $1.6 billion (net of taxes) of the $7.9 billion of

hedging losses (of which $7.9 billion are related to closed cash Öow hedges and less than $0.1 billion are net

unrealized losses on open cash Öow hedges) in AOCI at December 31, 2004 will be reclassiÑed into earnings

during 2005.

Table 39 presents the scheduled amortization of the net deferred losses in AOCI at December 31, 2004,

related to closed cash Öow hedges, into income over future periods based on certain assumptions that may

diÅer from our expectations of future events or from actual future events. For purposes of this table, a number

of hypothetical assumptions were made. It is likely that actual amortization in any given future period will

diÅer from the scheduled amortization, perhaps materially, as we make decisions or changes in market

conditions occur that diÅer from these assumptions. For example, the scheduled amortization for cash Öow

hedges related to future debt issuances is based on the assumption that we will not repurchase debt and that no

other factors aÅecting debt issuance probabilities will change. In addition, for purchase and sale commitments

in cash Öow hedge relationships, the scheduled amortization assumes no changes in prepayment activities or

other factors aÅecting the timing of reclassiÑcations.

Freddie Mac

73
Table 39 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to Closed Cash

Flow Hedge Relationships

December 31, 2004

Amount Amount

Period of Scheduled Amortization to Income (Pre-tax) (After-tax)

(dollars in millions)

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (2,477) $(1,610)

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,967) (1,279)

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,461) (949)

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,326) (862)

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,103) (717)

2010 to 2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,858) (1,858)

ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (960) (624)

Net deferred losses in AOCI related to closed cash Öow hedge relationships ÏÏÏÏ $(12,152) $(7,899)

Net deferred losses in AOCI related to open cash Öow hedge relationships ÏÏÏÏÏ (38) (25)

Total AOCI related to cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12,190) $(7,924)

The net unrealized gains related to available-for-sale securities decreased by approximately $2.0 billion,

after-tax, at December 31, 2004 compared to December 31, 2003. During 2004, higher yielding securities that

were generally in an unrealized gain position were liquidated or sold. The unpaid principal balance of the

mortgage-related and non-mortgage-related securities we held in our Retained portfolio and Cash and

investments portfolio that were classiÑed as available-for-sale totaled $610.1 billion and $598.5 billion at

December 31, 2004 and 2003, respectively.

AVERAGE CONSOLIDATED BALANCE SHEETS AND RATE/VOLUME ANALYSIS

Table 40 reÖects an analysis of net interest income and presents average balances and related yields

earned on assets and rates paid on liabilities. Average balance sheet information is presented because we

believe end-of-period balances may not always be representative of activity throughout the periods presented.

We also believe that the rate/volume analysis may be helpful in understanding how changes in business

volumes and yields inÖuenced our Ñnancial results, particularly net interest income on earning assets. For most

components of the average balances, a daily weighted average balance is calculated for the period. When daily

weighted average balance information is not available, a simple monthly average balance is calculated. In

addition, Net interest income/yield (fully taxable-equivalent basis) is presented on this table. Taxable

equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to

the equivalent amounts of interest income that would be necessary to derive the same net return if the

investments had been subject to income taxes using our statutory tax rate (35 percent).

Freddie Mac

74
Table 40 Ì Average Consolidated Balance Sheets and Rate/Volume Analysis

Year Ended December 31,

2004 2003 2002

Interest Interest Interest

Average Income Average Average Income Average Average Income Average

Balance(1)(2) (Expense) Rate(3)(4) Balance(1)(2) (Expense) Rate(3)(4) Balance(1)(2) (Expense) Rate(3)(4)

(dollars in millions)

Interest-earning assets:

Mortgage loans(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,566 $ 4,007 6.51% $ 63,396 $ 4,251 6.70% $ 61,077 $ 4,290 7.02%

Mortgage-related securities in

the Retained portfolio(6) ÏÏÏÏÏ 590,118 28,460 4.82 544,396 29,051 5.34 470,450 30,039 6.39

Total Retained portfolio ÏÏÏÏÏÏÏ 651,684 32,467 4.98 607,792 33,302 5.48 531,527 34,329 6.46

Investments(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81,833 2,716 3.29 94,768 3,246 3.40 91,794 3,693 3.99

Securities purchased under

agreements to resell and

Federal funds sold ÏÏÏÏÏÏÏÏÏÏ 29,996 420 1.40 49,085 550 1.12 29,032 454 1.56

Total interest-earning assets ÏÏÏ 763,513 35,603 4.66 751,645 37,098 4.93 652,353 38,476 5.89

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205,072 (2,908) (1.39) 226,850 (2,785) (1.21) 209,551 (4,303) (2.03)

Long-term debt(8) ÏÏÏÏÏÏÏÏÏÏÏÏ 530,816 (22,950) (4.32) 478,028 (22,083) (4.62) 406,802 (21,337) (5.24)

Total debt securities ÏÏÏÏÏÏÏÏÏÏ 735,888 (25,858) (3.50) 704,878 (24,868) (3.52) 616,353 (25,640) (4.15)

Due to Participation CertiÑcate

investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,401 (708) (5.71) 26,234 (1,641) (6.26) 18,110 (1,236) (6.82)

Total interest-bearing liabilities 748,289 (26,566) (3.54) 731,112 (26,509) (3.62) 634,463 (26,876) (4.23)

Income (expense) related to

derivatives(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 0.01 (1,091) (0.15) (2,075) (0.32)

Impact of net non-interest

bearing fundingÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,224 Ì 0.07 20,533 Ì 0.10 17,890 Ì 0.13

Total funding of interestearning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $763,513 $(26,466) (3.46) $751,645 $(27,600) (3.67) $652,353 $(28,951) (4.43)

Net interest income/yield ÏÏÏÏÏÏ $ 9,137 1.20 $ 9,498 1.27 $ 9,525 1.46

Fully taxable-equivalent

adjustment(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267 0.03 227 0.03 252 0.04

Net interest income/yield (fully

taxable-equivalent basis) ÏÏÏÏÏÏ $ 9,404 1.24 $ 9,725 1.30% $ 9,777 1.50%

2004 vs. 2003 Variance 2003 vs. 2002 Variance

Due to Due to

Total Total

Rate(11) Volume(11) Change Rate(11) Volume(11) Change

(dollars in millions)

Interest-earning assets:

Mortgages loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (123) $ (121) $ (244) $ (199) $ 160 $ (39)

Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,921) 2,330 (591) (5,330) 4,342 (988)

Total Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,044) 2,209 (835) (5,529) 4,502 (1,027)

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (98) (432) (530) (563) 116 (447)

Securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116 (246) (130) (155) 251 96

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,026) $ 1,531 $(1,495) $(6,247) $ 4,869 $(1,378)

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (406) $ 283 $ (123) $ 1,849 $ (331) $ 1,518

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,472 (2,339) (867) 2,725 (3,471) (746)

Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,066 (2,056) (990) 4,574 (3,802) 772

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 133 800 933 110 (515) (405)

Total interest-bearing liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,199 (1,256) (57) 4,684 (4,317) 367

Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,191 Ì 1,191 984 Ì 984

Total funding of interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,390 $(1,256) $ 1,134 $ 5,668 $(4,317) $ 1,351

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (636) $ 275 $ (361) $ (579) $ 552 $ (27)

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 2 40 9 (34) (25)

Net interest income/yield (fully taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (598) $ 277 $ (321) $ (570) $ 518 $ (52)

(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2) For securities classiÑed as available-for-sale, we calculate average balances based on their unpaid principal balance plus their associated deferred fees and costs

(e.g., premiums and discounts), but exclude the eÅects of other-than-temporary impairments. For securities in the Retained portfolio classiÑed as trading, we

calculate average balances excluding their mark-to-fair-value adjustments. For securities in the Cash and investments portfolio classiÑed as trading, we

calculate average balances based on their fair values.

(3) May not sum due to rounding.

(4) Average rates for securities classiÑed as available-for-sale are on the historical cost basis, which is not aÅected by the change in fair value that is reÖected in the

AOCI component of Stockholders' equity.

(5) Non-accrual loans are included in average balances.

(6) Rates calculated on a fully taxable-equivalent basis were 4.86%, 5.37% and 6.43% for the years ended December 31, 2004, 2003 and 2002, respectively, based

upon related income of $28,688 million, $29,246 million and $30,253 million, respectively.

(7) Investments consist of Cash and cash equivalents and the Total mortgage-related and non-mortgage-related securities subtotal of Investments as reported on

the consolidated balance sheets.

(8) Includes current portion of long-term debt.

(9) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements in accordance with the contractual

terms of all derivatives in qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our

consolidated Ñnancial statements for more information.

(10) Represents the adjustment necessary to calculate the tax-exempt income and yield on a tax equivalent basis. We analyze Net interest income, and the related

Net interest yield, on a taxable-equivalent basis. Analysis on a taxable-equivalent basis allows the comparison of ratios related to tax-exempt or tax-advantaged

securities to those of fully taxable securities with higher yields.

(11) Combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.

Freddie Mac

75
CONSOLIDATED FAIR VALUE BALANCE SHEETS

The consolidated fair value balance sheets in Table 41 present our estimates of the fair value of our

recorded assets and liabilities and oÅ-balance sheet Ñnancial instruments at December 31, 2004 and 2003.

Table 41 Ì Consolidated Fair Value Balance Sheets(1)

December 31, 2004 December 31, 2003

Carrying Carrying

Amount(2) Fair Value Amount(2) Fair Value

(dollars in billions)

Assets

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61.3 $ 63.3 $ 60.2 $ 62.5

Mortgage-related securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 603.2 603.4 600.2 600.4

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 664.5 666.7 660.4 662.9

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.3 35.3 23.1 23.1

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.8 29.8 65.4 65.4

Securities purchased under agreements to resell and Federal

funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.2 32.2 20.6 20.6

Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.3 15.3 16.2 16.2

Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.5 5.0 3.7 4.5

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.7 13.3 14.0 13.2

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795.3 $797.6 $803.4 $805.9

Liabilities and minority interest

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731.7 $737.0 $739.6 $749.8

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏ 4.1 2.1 2.9 2.4

Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.2 0.2 0.4 0.4

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏ 0.2 Ì 0.1 Ì

Other liabilities(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.2 25.7 27.0 23.9

Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.5 1.7 1.9 2.1

Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 763.9 766.7 771.9 778.6

Net assets attributable to stockholders

Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6 4.1 4.6 4.4

Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.8 26.8 26.9 22.9

Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.4 30.9 31.5 27.3

Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795.3 $797.6 $803.4 $805.9

(1) The consolidated fair value balance sheets do not purport to present our net realizable, liquidation or market value as a whole.

Furthermore, amounts we ultimately realize from disposition of assets or settlement of liabilities may vary signiÑcantly from the fair

values presented.

(2) Carrying amounts equal the amounts reported on our GAAP consolidated balance sheets.

(3) The fair value of Mortgage-related securities reported in this table exceeds the carrying value because the fair value includes PC

residuals related to Participation CertiÑcates held in the Retained portfolio that are not recognized under GAAP because such PCs

were issued prior to the implementation of FIN 45.

(4) Fair values include estimated income taxes on the diÅerence between the consolidated fair value pre-tax net assets and the

consolidated GAAP pre-tax net assets.

The fair value information on the consolidated fair value balance sheets includes the estimated fair values

of all items recorded in the consolidated balance sheets prepared in accordance with GAAP, as well as all oÅbalance sheet Ñnancial instruments that represent our assets or liabilities that are not recorded in the GAAP

consolidated balance sheets. These oÅ-balance sheet items predominantly consist of the unrecognized

guarantee assets and obligations associated with a portion of our PCs issued through our Guarantor Program

as well as commitments to purchase multifamily and single-family mortgage loans that will be classiÑed as

held-for-investment in the GAAP consolidated Ñnancial statements and insurance contracts on manufactured

housing investments. See ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES'' and ""OFFBALANCE SHEET ARRANGEMENTS'' as well as ""NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to the consolidated

Ñnancial statements for more information on fair values.

Freddie Mac

76
In conjunction with the preparation of our consolidated fair value balance sheets, we make use of a

number of Ñnancial models. See ""RISK MANAGEMENT Ì Operational Risks'' and ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for information concerning the risks associated with

these models.

Key Components of Changes in Fair Value of Net Assets

Changes in the fair value of net assets from period to period result from returns (measured on a fair value

basis) and capital transactions. Changes in fair value are attributable to changes in a number of key

components. The key components of changes in fair value of net assets are as follows:

Core spread income

Core spread income on the Retained portfolio is a fair value estimate of the current period accrual of

income from the spread between mortgage-related investments and debt, calculated on an option-adjusted

basis. An option-adjusted spread is an estimate of the yield spread between a given security and a benchmark

(London Interbank OÅered Rate, or LIBOR, agency or Treasury) yield curve, after consideration of the

security's variability in cash Öows across diÅerent potential future interest rate scenarios resulting from any

options embedded in the security, such as prepayment options. Core spread income approximates the amount

of current net interest income resulting from the net option-adjusted spread between assets and debt.

Return on risk positions

The types of interest-rate risk to which we are exposed as a result of our Retained portfolio activities

include duration and convexity risk, yield curve risk, volatility risk and basis risk. It is our business policy to

actively manage, or hedge, the majority of these risks to keep interest-rate risk exposure within prescribed

limits. We do not, however, hedge all interest-rate risk that exists at the time a mortgage is purchased or that

arises over its life. Therefore, in the normal course of business, we consistently have limited net exposures to

these risks. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more

information. Return on risk positions are fair value estimates of the return on all such market risks that we

actively hedge, or represents the estimated net gain or loss in fair value of net assets attributable to common

stockholders resulting from all net exposures related to these managed risks.

EÅect of changes in option-adjusted spread (mortgage-to-debt spread)

One risk that we do not attempt to hedge or actively manage is mortgage-to-debt spread risk, which is the

net option-adjusted spread between mortgage and agency debt sectors. Because we generally hold a substantial

portion of our mortgage assets for the long term, we do not believe that periodic Öuctuations in mortgage-todebt net option-adjusted spreads will signiÑcantly aÅect the long-term return of the retained portfolio. The

eÅect of changes in option-adjusted spreads is a fair value estimate of the net unrealized gain or loss in fair

value of net assets attributable to common stockholders that results from net option-adjusted spread

Öuctuations occurring during the period.

Core guarantee fees, net

Core guarantee fees, net is a fair value estimate of the current period accrual of income from the

diÅerence between fees we receive related to the credit guarantee business and associated costs and

obligations. Both contractual guarantee fees collected over the life of the credit guarantee portfolio and creditrelated delivery fees collected up-front when pools are formed are included. Associated costs are default and

capital costs. Core guarantee fees, net represents an estimate of the long-term expected annual income of the

credit guarantee portfolio, based on current portfolio characteristics and market conditions.

Change in fair value of guarantee portfolio

Change in fair value of guarantee portfolio represents the estimated impact on the fair value of the credit

guarantee business of additions to the portfolio (net diÅerence between the fair values of the guarantee asset

and guarantee obligation recorded when pools are formed) plus the eÅect of changes in interest rates and other

market factors (e.g., impact of the passage of time on cash Öow discounting and changes in projections of the

future credit outlook) on the fair value of the existing credit guarantee portfolio.

Freddie Mac

77
We generally do not hedge changes in the fair value of our existing credit guarantee portfolio, with two

exceptions discussed below. While periodic changes in the fair value of the guarantee portfolio may have a

signiÑcant impact on the fair value of net assets, we believe that changes in the fair value of our existing

guarantee portfolio are not the best indication of long-term fair value expectations because such changes do

not reÖect the strong probability that over time, replacement business will largely replenish guarantee fee

income lost because of prepayments.

We hedge interest rate exposure related to net buy-ups (up-front payments made by us that increase the

guarantee fee that we will receive over the life of the pool) and Öoat (expected gains or losses resulting from

our mortgage security program remittance cycles). These value changes are excluded from our estimate of the

change in fair value of the guarantee portfolio, so that it reÖects only the impact of changes in interest rates

and other market factors on the unhedged portion of the projected cash Öows from the credit guarantee

business. The value changes associated with net buy-ups and Öoat are considered in return on risk positions

(deÑned above) because they relate to hedged positions.

Fee income

Fee income includes miscellaneous fees, such as resecuritization fees, fees generated by our automated

underwriting service and delivery fees on some mortgage purchases.

Discussion of Fair Value Results

We believe fair value measures provide an important view of our business economics and risks because

fair value takes a consistent approach to the representation of all Ñnancial assets and liabilities, rather than an

approach that combines historical cost and fair value techniques, as is the case with our GAAP-based

consolidated Ñnancial statements. The consolidated fair value balance sheet is an important component of our

risk management processes as we use daily estimates of the changes in fair value to calculate our PMVS and

duration gap measures.

At December 31, 2004, the fair value of net assets (net of tax eÅect) was $30.9 billion, a $3.6 billion, or

13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to

common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets

attributable to preferred stockholders) was $26.8 billion, a $3.9 billion, or 17 percent, increase from

December 31, 2003. The fair value of net assets attributable to common stockholders, before common

dividends and capital transactions, increased by $4.7 billion, or 21 percent, from December 31, 2003, a return

that exceeds our long-term expectations.

The primary contributors to the increase in fair value of net assets in 2004 were core spread income from

the Retained portfolio, fee-based income (including guarantee fees and credit fees related to our PCs and

Structured Securities) and a gain in the fair value of our guarantees related to our outstanding PCs and

Structured Securities. The fair value increase also included gains resulting from tighter mortgage-to-debt

option-adjusted spreads. In 2004, we made improvements to our fair value estimation methodologies,

including reÑnements that better capture available market data relevant to determining the fair value of our

debt. The implementation of these improvements resulted in net increases in the fair value of total net assets

of approximately $0.6 billion (after-tax).

The most signiÑcant change occurred in the fourth quarter of 2004 when we began using newly available

market prices received from broker/dealers and reliable third-party providers for the valuation of a greater

portion of our debt instruments. Previously, the calculation of the fair value of these instruments was based

primarily on an internal model using available market inputs. The eÅect of the change was an increase of

approximately $0.4 billion (after-tax) to the fair value of net assets.

Freddie Mac

78
VOLUME STATISTICS

Table 42 summarizes purchases into our Total mortgage portfolio and securitization activity for the

periods presented. See ""OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' for more

information about the Total mortgage portfolio.

Table 42 Ì Volume Statistics(1)

Year Ended December 31,

2004 2003 2002

(dollars in millions)

New business purchases(2)(3)

Mortgage purchases

Single-family:

30-year Ñxed-rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $220,905 60% $377,847 53% $315,375 58%

15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,754 20 239,684 34 153,346 28

ARMs/Floating-Rate(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,969 14 52,556 7 44,917 8

Balloon/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,658 3 29,714 4 18,531 4

FHA/VA(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 319 Ì 1,417 Ì 845 Ì

RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 207 Ì 265 Ì 180 Ì

Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 354,812 97 701,483 98 533,194 98

Multifamily:

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,712 3 15,292 2 10,654 2

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,712 3 15,292 2 10,654 2

Total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $367,524 100% $716,775 100% $543,848 100%

Non-Freddie Mac mortgage-related securities purchased for

Structured Securities:

Alternative collateral deals(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prime and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,205 $ 3,918 $ 14,507

Structured Securities backed by Ginnie Mae CertiÑcates ÏÏÏÏÏÏ 85 539 265

Total Non-Freddie Mac mortgage-related securities purchased for

Structured SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,290 $ 4,457 $ 14,772

Non-Freddie Mac mortgage-related securities purchased into the

Retained portfolio:

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,038 $ 47,806 $ 45,798

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 166 820

Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,038 47,972 46,618

Single-family and other mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 102,914 54,109 36,004

Commercial mortgage backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,878 10,588 8,282

Mortgage revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,944 963 863

Manufactured housingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 318

Total non-agency mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,736 65,660 45,467

Total Non-Freddie Mac mortgage-related securities purchased into

the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $119,774 $113,632 $ 92,085

Total new business purchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $494,588 $834,864 $650,705

Mortgage purchases with credit enhancements(8)(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19% 16% 20%

Percentage of reÑnance mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 81 74

Average loan-to-value ofsingle-family purchases:

ReÑnance mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67 66 67

Purchase money mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 79 79

Mortgage liquidations(10)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $401,029 $719,608 $464,960

Mortgage liquidation rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28% 55% 40%

Securities Settlements:

Single-family PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $360,933 $705,450 $543,716

Multifamily PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,175 8,337 3,596

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $365,108 $713,787 $547,312

Resecuritization activity(11)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $215,430 $298,118 $331,672

Freddie Mac securities repurchased into the Retained portfolio(12)ÏÏÏÏÏ $ 96,235 $266,989 $192,817

(1) Based on unpaid principal balances.

(2) Based on our Total mortgage portfolio. Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(3) Includes certain mortgage-related securities that have been transferred from the Investments caption on the consolidated balance sheets.

(4) Also includes 40 and 20 year Ñxed-rate mortgages.

(5) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.

(6) Excludes FHA/VA loans that may be collateral for alternative collateral deals.

(7) Prior to 2004, alternative collateral deals included Structured Securities backed by non-agency securities, which were primarily backed by subprime mortgage loans;

and to a lesser extent, FHA/VA loans and home equity loans. Beginning in 2004, alternative collateral deals included Structured Securities backed by non-agency

securities, which were backed by a mixture of subprime and other (i.e., prime) mortgage loans.

(8) Credit enhancements include loans for which the lender or a third party has retained a portion of the default risk by pledging collateral or agreeing to accept losses

on loans that default. In some cases, the lender's or the third party's risk is limited to a speciÑc level of losses at the time the credit enhancement becomes eÅective.

(9) Excludes Structured Securities backed by Ginnie Mae CertiÑcates.

(10) Excludes the eÅect of sales of non-Freddie Mac mortgage-related securities. Subsequent to the issuance of our Information Statement dated September 24, 2004,

we reclassiÑed certain amounts related to credit impairments, increasing the dollar amount of liquidations for 2003 and 2002.

(11) Includes activity where we have resecuritized PCs and other previously issued Structured Securities related to multi-class Structured Securities, primarily

REMICs, as well as principal-only strips and other Structured Securities, backed by non-Freddie Mac mortgage-related collateral. These amounts exclude

resecuritizations of PCs into single-class securities.

(12) Excludes the repurchase of PCs and Structured Securities held by us in connection with our PC market-making and support activities that historically have been

reÖected in the Investments caption on the consolidated balance sheets. As previously disclosed in our Information Statement Supplement dated September 24,

2004, we ceased our PC market-making and support activities accomplished through our Securities Sales & Trading Group business unit and our external Money

Manager program during the fourth quarter of 2004.

Freddie Mac

79
Our Total new business purchases, which consist of mortgage loans and non-Freddie Mac mortgagerelated securities that are purchased for our Retained portfolio, as well as to become collateral for issued PCs

and Structured Securities, totaled $494,588 million, $834,864 million and $650,705 million during 2004, 2003

and 2002, respectively. Our Total new business purchases during 2003 were the highest in our history.

Interest rates for Ñxed-rate mortgages declined during 2002 and through the Ñrst half of 2003, resulting in

a surge of mortgage reÑnancing activity during both of these years. In the latter half of 2003, interest rates for

Ñxed-rate mortgages rose from the low point reached in mid-2002, but still ended the year at relatively low

levels compared to historical standards. During 2004, interest rates were less volatile than in prior years.

Total mortgage purchases were $367,524 million, $716,775 million and $543,848 million during 2004,

2003 and 2002, respectively. Mortgage lenders tend to deliver more Ñxed-rate residential mortgages to the

GSEs as compared to ARM/Öoating-rate products. 30-year and 15-year Ñxed-rate mortgages represented

80 percent, 87 percent and 86 percent of our Total mortgage purchases for 2004, 2003 and 2002. Fixed-rate

mortgage volume peaked in 2002 because declining interest rates increased the number of borrowers that

qualiÑed for and chose this mortgage product. ARMs/Floating-Rate and Balloon/Resets mortgages represented 17 percent, 11 percent and 12 percent of our Total mortgage purchases for 2004, 2003 and 2002,

respectively, highlighting borrowers increasing preference for ARMs/Floating-Rate products.

Total non-Freddie Mac mortgage-related securities purchased were $127,064 million, $118,089 million

and $106,857 million during 2004, 2003 and 2002, respectively. During 2004, the mix of purchases changed

signiÑcantly compared to 2003 and 2002. SpeciÑcally, we purchased signiÑcantly more non-agency singlefamily and other mortgage-related securities due to a number of factors described in ""CONSOLIDATED

BALANCE SHEETS ANALYSIS Ì Retained Portfolio,'' partially oÅset by a reduction in the purchase of

Fannie Mae securities. In addition, during 2003 and 2004, part of our strategy to support PC price

performance included the purchase and sale of other agency securities.

The liquidation rate on the Total mortgage portfolio totaled 28 percent, 55 percent and 40 percent for the

years ended December 31, 2004, 2003 and 2002, respectively. The relatively higher liquidation rates in 2003

and 2002 compared to 2004 reÖect accelerated borrower prepayments due to low Ñxed interest rates during

2002 and the Ñrst half of 2003.

The percentage of purchases with credit enhancements totaled 19 percent, 16 percent and 20 percent for

the years ended December 31, 2004, 2003 and 2002, respectively. Credit enhancements primarily include

third-party, primary loan-level mortgage insurance, third-party pool issuance or other arrangements in which

the third party has retained a portion of the default risk by pledging collateral or agreeing to accept losses on

loans that default. The drop in purchases with credit enhancements in 2003 compared to 2004 and 2002 was

due primarily to a decline in the number of loans purchased that are covered by primary mortgage insurance,

or PMI, which is not required for mortgage loans with low loan-to-value ratios. Purchases in 2003 had the

lowest weighted average loan-to-value ratio for the three years presented (i.e., 68 percent for 2003 compared

to 71 percent and 70 percent for 2004 and 2002, respectively) because the percentage of reÑnance mortgage

purchases was highest in 2003 of the three years presented (i.e., 81 percent for 2003 compared to 60 percent

and 74 percent for 2004 and 2002, respectively). Loan-to-value ratios tend to be lower for reÑnance mortgages

as compared to purchase money mortgages due to the strong house price appreciation experienced in recent

years. Our future ability and desire to utilize credit enhancements will depend on our evaluation of the credit

quality of new business purchase opportunities and the future availability of eÅective credit enhancements at

prices that permit an attractive return. See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit

Risk Ì Mortgage Credit Risk Management Strategies'' for more information.

We generate a signiÑcant portion of our mortgage purchase volume through several key mortgage lenders

that have entered into special business arrangements with us. See ""BUSINESS Ì Credit Guarantee

Activities'' for information about these relationships and consequent risks.

For a discussion of Resecuritization Activity, see ""CONSOLIDATED RESULTS OF OPERATIONS Ì Resecuritization Fees.''

Freddie Mac

80
Table 43 summarizes the characteristics of the single-family loan purchases deÑned as ""New business

purchases'' in ""Table 42 Ì Volume Statistics'' by original loan-to-value ratio range, credit score, loan

purpose, property type and occupancy type. See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage

Credit Risk'' for deÑnitions of those risk characteristics.

Table 43 Ì Characteristics of Purchases into the Single-Family Mortgage Portfolio(1)

Original Loan-to-Value Ratio Range(2) Year Ended December 31,

2004 2003 2002

0% to 60%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23% 29% 25%

Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 19 16

Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 40 43

Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 7 9

Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 4 6

Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average original loan-to-value ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71% 68% 70%

Credit Score(3)

740 and above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41% 49% 44%

700 to 739ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 23 24

660 to 699ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 17 18

620 to 659ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 8 9

Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 3 4

Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average credit score ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 719 729 722

Loan Purpose(3)

Purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40% 19% 26%

Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 26 29

Other reÑnanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 55 45

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Property Type(3)

1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97% 98% 98%

2-4 units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 2 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Occupancy Type(3)

Primary residenceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92% 95% 94%

Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 3 3

Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 2 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

(1) Based on purchase activity related to the single-family mortgage portfolio (excluding non-Freddie Mac mortgage-related securities,

alternative collateral deals and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates), which totaled

$355 billion, $701 billion and $533 billion at December 31, 2004, 2003 and 2002, respectively.

(2) Our charter requires that mortgage loans we purchase with loan-to-value ratios above 80 percent have mortgage insurance for the

portion of the mortgage loan balance and that exceeds 80 percent of the property's value or other credit protections.

(3) See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risk'' for more information.

Single-family mortgage loans purchased with loan-to-value ratios above 80 percent accounted for

15 percent, 12 percent and 16 percent for the years ended December 31, 2004, 2003 and 2002, respectively. In

addition, the weighted average loan-to-value ratio of the mortgage loans purchased decreased from 70 percent

for the year ended December 31, 2002 to 68 percent for the year ended December 31, 2003 and increased to

71 percent for the year ended December 31, 2004. The lower loan-to-value ratios in 2002 and 2003 as

Freddie Mac

81
compared to 2004 are primarily the result of house-price appreciation combined with the surge in reÑnance

activity in these years as a result of the reduction in interest rates.

The proportion of mortgage loans purchased resulting from reÑnancing transactions decreased from a

total of 81 and 74 percent for the years ended December 31, 2003 and 2002, respectively, to 60 percent for the

year ended December 31, 2004. This decrease in reÑnance activity is a result of the higher interest rates

experienced during the second half of 2003 and 2004.

The quality of mortgage loans purchased continued to be strong. The strong credit quality of borrowers is

evidenced by the high average credit scores of mortgage loans purchased of 719, 729 and 722 for the years ended

December 31, 2004, 2003 and 2002, respectively. Credit scores are ranked on a scale of approximately 300 to

850 points. The slight decrease in the average credit score in 2004 resulted from a decline in the proportion of

refinance mortgage loans, which generally have higher credit scores than purchase mortgage loans. The

proportion of one-unit properties in our mortgage loan purchase volume remained stable over the past three

years, accounting for 97 percent for the year ended December 31, 2004, a slight decrease from 98 percent for the

years ended December 31, 2003 and 2002. The proportion of primary and secondary residences in our mortgage

loan purchase volume remained stable over the past three years, accounting for 96 percent, 98 percent and

97 percent in 2004, 2003 and 2002, respectively.

Freddie Mac

82
LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our business activities present liquidity demands driven by maturities and repurchases of our debt,

purchases of mortgage loans, mortgage-related securities and other investments, payments of principal and

interest to PC and Structured Securities holders, general operations and the payment of dividends to our

stockholders. Our sources of cash to meet the needs of our business activities and general operations include:

‚ issuances of long-term and short-term debt;

‚ receipts of principal and interest on securities we hold or mortgages we have securitized and sold;

‚ sales of securities we hold, particularly those in the Cash and investments portfolio;

‚ borrowings against mortgage-related securities and other investment securities we hold;

‚ other cash Öows from operating activities including guarantee activities; and

‚ issuances of common and preferred stock.

We measure our cash Öow position on a daily basis, netting uses of cash (principally, the settlement of

mortgage and non-mortgage investment security purchases, principal and interest payments on debt and

mortgage securities, net payments on derivative instruments and other operating cash Öows) with sources of

cash (principally, the settlement of debt borrowings and principal and interest receipts on mortgage and nonmortgage investment securities held in portfolio and mortgages we have securitized and sold). The net cash

position is managed over a rolling forecasted period of 90 days, so that the amount of debt funding needed to

cover expected negative balances does not adversely aÅect our overall funding levels. We maintain alternative

sources of liquidity to allow normal operations for 90 days and comply with the principles of sound liquidity

management set forth by the Basel Committee on Banking Supervision. See ""BUSINESS Ì Regulatory and

Governmental Matters Ì Other Regulatory Matters'' for additional information on the Basel Committee on

Banking Supervision. We ensure that three months' worth of liquidity is maintained (based on internal

models) assuming we have no access to new-issue public debt markets. This daily management of our

liquidity is in accordance with the Liquidity Management and Contingency Planning voluntary commitment.

See ""VOLUNTARY COMMITMENTS'' for further information.

To reÑnance maturing debt, we depend on the continuing willingness of investors to purchase our debt

securities (for more information regarding the maturity proÑle of our outstanding debt securities, see

""Table 44 Ì Total Capitalization''). Our inability to prepare timely consolidated Ñnancial statements, as

discussed in ""RISK MANAGEMENT Ì Operational Risks,'' or any change in legislative or regulatory

exemptions as described in ""BUSINESS Ì Regulatory and Governmental Matters,'' could adversely aÅect

our access to some debt investors, thereby potentially increasing our debt funding costs. However, because of

our Ñnancial performance and our regular and signiÑcant participation as an issuer in the funding markets, our

sources of liquidity have remained adequate to meet our needs and we anticipate that they will continue to do

so. Our ability to issue common stock, preferred stock or subordinated debt may be limited until we have

returned to timely Ñnancial reporting.

Under our charter, the Secretary of the Treasury has discretionary authority to purchase our obligations

up to a maximum of $2.25 billion principal balance outstanding at any one time. However, we do not rely on

this authority as a source of liquidity to meet our obligations. See ""BUSINESS Ì Regulatory and

Governmental Matters'' for more information.

Depending on market conditions and the mix of our derivatives employed in connection with our ongoing

risk management activities, our derivative portfolio can be either a net source of or a net use of cash. For

example, depending on the prevailing interest-rate environment, interest-rate swap agreements could cause us

either to make interest payments to counterparties or to receive interest payments from counterparties.

Purchased options require us to pay a premium while written options allow us to receive a premium.

Also, the legal proceedings discussed in ""NOTE 13: LEGAL CONTINGENCIES'' to the consolidated

Ñnancial statements may result in a use of cash.

Freddie Mac

83
Total Capitalization

Table 44 sets forth our capitalization at the dates presented. We engage in transactions and issue or

repurchase debt obligations on an ongoing basis, all of which cause our total capitalization to change.

Therefore, on any date after December 31, 2004, our total capitalization will diÅer (perhaps substantially)

from the Ñgures contained in this capitalization table.

Table 44 Ì Total Capitalization

December 31,

2004 2003

(dollars in millions)

Total debt securities, net:

Senior debt, due within one year:

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $196,639 $212,035

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,664 83,227

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 282,303 295,262

Senior debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 443,772 438,738

Subordinated debt, due after one year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,622 5,613

Senior and subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 449,394 444,351

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 731,697 739,613

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,416 31,487

Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $763,113 $771,100

(1) The year-over-year increase in the balance of subordinated borrowings results from principal accretion related to zero-coupon

subordinated debt.

See ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' and ""NOTE 9:

STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements for further information.

Debt Securities

We Ñnance our purchases of mortgage loans, mortgage-related securities and non-mortgage-related

securities held in our Retained portfolio and Cash and investments portfolio primarily through the issuance of

both long-term and short-term debt. Table 45 below summarizes the par value of our debt security issuances

based on settlement dates during 2004 and 2003. We seek to maintain consistent, active funding programs that

promote investor conÑdence and high-quality coverage by market makers. By diversifying our investor base

and the types of debt securities we oÅer, we enhance our ability to maintain continuous access to the debt

markets under a variety of conditions.

Table 45 Ì Debt Security Issuances by Product(1)

Year Ended December 31,

2004 2003

(dollars in millions)

Short-term debt:

Short-term Reference Bills» and discount notes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $793,462 $ 779,004

Medium-term Notes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191 5,610

Total short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 793,653 784,614

Long-term debt:

Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150,859 213,924

U.S. dollar denominated Reference Notes»ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,000 54,000

4Reference Notes» ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,680 4,347

Total long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 199,539 272,271

Total debt securities issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $993,192 $1,056,885

(1) Excludes securities sold under agreements to repurchase and Federal funds purchased, swap collateral obligations, and securities

sold, not yet purchased.

(2) Amounts for 2003 have been revised to present additional detail and to conform with the 2004 presentation.

Freddie Mac

84
Short-Term Debt. We raise funds to meet our operating cash needs primarily through the issuance of

Reference Bills» securities and other discount notes, which are short-term instruments with maturities of one

year or less that are sold on a discounted basis, paying only principal at maturity. Our Reference Bills»

program consists of large issues of short-term debt that we auction to dealers through the Internet on a regular

schedule. We currently auction Reference Bills» securities with one-, three- and six-month maturities weekly.

We auction Reference Bills» securities with 12-month maturities every four weeks. We issue discount notes

with maturities ranging from one day to one year in response to investor demand and our cash needs.

Short-term debt also includes certain Medium-term Notes that have original maturities of one year or

less.

Long-Term Debt. We issue long-term debt primarily through our Medium-term Notes program and

our Reference Notes» securities program. Medium-term Notes have a variety of structures, including callable

and non-callable Ñxed-rate securities, zero coupon securities and variable-rate securities. Reference Notes»

securities are regularly issued non-callable Ñxed-rate securities.

Medium-term Notes. We issue a variety of Ñxed- and Öoating-rate Medium-term Notes with

various maturities ranging up to 30 years. Medium-term Notes with original maturities of one year or less

are classiÑed as short-term debt. Medium-term Notes typically contain call provisions, eÅective as early

as three months or as late as ten years after the securities are issued.

Reference Notes». Through our Reference Notes» securities program, we sell large issues of longterm debt that provide investors worldwide with a high-quality, liquid investment vehicle. Some of our

Reference Notes» securities are sold through Internet auctions. Newly issued Reference Notes»

securities have maturities ranging from two through ten years. We primarily issue securities denominated

in U.S. dollars, although we also issue securities denominated in various other currencies, particularly

Euros. We hedge our exposure to changes in foreign currency exchange rates by entering into swap

transactions that eÅectively convert foreign-denominated obligations to U.S. dollar denominated obligations. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Sources of

Interest-Rate Risk and Other Market Risks'' for more information.

The investor base for our debt is predominantly institutional. However, we also conduct weekly oÅerings

of FreddieNotes» securities, a Medium-term Notes program designed to meet the investment needs of retail

investors.

Subordinated Debt. In October 2000, we announced plans to initiate periodic issuances of subordinated

debt securities, which we refer to as Freddie SUBS» securities, as part of a series of voluntary commitments

regarding our Ñnancial operations and disclosures designed to further strengthen our transparency, capital

adequacy and market discipline. The Freddie SUBS» program is in addition to the subordinated debt issued

prior to October 2000. During 2001 and 2002, we completed a total of four oÅerings of Freddie SUBS» that

provided approximately $5.5 billion in net proceeds. During 2004 and 2003, we did not issue any Freddie

SUBS». Our ability to issue subordinated debt may be limited until we return to timely Ñnancial reporting.

See ""VOLUNTARY COMMITMENTS'' for additional information.

Financing Calendars. Annually, we publish Ñnancing calendars for the upcoming year, which are

intended to provide clarity and transparency with regard to the timing of new debt issues and reopening of

prior issues, the anticipated size of individual oÅerings and settlement dates. All Reference Notes» securities,

4Reference Notes» securities and Reference Bills» securities issued during 2004 and the Ñrst Ñve months of

2005 were issued in accordance with our previously announced Ñnancing calendars.

Our Ñnancing calendars underscore our goal of aligning our interests with investors while also ensuring

that we have the Öexibility to oÅer the marketplace securities of the appropriate size and maturity. In addition,

we have supplemented our calendars by publishing the ""Quarterly Funding Announcement,'' or QFA, which

promotes additional transparency and predictability by detailing our expected funding activity for the

upcoming quarter. We also publish detailed funding summaries on a monthly basis, which outline our funding

activity for the previous month. The QFA and the monthly funding summaries are available on our website,

www.FreddieMac.com. (We are providing this Internet address solely for the information of interested

persons. We do not intend this Internet address to be an active link and are not using references to this

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Internet address here or elsewhere in this Information Statement to incorporate additional information into

this Information Statement.)

By adhering to our Ñnancing calendars, we are able to provide our debt investors with a predictable source

of investment opportunities. However, there is no assurance that we will be able to continue to adhere to our

Ñnancing calendars in the future. In order to continue our debt oÅerings as scheduled and properly manage our

asset/liability mix, we regularly conduct repurchases of outstanding debt securities. Our repurchase operations

support the transparency, liquidity and predictability of Reference Notes» securities, 4Reference Notes»

securities and callable debt securities. During 2004 and 2003, we repurchased approximately $9.0 billion and

$24.8 billion, respectively, of our outstanding Reference Notes» securities and 4Reference Notes» securities.

In addition, primarily as a response to declining interest rates, we called approximately $120.0 billion and

$153.0 billion of our higher-rate long-term callable debt during 2004 and 2003, respectively. From time to

time, we may also enter into transactions in which we exchange newly issued debt securities for similar

outstanding debt securities held by investors. These transactions are not accounted for as repurchases, but

rather as debt exchanges.

Credit Ratings. Our ability to access the capital markets and other sources of funding, as well as our

cost of funds, are highly dependent upon our credit ratings. Table 46 indicates our credit ratings at May 23,

2005.

Table 46 Ì Freddie Mac Credit Ratings

Rating Agency

Standard & Poor's Moody's Fitch

Senior long-term debt(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AAA Aaa AAA

Short-term debt(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1° Prime-1 F-1°

Subordinated debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AA¿ Aa2 AA¿Watch Negative

Preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AA¿ Aa3 AA¿Watch Negative

(1) Includes Medium-term Notes, U.S. dollar denominated Reference Notes» securities and 4Reference Notes» securities.

(2) Includes Reference Bills» securities and discount notes.

In addition to the ratings described in Table 46, Standard & Poor's, or S&P, provides a ""Risk-To-TheGovernment'' rating that measures our ability to meet our debt obligations and the value of our franchise in

the absence of any implied government support. Our ""Risk-To-The-Government'' rating was AA- at May 23,

2005. Moody's also provides a ""Bank Financial Strength'' rating that represents Moody's opinion of our

intrinsic safety and soundness and, as such, excludes certain external credit risks and credit support elements.

Ratings under this measure range from A, the highest, to E. Our ""Bank Financial Strength'' rating was A- at

May 23, 2005.

Equity Securities

During the Ñrst Ñve months of 2005 and all of 2004 and 2003, we did not issue, redeem or repurchase any

equity securities, other than transfers of previously issued treasury stock under our stock compensation plans.

During 2002, we redeemed $287 million of 6.125 percent preferred stock issued in November 1996, and

eÅectively replaced it with a 5.81 percent perpetual non-cumulative preferred stock issuance with a

redemption value of $300 million, resulting in additional net cash proceeds to us of approximately $13 million.

We repurchased approximately 9.1 million common shares during 2002 for approximately $555 million.

Cash and Investments Portfolio

We maintain a Cash and investments portfolio that is important to our Ñnancial management and our

ability to provide liquidity and stability to the mortgage market. At December 31, 2004, the investments in this

portfolio consisted of liquid non-mortgage-related securities that could be sold or Ñnanced to:

‚ protect against temporary disruptions in our ability to obtain funding for our business operations;

‚ manage recurring cash Öows and meet other cash management needs;

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‚ temporarily deploy capital until the capital can be redeployed into Retained portfolio investments

or credit guarantee business opportunities;

‚ maintain capital reserves to meet mortgage funding needs;

‚ provide diverse sources of liquidity; and

‚ help manage the interest-rate risk inherent in mortgage-related assets.

The non-mortgage-related securities in the Cash and investments portfolio consist principally of assetbacked securities and other marketable assets that can be readily converted to cash. During 2004, we adjusted

the investment strategy for the Cash and investments portfolio and, as a result, this portfolio did not hold

corporate debt securities or preferred stock at December 31, 2004. The non-mortgage investments in this

portfolio may expose us to institutional credit risk and the risk that the investments will decline in value due to

market-driven events such as credit downgrades or changes in interest rates and other market conditions. See

""RISK MANAGEMENT Ì Credit Risks Ì Institutional Credit Risk'' for more information.

At December 31, 2003, the Cash and investments portfolio included certain mortgage-related securities

that were not included in the Retained portfolio since they were acquired in conjunction with the PC marketmaking and support activities conducted through our Securities Sales & Trading Group business unit and

external Money Manager program, both of which ceased operations during the fourth quarter of 2004.

Consequently, we held no mortgage-related securities in the Cash and investments portfolio at December 31,

2004, compared to $32.8 billion at December 31, 2003. In addition, our Securities Sales & Trading Group

business unit and external Money Manager program held approximately $8.3 billion of securities purchased

under agreements to resell at December 31, 2003, which we subsequently disposed of during 2004. For

additional information on our Cash and investments portfolio, see ""CONSOLIDATED BALANCE

SHEETS ANALYSIS Ì Cash and Investments.''

Contractual Obligations

""Table 47 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2004)'' includes aggregated

information about the listed categories of our contractual obligations. These contractual obligations aÅect our

short- and long-term liquidity and capital resource needs. Table 47 includes information about undiscounted

future cash payments due under these contractual obligations, aggregated by type of contractual obligation,

including the contractual maturity proÑle of our consolidated debt securities and other liabilities reported on

our consolidated balance sheets and our operating leases at December 31, 2004. The timing of actual future

payments may diÅer from those presented in this table due to a number of factors, including discretionary debt

repurchases. Our contractual obligations include other purchase obligations that are enforceable and legally

binding. For purposes of the table, purchase obligations are included through the termination date speciÑed in

the respective agreements, even if the contract is renewable. Many of the purchase agreements for goods or

services include clauses that would allow us to cancel the agreement prior to the expiration of the contract

within a speciÑed notice period; however, the table includes such obligations without regard to such

termination clauses (unless actual notice of our intention to terminate the agreement has been communicated

to the counterparty).

Table 47 excludes guarantee obligations, which represent our obligations to stand ready to perform under

our guarantees of the payment of principal and interest of PCs and Structured Securities, as the amount and

timing of payments under these arrangements are generally contingent upon the occurrence of future events.

The liabilities on our consolidated balance sheets associated with our guarantee obligations are included in the

caption Guarantee obligation for Participation CertiÑcates. See ""NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for additional information about our

guarantee obligations.

The funding policy for our tax-qualiÑed deÑned beneÑt pension plan, or Pension Plan, is generally to

contribute an amount equal to at least the minimum required contribution, if any, but no more than the

maximum amount deductible for federal income tax purposes each year. Based on a preliminary analysis, we

currently believe that under applicable law no minimum contribution will be required and no tax-deductible

contribution will be permitted for 2005. Therefore, we do not currently expect to contribute to our Pension

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Plan in 2005. For additional information regarding our retirement beneÑt obligations see ""NOTE 15:

EMPLOYEE BENEFITS'' to the consolidated Ñnancial statements.

With the exception of purchase commitments that are accounted for as derivatives, derivative transactions that may require cash settlement in future periods are not reÖected on Table 47. See ""Table 54 Ì

Derivative Fair Values and Maturities,'' which describes the notional amount and fair value for each derivative

type and the maturity proÑle of the positions in ""RISK MANAGEMENT Ì Interest-Rate Risk and Other

Market Risks.''

Dividend payments on preferred stock are not reÖected on Table 47, since all classes of preferred stock

are non-cumulative. See ""NOTE 9: STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements

for additional information.

Table 47 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2004)

Total 2005 2006 2007 2008 2009 Thereafter

(dollars in millions)

Long-term debt securities(1) ÏÏÏÏÏ $551,707 $ 83,625 $83,447 $64,838 $46,092 $55,574 $218,131

Short-term debt securities(1)(2) ÏÏÏ 196,639 196,639 ÌÌÌÌ Ì

Other liabilities reÖected on our

consolidated balance sheets:

Due to Participation CertiÑcate

investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,654 13,654 ÌÌÌÌ Ì

Accrued interest payable(3) ÏÏÏÏ 7,329 7,329 ÌÌÌÌ Ì

Other contractual liabilities(4)(5) 3,482 1,625 842 629 162 80 144

Purchase obligations:

Purchase commitments(6)ÏÏÏÏÏÏ 23,394 23,394 ÌÌÌÌ Ì

Other purchase obligationsÏÏÏÏÏ 139 81 23 19 15 Ì 1

Operating lease obligations ÏÏÏÏÏÏ 106 17 17 16 10 9 37

Total speciÑed contractual

obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $796,450 $326,364 $84,329 $65,502 $46,279 $55,663 $218,313

(1) The amounts presented for long-term debt securities exclude net premiums, discounts, and foreign-currency-related and hedgingrelated basis adjustments of $16,649 million at December 31, 2004. Callable debt is included in this table at its contractual maturity.

For additional information about long-term and short-term debt securities, see ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to the consolidated Ñnancial statements.

(2) Includes unamortized discounts and premiums.

(3) Accrued interest payable primarily represents the accrual of interest on our short-term and long-term debt securities, as well as the

accrual of periodic cash settlements in accordance with the contractual terms of all derivatives, netted by counterparty as permitted

by GAAP.

(4) Other contractual liabilities primarily represent future cash payments due under our contractual obligations to make delayed equity

contributions to low-income housing tax credit, or LIHTC, partnerships that are unconditional and legally binding.

(5) Accrued obligations related to our deÑned beneÑt pension plans and executive deferred compensation plan are included in the Total

and 2005 columns. However, the timing of payments due under these obligations is uncertain. See ""NOTE 15: EMPLOYEE

BENEFITS'' to the consolidated Ñnancial statements for additional information.

(6) Purchase commitments represent our obligations to purchase mortgage loans and mortgage-related securities from third parties. The

majority of purchase commitments included in this caption are accounted for as derivatives in accordance with SFAS 133.

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Capital Resources

We manage our capital resources to provide attractive returns on our common equity, while maintaining

suÇcient capital to satisfy regulatory capital requirements and assuring that capital is available to absorb

unforeseen losses that might arise in fulÑlling our obligations and conducting our business programs.

Table 48 summarizes the components of our Core capital as of the dates presented. Core capital excludes

AOCI consistent with our regulatory capital requirements, which are described under ""Capital Adequacy''

below.

Table 48 Ì Summary of Core Capital

December 31,

2004 2003

(dollars in millions)

Common stock, at par valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 152 $ 152

Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,609 4,609

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 873 814

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,728 28,837

Treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,353) (1,427)

Core capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,009 $32,985

Capital Transactions

During 2004 and 2003, we added approximately $2.0 billion and $4.0 billion, respectively, to Core capital

primarily from Net income, partially oÅset by the payment of common and preferred stock dividends.

Our Board of Directors approved a dividend per common share of $0.35 for Ñrst quarter 2005, an increase

of 17 percent over the quarterly dividend in 2004. The dividend per common share was $0.30 for each quarter

in 2004, an increase of 15 percent over the $0.26 quarterly dividend paid each quarter during 2003. We paid a

quarterly dividend per common share of $0.22 in 2002. Dividends declared and paid in any quarter will be

determined by our Board of Directors after considering our capital position and earnings and growth prospects,

among other factors.

In addition, under the capital monitoring framework established by OFHEO in January 2004, we are

required to obtain prior written approval from the Director of OFHEO before engaging in certain capital

transactions, including the repurchase of any shares of common stock, redemption of any preferred stock or

payment of preferred stock dividends above stated contractual rates. We also must submit a written report to

the Director of OFHEO after the declaration, but before the payment, of any dividend on our common stock.

The report must contain certain information on the amount of the dividend, the rationale for the payment and

the impact on our capital surplus.

As we return to timely Ñnancial reporting, in periods when we are adequately capitalized and attractive

investment opportunities are not available, we will consult with OFHEO and consider options to return capital

to our stockholders through dividends or common stock repurchases. The amount of capital available to

distribute to our stockholders will be aÅected primarily by our capital position and earnings and growth

prospects, among other factors.

All repurchases of our common stock have been made as part of the stock repurchase plan approved by

our Board of Directors on September 5, 1997. This plan allows repurchases of common stock not to exceed

Ñve percent of shares outstanding as of September 5, 1997, which was approximately 34 million shares. At

December 31, 2004, approximately 13 million common shares remained available for repurchase under this

plan. During 2003, 2004 and the Ñrst Ñve months of 2005, we did not repurchase any common shares. We

repurchased approximately 9.1 million shares of common stock during 2002 for approximately $555 million. In

addition, we may not be able to issue or redeem preferred stock or subordinated debt until we resume timely

Ñnancial reporting and therefore, changes in Core capital will generally be limited to net income and

dividends. See ""BUSINESS Ì Regulatory and Governmental Matters Ì OFHEO'' for a discussion of the

framework established by OFHEO for monitoring our capital. In addition, we periodically reissue treasury

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stock to employees and non-employee directors as part of our stock-based compensation plans. See

""NOTE 11: STOCK-BASED COMPENSATION'' to the consolidated Ñnancial statements for a description

of these plans.

For a summary of our preferred stock outstanding at December 31, 2004 and information on redemption

dates for our preferred stock issuances, see ""NOTE 9: STOCKHOLDERS' EQUITY'' to the consolidated

Ñnancial statements.

Capital Adequacy

We regularly assess the adequacy of our capital to conÑrm that we hold capital suÇcient to satisfy all of

our Ñnancial obligations, even if economic circumstances deteriorate unexpectedly and severely.

The GSE Act establishes our capital standards, and OFHEO has issued regulations that set our

minimum, critical and risk-based capital requirements. We operate with the intention to hold capital that

exceeds all regulatory requirements.

The risk-based capital standard determines the amount of capital that we must hold to absorb projected

losses resulting from future adverse interest-rate and credit-risk conditions speciÑed by the GSE Act, plus

30 percent mandated by the GSE Act to cover management and operations risk. The risk-based capital

standard is based on stress test results calculated under two interest-rate scenarios prescribed by the GSE Act,

one in which 10-year Treasury yields rise by as much as 75 percent (up-rate scenario) and one in which they

fall by as much as 50 percent (down-rate scenario). The credit component of the stress tests simulates the

performance of our mortgage portfolio based on loss rates for the Benchmark Region. The criteria for the

Benchmark Region are set forth by the GSE Act and are intended to capture the region that experienced the

highest historical rates of default and severity of mortgage losses for two consecutive origination years. The

risk-based capital requirement is the amount of Total capital needed to absorb the stress test losses in the most

adverse scenario, plus 30 percent of that amount to cover management and operations risk. Total capital

includes Core capital and general reserves for mortgage and foreclosure losses and any other amounts available

to absorb losses that OFHEO includes by regulation. Core capital consists of the par value of outstanding

common stock (common stock issued less common stock held in treasury), the par value of outstanding

perpetual noncumulative preferred stock, additional paid-in capital and retained earnings as determined in

accordance with GAAP.

The minimum capital standard requires us to hold an amount of Core capital that is generally the sum of

2.50 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and approximately 0.45 percent of outstanding mortgage-related securities guaranteed by us and other aggregate oÅbalance sheet obligations. As discussed below, in 2004 OFHEO implemented a framework for monitoring our

capital adequacy which includes a targeted capital surplus of 30 percent of our minimum capital requirement.

The critical capital standard requires us to hold an amount of Core capital that is generally the sum of

1.25 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and approximately 0.25 percent of outstanding mortgage-related securities guaranteed by us and other aggregate oÅbalance sheet obligations.

We evaluate ongoing capital compliance under changing market conditions through regular assessments

of the impact of these conditions on the level of our minimum capital surplus and our actions. We measure the

eÅects of key drivers, including the level of interest rates, the slope of the yield curve and changes in implied

market volatilities. Our assessment process is designed to ensure that we maintain a signiÑcant minimum

capital surplus across a wide range of economic scenarios. We also monitor the level and variability of our

capital surplus relative to our targeted 30 percent surplus under the capital monitoring framework temporarily

mandated by OFHEO. Our estimated surplus in excess of the 30 percent target surplus was approximately

$3.6 billion at December 31, 2004. Our sensitivity analysis currently indicates that our actual surplus would

exceed the targeted surplus across a wide range of economic scenarios. We also evaluate ongoing compliance

with the risk-based capital requirement through regular intra-quarter analysis and reporting. We monitor the

eÅects of interest rate changes and risk management actions on the level of risk-based capital surplus.

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Table 49 summarizes our regulatory capital requirements and surpluses at December 31, 2004 and 2003.

Amounts for 2004 are as currently reported to OFHEO. See ""NOTE 10: REGULATORY CAPITAL'' to the

consolidated Ñnancial statements for further information.

Table 49 Ì Regulatory Capital Requirements

December 31,

2004 2003

(dollars in millions)

Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,131 $23,774

Core capital(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,009 32,985

Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,878 9,211

Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,308 12,097

Core capital(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,009 32,985

Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,701 20,888

Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,108 5,426

Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,691 33,436

Risk-based capital surplus(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,583 28,010

(1) OFHEO is the authoritative source of the capital calculations that underlie our capital classiÑcations. For 2004, we amended the

minimum and critical capital requirements, core capital and surplus amounts previously reported to OFHEO to incorporate

adjustments reÖected in our consolidated Ñnancial statements. The 2004 minimum and critical capital requirements, core capital and

surplus amounts are estimates and have been revised to reÖect changes related to a closing agreement entered into with the IRS

concerning our REIT subsidiaries. See ""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements for further

information.

(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par

value of outstanding perpetual noncumulative preferred stock, additional paid in capital and retained earnings, as determined in

accordance with GAAP.

(3) Risk-based and Total capital amounts are those calculated by OFHEO prior to the issuance of our 2004 and 2003 Ñnancial results.

OFHEO determined not to recalculate the risk-based capital amounts given that the minimum capital requirement remained the

determining requirement for our classiÑcation as adequately capitalized.

(4) Total capital includes Core capital and general reserves for mortgage and foreclosure losses.

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OFF-BALANCE SHEET ARRANGEMENTS

OÅ-Balance Sheet Transactions

In the ordinary course of business, we fulÑll our statutory purposes by engaging in various transactions.

These transactions enable us to:

‚ maintain the lowest possible cost of Ñnancing for our mortgage investments;

‚ bring eÇciency to the mortgage market;

‚ manage interest-rate risk, credit risk and other business and market risks; and

‚ enhance our liquidity and capital resources.

Financial instruments created through these transactions may or may not be recorded on our consolidated

balance sheets at their fair value or on a cost basis. A transaction's contractual or notional amount usually does

not equal the related fair value or carrying amount. See ""CRITICAL ACCOUNTING POLICIES AND

ESTIMATES Ì Issuances and Transfers of PCs and Structured Securities'' for more discussion on oÅbalance sheet arrangements.

Guaranty of PCs and Structured Securities

As discussed in ""BUSINESS Ì Credit Guarantee Activities,'' we participate in the secondary mortgage

market by issuing PCs and Structured Securities to third party investors. PCs represent undivided interests in

pools of mortgage loans that are backed by either single-family or multifamily mortgage loans. Structured

Securities represent undivided interests in PCs or other mortgage-related securities issued by either Ginnie

Mae or non-agency issuers. In each case, we guarantee the payment of principal and interest on issued PCs or

Structured Securities. In these transactions, mortgage-related assets that back PCs and Structured Securities

held by third parties are not reÖected as our assets under GAAP, unless we retained an interest in PCs that

back Structured Securities that were issued as part of a sale transaction.

We assume the mortgage credit risk on the mortgages underlying PCs and Structured Securities by

guaranteeing the payment of principal and interest to holders of these securities. We manage this risk

carefully, sharing the risk in some cases with third parties through the use of primary loan-level mortgage

insurance, pool insurance and other credit enhancements. ""NOTE 4: FINANCIAL GUARANTEES'' to the

consolidated Ñnancial statements provides details related to credit protections and maximum coverages that

we obtain through credit enhancements in our credit guarantee activities. Also, see ""RISK MANAGEMENT Ì Credit Risks'' for more information.

Our PCs and Structured Securities are an integral part of our mortgage purchase program and any

decline in the price performance of or demand for our PCs could have a material adverse eÅect on the

proÑtability of our new credit guarantee business.

Most of our credit guarantee activity occurs through the Guarantor Program in the form of mortgage

swap transactions. In a mortgage swap transaction, a mortgage lender delivers mortgages to us in exchange for

PCs that represent undivided interests in those same mortgages. We receive various forms of consideration in

exchange for providing our guarantee on issued PCs, including (i) the contractual right to receive a

management and guarantee fee, (ii) delivery or credit fees for higher-risk mortgages and (iii) other forms of

credit enhancements received from counterparties or mortgage loan insurers.

Most of the remaining credit guarantee activity occurs through our Cash Window or our MultiLender

Program. Single-family mortgage loans we purchase for cash through the Cash Window are typically either

retained by us in our Retained portfolio or pooled together with other single-family mortgage loans we

purchase in connection with PC swap-based transactions in our MultiLender Program executed with various

lenders. We may issue such PCs to these lenders in exchange for the mortgage loans we purchase from them

or, to the extent these loans are pooled with loans purchased for cash, we may sell them to third parties for

cash consideration through an auction.

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In addition to the issuance and transfer of PCs to third parties, we also sell PCs from our Retained

portfolio in resecuritized form. More speciÑcally, we issue single- and multi-class Structured Securities that

are backed by securities held in our Retained portfolio and subsequently transfer such Structured Securities to

third parties in exchange for cash, or for PCs and other mortgage-related securities delivered to us by third

party dealers who sell such Structured Securities to mortgage security investors. We generally earn

resecuritization fees in connection with the creation of Structured Securities and can earn an ongoing

management and guarantee fee for certain issued Structured Securities. Our principal exposure on Structured

Securities relates only to that portion of resecuritized assets that are represented by non-Freddie Mac

mortgage-related securities.

See ""Table 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based

on Unpaid Principal Balances'' for our total PCs and Structured Securities outstanding (held by third parties)

at December 31, 2004 and 2003. Our outstanding PCs and Structured Securities also include:

‚ Structured Securities backed by Ginnie Mae CertiÑcates;

‚ multifamily mortgage loans for which we provide our guarantee of the payment of principal and

interest, and that are originated and held by state and municipal agencies to support tax-exempt

multifamily housing revenue bonds (see ""NOTE 4: FINANCIAL GUARANTEES'' to the

consolidated Ñnancial statements);

‚ tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates issued by

third parties for which we provide our guarantee of the payment of principal and interest;

‚ Freddie Mac pass-through certiÑcates which are backed by tax-exempt housing revenue bonds

and related taxable bonds and/or loans; and

‚ mortgage loans held by third parties for which we provide a credit guarantee.

For our purchase and securitization activity for 2004 and 2003, see ""Table 42 Ì Volume Statistics''.

The accounting policies we apply to our credit guarantee activities signiÑcantly aÅect the volatility of our

reported earnings through the initial recognition of the fair value of guarantee assets and guarantee obligations

in connection with sales of PCs and Structured Securities, the recognition of subsequent gains or losses from

the change in fair value of guarantee assets and PC residuals generated from such sales and the repurchase

and sale of PCs into and out of our Retained portfolio and our Cash and investments portfolio. See

""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-Interest Income (Loss) Ì Management and

Guarantee Income'' for an analysis of management and guarantee income and other aÅected consolidated

statements of income captions related to our credit guarantee activities. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS'' for discussion of our guarantee assets and guarantee obligations. The

accounting and Ñnancial results for our securitization transactions (including gains and losses on transfers of

PCs and Structured Securities that are accounted for as sales and periodic cash Öows on transfers of

securitized interests and corresponding retained interests) and the signiÑcant assumptions used to determine

the gains or losses from such transfers that are accounted for as sales are discussed in ""NOTE 2:

TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' to the consolidated Ñnancial statements. The maximum potential amount of future principal payments we could be required

to make in connection with the unpaid principal balance of all PCs and Structured Securities held by third

parties totaled $852 billion and $752 billion at December 31, 2004 and 2003, respectively. See

""NOTE 4: FINANCIAL GUARANTEES'' to the consolidated Ñnancial statements for additional

information.

Other

We extend other guarantees and provide indemniÑcation to counterparties for breaches of standard

representations and warranties in contracts entered into in the normal course of business based on an

assessment that the risk of loss would be remote. See ""NOTE 4: FINANCIAL GUARANTEES'' to the

consolidated Ñnancial statements for additional information.

We are a party to numerous entities that are considered to be variable interest entities, or VIEs, under

FASB Interpretation No. 46 (Revised December 2003), ""Consolidation of Variable Interest Entities'', or

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FIN 46-R. These VIEs include low-income multifamily housing tax credit partnerships, certain Structured

Securities trusts (T-Series transactions or alternative collateral deals), and certain asset-backed investment

entities. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' to the consolidated Ñnancial statements for

additional information related to our signiÑcant variable interests in these VIEs.

As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments

for mortgage loans and mortgage-related securities. Pursuant to SFAS 133, a portion of these commitments

are accounted for as derivatives under GAAP, with their fair value reported as either Derivative assets, at fair

value or Derivative liabilities, at fair value on the consolidated balance sheets. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Derivative Tables'' for further information. Certain

non-derivative commitments are related to commitments arising from mortgage swap transactions and

commitments to purchase certain multifamily mortgage loans that will be classiÑed as held-for-investment

under GAAP. These non-derivative commitments totaled $183.0 billion and $178.4 billion at December 31,

2004 and 2003, respectively. Such commitments were not accounted for as derivatives in accordance with

SFAS 133 and were not recorded on our consolidated balance sheets at fair value.

We have individually negotiated several arrangements providing for a mortgage lender's commitment to

sell a high proportion of its conforming mortgage origination volume to us. We are exposed to the risk that we

could lose purchase volume to the extent these agreements are terminated or modiÑed without replacement

from other lenders.

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RISK MANAGEMENT

Our business of purchasing mortgages and mortgage-related securities, funding these purchases and

guaranteeing the payment of principal and interest on the mortgage-related securities we issue exposes us to

three broad categories of risk: operational risks, market risk, and credit risk. Managing these risks is a critical

function for us as our eÅectiveness inÖuences our ability to accomplish our mission as well as the level and

stability of our earnings and long-term value. Our strategies for managing operational risks, market risk, and

credit risk are based upon the principle that risk should be understood, measured and managed directly by our

business areas, with appropriate, independent oversight.

Risk Oversight

We oversee business area management of operational, market and credit risks through our Enterprise

Risk Oversight group led by the Chief Enterprise Risk OÇcer, who reports directly to the Chief Executive

OÇcer. The Chief Enterprise Risk OÇcer provides advice to senior management on key risk management

issues and provides reporting on risk matters to the Audit Committee of the Board of Directors. Within the

Enterprise Risk Oversight function, the Operational Risk Oversight group, the Market Risk Oversight group

and the Credit Risk Oversight group each provide independent oversight. Oversight of our financial reporting

processes and internal controls occurs through the Chief Financial OÇcer. The Chief Financial OÇcer

provides overall guidance on the internal controls framework and communicates an assessment of internal

controls to senior management and the Audit Committee of the Board of Directors on a regular basis. The

Chief Financial OÇcer has established an internal controls organization to oversee the adequacy of internal

controls across the enterprise.

Our Internal Audit and Corporate Compliance Divisions play key roles in our risk oversight process.

Internal Audit assesses whether our risk management, control and governance processes are adequate and

functioning eÅectively. Corporate Compliance helps ensure that we comply with statutory and regulatory

requirements, and related corporate policies that govern our business activities. Internal Audit reports to the

Audit Committee. The Chief Compliance OÇcer reports directly to the Chief Executive OÇcer and provides

reports on compliance matters to the Audit Committee.

The Board of Directors oversees risk management through the Audit Committee, the Finance and

Capital Deployment Committee and the Mission and Sourcing Committee. An independent director chairs

each of these Committees.

Operational Risks

Summary

Operational risks represent the potential for Ñnancial loss resulting from failed or inadequate controls with

respect to process, technology, people or external events. Operational risks are present in all of our business

processes, including Ñnancial reporting. While we have made strides in remediating internal control

weaknesses with respect to Ñnancial reporting, we have a signiÑcant number of internal control issues that

have not been fully remediated and considerable challenges remain. Some of these control issues represent

""material weaknesses'' in our internal controls over Ñnancial reporting. We have detailed these material

weaknesses and remediation activities in Ì ""Internal Controls over Financial Reporting''. We have focused

intense eÅort in 2004 on identifying and remediating control design issues; however, we may discover new

control weaknesses as we complete our controls eÅectiveness testing eÅort which is currently underway.

Our process for managing operational risks is to identify, measure, remediate, and monitor all key sources

of operational risks. To improve our ability to manage operational risks, we have undertaken a number of

corporate initiatives. In 2004 we implemented corporate-wide ethics training; an enhanced employee hotline

process for reporting concerns, including those relating to our Ñnancial reporting processes; a revised corporate

disclosure policy; an enhanced Disclosure Committee; and a New Products Committee. We believe these

initiatives have strengthened our entity-level control, and emphasized a ""tone from the top'' of strong integrity

and ethical behavior.

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A major corporate reorganization in early 2005 resulted in a functional organization structure with

responsibilities for operations and technology under a new executive vice president position. We also

completed a full integration of all Ñnancial accounting functions under the Chief Financial OÇcer to enable

greater accountability and role clarity.

Finally, we have undertaken a key initiative to improve our capabilities to better measure our operational

risks. We have deÑned an operational risks framework that we believe is consistent with the Basel II Advanced

Measurement Approach scheduled to be adopted by large U.S. banks. See ""BUSINESS Ì Regulatory and

Governmental Matters Ì Other Regulatory Matters.'' The framework includes common risk language, the

operational loss event, tracking key risk indicators and control self-assessments. We believe that the

implementation of this framework improves our operational risks management capabilities. We are in the early

stage of a multi-year eÅort to fully implement the components of this framework.

Sources of Operational Risks

Process Risk. Process risk includes transaction execution, modeling, and vendor management risk.

Transaction execution risk is mitigated through comprehensive product development processes, suitable

approval authorities, data quality standards and identiÑcation and execution of control procedures. While we

are exposed to the risk of loss from failure to develop or follow appropriate processes for our business

transactions, process risk management enables us to fulÑll our commitment to introduce new products and

programs to improve homeownership opportunities for low- and moderate-income borrowers and to meet our

customers' needs. We have strengthened our controls over the new product process with the creation of a New

Products Committee, designed to clearly identify the requirements for implementing all new product ideas.

We make signiÑcant use of business and Ñnancial models. In 2004, we strengthened our processes to

validate assumptions, model code and theory. We have enhanced our oversight processes, including

establishing a corporate function to focus on the key models used in management decisions and Ñnancial

reporting. While controls over model risk have been enhanced, signiÑcant eÅorts remain with respect to

controls over model applications. We plan to further remediate model oversight issues during 2005.

Vendor management is critical for us because we currently outsource to external parties certain key

functions. These functions include processing functions for trade capture, market risk management analytics,

asset valuation (Blackrock Financial Management, Inc.), and processing functions for mortgage loan

underwriting (Electronic Data Systems Corporation). We may enter into similar outsourcing relationships in

the same or other business areas in the future. If one or more of these key external parties were not able to

perform their functions for a period of time or at an acceptable service level, there is a risk that our Ñnancial

condition or results of operations would be adversely aÅected, perhaps materially. Our use of vendors also

exposes us to the risk of a loss of intellectual property or a breach of conÑdentiality or other harm. We

endeavor to mitigate these risks through detailed vendor requirements, active vendor management, legal

contracts, business continuity planning, and third party review of vendors. In addition, to ensure the integrity

of data used in Ñnancial reporting, we have implemented quality assurance processes valuations and processes

performed by Blackrock.

Technology Risk. Technology risk includes the risk of inadequate or failed systems, inappropriate

systems implementation and inadequate system security that allows unauthorized access to computer systems.

We monitor computer security measures and applications and we use corporate information access policies

and periodic access reviews to verify that only authorized personnel have access to our systems. We identiÑed

material weaknesses related to system security, change management and information technology application

and general controls during our control reviews in 2004. These weaknesses related not only to Ñnancial

reporting systems, but other business applications as well. Remediation eÅorts to correct these weaknesses

began in 2004 and will continue through 2005. See ""Internal Controls over Financial Reporting'' for more

information concerning internal control issues related to our systems.

We are making signiÑcant investments to build new Ñnancial reporting systems and to move to more

eÅective and eÇcient business processing systems. During the transition period, however, we are more reliant

on end-user computing systems than we prefer. End-user computing systems increase the risk of errors in

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some of our core operational processes and increase our reliance on monitoring controls. In addition, changes

in management controls for these systems required signiÑcant enhancement in 2004. We are mitigating this

risk by improving our documentation and moving responsibility for key end-user systems to the Information

Technology Group. See ""Ì Internal Controls over Financial Reporting'' for more information concerning

end-user system issues and mitigation activities.

People Risk. People risk includes the risk of inadequate or unqualiÑed staÇng, as well as the risk of

employee errors and internal fraud. We mitigate this risk at the entity-level through the use of professional

recruiting staÅ, employee screening and targeted retention actions. At the business-unit level this risk is

mitigated by employee training and development activities and supervisory review of staÅ. People risk was

generally a signiÑcant risk during 2003 and, to a lesser extent, during 2004, with large staÅ additions in both

the accounting and information technology areas to address Ñnancial reporting processes and control

remediation. During 2003 and 2004, we also made extensive use of consultants. In the fourth quarter of 2004

the use of consultants began to decline signiÑcantly. This trend has continued in 2005, and while people risk is

still elevated, it has begun to decline.

External Event Risk. We are exposed to the risk that a catastrophic event, such as a terrorist event or

natural disaster, could result in a signiÑcant business disruption and an inability to process transactions

through normal business processes. To mitigate this risk, we maintain and test a business continuity plan and

have established backup facilities for critical business processes and systems away from, although in the same

metropolitan area as, our main oÇces. In 2004, we began an eÅort to determine the feasibility of establishing

an alternate site for critical business processes that has a separate power grid, labor pool and geographic

location. We are in the early phases of this eÅort.

We are also exposed to the risk that our sellers or servicers misrepresent the mortgages they sell to us, or

sell or service these mortgages in a manner inconsistent with our selling requirements or servicing guidelines,

and as a result, adversely aÅect our income or asset values. We rely on a variety of preventative and detective

controls to mitigate this risk. In particular, we use quality control reports and reviews, on-site audits and

investigations of situations involving possible fraud to identify problems. We also require sellers and servicers

to represent and warrant to us that the loans they sell to us or service for us meet our standards. We impose

minimum net worth, insurance and other eligibility requirements to help ensure that our sellers and servicers

have the capability and incentive to meet our standards. See ""Credit Risks'' and ""BUSINESS Ì Predatory

Lending'' for more information on how we manage the risk of sellers and servicers.

Internal Controls over Financial Reporting

Improving internal controls over Ñnancial reporting and addressing material weaknesses were top

priorities in 2004 and continue to be in 2005. As we are working to strengthen our control environment we

focused on managing the operational risks related to inaccurate or incomplete Ñnancial reporting to our

stakeholders. Throughout 2004, there were a number of material weaknesses and other control deÑciencies in

our internal controls over Ñnancial reporting that required our attention. They were:

‚ signiÑcant integration issues among numerous core business, accounting, and external service

provider operations and over-reliance on end-user computing systems for certain major activities;

‚ inadequate controls over data input and systems limitations in Ñnancial processes;

‚ inadequate supervisory review of the preparation of journal entries in certain accounting units;

‚ end-user computing solutions with both insuÇcient documentation and change controls;

‚ inadequate staÇng and systems to support the appropriate scope of independent price veriÑcation

of Ñnancial instruments used in the preparation of Ñnancial statements;

‚ lack of formal change management and oversight processes over certain models used to support

Ñnancial reporting;

‚ insuÇcient monitoring controls within Ñnancial operations and related reporting functions;

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‚ insuÇcient documentation controls regarding roles and responsibilities related to certain data

correction activities;

‚ technology implementation control deÑciencies, including changes in management processes that

allow access to production environments by developers; and

‚ access by some business end-users to production databases.

In order to compensate for these material weaknesses we have had to perform extensive veriÑcation and

validation procedures to ensure our Ñnancial statements are fairly presented in accordance with GAAP. This

work began with the completion of process documentation for our controls over Ñnancial reporting and an

internal review to assess the design of internal controls over these processes. Our objective was to assess the

quality of the controls design and to initiate substantive actions to improve any design weaknesses. This eÅort

identiÑed additional material weaknesses in our controls design related to:

‚ lack of documentation and evaluation of information technology general and application controls;

‚ weaknesses in certain processes surrounding the accounting for security impairment; and

‚ weaknesses in management's processes for identifying deÑciencies in controls over Ñnancial

reporting.

We undertook considerable work in 2004 to address the risks of the material weaknesses in our Ñnancial

reporting processes. This work resulted in the risks related to many weaknesses either being fully remediated

or reduced. However, as of the end of 2004, we still had several material weaknesses within our Ñnancial

reporting controls. These weaknesses must be monitored closely and compensating procedures must be

executed to ensure there is no material impact to our Ñnancial reporting. We continue to place considerable

management emphasis on the development and execution of plans to reduce and eventually eliminate the risk

associated with these remaining weaknesses. The remaining material weaknesses as of December 31, 2004

include:

‚ end-user computing controls;

‚ monitoring controls within Ñnancial operations;

‚ information technology general and application controls;

‚ management risk and control self-assessment process; and

‚ integration between Operations and Finance.

In 2004 the focus was on improving the controls design and in addressing design weaknesses in our

Ñnancial reporting controls. We plan to remediate the existing material weaknesses described above by the end

of 2005, except for the material weakness related to integration between Operations and Finance. For this

weakness, we will apply risk reduction techniques in 2005, but do not expect to remediate fully until 2006.

Further, we are addressing other control deÑciencies that are not material weaknesses, as they still represent

risks in our control environment.

The next step in our plan is to test the operating eÅectiveness of the controls over Ñnancial reporting.

Controls testing will provide evidence that the controls are working as designed, or will indicate where we have

deÑciencies. Additionally, we are pursuing actions to fully document and test our entity-level controls and

controls over third party vendors. Entity-level controls include components such as: our Code of Conduct,

employee hotline, anti-fraud program and compliance program. Third party controls are those controls that

ensure the information and services we receive from third party vendors are well controlled and meet our

quality requirements.

There are continued risks to our Ñnancial reporting timeline as we strive to fully remediate the remaining

material weaknesses and enhance our internal control environment. As we execute testing we may also

encounter additional material weaknesses that we need to address. We manage these timeline and scope risks

through a centralized internal controls and program management oÇce with signiÑcant involvement of key

executives.

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Interest-Rate Risk and Other Market Risks

We are exposed to the risk that changes in interest rates or in other market factors will adversely aÅect

our cash Öows, the fair value of net assets and/or future earnings. We take an active and disciplined approach

to the management of these risks. Our disciplined approach to risk management is essential to generating fair

value growth for stockholders in a wide range of interest-rate environments. Our interest-rate risk exposure

results primarily from mortgage loans and mortgage-related securities held in our Retained portfolio and the

liabilities funding this portfolio. To a lesser extent, we are also exposed to interest-rate risk through our credit

guarantee activities.

Oversight of Interest-Rate Risk and Other Market Risks

The purpose of the Market Risk Oversight group is to provide independent oversight of market risk,

including interest-rate risk, and to enhance our market risk measurement and management capabilities so that

they are consistent with industry best practice. Market Risk Oversight fulÑlls its mission by reporting to senior

management concerning the key investment strategies and market risks taken throughout the corporation, the

consistency of market risk positions with stated strategies and the appropriateness of limits and policies related

to risk exposure. The Models and Methods group, also a part of the Enterprise Risk Oversight function, is

responsible for independently assessing the design and adequacy of all key models, including prepayment

models.

Sources of Interest-Rate Risk and Other Market Risks

Retained Portfolio. Our Retained portfolio activities expose us to interest-rate risk and other market

risks. This exposure results primarily from the uncertainty as to when borrowers will pay the outstanding

principal balance of mortgage loans and mortgage-related securities held in the Retained portfolio, known as

prepayment risk, and the resulting potential mismatch in the timing of our receipt of cash Öows on our assets

versus the timing of our obligation to make payments on our liabilities. For the vast majority of our mortgagerelated investments, the mortgage borrower has the option to make unscheduled payments of additional

principal or to completely pay oÅ a mortgage loan at any time before its scheduled maturity date (without

having to pay prepayment penalties) or to hold the mortgage to its stated maturity. The borrower's option

makes the timing and amount of mortgage prepayments (and thus the timing and amount of mortgage cash

Öows received by us) very sensitive to changes in interest rates, among other factors.

The Retained portfolio comprises mortgage investments with a range of diÅerent characteristics,

including diÅerent stated maturities, underlying collateral, principal and interest payment structures and

prepayment patterns. To manage the interest-rate risk associated with this wide range of mortgage-related

investments, we employ a risk management strategy that seeks to substantially match the duration

characteristics of our assets and liabilities. We use various instruments, including short-term debt, callable and

non-callable long-term debt and interest-rate derivatives, to mitigate the risk that mortgage investments may

prepay faster or slower than expected.

The types of interest-rate risk and other market risks to which we are exposed through our Retained

portfolio are described below.

‚ Duration Risk. Duration is a measure of a Ñnancial instrument's price sensitivity to changes in

interest rates. We actively manage duration risk through asset selection and structuring (that is,

by identifying or structuring mortgage-related securities with attractive prepayment and other

characteristics), by issuing a broad range of both callable and non-callable debt instruments and

by transacting in interest-rate derivatives.

We monitor duration against limits and reporting thresholds established by senior management

and the Board of Directors. Our interest-rate sensitivity is estimated and reported through our

PMVS and duration gap measures. These measures are estimated on a daily basis and publicly

reported on a monthly basis. See ""Measurement of Interest-Rate Risk'' below.

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Although duration risk has been maintained at relatively low levels as indicated by our PMVS and

duration gap estimates (see ""Measurement of Interest-Rate Risk Ì PMVS and Duration Gap''),

fair value gains or losses will generally occur as market conditions change. For example, fair value

gains or losses occur when our duration gap is positive or negative and the level of interest rates or

shape of the yield curve changes.

‚ Convexity Risk. Convexity is a measure of how much duration changes as interest rates change.

Convexity risk primarily results from mortgage prepayment risk. We actively mitigate this risk by

maintaining a high percentage of callable debt and option-based derivatives relative to the Ñxedrate mortgage assets held in the Retained portfolio.

We do not, however, hedge all prepayment option risk that exists at the time a mortgage is

purchased or that arises over its life. For the portion of risk not hedged at the time of purchase, we

undertake frequent rebalancing actions in order to keep our interest-rate risk exposure within our

internal limits (see ""Use of Derivatives and Interest-Rate Risk Management Ì Use of Derivatives Ì Adjust Funding Mix'' below). Although convexity risks have been maintained at relatively

low levels as indicated by our PMVS estimate (see ""Measurement of Interest-Rate Risk Ì

PMVS and Duration Gap''), fair value gains or losses will generally occur as market conditions

change. For example, because we do not hedge all of the prepayment risk inherent in our

mortgage investment portfolio, fair value gains or losses occur from changes in the relationship

between interest-rate volatility expected at the time a mortgage loan is acquired and the volatility

actually experienced (see ""Volatility Risk'' below for more information).

‚ Yield Curve Risk. Yield curve risk is the risk that non-parallel shifts in the yield curve (such as

a Öattening or steepening) will adversely aÅect our cash Öows, fair value of net assets and/or

future earnings. Changes in the shape, or slope, of the yield curve often arise due to changes in the

market's expectation of future interest rates at diÅerent points along the yield curve, including

expectations regarding action by the Federal Reserve Board. For this reason, we evaluate our

exposure to yield curve risk by examining potential reshaping scenarios at various points along the

yield curve. Our yield curve risk under a speciÑed yield curve scenario is reÖected in our PMVSYield Curve, or PMVS-YC, disclosure.

‚ Volatility Risk. Volatility risk is the risk that changes in the market's expectation of the

magnitude of future variations in interest rates will adversely aÅect our cash Öows, fair value of net

assets and/or future earnings. The market's expectation about the future volatility of interest rates,

or implied volatility, is a key determinant of the value of an interest-rate option. Higher expected

volatility implies a greater likelihood that the expected life of a mortgage asset will either extend

or contract. For example, higher interest-rate volatility implies a higher likelihood that interest

rates will decline to levels that make mortgage prepayments attractive to homeowners, thereby

making their prepayment option more valuable and making our mortgage assets subject to their

prepayment option less valuable. We manage volatility risk through asset selection and by

maintaining a consistently high percentage of option-embedded liabilities (e.g., callable debt) and

option-based derivatives relative to our mortgage assets. We monitor volatility risk by measuring

exposure levels on a daily basis and we maintain internal limits on the amount of volatility risk

exposure.

‚ Basis Risk. Basis risk is the risk that interest rates in diÅerent market sectors will not move in

tandem and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.

This risk arises principally because we hedge mortgage-related investments with LIBOR- and

Treasury-based interest-rate derivatives. We do not actively manage the basis risk arising from

funding Retained portfolio investments with our debt securities, also referred to as mortgage-todebt option-adjusted spread risk. See ""CONSOLIDATED FAIR VALUE BALANCE

SHEETS Ì Key Components of Changes in Fair Value of Net Assets Ì EÅect of changes in

option-adjusted spread (mortgage-to-debt spread)'' for additional information. We also incur

basis risk when we use LIBOR- or Treasury-based instruments in our risk management activities.

We monitor the fair value Öuctuations associated with these basis risks and manage this exposure

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by adjusting our mix of LIBOR- and Treasury-based instruments and our debt in response to

changes in the expected interest-rate relationships in these diÅerent markets. We monitor basis

risk on a daily basis and maintain internal limits on the amount of basis risk exposure.

‚ Prepayment Model Risk. Prepayment model risk is the risk that actual mortgage prepayment

behavior will diÅer from the prepayment behaviors we forecast using our proprietary internal

models and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.

These models are used to determine the estimated duration and convexity of mortgage assets for

our PMVS and duration gap measures. To mitigate prepayment model risk, we perform extensive

monthly testing of actual results against model results and sensitivity analysis to facilitate

informed asset selection and risk management decisions. However, expected returns can be

aÅected by diÅerences between prepayments forecasted by the models and actual prepayments.

‚ Foreign Currency Risk. Foreign currency risk is the risk that Öuctuations in currency exchange

rates (e.g., foreign currencies to the U.S. dollar) will adversely aÅect our cash Öows, fair value of

net assets and/or future earnings. Our exposure to foreign currency risk arises primarily because

we issue debt denominated in currencies other than the U.S. dollar, our functional currency. In

the case of our 4Reference Notes» securities program, we are obligated to make periodic interest

and principal payments in Euros. We mitigate the risk associated with Öuctuations in currency

exchange rates by entering into swap transactions that eÅectively convert foreign-denominated

obligations into U.S. dollar denominated obligations.

Credit Guarantee Activities. Changes in interest rates and credit expectations cause Öuctuations in the

fair value of our existing credit guarantee portfolio. We do not hedge these changes in the fair value of our

existing credit guarantee portfolio, other than the interest-rate exposure related to net buy-ups. We also hedge

expected gains or losses resulting from our mortgage security program cycles. Timing diÅerences caused by

mortgage security program cycles can lead to signiÑcant interest expense, particularly in a rapidly declining

interest-rate environment. If the interest rate paid to a PC investor is higher than the reinvestment rate on

payments received from mortgage borrowers, we bear the cost diÅerence, recognized as interest expense, for

the time period between when the borrower pays us and when we reduce the PC balance.

While year-to-year changes in the fair value of the guarantee portfolio may have a signiÑcant impact on

the fair value of net assets, we believe that changes in the fair value of our existing guarantee portfolio are not

a good indication of long-term fair value expectations because such changes do not reÖect the strong

probability that, over time, replacement business will largely replenish guarantee fee income lost because of

prepayments.

Use of Derivatives and Interest-Rate Risk Management

Use of Derivatives. To manage interest-rate and other market risks, we use derivatives primarily to:

‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;

‚ hedge foreign-currency exposure associated with certain debt issuances; and

‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the

interest-rate characteristics of our mortgage assets.

Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase

mortgage investments on an opportunistic basis for a future settlement date that often ranges from two weeks

to three months after the date of the commitment. To facilitate larger and more predictable debt issuances

that contribute to lower funding costs, we use interest-rate derivatives to hedge the anticipated debt issuances

associated with these periodic mortgage purchases. In doing so, we economically hedge the interest-rate risk

exposure from the time the mortgage is committed to be purchased to the time the debt is issued. We typically

fund mortgage investments with a combination of callable and non-callable debt of various maturities in order

to better match the cash-Öow and optionality characteristics of the mortgage investments. Through the use of

interest-rate derivatives, we can synthetically create the substantive economic equivalent of these various

funding structures. For example, the combination of a series of short-term debt issuances over a deÑned

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longer-term period and a pay-Ñxed swap with the same maturity is the substantive economic equivalent of a

long-term debt instrument of comparable maturity. Similarly, the combination of non-callable debt and a

swaption, or option to enter into a receive-Ñxed swap, with the same maturity as the non-callable debt, is the

substantive economic equivalent of callable debt. The ability to either issue debt or synthetically create its

substantive economic equivalent through derivatives increases funding Öexibility, allows us to better match

asset and liability cash Öows and often reduces the overall funding cost.

Hedge Foreign-Currency Exposure. We also use derivatives to hedge foreign-currency exposure

associated with foreign currency denominated debt issuances, such as our 4Reference Notes» securities

program, as discussed above in ""Sources of Interest-Rate Risk and Other Market Risks Ì Retained

Portfolio Ì Foreign Currency Risk.'' Through the use of derivatives, we are able to mitigate nearly all

currency risk at the time of debt issuance.

Adjust Funding Mix. As market conditions dictate, we undertake rebalancing actions in order to keep

our interest-rate risk exposure within management limits. As interest rates decline, mortgage prepayments

tend to increase and the expected life of mortgages tends to decrease. In this environment, we typically enter

into receive-Ñxed swaps or purchase Treasury-based derivatives to adjust the duration of our funding to oÅset

the declining mortgage duration. As interest rates increase, prepayments tend to decrease and lengthen the

expected life of mortgages. In this case, we typically enter into pay-Ñxed swaps or sell Treasury-based

derivatives in order to adjust the duration of our funding to oÅset increasing mortgage duration.

Types of Derivatives. We use derivatives that are common in the Ñnancial markets to conduct our risk

management activities. The majority of our derivative positions fall into the following four categories:

‚ LIBOR-based interest-rate swaps;

‚ LIBOR- and Treasury-based exchange-traded futures;

‚ LIBOR- and Treasury-based options (including swaptions); and

‚ Foreign currency swaps.

In addition to swaps, futures and options, our derivative positions include certain purchase and sale

commitments and other contractual agreements including swap guarantee derivatives and credit risk-sharing

agreements discussed further below.

Forward Purchase and Sale Commitments. We routinely enter into forward purchase and sale

commitments for mortgage loans and mortgage-related securities. Most of these commitments are derivatives

subject to the requirements of SFAS 133 and accordingly must be recorded at fair value on our consolidated

balance sheets.

Prepayment Management Agreement. Practices of seller/servicers may aÅect prepayment levels on

mortgages that underlie PCs. As a result, mortgages underlying some PCs may be prepaid faster than similar

mortgages underlying other PCs, adversely aÅecting our management and guarantee income and the

performance of our mortgage-related securities. We have taken steps to achieve prepayment experience on

PCs that is consistent with market norms. Beginning in 2002, we required that certain mortgage pools

delivered to us between 2001 and 2003, which we considered to pose elevated risk of prepayment, be covered

by a prepayment management agreement to partially compensate us for the adverse Ñnancial impacts caused

by disproportionately higher mortgage prepayments. We also oÅered an incentive through an adjusted

guarantee fee level on certain mortgage deliveries when the prepayment experience of the mortgage pools is

within deÑned ranges. This type of agreement is accounted for as a derivative in accordance with SFAS 133

and classiÑed as no hedge designation, with changes in fair value recorded as Derivative gains (losses) on the

consolidated statements of income. This type of agreement is reÖected at fair value on our consolidated

balance sheets in the Derivative assets, at fair value, or Derivative liabilities, at fair value, caption. At

December 31, 2004 and 2003, approximately $113.7 billion and $152.5 billion, respectively, of the mortgages

underlying PCs included in our Total mortgage portfolio (see ""Table 8 Ì Freddie Mac's Total Mortgage

Portfolio Based on Unpaid Principal Balances'') were subject to this type of agreement. Amounts due to us

under this type of agreement are reported as a component of our Management and guarantee income.

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Swap Guarantee Derivatives. We guarantee the payment of principal and interest on (a) multifamily

mortgage loans that are originated and held by state and municipal housing Ñnance agencies to support taxexempt multifamily housing revenue bonds, (b) tax-exempt multifamily housing revenue bonds that support

pass-through certiÑcates issued by third parties, and (c) Freddie Mac pass-through certiÑcates which are

backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans. In

connection with these guarantees we have also guaranteed the sponsor's or the borrower's performance as a

counterparty on any related interest-rate swaps used to mitigate interest-rate risk. Guarantees of these

interest-rate swaps entered into after June 30, 2003 are treated as derivatives in accordance with SFAS 149

and are reported as swap guarantee derivatives. The notional amount of these swap guarantees was

$408 million and $31 million at December 31, 2004 and 2003, respectively.

Summary of Derivative Positions. The fair value of our derivatives was a net asset balance of

$15.0 billion and $15.8 billion at December 31, 2004 and 2003, respectively. In our consolidated balance

sheets, derivative instruments are presented in Derivative assets, at fair value or Derivative liabilities, at fair

value. See ""Table 35 Ì Total Derivative Portfolio'' for a summary of notional amounts and fair values by

product type.

Derivative-Related Risks

Our use of derivatives exposes us to derivative market liquidity risk and counterparty credit risk. We are

subject to derivative market liquidity risk, described below, arising from possible diÇculties in entering into

and exiting out of derivatives to meet our needs. Counterparty credit risk arises from the possibility that the

counterparty will not be able to meet its contractual obligations.

Derivative Market Liquidity Risk. Derivative market liquidity risk is the risk that we may not be able to

enter into or exit out of derivative transactions at a reasonable cost. A lack of suÇcient capacity or liquidity in

the derivatives market could limit our risk management activities, increasing our exposure to interest-rate risk.

Limited liquidity or capacity in the derivatives market could make derivatives that we need for risk

management purposes either unavailable or prohibitively expensive. To help maintain continuous access to

derivative markets, we use a variety of products and transact with many diÅerent derivative counterparties. In

addition to over-the-counter, or OTC, derivatives, we also use exchange-traded derivatives, asset securitization

activities, callable debt, and short-term debt to rebalance our portfolio.

To mitigate the risk that we may be unable to enter into or replace derivatives transactions at reasonable

cost, we limit our duration and convexity exposure to each counterparty. At December 31, 2004, the largest

single notional balance of our 25 approved OTC counterparties listed in ""Table 50 Ì Derivative Counterparty

Credit Exposure'' was $60.9 billion, or 13 percent, of the total notional balance of our OTC interest-rate

swaps, option-based derivatives and foreign currency swaps.

Derivative Counterparty Credit Risk. Exchange-traded derivatives, such as futures contracts, do not

measurably increase our counterparty credit risk because changes in the value of open exchange-traded

contracts are settled daily through a Ñnancial clearinghouse established by each exchange. OTC derivatives,

however, expose us to counterparty credit risk because transactions are executed and settled between us and

the counterparty. When an OTC derivative has a market value above zero at a given date (i.e., an asset

reported as Derivative assets, at fair value on the consolidated balance sheets), then the counterparty could

potentially be obligated to deliver cash, securities or a combination of both having that market value to satisfy

its obligation to us under the derivative.

We actively manage our exposure to counterparty credit risk. We use several tools to manage and

minimize counterparty credit risk including:

‚ review of external rating analyses;

‚ strict standards for approving new derivative counterparties;

‚ ongoing monitoring of our positions with each counterparty by type of derivative;

‚ diversiÑcation of counterparties (discussed under ""Derivative Market Liquidity Risk'');

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‚ master netting agreements and collateral agreements; and

‚ stress-testing to evaluate potential exposure under possible adverse market scenarios.

On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to conÑrm

that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are assigned to

each counterparty based on quantitative and qualitative analysis, which we update and monitor on a regular

basis. Additional reviews are completed when market conditions dictate or events aÅecting an individual

counterparty occur.

Derivative Counterparties. Our standards for entering into OTC interest-rate swaps, option-based

derivatives and foreign-currency swaps include rigorous internal credit and legal reviews. Our derivative

counterparties carry external credit ratings among the highest available from major rating agencies. All of

these counterparties are major Ñnancial institutions and are experienced participants in the OTC derivatives

market.

Master Netting and Collateral Agreements. We use master netting and collateral agreements to reduce

our credit risk exposure to our active OTC derivative counterparties for interest-rate swaps, option-based

derivatives and foreign-currency swaps. Master netting agreements provide for the netting of amounts

receivable and payable from an individual counterparty, which reduces our exposure to a single counterparty in

the event of default. For example, if we have a gain position on one derivative and a loss position on another

derivative with the same counterparty, then the gain can be netted with the loss to determine the amount of

our net exposure to the counterparty. On a daily basis, the market value of each counterparty's derivatives

outstanding is calculated to determine the amount of our net credit exposure, which is equal to derivatives in a

net gain position by counterparty after giving consideration to collateral posted. Our collateral agreements

require most counterparties to post collateral for the amount of our net exposure to them above the applicable

threshold. Collateral posting thresholds are generally tied to a counterparty's credit rating. Derivative

exposures and collateral amounts are monitored on a daily basis using both internal pricing models and dealer

price quotes. Our derivative counterparties typically transfer collateral within one to three business days based

on the values of the related derivatives. As described further below, this time lag in posting collateral can

aÅect our net uncollateralized exposure to derivative counterparties.

The collateral posted by counterparties serves to protect us against the risk of counterparty credit losses.

Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities, agency

securities or other mortgage-related securities. In the event a counterparty defaults on its obligations under the

derivatives agreement and the default is not remedied in the manner prescribed in the agreement, we have the

right under the agreement to direct the custodian bank to transfer the collateral to us or, in the case of noncash collateral, to sell the collateral and transfer the proceeds to us.

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Table 50 summarizes our exposure to counterparty credit risk in our derivatives. This table is useful in

understanding our credit risk related to our derivative portfolio.

Table 50 Ì Derivative Counterparty Credit Exposure

December 31, 2004

Weighted Average

Total Exposure, Contractual

Number of Notional Exposure at Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Amount Fair Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 3,041 $ 498 $498 2.5 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 597 399 32 23.9 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 110,692 3,096 25 4.4 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 135,041 5,199 36 5.2 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 153,867 6,505 Ì 5.1 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 56,530 1,478 8 5.1 $1 million or less

A- ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 210 11 2 7.0 $1 million or less

Subtotal(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 459,978 17,186 601 5.0

Other derivatives(8) ÏÏÏÏÏÏÏÏÏÏ 138,822 Ì Ì

Prepayment management

agreement(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,692 Ì Ì

Commitments(10) ÏÏÏÏÏÏÏÏÏÏÏÏ 32,952 40 40

Credit derivatives(11) ÏÏÏÏÏÏÏÏÏ 10,926 Ì Ì

Swap guarantee derivatives(9)ÏÏ 408 Ì Ì

Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ $756,778 $17,226 $641

December 31, 2003

Weighted Average

Total Exposure, Contractual

Number of Notional Exposure at Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Amount Fair Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 2,825 $ 283 $283 3.6 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 604 303 5 24.7 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 119,409 1,610 29 4.6 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 237,048 7,091 250 4.1 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 236,944 5,922 133 5.4 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 87,001 2,143 95 5.2 $1 million or less

A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 1,018 19 1 3.3 $1 million or less

Subtotal(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 684,849 17,371 796 4.8

Other derivatives(8) ÏÏÏÏÏÏÏÏÏÏ 141,381 Ì Ì

Prepayment management

agreement(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,548 Ì Ì

Commitments(10) ÏÏÏÏÏÏÏÏÏÏÏÏ 89,520 101 101

Credit derivatives(11) ÏÏÏÏÏÏÏÏÏ 15,542 7 7

Swap guarantee derivatives(9)ÏÏ 31 Ì Ì

Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ $1,083,871 $17,479 $904

(1) We use the lower of S&P and Moody's ratings to manage collateral requirements. In this table, the rating of the legal entity (or the

guarantor of the legal entity) is stated in terms of the S&P equivalent.

(2) Based on legal entities. AÇliated legal entities are reported separately.

(3) For each counterparty, this amount includes derivatives with a net positive fair value (recorded as Derivative assets, at fair value)

including the related accrued interest receivable/payable (net) (recorded in Accounts and other receivables, net and Accrued

interest payable).

(4) Total Exposure at Fair Value less collateral held as determined at the counterparty level.

(5) Counterparties are required to post collateral when their exposure exceeds agreed-upon collateral posting thresholds. These

thresholds are typically based on the counterparty's credit rating and are individually negotiated.

(6) At December 31, 2004, two of our derivative counterparties were rated AAA. In early 2005, one of these counterparties was

downgraded to AA°. With respect to this downgraded counterparty, there was no Total Exposure at Fair Value at December 31,

2004 as the fair value of the underlying derivatives were in a net liability position at that date.

(7) Consists of OTC derivative agreements for interest-rate swaps, option-based derivatives, excluding written options, and foreign-currency swaps. Written options do not present counterparty credit exposure, because we receive a one-time up-front premium in exchange for giving the holder the right to execute a contract under speciÑed terms, which generally puts us in a liability position.

(8) Consists primarily of exchange-traded contracts, which do not measurably increase our exposure to counterparty credit risk because changes in value of open exchange-traded contracts are settled daily through a Ñnancial clearinghouse established by each

exchange.

(9) See ""Use of Derivatives and Interest-Rate Risk Management Ì Types of Derivatives'' for additional information concerning the

nature of the prepayment management agreement and swap guarantee derivatives.

(10) Consists of OTC derivative agreements for forward purchase and sale commitments.

(11) See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for additional information about

credit derivatives.

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Over time, our exposure to certain counterparties for OTC interest-rate swaps, option-based derivatives

and foreign-currency swaps varies depending on changes in fair values which are aÅected by changes in

period-end interest rates, the implied volatility of interest rates, foreign-currency exchange rates and the

amount of derivatives held. Our uncollateralized exposure to counterparties for OTC interest-rate swaps,

option-based derivatives and foreign-currency swaps, after applying netting agreements and collateral,

decreased to $601 million as of December 31, 2004 from $796 million as of December 31, 2003. This decrease

in uncollateralized exposure was due to the following three factors:

‚ decreases in the diÅerences between fair value estimates used by our derivative counterparties in

determining the value of collateral to be posted and the estimates of derivative fair values used in

our Ñnancial reporting;

‚ smaller market movements during the time period between when a derivative was marked to fair

value and the date we received the related collateral. Our derivative counterparties typically post

collateral one to three business days after we request collateral; and

‚ decreases in the exposure below the posting thresholds of our derivative counterparties.

As indicated in Table 50, approximately 97 percent of our counterparty credit exposure for OTC interestrate swaps, option-based derivatives and foreign currency swaps was collateralized at December 31, 2004. In

the extremely unlikely event that all of our counterparties for these derivatives were to have defaulted

simultaneously on December 31, 2004, our maximum loss for accounting purposes would have been

approximately $601 million. As discussed below, in ""Derivative Portfolio Stress-Testing,'' however, our

economic loss, as measured by our potential additional uncollateralized exposure, may be higher than the

$601 million uncollateralized exposure of our derivatives if we were not able to replace the defaulted

derivatives in a timely fashion.

OTC Forward Purchase and Sale Commitments Treated as Derivatives. Since the typical maturity for our

OTC commitments is less than one year, we do not require master netting and collateral agreements for the

counterparties of these commitments. Therefore, as indicated in Table 50, the exposure to OTC commitments

counterparties of $40 million and $101 million as of December 31, 2004 and 2003, respectively, was

uncollateralized. The decrease in uncollateralized exposure was due to a signiÑcant decrease in the volume of

unsettled commitments as of December 31, 2004, which contributed to the reduction of notional amounts for

OTC commitments treated as derivatives.

Similar to counterparties for OTC interest-rate swaps, option-based derivatives and foreign-currency

swaps, we monitor the credit fundamentals of our OTC commitments counterparties on an ongoing basis to

ensure that they continue to meet our internal risk-management standards.

Derivative Portfolio Stress-Testing. Market values of derivatives can change signiÑcantly when market

conditions change. As a result, we monitor the risk that our uncollateralized exposure to each of our OTC

counterparties for interest-rate swaps, option-based derivatives and foreign-currency swaps will increase under

certain adverse market conditions. We perform severe market stress tests on a daily basis to evaluate the

potential additional uncollateralized exposure we have to each of these derivative counterparties. The market

stress test assumes changes in the level, slope and implied volatility of interest rates and changes in foreigncurrency exchange rates over a brief time period. The market stress test also assumes high OTC counterparty

default rates coupled with low recovery rates to calculate our potential exposure to each OTC counterparty.

To date, we have not incurred any credit losses on OTC derivative counterparties or set aside speciÑc

reserves for institutional credit risk exposure. We do not believe such reserves are necessary, given our

counterparty policies and collateral requirements.

Derivative Tables

Table 51 shows the notional amount for each of our hedge accounting categories under SFAS 133 and

the corresponding impact of those positions on our consolidated Ñnancial statements. The application and

eÅectiveness of our hedging strategies can materially aÅect Stockholders' equity and the timing of our

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recognition of earnings. See ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements for more

information concerning our hedging activity.

Table 51 Ì Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions

Consolidated Balance Sheets

Description December 31, 2004 December 31, 2003

Notional Fair Value AOCI Notional Fair Value AOCI

Amount (Pre-Tax)(1) (Net of Tax)(2) Amount (Pre-Tax)(1) (Net of Tax)(2)

(dollars in millions)

Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $113,101 $12,317 $ Ì $ 145,690 $10,185 $ Ì

Cash Öow hedges-openÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,214 228 (25) 141,903 (2,808) (1,927)

No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 622,463 2,486 Ì 796,278 8,446 Ì

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 756,778 15,031 (25) 1,083,871 15,823 (1,927)

Balance related to closed cash Öow hedges ÏÏÏ Ì Ì (7,899) Ì Ì (5,910)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $756,778 $115,031 $(7,924) $1,083,871 $15,823 $(7,837)

Consolidated Statements of Income

Year Ended Year Ended Year Ended

Description December 31, 2004 December 31, 2003 December 31, 2002

Hedge Hedge Hedge

Accounting Derivative Accounting Derivative Accounting Derivative

Gains Gains Gains Gains Gains Gains

(Losses)(4) (Losses)(5) (Losses)(4) (Losses)(5) (Losses)(4) (Losses)(5)

(dollars in millions)

Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $742 $ Ì $697 $Ì $241 $ Ì

Cash Öow hedges-openÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 2 (53) 29 (54) 116

No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (4,477) Ì 10 Ì 5,186

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $743 $(4,475) $644 $39 $187 $5,302

(1) The fair values of derivatives (netted by counterparty as permitted by GAAP) are presented as Derivative assets, at fair value, and

Derivative liabilities, at fair value, on our consolidated balance sheets. The fair values for futures are directly derived from quoted

market prices. Fair values of other derivatives are derived primarily from valuation models with incorporation of market-based inputs.

(2) Derivatives that meet speciÑc criteria are accounted for as cash Öow hedges under SFAS 133. Changes in the eÅective portion of the

fair value of these open derivatives contracts are recorded in AOCI, net of taxes. Net deferred gains and losses on closed cash Öow

hedges (i.e., where the derivative is either terminated or redesignated) are also classiÑed in AOCI, net of taxes, until the related

forecasted transaction is determined to be probable of not occurring or aÅects earnings.

(3) A signiÑcant portion of our derivatives is not designated in hedge accounting relationships and is reported as no hedge designation.

For most derivatives not qualifying as an accounting hedge, fair value gains and losses are reported as Derivative gains (losses) on our

consolidated statements of income. For purchase and sale commitments of securities classiÑed as trading under SFAS 115 (with

notional balances of approximately $0 billion, $78 billion and $147 billion at December 31, 2004, 2003 and 2002, respectively), fair

value gains and losses are reported as Gains (losses) on investment activity on our consolidated statements of income and therefore,

those fair value gains and losses are not included above.

(4) Hedge accounting gains (losses) arise when the fair value change of a derivative does not exactly oÅset the fair value change of the

hedged item. For further information, see ""NOTE 12: DERIVATIVES'' to the consolidated Ñnancial statements.

(5) Includes gains or losses reclassiÑed from AOCI, net of taxes, as a result of the termination of cash Öow hedge designations because

we determined that the related forecasted transaction is probable of not occurring.

EÅect on Consolidated Financial Statements. As Table 51 shows, a signiÑcant portion of our derivatives

was not designated in hedge accounting relationships at December 31, 2004 and 2003. Derivatives that are not

in qualifying hedge accounting relationships generally increase the volatility of reported Net income because

they are marked to fair value through earnings without the oÅsetting change in value of the economically

hedged exposures also being recognized in earnings. For information about our hedging activities, see

""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-Interest Income (Loss) Ì Derivative Gains

(Losses).''

To qualify for cash Öow hedge accounting treatment, hedged forecasted transactions must be considered

probable of occurring. In addition, SFAS 133 imposes a variety of operational requirements that must be met.

At December 31, 2004, $21,214 million notional amount of derivative contracts was designated in cash Öow

hedge relationships, including $1,576 million notional amount of foreign-currency swaps and $19,638 million

notional amount of commitments. The current fair value of the derivatives included in cash Öow hedge

relationships is recorded on the consolidated balance sheets as Derivative assets, at fair value, or Derivative

liabilities, at fair value. For derivatives that receive cash Öow hedge accounting treatment under SFAS 133,

the eÅective portion of the change in fair value of the derivative asset or derivative liability is presented in the

Stockholders' equity section of our consolidated balance sheets in AOCI, net of taxes. The eÅective portion of

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the derivative generally oÅsets, on a cumulative basis, the cumulative change in the present value of the

hedged cash Öows.

As of December 31, 2004, the net cumulative change in the fair value of all derivatives designated in cash

Öow hedge relationships that were still open or for which the forecasted transactions had not yet occurred since

SFAS 133 was implemented on January 1, 2001 (net of amounts previously reclassiÑed to earnings through

December 31, 2004) was a loss of approximately $7.9 billion on an after-tax basis. This amount was related

almost entirely to $7.9 billion of deferred losses on closed cash Öow hedge relationships. The majority of the

closed cash Öow hedges related to the hedging of the variability of cash Öows from forecasted issuances of debt

with various derivatives. Closed cash Öow hedges involve derivatives that have been terminated or are no

longer designated in cash Öow hedge relationships. Fluctuations in prevailing market interest rates have no

impact on the deferred portion of AOCI, net of taxes, relating to losses on closed cash Öow hedges. Therefore,

the $7.9 billion in deferred losses related to closed cash Öow hedges will be recognized as a reduction of

earnings as the originally hedged forecasted transactions aÅect earnings, unless it becomes probable that the

forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur, then the

entire deferred amount associated with the forecasted transaction will be reclassiÑed into earnings immediately. See ""Table 39 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to

Closed Cash Flow Hedge Relationships'' for more information on expected reclassiÑcations to income of net

deferred losses related to closed cash Öow hedges during future periods.

Table 52 summarizes the notional amounts for each type of derivative, including our new contracts,

maturities and terminations during the year. This information indicates the level and type of derivative activity

undertaken during the year and reÖects our use of diÅerent derivative products in the execution of our risk

management strategies. The notional amounts of our derivatives are a reference point to determine the

payments owed between us and our counterparties under the contracts. The notional amount of a derivative is

not an indication of the fair value of the position or of the cash Öows related to the position. In most market

environments, derivatives have fair values that are a small percentage of their notional amount.

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Table 52 Ì Changes in Derivative Notional Amounts

Year Ended December 31, 2004

Derivative Notional Amount(1)

Beginning New Maturities/ Ending

Balance Contracts Terminations(2) Balance

(dollars in millions)

Interest-rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $179,751 $163,369 $ (248,077) $ 95,043

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107,417 230,194 (254,009) 83,602

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 424 Ì (330) 94

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 287,592 393,563 (502,416) 178,739

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 217,338 45,555 (72,948) 189,945

Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 123,611 32,911 (131,347) 25,175

Other option-based derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,379 17,923 (19,321) 18,981

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,328 96,389 (223,616) 234,101

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130,798 489,176 (490,864) 129,110

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,512 19,428 (9,090) 56,850

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $826,230 $998,556 $(1,225,986) $598,800

Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,692

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,952

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,926

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $756,778

Year Ended December 31, 2003

Derivative Notional Amount(1)

Beginning New Maturities/ Ending

Balance Contracts Terminations(2) Balance

(dollars in millions)

Interest-rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $135,758 $ 228,727 $ (184,734) $ 179,751

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,397 162,363 (204,343) 107,417

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,941 136 (4,653) 424

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 290,096 391,226 (393,730) 287,592

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131,679 125,839 (40,180) 217,338

Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,881 93,237 (99,507) 123,611

Other option-based derivatives(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,522 26,519 (33,662) 20,379

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 289,082 245,595 (173,349) 361,328

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,411 444,830 (542,443) 130,798

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,687 23,193 (20,368) 46,512

Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $851,276 $1,104,844 $(1,129,890) $ 826,230

Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,548

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89,520

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,542

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,083,871

(1) Notional amounts are used to calculate the periodic amounts to be received and paid and generally do not represent actual amounts to be

exchanged or directly reÖect our exposure to institutional credit risk. Notional amounts are not recorded as assets or liabilities in our

consolidated balance sheets.

(2) Includes foreign currency translation adjustments to notional amounts as of the date presented.

(3) Primarily represents written options.

(4) Subsequent to the issuance of our Information Statement dated September 24, 2004, we decreased the beginning balance of Other

option-based derivatives for the year ended December 31, 2003 by $585 million. The eÅect of this change was a decrease to the

beginning balance at that date to $851,276 million from $851,861 million. We also increased new contracts of Other option-based

derivatives by $585 million. The eÅect of this change was an increase to new contracts at that date to $1,104,844 million from

$1,104,259 million.

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The total notional amount of our derivatives (excluding the prepayment management agreement,

commitments, credit derivatives and swap guarantee derivatives) decreased by $227.4 billion from December 31, 2003 to December 31, 2004. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì

Derivative Assets and Liabilities, at Fair Value'' for information on the factors driving the decrease in notional

amounts during 2004.

Table 53 summarizes the change in derivative fair values for the periods presented. See ""Table 54 Ì

Derivative Fair Values and Maturities'' for a breakdown of our derivative fair values by derivative type. Also

see ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Fair Value Measurement'' for a

discussion of how changes in fair values aÅect our Ñnancial results under GAAP.

Table 53 Ì Changes in Derivative Fair Values

Year Ended

December 31,

2004 2003

(dollars in millions)

Beginning balance Ì Net asset (liability)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,823 $ 9,426

Net change in:

Futures(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (214) (609)

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221 (483)

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) 1

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) Ì

Other derivatives:(2)

Changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (627) 6,572

Fair value of new contracts entered into during the period(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,733 4,841

Contracts realized or otherwise settled during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,897) (3,925)

Ending balance Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,031 $15,823

(1) The fair value changes for futures are determined by the individual exchanges on which they are traded, and not by us.

(2) Includes fair value changes for OTC interest-rate swaps, option-based derivatives and foreign-currency swaps.

(3) Consists primarily of cash premiums paid or received on options and the initial value of interest-rate swaps after we have exercised

related swaptions.

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Table 54 shows the notional amount and fair value for each derivative type and the maturity proÑle of the

positions. The fair values of the derivative positions are presented on a product-by-product basis, without

netting by counterparty. The fair value of a longer-term derivative generally will vary more over time than a

comparable derivative with a shorter maturity. A positive fair value in Table 54 for a derivative product

category is the estimated amount, prior to netting by counterparty, that we would be entitled to receive if we

terminated those transactions. A negative fair value is the estimated amount, prior to netting by counterparty,

that we would owe if we terminated the derivatives in that product category.

Table 54 Ì Derivative Fair Values and Maturities

December 31, 2004

Fair Value(2)

Greater than

Notional Total Fair Less than 1 to 3 3 and up to In Excess

Amount Value(1) 1 Year Years 5 Years of 5 Years

(dollars in millions)

Interest-rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 95,043 $(2,879) $ 20 $ (21) $ (20) $(2,858)

Receive-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,602 2,394 40 319 170 1,865

Basis (Öoating to Öoating)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94 1 Ì Ì Ì 1

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,739 (484) 60 298 150 (992)

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 189,945 4,988 237 1,997 1,158 1,596

Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,175 267 207 56 Ì 4

Other option-based derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,981 2 Ì 4 2 (4)

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234,101 5,257 444 2,057 1,160 1,596

FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129,110 (33) (33) Ì Ì Ì

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,850 10,303 3,370 2,116 1,026 3,791

Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏ 113,692 Ì Ì Ì Ì Ì

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,952 (9) (9) Ì Ì Ì

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 (1) Ì Ì Ì (1)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 745,852 15,033 $3,832 $4,471 $2,336 $ 4,394

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,926 (2)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $756,778 $15,031

(1) The fair value by derivative type presented on this table is shown prior to netting by counterparty. The fair value of derivatives

presented on the consolidated balance sheets, however, is netted by counterparty as permitted by GAAP, and is reported in the

Derivative assets, at fair value, and Derivative liabilities, at fair value captions.

(2) Fair value is categorized based on the years from December 31, 2004 until the contractual maturity of the derivative.

See ""CONSOLIDATED RESULTS OF OPERATIONS'' and ""CONSOLIDATED BALANCE

SHEETS ANALYSIS'' for more information regarding how these changes in fair value aÅect our Ñnancial

results.

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111
Table 55 provides a summary of the contractual terms of our pay-Ñxed and receive-Ñxed swaps. This

table provides information about the eÅect of interest-rate swaps on net interest yield if the derivative is in a

fair value or cash Öow hedge relationship. If the derivative is classiÑed as no hedge designation, the derivative

does not aÅect our net interest yield, but rather is reported in Derivative gains (losses) on our consolidated

statements of income.

Table 55 Ì Contractual Terms of Pay-Fixed and Receive-Fixed Swaps

December 31, 2004

Pay-Fixed/ Receive-Fixed/

Receive-Variable Pay-Variable

Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate

(dollars in millions)

Swaps

Maturity less than 1 yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,282 2.34% 2.19% $11,032 3.48% 2.17%

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,703 3.84 2.38 24,581 3.92 2.20

Maturity greater than 3 and up to 5 yearsÏÏÏ 15,147 3.99 2.37 15,751 3.67 2.22

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,205 4.91 2.30 32,238 5.19 2.22

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,337 83,602

Forward-starting swaps(2)

Maturity greater than 3 and up to 5 yearsÏÏÏ 1,625 3.73 Ì Ì Ì Ì

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,081 6.20 Ì Ì Ì Ì

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,706 Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $95,043 $83,602

December 31, 2003

Pay-Fixed/ Receive-Fixed/

Receive-Variable Pay-Variable

Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate

(dollars in millions)

Swaps

Maturity less than 1 yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,900 5.76% 1.18% $ 21,106 1.40% 2.38%

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,073 2.69 1.17 18,247 1.73 3.88

Maturity greater than 3 and up to 5 yearsÏÏÏ 15,967 3.63 1.17 11,249 1.99 3.99

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ 65,395 4.91 1.17 24,202 1.66 5.64

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 117,335 74,804

Forward-starting swaps(2)

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 8,520 Ì 2.83

Maturity greater than 3 and up to 5 yearsÏÏÏ 220 4.49 Ì 3,260 Ì 3.21

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,196 6.11 Ì 20,833 Ì 5.07

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,416 32,613

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $179,751 $107,417

(1) The weighted-average rate payable and receivable is as of the date indicated. Because the rates of the swaps are Öoating, these rates will

change as prevailing interest rates change. The variable legs of these swaps are generally based on LIBOR or Euro Interbank OÅered Rate.

(2) Represents interest-rate swap agreements scheduled to begin on a future date. Generally, the interest rate associated with the variable leg of

the swap is set when the Ñrst payment cycle begins and is periodically reset thereafter.

Measurement of Interest-Rate Risk

We measure our exposure to key interest-rate risks every day against both internal management limits

and limits set by the Board of Directors. Throughout 2004 our interest-rate risk remained low and well below

management and Board limits.

PMVS and Duration Gap. Our interest-rate sensitivity disclosures provide a set of management

estimates that convey a useful assessment of the amount of our interest-rate risk at a given point in time. This

section describes our primary interest-rate risk measures: PMVS and duration gap. PMVS is measured in two

ways, one measuring the estimated sensitivity of our portfolio market value (as deÑned below) to parallel

moves in interest rates (PMVS-L) and the other to nonparallel movements (PMVS-YC). We calculate

PMVS-L and PMVS-YC every business day. PMVS-L and PMVS-YC are based on the assumption of

instantaneous yield curve shifts; therefore neither measure includes the eÅect on fair value of any rebalancing

actions that we would typically take to reduce our risk exposure.

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‚ PMVS-L shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our

after-tax fair value of net assets attributable to common stockholders (measured as fair value of net

assets less the fair value of preferred stock) from an immediate adverse 50 basis point parallel shift in

the level of LIBOR rates (that is, when the yield at each point on the LIBOR yield curve increases or

decreases by 50 basis points). We believe the use of an immediate 50 basis point shift in the LIBOR

yield curve is a conservative estimate of interest-rate risk. The periodic disclosure in our Monthly

Volume Summary report, which is available on our website at www.FreddieMac.com, reÖects the

average of the daily PMVS-L estimates for a given reporting period (a month, quarter or year). (We

are providing this Internet address solely for the information of interested persons. We do not intend

this Internet address to be an active link and are not using references to this Internet address here or

elsewhere in this Information Statement to incorporate additional information into this Information

Statement.)

‚ PMVS-YC shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our

after-tax fair value of net assets attributable to common stockholders, from an immediate adverse

25 basis point change in the slope (up and down) of the LIBOR yield curve. The 25 basis point change

in slope for the PMVS-YC measure is obtained by shifting the two-year and ten-year LIBOR rates by

an equal amount (12.5 basis points), but in opposite directions. LIBOR rate shifts between the twoyear and ten-year points are interpolated. The periodic disclosure in our Monthly Volume Summary

report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily

PMVS-YC estimates for a given reporting period (a month, quarter or year).

‚ Duration gap estimates the net sensitivity of the fair value of our Ñnancial instruments to movements in

interest rates. Duration gap is presented in units expressed as months. On a daily basis, we estimate the

fair value and eÅective duration of our Ñnancial assets and liabilities, including derivatives. The fair

value of each instrument is multiplied by its duration to determine the instrument's duration dollars.

Duration dollars are then aggregated to estimate the portfolio's net duration dollar exposure. To

calculate duration gap, the net duration dollar exposure is divided by the fair value of total interestearning assets and expressed in months. A duration gap of zero implies that the change in value of

assets from an instantaneous rate move will be accompanied by an equal and oÅsetting move in the

value of debt and derivatives thus leaving the net fair value of equity unchanged. However, because

duration does not capture convexity exposure (the amount by which duration itself changes as rates

move), actual changes in fair value from interest-rate changes may diÅer from those implied by

duration gap alone. For that reason, management believes duration gap is most useful when used in

conjunction with PMVS. The periodic duration gap disclosure in our Monthly Volume Summary

report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily

duration gap estimates for a given reporting period (a month, quarter or year).

In measuring the expected loss in portfolio market value, which is the numerator in the fraction used to

calculate the PMVS percentages, we estimate the sensitivity to changes in interest rates of the fair value of all

interest-earning assets and interest-bearing liabilities, including short-term interest-earning assets and interestbearing liabilities and all derivatives on a pre-tax basis. When we calculate the expected loss in portfolio

market value and duration gap, we also take into account the cash Öows related to certain credit guaranteerelated items, including net buy-ups and expected gains or losses due to net interest from security program

cycles. In calculating the expected loss in portfolio market value and duration gap, we do not consider the

sensitivity to interest-rate changes of the following assets and liabilities:

‚ Guarantee fee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups

and net interest from security program cycles), the sensitivity of the fair value of the guarantee fee

portfolio to changes in interest rates is not included in calculating the expected loss in portfolio market

value or duration gap because we believe the expected beneÑts from replacement business provide an

adequate hedge against interest-rate changes.

‚ Other assets with minimal interest-rate sensitivity. Other assets, primarily including non-Ñnancial

instruments such as Ñxed assets and REO, are not included in the calculation of the expected loss in

Freddie Mac

113
portfolio market value or duration gap because of the minimal impact they would have on both PMVS

and duration gap.

The fair value of the guarantee fee portfolio and certain other assets with minimal interest-rate risk

sensitivity is included in the estimate of the after-tax fair value of net assets attributable to common

stockholders, which is the denominator of the fraction used to calculate the PMVS-L and PMVS-YC

percentages.

While PMVS and duration gap estimate the exposure of the fair value of net assets attributable to

common stockholders to changes in interest rates, they do not capture the potential impact of certain other

market risks, such as changes in volatility, basis, prepayment model, mortgage-to-debt spread and foreign

currency risk. The impact of these other market risks can be signiÑcant. See ""Sources of Interest-Rate Risk

and Other Market Risks'' for further information.

Our PMVS and duration gap estimates are determined using models that involve interest-rate and

prepayment assumptions made in our best judgment. In addition, in the case of PMVS, daily calculations are

based on an estimate of the fair value of our net assets attributable to common stockholders. Accordingly,

while we believe that PMVS and duration gap are useful risk management tools, they should be understood as

estimates rather than precise measurements.

PMVS Results. Table 56 provides estimated point-in-time PMVS-L and PMVS-YC results at December 31, 2004 and 2003. To supplement the PMVS-L results based on an assumed 50 basis point shift in the

LIBOR yield curve, Table 56 also provides year-end PMVS-L estimates assuming an immediate 100 basis

point shift in the LIBOR yield curve. Because we do not hedge all prepayment option risk, the duration of our

mortgage assets changes more rapidly as changes in interest rates increase. Accordingly, as shown in Table 56,

the PMVS-L results based on a 100 basis point shift in the LIBOR curve are disproportionately higher than

the PMVS-L results based on a 50 basis point shift in the LIBOR curve. We disclose the average daily,

quarterly and annual PMVS-L and PMVS-YC results in our Monthly Volume Summary report.

Table 56 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve

Potential Pre-Tax Loss in

Portfolio Market Value Sensitivity Portfolio Market Value (millions)

PMVS-YC PMVS-L PMVS-YC PMVS-L

25 bp 50 bp 100 bp 25 bp 50 bp 100 bp

At:

December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 3% 8% $25 $725 $2,083

December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 2% 9% $20 $559 $2,171

Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a wide

range of interest-rate environments. By keeping PMVS-L and PMVS-YC low, we have been able to reduce

the exposure of the fair value of our stockholders' equity to adverse changes in interest rates.

Table 57 shows that the low PMVS-L risk levels for the periods presented would generally have been

substantially higher if we had not used derivatives to manage our interest-rate risk exposure.

Table 57 Ì Derivative Impact on PMVS

Before After EÅect of

Derivatives Derivatives Derivatives

At December 31, 2004

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7% 3% (4)%

PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1% 0% (1)%

At December 31, 2003

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6% 2% (4)%

PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 0% 0%

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114
Duration Gap Results. We disclose the average daily, quarterly and annual duration gap in our Monthly

Volume Summary report. Table 58 provides estimated average duration gap results for December 2004 and

2003.

Table 58 Ì Duration Gap

Average for the Month of December, Duration Gap

(in months)

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1)

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0

Credit Risks

Our Total mortgage portfolio is subject to credit risks. See ""Table 8 Ì Freddie Mac's Total Mortgage

Portfolio Based on Unpaid Principal Balances'' for more information on the composition of our Total

mortgage portfolio. We are subject primarily to two types of credit risk Ì mortgage credit risk and

institutional credit risk. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a

mortgage owned or guaranteed by us. Institutional credit risk is the risk that a counterparty that has entered

into a business contract or arrangement with us will fail to meet its obligations. A portion of the revenue that

Freddie Mac earns from management and guarantee fees is designed to compensate the Ñrm for taking on

credit risk.

Oversight of Credit Risks

The purpose of the Credit Risk Oversight group is to provide independent oversight of the corporate-wide

credit risk management functions, including asset selection, portfolio management, loss mitigation, and

institutional counterparty risk. In particular, Credit Risk Oversight is responsible for providing senior

management with regular, independent evaluations of whether credit risks are eÅectively identiÑed, measured,

managed, and controlled. The Models and Methods Oversight group, a part of the Enterprise Risk Oversight

function, is responsible for independently assessing the design and adequacy of all key credit risk models.

Mortgage Credit Risk

Defaults by mortgage borrowers result in losses if we are unable to collect amounts due through the sale

of the underlying properties, restructuring the mortgage loans or by using other loss mitigation strategies. The

discussion below describes our mortgage credit risk management strategies and summarizes our credit

performance.

Mortgage Credit Risk Management Strategies. Our strategies for managing mortgage credit risk focus

on Ñve primary areas:

‚ underwriting requirements and quality control standards;

‚ credit enhancements;

‚ portfolio diversiÑcation;

‚ loss mitigation activities; and

‚ other risk management activities.

Underwriting Requirements and Quality Control Standards. All mortgages that we purchase have an

inherent risk of default. Through our underwriting and quality control processes, we seek to understand the

underlying risk in a given mortgage we securitize or purchase for our Retained portfolio to ensure that we

adequately price for the risk we assume. Our current business model relies on a process of delegated

underwriting for the single-family mortgages we purchase or securitize. That is, we provide originators with a

series of guidelines to follow in the underwriting of a mortgage and they represent and warrant to us that the

mortgages sold to us meet these guidelines. We subsequently review a sample of these loans and if we

determine that any loan is not in compliance with our underwriting standards, we may require the seller/

Freddie Mac

115
servicer to repurchase that mortgage or make us whole in the event of a default. To assist us in purchasing

mortgages that can be sold to us, we provide originators with automated underwriting software tools, such as

Loan Prospector» and other quantitative credit risk management tools to evaluate and purchase single-family

mortgages and monitor the related mortgage credit risk. Loan Prospector» combines information on the key

indicators of mortgage default risk, such as loan-to-value ratios, credit scores and other mortgage and borrower

characteristics to generate credit risk classiÑcations. These statistically-based risk assessment tools increase

our ability to distinguish among single-family loans based on their risk, return and importance to our mission.

On a negotiated basis, we may allow seller/servicers to underwrite mortgages for sale to us using other

proprietary automated underwriting systems.

For 2004 and 2003, Loan Prospector» was used to evaluate approximately 61 percent and 64 percent,

respectively, of our single-family purchase volume prior to purchase. As part of our post-purchase quality

control review process, we use Loan Prospector» to evaluate the credit quality of virtually all single-family

mortgages that were not evaluated by Loan Prospector» prior to purchase. Loan Prospector» risk classiÑcations inÖuence both the price we charge to guarantee loans and the sample of loans we review in quality

control. As such, Loan Prospector» provides an eÅective credit risk management tool.

For multifamily mortgage loans, unless the mortgage loans have signiÑcant credit enhancements, we use

an intensive pre-purchase underwriting process for the mortgages we purchase. Our underwriting process

includes assessments of the local market, the borrower, the property manager, the property's historical and

projected Ñnancial performance and the property's physical condition, which may include a physical inspection

of the property. In addition to our own inspections, we utilize third-party appraisals and environmental and

engineering reports.

Credit Enhancements. For most of the mortgage loans in our Total mortgage portfolio (other than nonFreddie Mac mortgage-related securities and that portion of issued Structured Securities that is backed by

Ginnie Mae CertiÑcates), we retain the primary risk of loss in the event of default by the borrower on the

underlying mortgage. Our charter requires that, to be eligible for purchase, single-family mortgages with loanto-value ratios above 80 percent at the time of purchase be covered by (a) primary mortgage insurance or

(b) certain other credit protections. In addition, for some mortgage loans, we elect to share the default risk by

transferring a portion of that risk to various third parties through a variety of other credit enhancement

vehicles. Mortgage loans covered by primary mortgage insurance and these other credit protections are

referred to as credit-enhanced mortgages. Proceeds received from these credit enhancements are applied to

oÅset credit losses and to Net interest income for that portion that represents forgone interest not previously

recognized related to individual mortgage loans that default.

Table 59 shows the credit-enhanced portion of our Total mortgage portfolio (excluding non-Freddie Mac

mortgage-related securities and Structured Securities issued by us that are backed by Ginnie Mae

CertiÑcates).

Table 59 Ì Credit-Enhanced Percentage of the Total Mortgage Portfolio(1)

December 31,

2004 2003 2002

Credit-enhanced(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19% 21% 27%

(1) Non-Freddie Mac mortgage-related securities are excluded from this table because they do not expose us to primary risk of loss in

the event of a default by the borrower on the underlying mortgage. That portion of Structured Securities backed by Ginnie Mae

CertiÑcates is excluded because the incremental credit risk to which it exposes us is considered de minimis. See ""Table 33 Ì Credit

Characteristics of Mortgages and Mortgage-Related Securities in the Retained Portfolio'' for additional information about our nonFreddie Mac mortgage-related securities.

(2) Credit enhancements primarily include third party primary loan-level mortgage insurance, third party pool insurance and other

arrangements in which the lender or a third party has retained a portion of the default risk by pledging collateral or agreeing to accept

losses on loans that default. In many cases, the lender's or third party's risk is limited to a speciÑc level of losses at the time the credit

enhancement becomes eÅective.

The percentage of our Total mortgage portfolio (excluding Structured Securities backed by Ginnie Mae

CertiÑcates and non-Freddie Mac mortgage-related securities held by us) with credit-enhancements decreased from 2002 to 2004. This decrease was primarily due to a high level of reÑnance loans acquired in 2003

and 2004, which tend to have lower loan-to-value ratios and, therefore, generally do not require credit

Freddie Mac

116
enhancements. Our ability and desire to expand the portion of our Total mortgage portfolio with credit

enhancements will depend on our evaluation of the credit quality of new business purchase opportunities, our

portfolio risk proÑle and the future availability of eÅective credit enhancements at prices that permit an

attractive return.

Primary mortgage insurance is the most prevalent type of credit enhancement protecting our Total

mortgage portfolio and is obtained on a loan-level basis for certain single-family mortgages. Primary mortgage

insurance transfers varying portions of the credit risk associated with the mortgage to a third party insurer. The

amount we obtain on any mortgage depends on our charter requirement and our assessment of risk. We may

from time to time agree with the insurer to reduce the amount of coverage that is in excess of our charter's

minimum requirement and may also furnish certain services to the insurer in exchange for fees paid by the

insurer. As is the case with credit enhancement agreements generally, these agreements often improve the

overall value of purchased mortgages and thus may allow us to oÅer lower guarantee fees to sellers.

After primary mortgage insurance, the most prevalent type of credit enhancement that we use is pool

insurance. With pool insurance, a mortgage insurer provides insurance on a pool of loans up to a stated

aggregate loss limit. Our pool insurance contracts cover losses ranging between approximately 0.69 percent

and 5.00 percent of the aggregate unpaid principal balance of the pooled loans at the time of purchase. In

addition to a pool-level loss coverage limit, some pool insurance contracts may have limits on coverage at the

loan level. For pool insurance contracts that expire before the completion of the contractual term of the

mortgage loan, we seek to ensure that the contracts cover the period of time during which we believe the

mortgage loans are most likely to default.

Other forms of credit enhancements on single-family mortgage loans include collateral (including cash or

high-quality marketable securities) pledged by a lender, government guarantees, and recourse agreements

(under which we may require a lender to repurchase loans that default). In some instances, our agreements

with insurers limit the insurance to a stated aggregate loss.

For multifamily mortgages, we occasionally utilize credit enhancements to mitigate risk. The types of

credit enhancements used for multifamily mortgage loans include recourse, third-party guarantees or letters of

credit, subordinated participations in mortgage loans or structured pools, and cross-default and crosscollateralization provisions. With a cross-default provision, if the loan on a property goes into default, we have

the right to declare speciÑed other mortgage loans of the same borrower or certain of its aÇliates to be in

default and to foreclose those other mortgages. With a cross-collateralization provision, we have the additional

right to apply excess proceeds from the foreclosure of one mortgage to amounts owed to us by the same

borrower or certain of its aÇliates relating to other multifamily mortgage loans we own. We also receive

similar credit enhancements for Multifamily PC guarantor swaps; for tax-exempt multifamily housing revenue

bonds that support pass-through certiÑcates issued by third parties for which we provide our guarantee of the

payment of principal and interest; for Freddie Mac pass-through certiÑcates that are backed by tax-exempt

multifamily housing revenue bonds and related taxable bonds and/or loans, and for multifamily mortgage

loans that are originated and held by state and municipal agencies to support tax-exempt multifamily housing

revenue bonds for which we provide our guarantee of the payment of principal and interest. For information

about our maximum coverage in regards to these credit enhancements, see ""NOTE 4: FINANCIAL

GUARANTEES'' to the consolidated Ñnancial statements.

While the use of credit enhancements reduces our exposure to mortgage credit risk, it increases our

exposure to institutional credit risk. See ""Institutional Credit Risk'' for more information.

Portfolio DiversiÑcation. A key characteristic of our credit risk portfolio is broad diversiÑcation along a

number of critical risk dimensions. We continually monitor a variety of mortgage loan characteristics such as

product mix, loan-to-value ratios and geographic concentration, which may aÅect the default experience on

our overall mortgage portfolio, and may seek to reinsure a portion of our portfolio if we observe unacceptable

levels of concentration.

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Product Mix. Table 60 presents the distribution of underlying mortgage assets for total PCs and

Structured Securities issued and outstanding.

Table 60 Ì Freddie Mac Issued and Outstanding PCs and Structured Securities(1)

December 31,

2004 2003

Total Issued PCs Outstanding PCs Total Issued PCs Outstanding PCs

and Structured and Structured and Structured and Structured

Securities Securities(2) Securities Securities(2)

(dollars in millions)

Freddie Mac issued PCs and Structured

Securities

Single-family:

Conventional:

30-year Ñxed-rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 689,945 $509,923 $ 649,719 $449,281

15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 347,135 224,627 355,800 197,677

ARMs/Öoating-rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 102,273 59,089 81,184 39,868

Seconds(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2 2

FHA/VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,350 1,340 2,098 2,058

RHS and other federal guarantee loans 178 178 164 164

Alternative collateral deals(6) ÏÏÏÏÏÏÏÏÏÏ 16,560 8,125 17,486 11,478

Balloons/resets(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,966 31,075 34,788 31,818

Structured Securities backed by Ginnie

Mae CertiÑcates(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,015 2,628 4,729 4,059

Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,193,422 836,985 1,145,970 736,405

Multifamily:

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,546 15,285 16,098 15,759

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,208,968 $852,270 $1,162,068 $752,164

(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2) Represents PCs and Structured Securities held by third parties.

(3) Also includes 20-year and 40-year Ñxed-rate mortgages.

(4) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.

(5) Represents mortgage loans on properties that are subordinate to the superior mortgage lien.

(6) Prior to 2004, alternative collateral deals included Structured Securities backed by non-agency securities, which were primarily

backed by subprime mortgage loans; and to a lesser extent, FHA / VA loans and home equity loans. Beginning in 2004, alternative

collateral deals included Structured Securities backed by non-agency securities, which were backed by a mixture of subprime and

other (i.e., prime) mortgage loans. The alternative collateral deal portion of outstanding PCs and Structured Securities consisted of

$1,587 million and $2,572 million of Ñxed-rate, $1,165 million and $2,723 million of ARMs/Öoating rate, $5,286 million and

$6,040 million of FHA/VA, $17 million and $5 million of the Rural Housing Service and other federal guarantee loans, and

$70 million and $138 million of seconds at December 31, 2004 and 2003, respectively.

(7) Mortgages whose terms require lump sum principal payments on contractually determined future dates unless the borrower qualiÑes

for and elects an extension of the maturity date at an adjusted interest rate.

(8) Ginnie Mae CertiÑcates which underlie the Structured Securities are backed by FHA/VA loans.

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Table 61 presents the distribution of unsecuritized whole mortgage loans held in our Retained portfolio.

Table 61 Ì Mortgage Loans Held in the Retained Portfolio(1)

December 31,

2004 2003

(dollars in millions)

Single-family:

Conventional

Fixed-rate(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21,409 $24,902

Adjustable-rate(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 990 1,245

Seconds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1

Total ConventionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,399 26,148

FHA/VA Ì Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 344 513

RHS and other federal guarantee loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 646 613

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,389 $27,274

Multifamily Mortgages:

ConventionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,968 $32,993

FHA/RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,971 32,996

Total mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $61,360 $60,270

(1) Based on unpaid principal balances. Excludes mortgage loans traded, but not yet settled.

(2) We reclassiÑed $374 million of mortgage loans from Single-family Conventional Fixed-rate to Single-family Conventional

Adjustable-rate for the year ended December 31, 2003 to conform with the 2004 presentation.

Product mix aÅects the credit risk proÑle of our Total mortgage portfolio. In general, 15-year Ñxed-rate

mortgages exhibit the lowest default rate among the types of single-family mortgage loans we securitize and

purchase, due to the accelerated rate of principal amortization on these mortgages and the credit proÑles of

borrowers who seek and qualify for them. The next lowest rate of default is associated with 30-year Ñxed-rate

mortgages. Balloon/reset mortgages and ARMs typically default at a higher rate than Ñxed-rate mortgages,

although default rates for diÅerent types of ARMs may vary. While ARMs are typically originated with

interest rates that are initially lower than those available for Ñxed-rate mortgages, their interest rates also

change over time based on changes in an index or reference interest rate. As a result, the borrower's payments

may rise or fall, within limits, as interest rates change. As payment amounts increase, the risk of default also

increases. In the low interest rate environment experienced during 2002, 2003 and 2004, this trend was

reversed with ARMs exhibiting lower default rates than Ñxed-rate mortgages.

During 2004, there was a rapid proliferation of alternative product types, including initial interest-only

loans (loans where the borrower pays only interest for a period of time before the loan begins to amortize),

negative amortization loans (loans where the borrower's payment is capped and as a result the loan balance

may actually increase due to the diÅerence between the capped payment and the fully indexed payment), and

Alternative A products (primarily loans originated based on stated income or asset information or where the

borrower provides no supporting documentation ofincome, assets or employment). While each of these

products has been on the market for some time, their prevalence increased in 2004. These products are

designed to address a variety of borrower needs, including aÅordability issues and documentation issues. Each

of these products is expected to default more often than our traditional product types. To date, we have

purchased a limited amount of these products through our securitization programs, although we expect our

participation in these products to grow over the coming years. We will monitor the growth of these products in

our portfolio, and if appropriate, may seek credit enhancements to manage the incremental risk.

The subprime segment of the mortgage market primarily serves borrowers with lower quality credit

payment histories. These mortgages typically carry a higher risk of default. Our participation in this market

helps to increase the availability of mortgage credit and reduce the costs of homeownership for a broader

spectrum of borrowers.

We participate in the subprime market segment in two ways. First, our Retained portfolio makes

investments in non-Freddie Mac mortgage-related securities that were originated in this market segment.

Substantially all of these securities were rated ""AAA'' by one or more rating agencies at the time of purchase.

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119
These investments are included in the single-family and other mortgage-related securities portion of our nonFreddie Mac mortgage-related securities portfolio shown in ""Table 33 Ì Credit Characteristics of Mortgages

and Mortgage-Related Securities in the Retained Portfolio.'' Second, we guarantee securities backed by

subprime mortgages. (These securities comprise a portion of our ""alternative collateral deals.'') These

securities have previously been credit enhanced and at the time of our purchase most of these securities were

""shadow rated'' at least ""BBB'' (based on the S&P rating scale) by at least one nationally recognized credit

rating agency which assessed the risks of the securities without regard to the beneÑts of our guarantee. In

addition to the non-Freddie Mac mortgage-related securities discussed above, our Retained portfolio makes

investments in some of the Structured Securities issued in these transactions.

The distribution of the single-family loans underlying our Total mortgage portfolio (excluding nonFreddie Mac mortgage-related securities, alternative collateral deals and that portion of Structured Securities

that is backed by Ginnie Mae CertiÑcates) by original and estimated current loan-to-value ratio ranges, credit

scores, loan purpose, property type and occupancy type is shown in Table 62.

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Table 62 Ì Characteristics of Single-Family Mortgage Loan Portfolio(1)

December 31,

Original LTV Ratio Range(2) 2004 2003 2002

Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26% 26% 21%

Above 60% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 17 15

Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 41 43

Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 9 11

Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 6 8

Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average original loan-to-value ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70% 70% 72%

Estimated Current LTV Ratio Range(3)

Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53% 44% 45%

Above 60% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 20 19

Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 23 22

Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 9 9

Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 3 3

Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average estimated current LTV ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57% 61% 61%

Credit Score

740 and above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44% 44% 39%

700 to 739 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 23 23

660 to 699 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 17 18

620 to 659 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 9 10

Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 4 4

Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 3 6

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average credit scoreÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 723 723 718

Loan Purpose

PurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28% 25% 34%

Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 26 25

Other reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45 49 41

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Property Type

1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97% 97% 97%

2-4 unitsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Occupancy Type

Primary residence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94% 94% 94%

Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3 3

Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

(1) Based on the single-family mortgage portfolio (excluding non-Freddie Mac mortgage-related securities, alternative collateral deals

and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates), which totaled $1,197 billion, $1,151 billion and

$1,084 billion at December 31, 2004, 2003 and 2002, respectively.

(2) Our charter requires that mortgage loans purchased with loan-to-value ratios above 80 percent be covered by mortgage insurance or

other credit enhancements.

(3) Current market values are estimated by adjusting the value of the property at origination based on changes in the market value of

house prices since origination.

Loan-to-Value Ratios. Our principal safeguard against credit losses for mortgage loans in our singlefamily, non-credit-enhanced portfolio is provided by the borrowers' equity in the underlying properties. The

weighted average original loan-to-value ratio decreased to 70 percent for the years ended December 31, 2004

Freddie Mac

121
and 2003 from 72 percent for the year ended December 31, 2002. Mortgage loans with higher loan-to-value

ratios (and therefore lower levels of borrower equity) at the time of purchase are also protected by credit

enhancements, since our charter requires that loans with loan-to-value ratios above 80 percent at the time of

purchase be covered by mortgage insurance or certain other credit protections.

The likelihood of single-family mortgage default depends not only on the initial credit quality of the loan,

but also on events that occur after origination. Accordingly, we monitor changes in house prices across the

country and the impact of these house price changes on the underlying loan-to-value ratio of mortgages in our

portfolio.

Figure 1 Ì Annual House Price Appreciation

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Growth Rate

(Percent)

As shown in Figure 1, house prices have risen signiÑcantly over the last ten years, and have grown very

dramatically over the last three years. This house price appreciation has positively inÖuenced the values of

properties underlying the mortgages in our portfolio. The weighted average estimated current loan-to-value

ratio of our single-family non-credit-enhanced portfolio decreased to 57 percent for the year ended

December 31, 2004 from 61 percent for each of the years ended December 31, 2003 and 2002. The decrease is

primarily the result of unusually strong house price appreciation. Despite these positive national trends, we

remain vigilant in identifying possible weaknesses in regional geographic markets, particularly with respect to

new loans originated in an environment of strong house prices, and may seek to reinsure a portion of this risk

should we determine that the possibility of such weaknesses warrants action. Historical experience has shown

that defaults are less likely to occur on mortgages with lower estimated current loan-to-value ratios.

Furthermore, in the event of a default, higher levels of borrower equity in a property reduce the total amount

of loss, thereby mitigating credit losses.

Credit Score. Credit scores are a useful measure for assessing the credit quality of a borrower. Credit

scores are numbers reported by the credit repositories, based on statistical models, that summarize an

individual's credit record and predict the likelihood that a borrower will repay future obligations as expected.

FICO» scores, or FICO, developed by Fair, Isaac and Co., Inc., are the most commonly used credit scores

today.

FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically, consumers with

higher credit scores are more likely to repay their debts as expected than those with lower scores. The

weighted average credit score for the Total mortgage portfolio (based on the credit score at origination)

remained high at 723 at both December 31, 2004 and 2003 and a slight increase from 718 at December 31,

Freddie Mac

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2002, indicating strong credit quality borrowers. In particular, the percentage of the mortgage loans with an

available FICO score of 740 or greater in the Total mortgage portfolio has remained at 44 percent at

December 31, 2004 and 2003 and increased from 39 percent at December 31, 2002.

Loan Purpose. Mortgage loan purpose indicates how the borrower intends to use the funds from a

mortgage loan. The three general categories are: purchase, cash-out reÑnance, or other reÑnance. In a

purchase transaction, funds are used to acquire a property. In a cash-out reÑnance transaction, in addition to

paying oÅ an existing Ñrst mortgage lien, the borrowers obtain additional funds that may be used for other

purposes, including paying oÅ subordinate mortgage liens and providing unrestricted cash proceeds to the

borrower. In other reÑnance transactions, the funds are used to pay oÅ an existing Ñrst mortgage lien and may

be used in limited amounts for certain speciÑed purposes; such reÑnances are generally referred to as ""no

cash-out'' or ""rate and term'' reÑnances. Other reÑnance transactions also include reÑnance mortgages for

which the delivery data provided was not suÇcient for us to determine whether the mortgage was a cash-out or

a no cash-out reÑnance transaction. From a risk perspective, purchase transactions have the lowest likelihood

of default (all else being equal), followed by no-cash out reÑnances, then cash out reÑnances. As a practical

matter, however, no-cash out reÑnances tend to have lower loan-to-value ratios and higher credit scores than

purchase transactions and as such, have better overall performance than purchase transactions. While a

reduction in interest rates in 2003 increased the proportion of reÑnance mortgage loans in the Total mortgage

portfolio from a total of 66 percent at December 31, 2002 to 75 percent at December 31, 2003, an increase in

interest rates in 2004 slightly decreased the proportion of reÑnance mortgage loans in the Total mortgage

portfolio to a total of 72 percent at December 31, 2004.

Property Type. Single-family mortgage loans are deÑned as mortgages secured by housing with up to

four living units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on multipleunit properties. The proportion of one-unit properties in the Total mortgage portfolio remained the same over

the past three years, accounting for 97 percent at December 31, 2004, 2003 and 2002.

Occupancy Type. Borrowers may purchase a home as a primary residence, second/vacation home or

investment property that is typically a rental property. Mortgage loans on properties occupied by the borrower

as a primary or secondary residence tend to have a lower credit risk than mortgages on investment properties.

The proportion of primary and secondary residences in the Total mortgage portfolio remained the same over

the past three years, accounting for 97 percent at December 31, 2004, 2003 and 2002.

Geographic Concentration. Since our business model involves purchasing mortgages from every

geographic region in the U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation

provides protection from changing local and economic conditions. See ""NOTE 17: CONCENTRATION OF

CREDIT AND OTHER RISKS'' to our consolidated Ñnancial statements for more information concerning

the distribution of our Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and

that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic region. Our

Total mortgage portfolio's geographic distribution was relatively stable from 2003 to 2004, and remains

broadly diversiÑed across these regions.

Loss Mitigation Activities. Within our credit portfolio, we expect and price for some mortgage loans to

become non-performing due to changes in general economic conditions, changes in the Ñnancial status of

individual borrowers or other factors.

Table 63 summarizes our non-performing assets. The increase in our non-performing assets from 2000

through 2003 was primarily driven by higher delinquencies associated with our alternative collateral deals.

While these delinquencies result in higher levels of non-performing assets, we have limited loss exposure due

to the credit enhancements associated with these securities. Prior to 2004, alternative collateral deals consisted

only of Structured Securities backed by non-agency securities, which were primarily backed by subprime

mortgage loans; and to a lesser extent, FHA/VA loans and home equity loans. Beginning in 2004, however,

certain alternative collateral deals were backed by prime mortgage loans.

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123
Table 63 Ì Non-Performing Assets

December 31,

2004 2003 2002 2001 2000

(dollars in millions)

Troubled debt restructurings, or TDRs(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,297 $ 2,370 $2,164 $1,617 $1,389

Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,318 7,470 6,830 5,070 3,546

Non-accrual loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 21 47 44 9

Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,642 9,861 9,041 6,731 4,944

REO, net(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 741 795 594 447 358

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,383 $10,656 $9,635 $7,178 $5,302

(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the

modiÑed terms. TDRs are considered part of our impaired loan population. Figures presented are based on unpaid principal balances

of mortgage loans. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for additional information

on impaired loans.

(2) Includes single-family loans 90 days or more delinquent. For multifamily loans, the population includes all loans 60 days or more

delinquent, but less than 90 days delinquent. Also included within this population are multifamily loans greater than 90 days past due

but where principal and interest are being paid to us under the terms of a credit enhancement agreement. Also includes seriously

delinquent loans in alternative collateral deals which totaled $2,234 million, $2,793 million, $2,290 million, $1,052 million and

$529 million at December 31, 2004, 2003, 2002, 2001 and 2000, respectively. See the discussion related to alternative collateral deal

delinquencies following ""Table 65 Ì Delinquency Performance.''

(3) Non-accrual mortgage loans are loans for which interest income is recognized only on a cash basis and only includes multifamily

loans that are 90 days or more delinquent. Balance represents 2, 2, 3, 5 and 10 properties at December 31, 2004, 2003, 2002, 2001 and

2000, respectively. No single-family mortgage loans are classiÑed as non-accrual. For single-family mortgages we recognize interest

income on an accrual basis for all such loans, regardless of delinquency. We establish reserves for uncollectible interest that are

estimated using statistical models which quantify accrued but unpaid interest at the consolidated balance sheet date. Mortgage loans

placed on non-accrual status are considered part of our impaired loan population.

(4) For the year ended December 31, 2004, $443 million was included in net interest income and management and guarantee income

related to these mortgage loans (excluding interest income related to alternative collateral deals). The amount of forgone net interest

income and additional management and guarantee income that we would have recorded had these loans been current is $65 million

for the year ended December 31, 2004.

(5) For more information about REO balances, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and

""NOTE 7: REAL ESTATE OWNED'' to the consolidated financial statements.

Loss mitigation activities are a key component of our strategy for managing and resolving troubled assets

and lowering credit losses. Our loss mitigation strategy emphasizes early intervention in delinquent mortgages

and alternatives to foreclosure. Foreclosure alternatives are intended to reduce the number of delinquent

mortgages that proceed to foreclosure and, ultimately, mitigate our total credit losses by eliminating a portion

of the costs related to foreclosed properties. Table 64 summarizes the number of loans involved in diÅerent

types of single-family foreclosure alternatives.

Table 64 Ì Single-Family Foreclosure Alternatives(1)

December 31,

2004 2003 2002

(number of loans)

Foreclosure Alternatives(2)

Repayment plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,406 34,458 32,672

Loan modiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,789 8,508 7,951

Forbearance agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,105 2,226 2,798

Pre-foreclosure sales(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,010 1,755 1,531

Foreclosure alternatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,310 46,947 44,952

(1) Based on the single-family Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities, alternative collateral

deals and that portion of Structured Securities that is backed by non-Freddie Mac mortgage-related securities.

(2) Some mortgage loans may go through a foreclosure alternative more than once or may go through more than one type of foreclosure

alternative. Additionally, the table represents only instances that successfully return the borrower to a current payment status, with

the exception of pre-foreclosure sales, where the relationship with the borrower has concluded.

(3) This amount includes third party sales and other foreclosure alternatives.

The increase in foreclosure alternatives from 2002 through 2004 was primarily driven by an enhanced

eÅort by us and servicers to pursue loss mitigation for homeownership preservation and a favorable interest

rate environment that facilitated the foreclosure alternatives. Repayment plans, the most common type of

foreclosure alternative, mitigate our credit losses because they assist borrowers in returning to compliance with

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124
the original terms of their mortgages. Loan modiÑcations, the second most common type of foreclosure

alternative, involve changing the terms of a mortgage and therefore are a more favorable alternative to the

borrower during a declining interest-rate environment, such as we experienced during 2002 and the Ñrst half

of 2003. Forbearance agreements, the third most common type of foreclosure alternative, provide a temporary

suspension of the foreclosure process to allow additional time for the borrower to return to compliance with the

original terms of the borrower's mortgage or to implement another foreclosure alternative.

Other single-family loss mitigation activities include providing default management tools designed to help

single-family servicers manage non-performing loans more eÅectively. These tools include Early Indicator», a

system that estimates the probability that delinquent loans will be resolved or advanced through to a lossproducing state. In addition, we provide the servicers with a suite of self-management tools such as Timeline

Manager, Workout Manager, Expense Manager and REO Manager. We also use Servicer Performance

ProÑle reports to evaluate and manage the performance of our mortgage servicers based on their management

of performing and non-performing loans.

We require multifamily servicers to closely manage mortgage loans they have sold us in order to mitigate

potential losses. At least once a year, for loans over $1 million, servicers must submit an assessment of the

mortgaged property to us based on an inspection of the property and a review of the property's Ñnancial

statements. We also evaluate these assessments internally and may direct the servicer to take speciÑc actions

to reduce the likelihood of delinquency or default. If a loan defaults despite this intervention, we then

determine whether it is in our best interest to oÅer a reasonable foreclosure alternative to the borrower. For

example, we may modify the terms of a multifamily mortgage loan which gives the borrower an opportunity to

bring the loan current and allows the borrower to retain ownership of the property. Since multifamily

seller/servicers are an important part of our loss mitigation process, we rate their performance regularly and

conduct on-site reviews of their servicing operations to conÑrm compliance with our standards.

Other Credit Risk Management Activities. As noted previously, we purchase a broad range of mortgage

products with diÅering degrees of default risk. To compensate us for unusual levels of risk in some mortgage

products we may charge incremental fees above a base guarantee fee calculated on credit risk factors such as

the mortgage product type, loan purpose, loan-to-value ratio, and other loan attributes. In addition, we

occasionally use Ñnancial incentives and credit derivatives, as described below, in situations where we believe

they will beneÑt our credit risk management strategy. These arrangements are intended to reduce our creditrelated expenses and to help us manage purchase quality, thereby improving our overall returns.

In some cases, we also provide Ñnancial incentives in the form of lump sum payments to selected

seller/servicers if they deliver a speciÑed volume or share of mortgage loans meeting speciÑed credit risk

standards over a deÑned period of time. These Ñnancial incentives may also take the form of a fee payable to

us by the seller if the mortgages delivered to us do not meet certain credit standards.

We have also entered into risk-sharing agreements that are accounted for as derivatives in accordance

with GAAP. In part because the agreements may result in us making payments to the seller/servicer

(depending upon actual default experience over the lives of the mortgages), they are considered credit

derivatives, rather than Ñnancial guarantees under GAAP. Under these agreements, default losses on speciÑc

mortgage loans delivered by sellers are compared to default losses on reference pools of mortgage loans with

similar characteristics. Based upon the results of that comparison, we remit or receive payments based upon

the default performance of the speciÑed mortgage loans. These payments are recorded in Management and

guarantee income on the consolidated statements of income. The total notional amount of mortgage loans

subject to these agreements was approximately $10.9 billion and $15.5 billion at December 31, 2004 and 2003,

respectively. These risk-sharing agreements are classiÑed as no hedge designation for purposes of applying

SFAS 133, with changes in fair value recorded as Derivative gains (losses) on the consolidated statements of

income. The fair value of these risk-sharing agreements is recorded in the Derivative assets, at fair value and

Derivative liabilities, at fair value on the consolidated balance sheets, with net amounts of $(2) million and

$5 million at December 31, 2004 and 2003, respectively.

Although these arrangements are part of our overall credit risk management strategy, we have not treated

them as credit enhancements for purposes of describing our Total mortgage portfolio characteristics because

Freddie Mac

125
the Ñnancial incentive and credit derivative agreements may result in us making payments to the

seller/servicer.

Credit Performance. The eÅectiveness of our credit risk management activities is reÖected, in part, in

the level of credit losses relative to our Total mortgage portfolio (excluding non-Freddie Mac mortgagerelated securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates). To the

extent we take on riskier assets, such as A- mortgages, and charge higher guarantee fees, credit losses may rise

despite eÅective credit risk management activities. Therefore, while credit losses are a useful indicator of

management activities, they must ultimately be considered relative to the revenue received for assuming the

underlying credit risk. Several key statistics associated with potential and actual credit losses are detailed in

the tables below.

Delinquencies. Table 65 summarizes the delinquency performance of our single-family and multifamily

mortgage portfolios. ""Table 66 Ì Single-Family Ì Non-Credit-Enhanced Delinquencies Ì By Region'' and

""Table 67 Ì Composition of Single-Family Mortgages by Year of Origination Ì Mortgage Portfolio and

Non-Credit-Enhanced Delinquencies'' provide a more detailed analysis of single-family delinquencies, by

geographic region and year of origination.

Table 65 Ì Delinquency Performance(1)

December 31,

2004 2003 2002

Single-family(2)

Non-credit-enhanced portfolio

Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.24% 0.27% 0.28%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,691 21,063 20,946

Credit-enhanced portfolio(4)

Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.75% 2.96% 2.07%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,913 66,283 58,768

Total portfolio

Delinquency rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.73% 0.86% 0.77%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,604 87,346 79,714

Multifamily(4)

Total portfolio

Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.06% 0.05% 0.13%

Net carrying value of delinquent loans (in millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 35 $ 24 $ 49

(1) Based on the Total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured

Securities that is backed by Ginnie Mae CertiÑcates.

(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(3) Includes alternative collateral deals.

(4) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.

The single-family total portfolio delinquency rate decreased by 13 basis points from December 31, 2003

to 0.73 percent at December 31, 2004. This decrease was driven by the single-family credit-enhanced

delinquency rate, which decreased by 21 basis points from December 31, 2003 to 2.75 percent at

December 31, 2004 and a 3 basis point decline in the single-family non-credit-enhanced portfolio. The

decrease in the credit-enhanced delinquency rate was primarily associated with reduced delinquencies in our

alternative collateral deals, the drop in the unemployment rate and continued house price appreciation. The

multifamily delinquency rate was 0.06 percent at December 31, 2004, up from 0.05 percent at December 31,

2003. Multifamily delinquencies include certain mortgage loans where the borrowers are not paying as agreed,

but principal and interest are being paid to us under the terms of a credit enhancement agreement.

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126
Table 66 presents delinquency rates for the non-credit-enhanced portion of the single-family loans

underlying our Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that

portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic region.

Table 66 Ì Single-Family Ì Non-Credit-Enhanced Delinquencies Ì By Region(1)(2)

December 31,

2004 2003 2002

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.24% 0.28% 0.30%

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.31 0.32 0.34

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.27 0.27 0.27

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26 0.28 0.28

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.15 0.19 0.23

Total all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.24% 0.27% 0.28%

(1) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(2) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a

description of these regions.

Regional delinquency rates generally declined in 2004. Reductions in the Northeast and West regions

were the primary drivers behind the decrease in the overall delinquency rate. These regions' delinquency

improvement is a result of improved economies and increased house price appreciation. The non-credit

enhanced delinquency rate for the North Central region, which has been adversely impacted by declines in the

manufacturing industry, remained unchanged despite the slight increase in the number of delinquent

properties.

Table 67 presents the distribution of the single-family loans underlying our Total mortgage portfolio

(excluding non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is

backed by Ginnie Mae CertiÑcates) and non-credit-enhanced delinquency rates by year of origination.

Table 67 Ì Composition of Single-Family Mortgages By Year of Origination Ì Mortgage Portfolio and

Non-Credit-Enhanced Delinquencies

December 31,

2004 2003 2002

Percent of Non-Credit- Percent of Non-Credit- Percent of Non-CreditSingle- Enhanced Single- Enhanced Single- Enhanced

Family Delinquency Family Delinquency Family Delinquency

Year of Origination Balance(1) Rate(2) Balance(1) Rate(2) Balance(1) Rate(2)

Pre-1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3% 0.65% 6% 0.68% 11% 0.54%

1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 0.83 1 0.82 3 0.51

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 0.49 4 0.45 11 0.26

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 0.78 3 0.73 8 0.44

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1.94 1 1.78 3 0.91

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 0.59 10 0.48 26 0.19

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 0.26 24 0.18 38 0.05

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44 0.06 51 0.01 Ì Ì

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 0.03 Ì Ì Ì Ì

As of December 31ÏÏÏÏÏÏÏÏÏÏ 100% 0.24% 100% 0.27% 100% 0.28%

(1) Single-family Total mortgage portfolio, based on unpaid principal balances, excluding non-Freddie Mac mortgage-related securities

and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.

(2) Based on mortgages 90 days or more delinquent or in foreclosure.

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127
Our single-family portfolio distribution by origination year was aÅected by heavy reÑnance volumes in

recent years. At December 31, 2004, 84 percent of our single-family mortgage portfolio consisted of mortgage

loans originated in 2002, 2003 or 2004. Mortgage loans originated in 2001 and earlier, which represent

approximately 16 percent of our single-family mortgage portfolio, have delinquency rates that are generally

higher than the overall portfolio delinquency rate due to the natural aging of the loans and, in some instances,

to the weaker credit quality of these loans. For instance, mortgage loans originated in 2000 were generally for

purchase transactions, which, as noted earlier, typically involve more risk resulting in weaker credit quality, as

opposed to reÑnancing transactions. As a result, we have experienced higher than average early defaults and

delinquency rates on these mortgage loans originated in 2000, but they represent only one percent of the

single-family Total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that

portion of Structured Securities that is backed by Ginnie Mae CertiÑcates).

Freddie Mac

128
Credit Loss Performance. Some of the loans that are delinquent or in foreclosure result in credit losses.

Table 68 provides detail on our credit loss performance, including REO activity, charge-oÅs and credit losses.

Table 68 Ì Credit Loss Performance

Year Ended December 31,

2004 2003 2002

(dollars in millions)

REO

REO balances:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 740 $ 758 $ 593

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 37 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 741 $ 795 $ 594

REO activity (number of properties):(1)

Beginning property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,170 7,222 5,713

Properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,489 17,750 13,520

Properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,055) (15,802) (12,011)

Ending property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,604 9,170 7,222

Average holding period (in days)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 177 174 185

REO operations income (expense):(3)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (1) $ (4) $ (4)

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 (3) Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3 $ (7) $ (4)

CHARGE-OFFS

Single-family: Foreclosure alternatives, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (47) $ (40) $ (46)

Recoveries(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 17 17

Foreclosure alternatives, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26) (23) (29)

REO acquisitions, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (253) (176) (124)

Recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139 127 80

REO acquisitions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114) (49) (44) Single-family totals: Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) (216) (170)

Recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 144 97

Single-family charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140) (72) (73)

Multifamily:

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (8) (1)

Recoveries(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 2

Multifamily charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (7) 1

Total Charge-oÅs:(3)

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) (224) (171)

Recoveries:

Related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 94 61

Not related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75 51 38

Total recoveries(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 145 99

Charge-oÅs, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (140) $ (79) $ (72)

CREDIT GAINS (LOSSES)(5)

Single-family(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (141) $ (76) $ (77)

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 (10) 1

Total(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (137) $ (86) $ (76)

In basis points:(6)

Single-family(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) (0.7) (0.7)

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (0.1) Ì

Total(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) (0.8) (0.7)

(1) Includes single-family and multifamily REO properties.

(2) Represents weighted average holding period for single-family and multifamily based on number of REO properties disposed.

(3) We reclassiÑed income of $30 million and $17 million for 2003 and 2002, respectively, from REO operations income (expense) to (Provision)

beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses related to uncollectible interest on

PCs held by third parties from Management and guarantee income to (Provision) beneÑt for credit losses to conform with the 2004

presentation. As a result of these reclassiÑcations, we decreased charge-oÅs Ì single-family, net by $26 million and $15 million for 2003 and

2002, respectively.

(4) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of default risk

has been assumed by servicers, mortgage insurers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit

enhancements are limited in many instances to amounts less than the full amount of the loss.

(5) Equal to REO operations income (expense) plus Charge-oÅs, net.

(6) Calculated as credit gains (losses) divided by the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities

and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.

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Overall, we continued to demonstrate strong credit performance during 2004, driven by eÅective risk

management and the sustained strength of the single-family housing market. The following discussion

provides additional analysis on key credit loss-related statistics and results.

Net credit losses (REO operations income (expenses) plus charge-oÅs, net) increased in 2004 as a result

of the increase in single-family charge-oÅs. Single-family credit losses totaled $141 million, or 1.1 basis points

of the average Total mortgage portfolio in 2004. This represents an increase from the historically low levels of

single-family credit losses experienced in 2003 ($76 million or 0.7 basis points) and in 2002 ($77 million or

0.7 basis points). Our multifamily portfolio produced a credit gain of $4 million in 2004, compared to a

$10 million loss in 2003, and a $1 million gain in 2002.

When we foreclose on a property, it may become part of our REO inventory. REO operations income

(expense), a component of credit losses, includes the expenses incurred to foreclose, acquire, maintain and sell

a property. REO inventory levels increased in 2004 in terms of number of properties held, although the dollar

amounts decreased. The single-family REO balance was $740 million at December 31, 2004, a change from

$758 million and $593 million at December 31, 2003 and 2002, respectively. Although REO inventories

increased, single-family REO income (expense) improved to expense of $1 million in 2004 from expense of

$4 million in both 2003 and 2002 largely due to house price growth, recoveries from credit enhancements and

reimbursements from seller/servicers. REO income arises when the fair market value of the acquired asset

exceeds the carrying value of the mortgage loan or when we are able to sell the REO at amounts in excess of

its carrying value.

Charge-oÅs, net, another component of credit losses, include losses and recoveries on mortgages that are

transferred to REO or involved in a foreclosure alternative. Single-family charge-oÅs, net of recoveries,

increased to $140 million in 2004 from $72 million in 2003 and $73 million in 2002, largely due to decreases in

the fair value of REO properties and increased REO acquisitions in the North Central region which continues

to hold the largest share of REO inventory. Charge-oÅs, net are reÖected on our consolidated balance sheets

as a reduction in loan loss reserves. See ""Table 71 Ì Loan Loss Reserves Activity'' for more information.

Table 69 and Table 70 provide detail by region for two key credit performance statistics, REO activity

and charge-oÅs. Regional REO acquisition and charge-oÅ trends follow a pattern that is similar to that of

regional delinquency trends.

Table 69 Ì REO Activity Ì By Region(1)

Year Ended December 31,

2004 2003 2002

(number of properties)

REO Inventory

Beginning property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,170 7,222 5,713

Properties acquired by region:

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,500 1,600 1,683

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,499 5,378 3,533

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,787 4,643 3,180

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,926 3,503 2,435

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,777 2,626 2,689

Total properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,489 17,750 13,520

Properties disposed by region:

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,562) (1,674) (1,798)

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,596) (4,476) (3,012)

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,111) (3,908) (2,420)

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,605) (3,018) (2,019)

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,181) (2,726) (2,762)

Total properties disposedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,055) (15,802) (12,011)

Ending property inventoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,604 9,170 7,222

(1) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a

description of these regions.

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130
Table 70 Ì Single-Family Charge-oÅs and Recoveries By Region(1)(2)

Year Ended December 31,

2004 2003(3) 2002(3)

(dollars in millions)

Northeast

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 24 $ 21 $ 27

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) (10) (13)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 11 14

Southeast

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 62 42

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49) (44) (24)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 18 18

North central

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 54 31

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49) (35) (20)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 19 11

Southwest

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 43 28

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (35) (32) (17)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 11 11

West

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 36 42

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) (23) (23)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 13 19

Total

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300 216 170

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (160) (144) (97)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 140 $ 72 $ 73

(1) See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to the consolidated Ñnancial statements for a

description of these regions.

(2) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of

default risk has been assumed by servicers, mortgage insurers, or other third parties through credit enhancements. Recoveries of

charge-oÅs through credit enhancements are limited in many instances to amounts less than the full amount of the loss.

(3) We reclassiÑed certain income for the years ended December 31, 2003 and 2002 from REO operations income (expense) to

(Provision) beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses related to

uncollectible interest on PCs held by third parties from Management and guarantee income to (Provision) beneÑt for credit losses to

conform with the 2004 presentation. As a result of these reclassiÑcations, we decreased charge-oÅs, net by $26 million and

$15 million for the years ended December 31, 2003 and 2002, respectively.

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131
Table 71 summarizes our loan loss reserves activity.

Table 71 Ì Loan Loss Reserves Activity

Year Ended December 31,

2004 2003 2002 2001 2000

(dollars in millions)

Total loan loss reserves(1):

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 299 $ 265 $ 224 $ 229 $ 217

Provision (beneÑt) for credit losses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143 (5) 122 33 82

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) (224) (171) (129) (124)

Recoveries(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 145 99 101 62

Charge-oÅs, net(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140) (79) (72) (28) (62)

Adjustment for change in accounting(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 110ÌÌÌ

Transfers-out during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20) (11) (9) (10) (8)

Other transfers, net during the period(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) 19ÌÌÌ

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 264 $ 299 $ 265 $ 224 $ 229

Charge-oÅs, net to Total mortgage portfolio(7) ÏÏÏÏÏÏÏÏÏÏÏ 1.1bp 0.7bp 0.7bp 0.3bp 0.7bp

Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 3.8 3.7 8.0 3.7

(1) Includes Reserves for loans held-for-investment in the Retained portfolio and Reserves for guarantee losses on Participation

CertiÑcates. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more details.

(2) We reclassiÑed certain income for the full years ended December 31, 2003, 2002, 2001 and 2000 from REO operations income

(expense) to (Provision) beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses

related to uncollectible interest on PCs held by third parties from Management and guarantee income to (Provision) beneÑt for

credit losses to conform with the 2004 presentation. This resulted in a $15 million decrease, $6 million decrease, $1 million increase

and $3 million increase in (Provision) beneÑt for credit losses during 2003, 2002, 2001 and 2000, respectively. As a result of these

reclassiÑcations, we increased recoveries by $26 million, $15 million, $9 million and $5 million for the full years 2003, 2002, 2001 and

2000, respectively.

(3) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of

default risk has been assumed by servicers, mortgage insurers or third parties through credit enhancements. Recoveries of charge-oÅs

through credit enhancements are limited in many instances to amounts less than the full amount of the loss.

(4) On January 1, 2003, $110 million of recognized guarantee obligations that was attributable to estimated incurred losses on

outstanding PCs or Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.

(5) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured

Securities, which is included as an oÅset to the related receivable balance within Accounts and other receivables, net on the

consolidated balance sheets.

(6) Represents the reclassiÑcation of the portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that

corresponds to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition

of a guarantee obligation. In addition, the 2004 amount includes a reduction of loan loss reserves of $31 million related to prior period

adjustments for which the related income was recorded in Other income.

(7) Calculated using the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of

Structured Securities that is backed by Ginnie Mae CertiÑcates.

We maintain two loan loss reserves Ì Reserve for losses on mortgage loans held-for-investment and

Reserve for guarantee losses on Participation CertiÑcates Ì at levels we deem adequate to absorb probable

incurred losses on mortgage loans held-for-investment in the Retained portfolio and certain mortgages

underlying PCs held by third parties. In certain circumstances, incurred losses related to PCs we hold are

captured as part of mark-to-market adjustments that are recognized in connection with PC residuals, which

represent the portion of the fair value of the PCs related to guarantee asset and guarantee obligation. See

""CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Credit Losses'' and ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for

further information.

Loan loss reserves are increased through periodic charges to the provision for credit losses and decreased

by charges-oÅs, net of recoveries. We record charge-oÅs to the loan loss reserves when the loss is speciÑcally

identiÑable and virtually certain. For mortgages that are transferred to REO or involved in a pre-foreclosure

sale, we record losses at the time of transfer or sale. For loans that have been modiÑed, losses are recorded at

the time of modiÑcation if the modiÑcation is a troubled debt restructuring.

As shown in ""Table 71 Ì Loan Loss Reserves Activity,'' total loan loss reserves decreased in 2004. This

decrease was primarily due to transfers out from the reserves related to uncollectible interest and a reduction

of reserves related to prior period adjustments for which the related income was recorded in Other income.

Credit Risk Sensitivity. As a part of our voluntary disclosure commitments made in October 2000, we

provide public disclosure of credit risk sensitivity results on a quarterly basis on our website. The credit risk

Freddie Mac

132
sensitivity analysis assesses the assumed increase in the present value of expected single-family mortgage

portfolio losses over ten years as the result of an estimated instantaneous Ñve percent decline in house prices

nationwide, followed by a return to more normal growth in house prices based on historical experience. An

internally developed Monte Carlo simulation-based model is used to generate our credit risk sensitivity

analyses. The Monte Carlo model uses an interest rate simulation program to generate numerous interest rate

paths that, in conjunction with a prepayment model, are used to estimate mortgage cash Öows along each path.

We use this same model to calculate the expected default cost component of the Guarantee obligation for

Participation CertiÑcates and to estimate expected future default costs of mortgage loans and mortgagerelated securities. In the credit rate sensitivity analysis, we adjust the house-price assumption used in the base

case to estimate the level and sensitivity of potential credit costs resulting from a sudden decline in house

prices. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED

ASSETS'' to the consolidated Ñnancial statements for more information.

The credit risk sensitivity results at December 31, 2004 and 2003 are shown in Table 72. Credit risk

sensitivity results as of the end of each quarter in 2004 and the Ñrst quarter of 2005 are presented in

""VOLUNTARY COMMITMENTS.''

Table 72 Ì Credit Risk Sensitivity Ì Estimated Net Present Value (NPV) of Increase in Credit Losses(1)

Before Receipt of Credit After Receipt of Credit

Enhancements(2) Enhancements(3)

NPV NPV Ratio(4) NPV NPV Ratio(4)

(dollars in millions, except ratios)

At:

December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $794 6.5bps $463 3.8bps

December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $926 7.9bps $533 4.6bps

(1) Based on single-family Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of

Structured Securities that is backed by Ginnie Mae CertiÑcates.

(2) Assumes that none of the credit enhancements currently covering our mortgages has any mitigating impact on our credit losses.

(3) Assumes we collect amounts due from credit enhancement providers after giving eÅect to certain assumptions about counterparty

default rates.

(4) Calculated as the ratio of net present value of increase in credit losses to the single-family Total mortgage portfolio, excluding nonFreddie Mac mortgage-related securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.

Institutional Credit Risk

We are subject to credit risk from institutional counterparties to the extent they do not fulÑll their

obligations to us under the terms of speciÑc contracts or agreements. Our primary institutional credit risk

exposure, other than counterparty credit risk exposure relating to derivatives (which is discussed in ""InterestRate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit Risk''),

arises from agreements with the following entities:

‚ mortgage seller/servicers;

‚ mortgage loan insurers;

‚ issuers, guarantors or third party providers of credit enhancements on non-Freddie Mac mortgagerelated securities held in our Retained portfolio;

‚ mortgage investors and originators; and

‚ issuers, guarantors and insurers of investments held in our Cash and investments portfolio.

Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of

mortgage seller/servicers that remit to us monthly principal and interest payments on mortgages, provide

credit enhancements such as recourse or collateral and represent and warrant that mortgages were originated

in compliance with our standards. The servicing fee charged by mortgage servicers varies by mortgage product.

We require our single-family servicers to retain a minimum percentage fee for mortgages serviced on our

behalf, typically 0.25 percent of the unpaid principal balance of the mortgage loans. However, we do on an

exception basis allow lower minimum servicing amounts. The credit risk associated with servicing fees relates

Freddie Mac

133
to whether we could transfer the servicing to an alternate servicer without a loss in the event the current

servicer is unable to fulÑll its responsibilities.

To protect us against these risks, we require seller/servicers to meet minimum Ñnancial capacity

standards, insurance and other eligibility requirements. We institute remedial actions against mortgage

seller/servicers that fail to comply with our standards. These actions may include transferring mortgage

servicing to other qualiÑed servicers or terminating our relationship with the mortgage seller/servicer.

We manage the credit quality of our multifamily seller/servicers by establishing institutional eligibility

requirements for participation in our multifamily programs. These seller/servicers must also meet our

standards for originating and servicing multifamily loans. We conduct regular quality control reviews of our

multifamily mortgage seller/servicers to determine whether they remain in compliance with our standards.

Mortgage Loan Insurers. We bear institutional credit risk relating to the non-performance of mortgage

insurers that insure purchased or guaranteed mortgages (see ""Mortgage Credit Risk Ì Mortgage Credit Risk

Management Strategies Ì Credit Enhancements'' for more information). We manage this risk by establishing

eligibility standards for mortgage insurers and by regularly monitoring our exposure to individual mortgage

insurers. We also monitor the mortgage insurers' credit ratings, as provided by nationally recognized credit

rating agencies. In addition, we periodically review the methods used by the credit rating agencies. We also

perform periodic on-site reviews of mortgage insurers to conÑrm compliance with our eligibility requirements

and to evaluate their management and control practices. In addition, state insurance authorities regulate

mortgage insurers. Substantially all mortgage insurers providing primary mortgage insurance and pool

insurance coverage on single-family mortgages purchased during 2004 were rated ""AA'' or better by S&P. At

December 31, 2004, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance

Corporation) that each provided more than Ñve percent of our Total mortgage insurance coverage (including

primary mortgage insurance and pool insurance) and together accounted for approximately 99 percent of our

overall coverage.

Non-Freddie Mac Mortgage-Related Securities. Investments for our Retained portfolio expose us to

institutional credit risk on non-Freddie Mac mortgage-related securities to the extent that issuers, guarantors,

or third parties providing credit enhancements, become insolvent. See ""Table 33 Ì Credit Characteristics of

Mortgages and Mortgage-Related Securities in the Retained Portfolio'' for more information concerning our

Retained portfolio.

Our non-Freddie Mac mortgage-related securities portfolio consists of both agency and non-agency

mortgage securities. Agency mortgage-related securities, which are securities issued or guaranteed by Fannie

Mae or Ginnie Mae, present minimal institutional credit risk exposure to us due to the high credit quality of

the issuers and guarantors. Agency mortgage-related securities are generally not separately rated by credit

rating agencies, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage

securities rated AAA (based on the S&P rating scale or an equivalent rating from other nationally recognized

rating agencies). At December 31, 2004, we held approximately $60 billion of agency securities, representing

approximately four percent of our Total mortgage portfolio (see ""Table 8 Ì Freddie Mac's Total Mortgage

Portfolio Based on Unpaid Principal Balances'' for more information about our Total mortgage portfolio).

Non-agency mortgage securities may expose us to some institutional credit risk, if the nature of the credit

enhancement relies on a third party to cover potential losses. However, most of our non-agency mortgage

securities rely primarily on subordinated tranches to provide credit loss protection and therefore expose us to

very limited counterparty risk. In those instances where we desire further protection, we may choose to

mitigate our exposure with bond insurance or by purchasing additional subordination. Bond insurance exposes

us to the claims paying ability of the bond insurer. Substantially all of the bond insurers providing coverage for

non-agency mortgage securities held by us were rated AAA or equivalent by at least one nationally recognized

credit rating agency. At December 31, 2004, we held approximately $175 billion of non-agency mortgagerelated securities. Of this amount, 97 percent were rated AAA or equivalent.

We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing

securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers of these securities and the bond insurers that guarantee them. To assess the

Freddie Mac

134
creditworthiness of non-agency securities, we may perform additional analysis, including on-site visits,

veriÑcation of loan documentation, review of underwriting or servicing processes and similar due diligence

measures. In addition, management regularly evaluates these investments to determine if any impairment in

fair value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination of

both. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated

Ñnancial statements for more information on impairments.

Mortgage Investors and Originators. We are exposed to pre-settlement risk through the purchase, sale

and Ñnancing of mortgage loans and mortgage-related securities with mortgage investors and originators. This

exposure primarily arose in connection with our Securities Sales & Trading Group business unit prior to its

cessation of activities in the fourth quarter of 2004. Pre-settlement risk is the risk that a counterparty will not

perform under the terms of a transaction due to adverse changes in market value between trade date and

settlement date. The probability of such a default is generally remote over the short time horizon between the

trade and settlement date. We manage this risk by evaluating the creditworthiness of our counterparties and

monitoring and managing our exposures. In some instances, we may require these counterparties to post

collateral.

Cash and Investments Portfolio. Institutional credit risk also arises from the insolvency of issuers or

guarantors of investments held in our Cash and investments portfolio. This portfolio is generally used to meet

both anticipated and unanticipated liquidity and working capital requirements (See ""LIQUIDITY AND

CAPITAL RESOURCES Ì Liquidity'' for more information). Instruments in this portfolio are investment

grade at the time of purchase and primarily short-term in nature, thereby signiÑcantly mitigating institutional

credit risk in this portfolio. We regularly evaluate these investments to determine if any impairment in fair

value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination of

both.

Freddie Mac

135
QUARTERLY SELECTED FINANCIAL DATA

2004

1Q 2Q 3Q 4Q Full-Year

(dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,126 $2,625 $ 2,321 $2,065 $ 9,137

Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26) 1,532 (3,691) (854) (3,039)

Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (503) (548) (603) (717) (2,371)

Income tax (expense) beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (285) (855) 467 (117) (790)

Net income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,312 $2,754 $(1,506) $ 377 $ 2,937

Basic earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏÏ $ 1.83 $ 3.92 $ (2.26) $ 0.47 $ 3.96

Diluted earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏ $ 1.82 $ 3.91 $ (2.26) $ 0.47 $ 3.94

2003

1Q 2Q 3Q 4Q Full-Year

(dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,421 $2,185 $2,442 $2,450 $ 9,498

Non-interest income (loss)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,247 1,830 (2,294) (1,027) (244)

Non-interest expense(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (410) (613) (562) (651) (2,236)

Income tax (expense) beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (991) (1,096) 126 (241) (2,202)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,267 $2,306 $ (288) $ 531 $ 4,816

Basic earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏÏÏ $ 3.22 $ 3.28 $(0.49) $ 0.70 $ 6.69

Diluted earnings (loss) per common share(1) ÏÏÏÏÏÏÏÏÏ $ 3.21 $ 3.27 $(0.49) $ 0.69 $ 6.68

(1) Earnings per share is computed independently for each of the quarters presented. Due to the use of weighted-average common shares

outstanding when calculating earnings per share, the sum of the four quarters may not equal the full-year amount. Earnings per share

amounts may not recalculate using the amounts in this table due to rounding.

(2) Certain expenses related to uncollectible interest on PCs held by third parties were reclassiÑed to (Provision) beneÑt for credit losses

from Management and guarantee income to conform with the 2004 presentation. This resulted in a reclassiÑcation of $4 million,

$3 million, $5 million and $3 million for 1Q 2003, 2Q 2003, 3Q 2003 and 4Q 2003, respectively, totaling a $15 million reduction in

the loss reported in Non-interest income (loss) with a corresponding increase in expenses reported in Non-interest expense

during 2003.

SUBSEQUENT ACCOUNTING REVISIONS

As we announced on May 12, 2005, we entered into a closing agreement with the IRS that resolves issues

relating to the tax treatment of dividends paid on step-down preferred stock that our two REIT subsidiaries

previously issued. The closing agreement resulted in changes to our 2004 Ñnancial results previously released

in our Information Statement Supplement dated March 31, 2005. SpeciÑcally, we recorded a reduction in tax

reserves, which are a component of Other assets, and a corresponding reduction in Income tax expense,

totaling $110 million. Of that amount, Income tax expense was reduced by $94 million, which was the balance

of the tax reserve related to this issue at January 1, 2004, and by a reversal of $16 million of additional tax

reserve recorded in 2004. The impact by quarter was an increase (reduction) to Net income of$101 million,

$16 million, ($9) million, and $2 million, aÅecting the Ñrst, second, third and fourth quarters of 2004,

respectively. In 2005 and thereafter, we will record tax beneÑts related to REIT preferred stock dividend

payments in the consolidated Ñnancial statements consistent with the closing agreement. See

""NOTE 14: INCOME TAXES'' to the consolidated Ñnancial statements for additional information.

Freddie Mac

136
ADDITIONAL INFORMATION

The following tables provide additional information about select captions on our consolidated balance

sheets at December 31, 2004, 2003 and 2002.

Table 73 Ì Fair Value of Securities

December 31,

2004 2003 2002

(dollars in millions)

Available-for-sale securities

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $352,102 $384,426 $327,995

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,519 76,844 81,930

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,762 2,918 5,175

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168,058 109,409 73,498

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,020 7,729 7,667

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 590,461 581,326 496,265

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,733 16,596 34,694

Debt securities issued by the U.S. Treasury and other U.S.

government corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 12,493

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4,924 10,102

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,097 9,494 6,641

Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 150 2,240

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 64 249

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 31,228 66,419

Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $620,291 $612,554 $562,684

Trading securities

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,398 $ 17,590 $ 28,535

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 385 586 519

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 24 50

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,842 18,200 29,104

Cash and investments portfolio(1)

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 17,266 20,244

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 15,052 11,029

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 490 1,062

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9 31

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 32,817 32,366

Non-mortgage-related securities:

Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 52 96

Debt securities issued by the U.S. Treasury and other U.S.

government corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 479 1,004

Mutual funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 540

Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 341 479

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 437 229

Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5 4

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 57

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,314 2,409

Total trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,842 $ 52,331 $ 63,879

(1) The reduction of trading securities within the Cash and investments portfolio in 2004 was attributable to us ceasing the operations of

our PC market-making and support activities accomplished through our Securities Sales & Trading Group business unit and external

Money Manager program during the fourth quarter of 2004.

For additional information about the securities we hold, see ""NOTE 5: RETAINED PORTFOLIO

AND CASH AND INVESTMENTS PORTFOLIO'' to the consolidated Ñnancial statements.

Freddie Mac

137
Table 74 Ì Senior Debt, Due Within One Year

2004

Average Outstanding

At December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance, Net(2) EÅective Rate(3) Month End

(dollars in millions)

Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $180,198 2.04% $184,834 1.40% $212,715

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 2.51 4,289 1.31 5,320

Securities sold under agreements to

repurchase and Federal funds purchased Ì Ì 801 1.37 3,046

Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,279 2.24 13,549 1.36 16,279

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,639

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 85,664

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ $282,303

2003

Average Outstanding

At December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance, Net(2) EÅective Rate(3) Month End

(dollars in millions)

Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $188,309 1.12% $207,374 1.21% $264,370

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,300 1.18 1,243 1.32 5,300

Securities sold under agreements to

repurchase and Federal funds

purchased(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,611 0.96 2,283 0.94 8,296

Swap collateral obligations(6) ÏÏÏÏÏÏÏÏÏÏÏÏ 16,082 1.02 11,694 1.13 16,082

Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ 733

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,035

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 83,227

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ $295,262

2002

Average Outstanding

At December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance, Net(2) EÅective Rate(3) Month End

(dollars in millions)

Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $163,202 1.61% $180,889 2.02% $211,393

Medium-term notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,015 2.07 5,528 2.39 8,163

Securities sold under agreements to

repurchase and Federal funds purchased 15,262 1.08 13,882 1.39 21,472

Swap collateral obligations(6)(7) ÏÏÏÏÏÏÏÏÏÏ 8,209 1.39 3,278 1.65 8,209

Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ 6,356

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,044

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 50,385

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ $244,429

(1) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums

and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

(2) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on the

consolidated balance sheets.

(3) Represents the approximate weighted average eÅective rate during the period, which includes the amortization of discounts or

premiums and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

(4) Maximum Balance, Net Outstanding at Any Month End for 2003 and 2002 has been revised to conform with the 2004 presentation.

(5) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2003 have been revised for

Securities sold under agreements to repurchase and Federal funds purchased to conform with the 2004 presentation.

(6) Weighted Average EÅective Rate at December 31, 2003 and 2002 have been revised to conform with the 2004 presentation.

(7) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2002 have been revised to conform

with the 2004 presentation.

For additional information about our debt securities, see ""NOTE 8: DEBT SECURITIES AND

SUBORDINATED BORROWINGS'' to the consolidated Ñnancial statements.

Freddie Mac

138
VOLUNTARY COMMITMENTS

The following provides updated information on the Voluntary Commitments we made in October 2000.

Additional information about our Voluntary Commitments is available on our website

(www.FreddieMac.com/investors).

Description Comments Status

1. Periodic Issuance of Subordinated Debt:

‚ We will issue publicly traded and externally ‚ We did not issue any Freddie SUBS» in

rated Freddie SUBS» on a semi-annual 2004. As a result of not having current

basis. consolidated Ñnancial statements, our ability

to issue subordinated debt may be limited.

‚ Freddie SUBS» will be issued in an amount ‚ At December 31, 2004, the ratio of‚ As of December 31, 2004, we met this

such that ""Voluntary Commitments' capital'' Voluntary Commitments' capital less commitment.

less 0.45 percent of Outstanding PCs and 0.45 percent of Outstanding PCs and

Structured Securities will equal or exceed Structured Securities to total assets was

four percent of on-balance sheet assets by 4.6 percent.

October 2003. Voluntary Commitments'

capital is deÑned as the sum of Core capital

(eÅectively equal to Stockholders' equity

less AOCI, net of taxes), loan loss reserves

and Freddie SUBS» outstanding.

‚ We cannot determine this ratio as of the end ‚ We plan to update our disclosure for this

of any period in 2005 with speciÑcity until we commitment following the release of our

release the consolidated Ñnancial statements 2005 consolidated Ñnancial statements for

for the relevant period. the relevant period.

2. Liquidity Management and Contingency

Planning:

‚ We will comply with principles of sound ‚ For purposes of this commitment, we will ‚ As of December 31, 2004, we met this

liquidity management set forth by the Basel maintain liquidity needed to meet our commitment.

Committee on Banking Supervision and will obligations to pay principal and interest

maintain more than three months' worth ofrelated to our outstanding debt maturities, to

liquidity (based on internal forecasts) pay PC investors the amounts due to them,

assuming we have no access to new issue to purchase mortgage loans and mortgagepublic debt markets. related securities that we have committed to

purchase as well as to fund operating

expenditures. To fund these obligations in

the event of market disruption, we could sell

some securities from our Retained portfolio

and liquidate non-mortgage investments

from our Cash and investments portfolio. In

addition, we could borrow against mortgagerelated securities that are a component of our

Retained portfolio by executing transactions

in the repurchase agreement market. (Our

ability to execute these and other strategies

may be adversely aÅected by market

conditions, operational constraints and other

factors.)

‚ In implementing this commitment, we will ‚ Assets that meet this deÑnition include Cash ‚ As of December 31, 2004, we met this

maintain at least Ñve percent of on-balance and cash equivalents (excluding operating commitment.

sheet assets in liquid, marketable, non- cash accounts, cash posted as collateral by

mortgage securities. We will also maintain derivative counterparties and certain other

additional, liquid mortgage securities for use balances), various non-mortgage investments

as collateral in short-term borrowings from such as municipal bonds, asset-backed

dealer counterparties. securities, commercial paper and certain

securities purchased under agreements to

resell (reverse repos). This commitment no

longer considers investments held by our

Securities Sales & Trading Group business

unit or as part of our external Money

Manager program as these operations ceased

activity during the fourth quarter of 2004.

‚ We cannot determine the percentage of on- ‚ We plan to update our disclosure for this

balance sheet assets in liquid, marketable, commitment following the release of our

non-mortgage securities as of the end of any 2005 consolidated Ñnancial statements for

period in 2005 with speciÑcity until we the relevant period.

release the consolidated Ñnancial statements

for the relevant period.

Freddie Mac

139
VOLUNTARY COMMITMENTS (continued)

Description Comments Status

3. Interest-Rate Risk Disclosures

We will provide public disclosure of interest- The full-year average PMVS-L and PMVSrate risk sensitivity results on a monthly basis. YC for 2004 was 2 and 0 percent, respectively.

SpeciÑcally, we will disclose the PMVS-L, 2005's monthly average PMVS results and

which shows the expected impact on our related disclosures are provided in our Monthly

portfolio market value from an immediate, Volume Summary, or MVS, which is available

adverse 50 basis point parallel shift in the yield on our website, www.FreddieMac.com/investor.

curve. We will also disclose the PMVS-YC,

which shows the same impact from an

immediate, adverse 25 basis point change in the

slope of the yield curve.

4. Credit Risk Disclosures:

We will provide public disclosure of credit risk An internally developed Monte Carlo Our quarterly credit risk sensitivity estimates

sensitivity results on a quarterly basis. simulation-based model is used to generate our are as follows:

Compared to a base case in which house prices credit risk sensitivity analyses. We use this

on average rise at rates consistent with long- same model to calculate the expected default

term trends, these disclosures show the increase cost component of the Guarantee obligation on

in the present value of expected single-family Participation CertiÑcates and to estimate

credit losses to us over a ten-year period expected future default costs of mortgage loans

assuming an immediate Ñve percent decline in and mortgage-related securities. In this

house prices followed by a resumption of the analysis, we adjust the house-price assumption

same long-term trend in house-price used in the base case to estimate the level and

appreciation as in the base case. sensitivity of potential credit costs associated

with our existing single-family mortgage

portfolio. See ""NOTE 2: TRANSFERS OF

SECURITIZED INTERESTS IN

MORTGAGE-RELATED ASSETS'' to the

consolidated Ñnancial statements for more

information.

Before Receipt After Receipt

of Credit of Credit

Enhancements(1) Enhancements(2)

NPV NPV

NPV(3) Ratio(4) NPV(3) Ratio(4)

(dollars in (dollars in

millions) millions)

As of:

03/31/05 $756 6.2 bps $447 3.6 bps

12/31/04 794 6.5 bps 463 3.8 bps

09/30/04 879 7.3 bps 512 4.2 bps

06/30/04 873 7.3 bps 522 4.4 bps

03/31/04 872 7.4 bps 503 4.3 bps

12/31/03 926 7.9 bps 533 4.6 bps

(1) Assumes that none of the credit enhancements

currently covering our mortgages has any mitigating impact on our credit losses.

(2) Assumes we collect amounts due from credit

enhancement providers after giving eÅect to

certain assumptions about counterparty default

rates.

(3) Based on single-family Total mortgage portfolio,

excluding Structured Securities backed by nonFreddie Mac mortgage-related securities and

Structured Securities backed by Ginnie Mae

CertiÑcates.

(4) Calculated as the ratio of net present value of

increase in credit losses to the total singlefamily mortgage portfolio, which excludes

multi-family mortgages and Structured Securities backed by Ginnie Mae CertiÑcates.

5. Public Disclosure of Annual Rating:

We will obtain an annual credit rating assessing We have a ""risk-to-the-government'' credit rat- As of May 23, 2005, S&P's risk-to-the-governrisk to the government or independent Ñnancial ing of ""AA¿'' from S&P. Moody's has as- ment rating us was ""AA-'' and Moody's Bank

strength from a nationally recognized statistical signed us a Bank Financial Strength Rating of Financial Strength Rating for us was ""A-.''

rating organization and will disclose this rating ""A¿.'' Both of these ratings are maintained on

to the public. a surveillance basis, which means that the rating agencies are committed to notify the public

if the rating is ever aÅected by a change in our

Ñnancial condition.

Freddie Mac

140
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Freddie Mac

141
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Freddie Mac:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of

income, of cash Öows, and of stockholders' equity present fairly, in all material respects, the Ñnancial position

of Freddie Mac, a stockholder-owned government-sponsored enterprise (the ""company''), and its subsidiaries

at December 31, 2004 and 2003, and the results of their operations and their cash Öows for each of the three

years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in

the United States of America. These Ñnancial statements are the responsibility of the company's management.

Our responsibility is to express an opinion on these Ñnancial statements based on our audits. We conducted

our audits of these statements in accordance with auditing standards generally accepted in the United States

of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in the Ñnancial statements, assessing the accounting

principles used and signiÑcant estimates made by management, and evaluating the overall Ñnancial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

We have also audited in accordance with auditing standards generally accepted in the United States of

America the supplemental consolidated fair value balance sheets of the company as of December 31, 2004 and

2003. As described in ""NOTE 16: FAIR VALUE DISCLOSURES,'' the supplemental consolidated fair

value balance sheets have been prepared by management to present relevant Ñnancial information that is not

provided by the historical-cost consolidated balance sheets and is not intended to be a presentation in

conformity with generally accepted accounting principles. In addition, the supplemental consolidated fair

value balance sheets do not purport to present the net realizable, liquidation, or market value of the company

as a whole. Furthermore, amounts ultimately realized by the company from the disposal of assets or amounts

required to settle obligations may vary signiÑcantly from the fair values presented. In our opinion, the

supplemental consolidated fair value balance sheets referred to above present fairly, in all material respects,

the information set forth therein as described in ""NOTE 16: FAIR VALUE DISCLOSURES.''

As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' the

company adopted the provisions of FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure

Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others'' and FASB StaÅ

Position 45-2 ""Whether FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements

for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' Provides Support for Subsequently

Accounting for a Guarantor's Liability at Fair Value,'' as of January 1, 2003.

McLean, Virginia

June 1, 2005

Freddie Mac

142
FREDDIE MAC

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

2004 2003 2002

(dollars in millions, except sharerelated amounts)

Interest income

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,007 $ 4,251 $ 4,290

Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,460 29,051 30,039

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,136 3,796 4,147

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,603 37,098 38,476

Interest expense

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,908) (2,785) (4,303)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,950) (22,083) (21,337)

Total interest expense on debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25,858) (24,868) (25,640)

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (708) (1,641) (1,236)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,566) (26,509) (26,876)

Income (expense) related to derivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 (1,091) (2,075)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,137 9,498 9,525

Non-interest income (loss)

Management and guarantee income (includes interest on Guarantee asset

for Participation CertiÑcates of $257, $244 and $242) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,382 1,653 1,527

Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair

value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,135) (1,461) (2,176)

Income on ""Guarantee obligation for Participation CertiÑcates'' ÏÏÏÏÏÏÏÏÏ 732 925 592

Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,475) 39 5,302

Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 743 644 187

Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (348) (1,114) 1,799

Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (327) (1,775) (674)

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159 352 276

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230 493 321

Non-interest income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,039) (244) 7,154

Non-interest expense

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (758) (624) (593)

Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (588) (311) (155)

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (52) (42)

Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (144) (194) (184)

Total administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,550) (1,181) (974)

(Provision) beneÑt for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (143) 5 (122)

REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 (7) (4)

Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (281) (200) (160)

Minority interests in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (129) (157) (184)

Other expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (271) (696) (432)

Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,371) (2,236) (1,876)

Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,727 7,018 14,803

Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (790) (2,202) (4,713)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $ 10,090

Preferred stock dividends and issuance costs on redeemed preferred stock

(including $0, $0 and $5 of issuance costs on redeemed preferred stock) (210) (216) (239)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,727 $ 4,600 $ 9,851

Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96 $ 6.69 $ 14.22

Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.94 $ 6.68 $ 14.17

Weighted average common shares outstanding (thousands)

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 689,282 687,094 692,727

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 691,521 688,675 695,116

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.20 $ 1.04 $ 0.88

The accompanying notes are an integral part of these Ñnancial statements.

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FREDDIE MAC

CONSOLIDATED BALANCE SHEETS

December 31, December 31,

2004 2003

(dollars in millions)

Assets

Retained portfolio

Mortgage loans:

Held-for-investment, at amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 58,852 $ 57,804

Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114) (174)

Held-for-sale, at lower of cost or market value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,582 2,530

Mortgage loans, net of reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,320 60,160

Mortgage-related securities:

Available-for-sale, at fair value (includes $194 and $282 pledged as collateral that may be

repledged) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 590,461 581,326

Trading, at fair value (includes $0 and $32 pledged as collateral that may be repledged) ÏÏÏÏÏÏ 11,842 18,200

Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 845 671

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 603,148 600,197

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 664,468 660,357

Cash and investments

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,253 23,142

Investments:

Mortgage-related securities:

Trading, at fair value (includes $0 and $6 pledged as collateral that may be repledged) ÏÏÏÏÏÏÏ Ì 32,817

Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (5)

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 31,228

Trading, at fair value (includes $0 and $23 pledged as collateral that may be repledged) ÏÏÏÏÏÏ Ì 1,314

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 32,542

Total mortgage-related and non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,830 65,354

Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,197 20,582

Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,280 109,078

Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,286 8,067

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,257 16,180

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,516 3,686

Real estate owned, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 741 795

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,736 5,286

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795,284 $803,449

Liabilities and stockholders' equity

Debt securities, net

Senior debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $282,303 $295,262

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 443,772 438,738

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,622 5,613

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 731,697 739,613

Due to Participation CertiÑcate investorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,654 13,205

Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,329 7,345

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,065 2,904

Derivative liabilities, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226 357

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150 125

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,238 6,484

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 762,359 770,033

Commitments and contingencies (Notes 1, 3, 4 and 13)

Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,509 1,929

Stockholders' equity

Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,609 4,609

Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and

690,606,185 shares and 688,573,911 shares outstanding, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 152

Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 873 814

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,728 28,837

Accumulated other comprehensive income (loss), (AOCI) net of taxes, related to:

Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,339 6,349

Cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,924) (7,837)

Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) (10)

Total accumulated other comprehensive income (loss), net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,593) (1,498)

Treasury stock, at cost, 35,276,095 shares and 37,308,369 shares, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,353) (1,427)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,416 31,487

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795,284 $803,449

The accompanying notes are an integral part of these Ñnancial statements.

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144
FREDDIE MAC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Year Ended December 31,

2004 2003 2002

Shares Amount Shares Amount Shares Amount

(dollars and shares in millions)

Preferred stock, at redemption value

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 $ 4,609 92 $ 4,609 92 $ 4,596

Preferred stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 6 300

Preferred stock redemptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (6) (287)

Preferred stock, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 4,609 92 4,609 92 4,609

Common stock, par value

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Common stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Additional paid-in capital

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 814 744 671

Stock-based compensation, before tax eÅect of $20, $23

and $23 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 64 65

Income tax beneÑt from employee stock option exercises ÏÏ 20 16 16

Preferred stock issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (2)

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) (10) (6)

Additional paid-in capital, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 873 814 744

Retained earnings

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,837 24,955 15,710

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,937 4,816 10,090

Preferred stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210) (216) (234)

Common stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (836) (718) (611)

Retained earnings, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,728 28,837 24,955

AOCI, net of taxes

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,498) 2,340 (557)

Changes in unrealized gains (losses) related to availablefor-sale securities, net of reclassiÑcation adjustmentsÏÏÏÏ (2,010) (5,868) 8,017

Changes in unrealized gains (losses) related to cash Öow

hedge relationships, net of reclassiÑcation adjustments ÏÏ (87) 2,040 (5,120)

Change in minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 (10) Ì

AOCI, net of taxes, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,593) (1,498) 2,340

Treasury stock, at cost

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 (1,427) 39 (1,470) 31 (948)

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) 74 (2) 43 (1) 33

Common stock repurchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 9 (555)

Treasury stock, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 (1,353) 37 (1,427) 39 (1,470)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $31,416 $31,487 $31,330

Comprehensive income

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $10,090

Changes in AOCI, net of taxes, net of reclassiÑcation

adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,095) (3,838) 2,897

Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 842 $ 978 $12,987

The accompanying notes are an integral part of these Ñnancial statements.

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145
FREDDIE MAC

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Cash Öows from operating activities

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $ 10,090

Adjustments to reconcile net income to net cash provided by operating activities:

Hedge accounting (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (743) (644) (187)

Unrealized (gains) losses on derivatives not in hedge accounting relationships, net ÏÏÏÏÏÏ 2,758 (1,079) (5,941)

Asset related amortization Ì premiums, discounts and hedging basis adjustmentsÏÏÏÏÏÏÏ 1,329 995 (404)

Debt related amortization Ì premiums and discounts on certain debt securities and

hedging basis adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,318 2,318 374

Losses on debt retirementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 327 1,775 674

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143 (5) 122

(Gains) losses on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 738 2,625 (1,784)

Purchases of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31,698) (82,074) (55,275)

Sales of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,965 84,329 49,035

Repayments of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 390 1,097

Net proceeds from purchases and sales of trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,672 8,935 7,170

Change in accounts and other receivables, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,149 4,394 3,238

Change in amounts due to Participation CertiÑcate investors, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 529 (22,369) 7,705

Change in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (513) (217) (1,207)

Change in income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 756 (1,090) (484)

Change in Guarantee asset for Participation CertiÑcates, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (830) (1,362) 711

Change in Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,173 1,606 272

Change in Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (170) (389) 326

Change in deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (346) 737 2,690

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 219 2,559

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,852 3,910 20,781

Cash Öows from investing activities

Purchases of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (276,573) (446,036) (451,510)

Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,583 143,513 176,928

Proceeds from maturities of available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,148 242,044 178,991

Purchases of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,241) (17,570) (13,197)

Repayments of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,511 15,283 12,999

Proceeds from sales of REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,552 1,327 980

Net (increase) decrease in securities purchased under agreements to resell and Federal

funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (11,615) 2,461 10,457

Derivative premiums and terminations, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (193) 3,333 (4,062)

Investments in housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) (32) (65)

Net cash used for investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25,897) (55,677) (88,479)

Cash Öows from Ñnancing activities

Proceeds from issuance of short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 826,020 900,073 2,048,131

Repayments of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (841,638) (881,860) (2,099,206)

Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187,878 258,371 269,386

Repayments of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (184,295) (210,841) (141,257)

Repayments of minority interest in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (405) (376) (350)

Proceeds from issuance of preferred stock, net of issuance costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 298

Redemption of preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (287)

Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 33 27

Repurchases of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (555)

Payment of cash dividends on preferred stock and common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,046) (934) (845)

Repayments of housing tax credit partnerships notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (415) (349) (316)

Net cash (used for) provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13,844) 64,117 75,026

Net increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,111 12,350 7,328

Cash and cash equivalents at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,142 10,792 3,464

Cash and cash equivalents at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 35,253 $ 23,142 $ 10,792

Supplemental cash Öow information

Cash paid for:

Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 23,257 $ 25,562 $ 26,590

Derivative interest carry ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 325 578 3,239

Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 363 2,538 2,491

Non-cash investing and Ñnancing activities:

Securitized and retained available-for-sale securities formed from prior period purchases

of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 272 1,681 2,910

Transfers from mortgage loans to REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,546 1,570 1,127

Investments in housing tax credit partnerships Ñnanced by notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,184 702 896

Transfers from held-for-sale mortgages to held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 198 179 209

The accompanying notes are an integral part of these Ñnancial statements.

Freddie Mac

146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Freddie Mac (the ""company'') is a stockholder-owned, government-sponsored enterprise (""GSE'')

established by Congress in 1970 to provide a continuous Öow of funds for residential mortgages. Freddie Mac's

obligations are the company's alone and not insured or guaranteed by the United States of America (""U.S.'')

or any other agency or instrumentality of the U.S.

Freddie Mac plays a fundamental role in the American housing Ñnance system, linking the domestic

mortgage market and the global capital markets. Freddie Mac's participation in the secondary mortgage

market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and

investing in mortgage loans and mortgage-related securities held in Freddie Mac's Retained portfolio.

Through its credit guarantee activities, Freddie Mac securitizes mortgage loans by issuing Mortgage

Participation CertiÑcates (""PCs'') to third-party investors. Freddie Mac also resecuritizes mortgage-related

securities that are issued by Freddie Mac or the Government National Mortgage Association (""Ginnie

Mae''), as well as non-agency entities. Securities issued through Freddie Mac's resecuritization activities are

referred to as Structured Securities. Freddie Mac also guarantees multifamily mortgage loans that support

housing revenue bonds issued by third parties and it guarantees other mortgage loans held by third parties,

which are included in the deÑnition of PCs and Structured Securities. In each case, under U.S. generally

accepted accounting principles (""GAAP''), securitized mortgage-related assets that back PCs and Structured

Securities that are held by third parties are not reÖected as assets of Freddie Mac. However, Freddie Mac does

retain an obligation to guarantee the payment of principal and interest on issued PCs and Structured

Securities, which usually results in the recognition of a guarantee asset and guarantee obligation on the

company's consolidated balance sheets.

Freddie Mac's Ñnancial reporting and accounting policies conform to GAAP. Certain amounts in prior

periods have been reclassiÑed to conform with the current presentation.

Estimates

The preparation of Ñnancial statements in conformity with GAAP requires management to make

estimates and assumptions that aÅect (a) the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the Ñnancial statements and (b) the reported amounts of

revenues and expenses during the reporting period. Actual results could diÅer from those estimates. The use of

certain estimates in preparation of the Ñnancial statements is described below.

A signiÑcant estimate that is prevalent in the company's Ñnancial statements is the estimation of fair

value for Ñnancial instruments, including derivative instruments, required to be recorded at fair value under

GAAP. The measurement of fair value is fundamental to the presentation of Freddie Mac's Ñnancial condition

and results of operations and, in many instances, requires management to make complex judgments. In

general, Freddie Mac records Ñnancial instruments at an estimate of the amount at which the instrument

could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Fair value is generally based on (i) quoted prices, (ii) market parameters obtained from third-party dealers,

pricing services or based on direct market observations in active markets or (iii) derived from such prices or

parameters, where available. If quoted prices or market parameters are not available, fair value is based on

internal valuation models using market data inputs or internally developed assumptions, where appropriate.

The use of diÅerent pricing models and assumptions could produce materially diÅerent estimates of fair value.

See ""NOTE 16: FAIR VALUE DISCLOSURES'' for further discussion of fair value estimates.

Freddie Mac also makes other signiÑcant estimates and judgments in:

‚ determining the expected future cash Öows (including the timing and amounts of prepayments) of

mortgage-related assets in the Retained portfolio;

‚ assessing when securities are other-than-temporarily impaired;

‚ assessing the reserves for credit losses on mortgage loans and guarantee losses on PCs;

‚ assessing Freddie Mac's legal and tax contingencies;

Freddie Mac

147
‚ estimating the expected timing and amounts of future issuances of non-callable debt and

redemptions of callable debt; and

‚ determining other matters that aÅect the reported amounts and disclosure of contingencies in the

Ñnancial statements.

In accordance with Statement of Financial Accounting Standards (""SFAS'') No. 5, ""Accounting for

Contingencies'' (""SFAS 5''), contingencies that might result in gains are not recorded prior to realization;

whereas, contingencies that might result in losses are accrued currently if it is probable a liability has been

incurred and the amount is reasonably estimable. Loss contingencies that are considered reasonably possible

are not accrued, but are required to be disclosed. Loss contingencies that are considered to have a remote

probability of occurrence are not required to be accrued or disclosed in accordance with SFAS 5.

Consolidation and Equity Method of Accounting

The consolidated Ñnancial statements include the accounts of the company and its subsidiaries. All

material intercompany transactions have been eliminated in consolidation. For each entity with which Freddie

Mac is involved, the company makes a determination as to whether the entity should be considered a

subsidiary of the company and included in the company's consolidated Ñnancial statements. Freddie Mac

consolidates all subsidiaries in which it holds more than 50 percent of the voting rights and has the ability to

exercise control over the entity. Based on its exercise of control over them, the company consolidates its two

majority-owned Real Estate Investment Trusts (""REITs''), Home Ownership Funding Corporation I and

Home Ownership Funding Corporation II. The company also consolidates the accounts of wholly-owned

JB 8000, Inc. (previously Ignition Mortgage Technology Solutions, Inc.). The equity and net earnings

attributable to the minority shareholder interests which relate to the company's consolidated subsidiaries are

reported separately in the consolidated balance sheets as Minority interests in consolidated subsidiaries and in

the consolidated statements of income as Minority interests in earnings of consolidated subsidiaries,

respectively.

In addition to voting interests in an entity, a controlling Ñnancial interest may also exist in entities through

arrangements that do not involve voting interests. Beginning in 2003, the company evaluated entities deemed

to be variable interest entities under the revision to Financial Accounting Standards Board (""FASB'')

Interpretation No. 46, ""Consolidation of Variable Interest Entities'' (""FIN 46-R''). FIN 46-R provides

guidance for determining when a company must consolidate the assets, liabilities and activities of a variable

interest entity. A variable interest entity is an entity (a) that has a total equity investment at risk that is not

suÇcient to Ñnance its activities without additional subordinated Ñnancial support from other entities or

(b) where the group of equity holders does not have the ability to make signiÑcant decisions about the entity's

activities, or the obligation to absorb the entity's expected losses or the right to receive the entity's expected

residual returns, or both. If an entity is a variable interest entity, the company must determine if its variable

interest is signiÑcant and whether the company is the ""primary beneÑciary.'' Under FIN 46-R, a company is

considered the primary beneÑciary and must consolidate a variable interest entity when it absorbs a majority of

expected losses or expected residual returns, or both. See ""NOTE 3: VARIABLE INTEREST ENTITIES''

for additional discussion and information regarding the consolidation of variable interest entities.

The company uses the equity method of accounting for companies over which it has the ability to exercise

signiÑcant inÖuence, but not control. Under the equity method of accounting, Freddie Mac reports its

recorded investment as part of Other assets on the consolidated balance sheets and recognizes its share of the

entity's net income or losses in the consolidated statements of income with an oÅset to the recorded

investment on the consolidated balance sheets. Losses are recognized up to the amount of investment

recorded.

The company regularly invests as a limited partner in qualiÑed low-income housing tax

credit (""LIHTC'') partnerships that are eligible for federal tax credits. These tax credits are reported as

reductions in the company's provision for income taxes pursuant to Emerging Issues Task Force (""EITF'')

Issue 94-1, ""Accounting for Tax BeneÑts Resulting from Investments in AÅordable Housing Projects''

(""EITF 94-1''). Freddie Mac accounts for the investments which are not consolidated using the equity

method of accounting, in accordance with Statement of Position (""SOP'') No. 78-9, ""Accounting for

Investments in Real Estate Ventures'' (""SOP 78-9''). For partnerships accounted for under the equity

method, Freddie Mac's recorded investment is reported as part of Other assets on the consolidated balance

Freddie Mac

148
sheets and its share of partnership income or loss is reported in the consolidated statements of income as Noninterest expense Ì Housing tax credit partnerships. The company's obligations to make delayed equity

contributions that are unconditional and legally binding are recorded at their present value in Other liabilities

on the consolidated balance sheets. To the extent that the company's cost basis in qualiÑed low-income

housing tax credit partnerships is diÅerent than the book basis reÖected at the partnership level, the basis

diÅerence is amortized over the life of the tax credits and included in the company's share of earnings

(losses) from housing tax credit partnerships. Freddie Mac periodically reviews these investments for

impairment and adjusts them to fair value when a decline in market value below the recorded investment is

deemed to be ""other than temporary'' under GAAP. Impairment losses are included in the consolidated

statements of income as part of Non-interest expense Ì Housing tax credit partnerships.

Cash and Cash Equivalents and Statements of Cash Flows

Freddie Mac accounts for highly liquid investment securities with an original maturity of three months or

less and used for cash management purposes as cash equivalents. Cash collateral obtained from counterparties

to derivative contracts where Freddie Mac is in an unrealized gain position is recorded as Cash and cash

equivalents.

In the consolidated statements of cash Öows, cash Öows related to the acquisition and termination of

derivatives other than forward commitments are generally classiÑed in investing activities, without regard to

whether they are designated as a hedge of another item. Cash Öows from commitments accounted for as

derivatives under SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities''

(""SFAS 133'') that result in the acquisition or sale of mortgage securities or mortgage loans are classiÑed in

either: (a) investing activities for available-for-sale securities or mortgage loans classiÑed as held-forinvestment or (b) operating activities for trading securities or mortgage loans classiÑed as held-for-sale. Cash

Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in operating activities unless the loans

have been securitized and retained as available-for-sale PCs within the same reporting period, in which case

they are classiÑed as investing activities. The periodic cash Öows on certain derivatives, which are recorded in

the consolidated statements of income on an accrual basis either in Income (expense) related to derivatives or

in Derivative gains (losses), are reported in operating activities. Cash Öows related to guarantee fees, including

buy-up and buy-down payments (""Buy-Ups'' and ""Buy-Downs,'' respectively), are classiÑed as operating

activities, along with the cash Öows related to the collection and distribution of payments on the mortgage

loans underlying PCs. Buy-Ups and Buy-Downs are discussed further below in ""Guarantor Swap Transactions

Executed Prior to January 1, 2003.'' Cash Öows related to the repayment of the original issue discount on

short-term, zero-coupon debt are reported as operating activities.

Freddie Mac reclassiÑed certain amounts from those previously reported on the consolidated statements

of cash Öows for the years ended December 31, 2003 and 2002. SpeciÑcally, for the years ended December 31,

2003 and 2002, Net cash provided by operating activities decreased by $572 million and $983 million,

respectively, while Net cash used for investing activities decreased by $432 million and $86 million,

respectively, and Net cash (used for) provided by Ñnancing activities increased by $140 million and

$897 million, respectively. These adjustments are corrections primarily related to certain timing diÅerences on

cash paid for interest related to short-term Discount notes and certain accruals related to the acquisition of

loans underlying Freddie Mac mortgage-related securities. In addition, Freddie Mac revised previously

reported supplemental cash Öow disclosures related to Cash paid for Interest for the years ended December 31, 2003 and 2002. This adjustment was made to include cash paid related to original issue discounts on

short-term Discount notes in conformity with the current period presentation and resulted in increasing

previously reported amounts by $2,710 million and $4,596 million for the years ended December 31, 2003 and

2002, respectively.

Freddie Mac often retains Structured Securities created through resecuritizations of mortgage-related

securities held by the company. The new Structured Securities the company acquires in these transactions are

classiÑed as available-for-sale or trading based upon the predominant classiÑcation of the mortgage-related

security collateral the company contributed. There were $428 million and $322 million of non-cash net

transfers to the available-for-sale classiÑcation from the trading classiÑcation related to resecuritization

transactions in 2004 and 2003, respectively.

Freddie Mac

149
Transfers of Financial Assets that Qualify as Purchases or Sales

Freddie Mac accounts for transfers of Ñnancial assets pursuant to the requirements of SFAS No. 140,

""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities''

(""SFAS 140''), and, prior to April 1, 2001, SFAS No. 125, ""Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities'' (""SFAS 125''), collectively referred to as

""SFAS 125/140.'' If Freddie Mac determines that it surrenders control over assets that it transfers to a third

party, Freddie Mac accounts for such transfers as sales to the extent its counterparty provides consideration

other than beneÑcial interests in the transferred assets (e.g., cash). Likewise, if Freddie Mac determines that

it obtains control over assets that were transferred to it, it accounts for such transfers as purchases to the extent

Freddie Mac provides consideration other than beneÑcial interests in exchange for the transferred assets.

Freddie Mac accounts for cash-based transfers of Ñnancial assets that do not qualify as sales as secured

borrowings.

If a transfer of Ñnancial assets qualiÑes as a sale, Freddie Mac continues to carry on its consolidated

balance sheets any retained interests in securitized Ñnancial assets. Such retained interests generally take one

of two forms. First, in connection with its right to receive guarantee payments (as further discussed below),

Freddie Mac recognizes a retained interest that is classiÑed on its consolidated balance sheets as Guarantee

asset for Participation CertiÑcates, at fair value. (This retained interest is referred to below as a ""GA''.)

Second, Freddie Mac recognizes PCs (or Structured Securities issued by the company using PCs held in its

portfolio) that are not transferred to third parties upon the completion of a securitization of mortgage loans

(or, in the case of Structured Securities, upon the resecuritization of PCs or Structured Securities held in

portfolio). PCs and Structured Securities that are held in portfolio are accounted for pursuant to the

requirements of SFAS No. 115, ""Accounting for Certain Investments in Debt and Equity Securities''

(""SFAS 115''). The carrying amounts of all of such retained interests are determined by allocating the

previous carrying amount of the transferred assets between assets sold and the retained interests based upon

their relative fair values at the date of transfer.

Upon completion of a transfer of Ñnancial assets that qualiÑes as a sale, Freddie Mac also de-recognizes

all assets sold and recognizes all assets obtained and liabilities incurred. In this regard, Freddie Mac recognizes

the fair value of its recourse obligation to guarantee the payment of principal and interest of PCs and

Structured Securities transferred in sale transactions. The initial fair value of such recourse obligations is

intended to reÖect the estimated amount that Freddie Mac would be required to pay to a third party of similar

credit standing to be relieved of Freddie Mac's obligations under the guarantee contract. The portion of such

recourse obligations that relates to Freddie Mac's non-contingent obligation to stand ready to perform under

its guarantee is recognized as Guarantee obligation for Participation CertiÑcates (or as a ""GO''), while the

portion of such recourse obligations that relates to incurred losses on securitized assets is recognized for

consolidated balance sheet purposes as Reserve for guarantee losses on Participation CertiÑcates. Such

recourse obligations serve as a reduction of proceeds in the calculation of the corresponding gain (loss) on the

sale of transferred PCs and Structured Securities. The fair value of a recognized recourse obligation is

estimated using an expected cash Öow approach consistent with Statement of Financial Accounting Concepts

No. 7, ""Using Cash Flow Information and Present Value in Accounting Measurements'' (""CON 7''). These

recourse obligations are valued independently of corresponding GAs. The resulting gain (loss) on sale of

transferred PCs and Structured Securities is reÖected in Freddie Mac's consolidated statements of income as a

component of Gains (losses) on investment activity.

Subsequent Measurement of Recognized GAs Ì Freddie Mac generally views recognized GAs as

Ñnancial assets that can be prepaid or otherwise settled in a manner that may prevent Freddie Mac from

recovering substantially all of its recorded investment. As a result, Freddie Mac generally accounts for GAs

like debt instruments classiÑed as trading under SFAS 115. All changes in the fair value of recognized GAs

are reÖected in earnings as a component of Gains (losses) on ""Guarantee asset for Participation CertiÑcates,

at fair value.'' All guarantee-related compensation that is received over the life of the loan in cash is reÖected

in earnings as a component of Management and guarantee income. See ""NOTE 2: TRANSFERS OF

SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' for a discussion of the attribution

of GA-related cash Öows.

Freddie Mac

150
Subsequent Measurement of Recognized GOs Ì With respect to the subsequent measurement of

recognized GOs for the year ended December 31, 2002, Freddie Mac accounts for recognized GOs at fair

value. All changes in fair value are reÖected in Freddie Mac's consolidated statements of income as a

component of Income on ""Guarantee obligation for Participation CertiÑcates.''

With respect to the subsequent measurement of recognized GOs for the years ended December 31, 2004

and 2003, Freddie Mac subsequently measures such liabilities using a systematic and rational method of

amortization. More speciÑcally, Freddie Mac amortizes recognized GOs into earnings in proportion to the rate

of unpaid principal balance decline of securitized mortgage loans. Periodic amortization of recognized GOs is

reÖected in earnings as a component of Income on ""Guarantee obligation for Participation CertiÑcates.''

Freddie Mac subsequently measures its contingent obligation to make guarantee payments pursuant to the

provisions of SFAS 5, which requires that credit losses be recognized in earnings when assessed as both

probable and estimable. See discussion below in ""Recently Adopted Accounting Standards and Accounting

Changes'' for further discussion concerning the change in methods used by Freddie Mac to subsequently

measure recognized GOs.

Guarantor Swap Transactions Executed Prior to January 1, 2003

Guarantor Swaps represent transactions in which third-party institutions transfer mortgage loans to

Freddie Mac in exchange for issued PCs that are backed by such mortgage loans. In return for providing its

guarantee on such issued PCs, and similar to PCs described above in ""Transfers of Financial Assets that

Qualify as Purchases or Sales,'' Freddie Mac earns a management and guarantee fee (""G-Fee'') that is paid

to Freddie Mac over the life of an issued PC. It is also common for Buy-Ups or Buy-Downs to be exchanged

between Freddie Mac and its counterparties upon the issuance of a PC. Buy-Ups represent upfront payments

that are made by Freddie Mac, which increase the G-Fee that Freddie Mac will receive over the life of the PC

in connection with its guarantee. Buy-Downs represent upfront payments that are made to Freddie Mac,

which decrease (i.e., partially prepay) the G-Fee that Freddie Mac will receive over the life of the PC in

connection with its guarantee. Moreover, Freddie Mac may receive upfront, cash-based payments as

additional compensation for its guarantee of mortgage loans with certain credit risk related characteristics

(""Credit Fees''). Finally, and as additional consideration received on such exchanges, Freddie Mac may

receive various types of seller-provided credit enhancements that correspond to securitized mortgage loans.

The accounting for the primary components of Guarantor Swaps executed prior to January 1, 2003 follows.

Accounting For Guarantee Fees, Buy-Up, Buy Down and Credit Fees Ì G-Fees (as adjusted for BuyDowns received) are recognized as Management and guarantee income on an accrual basis over the

corresponding guarantee period in accordance with the provisions of EITF Issue No. 85-20, ""Recognition of

Fees for Guaranteeing a Loan.''

Buy-Up amounts paid at PC issuance are recognized on the consolidated balance sheets as a GA if the

corresponding PCs are held by third parties and are accounted for like a debt security that is classiÑed as

trading under SFAS 115. If a Buy-Up was paid in connection with PCs that Freddie Mac holds, the Buy-Up is

recognized on the company's consolidated balance sheets as a component of Participation CertiÑcate

residuals, at fair value (""PC residuals''), which is discussed further below.

Buy-Down and Credit Fee amounts that were received at PC issuance prior to January 1, 2003 are

deferred on Freddie Mac's consolidated balance sheets as an adjustment of Other liabilities. These amounts

are amortized into Management and guarantee income pursuant to the requirements of SFAS No. 91,

""Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial

Direct Costs of Leases'' (""SFAS 91'').

If Freddie Mac were to purchase, and then subsequently sell for GAAP purposes, a PC that was issued

prior to January 1, 2003 as part of a Guarantor Swap (and for which a GA and GO were never previously

recognized), it would recognize, as a GA, the fair value of its contractual right to receive guarantee fees, and

would also recognize, as a GO, the fair value of its obligation to guarantee the payment of principal and

interest on such securities. Such assets and liabilities would be subsequently measured in a manner that is

consistent with principles described above in ""Transfers of Financial Assets that Qualify as Purchases or

Sales.''

Freddie Mac

151
Accounting For Incurred Credit Losses Ì Freddie Mac measures its contingent obligation to make

guarantee payments pursuant to the provisions of SFAS 5, which requires that credit losses be recognized in

earnings when assessed as both probable and estimable.

Accounting For Credit Enhancements Ì Premium payments on purchased pool insurance are recognized

as Other Assets, which are amortized into Non-interest expense (a) on a straight-line basis over three-month

periods to the extent that premiums paid were quarterly-based or (b) on a level yield basis to the extent that

Freddie Mac paid related pool insurance premiums upfront and in full. Otherwise, credit enhancements do not

receive recognition at the inception of executed Guarantor Swap transactions.

To the extent that related PCs that correspond to received credit enhancements (and for which a GA and

GO were never previously recognized) are purchased and then subsequently sold for GAAP purposes by

Freddie Mac, the fair value of received pool insurance or recourse is recognized as a component of GAs, while

the fair value of primary mortgage insurance (""PMI'') is recognized as a component of GOs. Such amounts

are subsequently measured in a manner that is consistent with principles described above in ""Transfers of

Financial Assets that Qualify as Purchases or Sales.''

Guarantor Swap Transactions Executed on or after January 1, 2003

Freddie Mac accounts for Guarantor Swaps that were executed on or after January 1, 2003 pursuant to

the requirements of FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure Requirements for

Guarantees, Including Indirect Guarantees of Indebtedness of Others'' (""FIN 45''). As exchange transactions, executed Guarantor Swap transactions are recognized by Freddie Mac at the inception of such

transactions on a fair value basis. The accounting for each of the components of Guarantor Swap transactions

executed on or after January 1, 2003 follows.

Accounting For Guarantee Fees Ì As consideration received in connection with a guarantee-related

exchange transaction, Freddie Mac recognizes the fair value of its contractual right to receive guarantee fees

as a GA at the inception of an executed guarantee. Consistent with principles described above, such assets,

which are classiÑed as Guarantee asset for Participation CertiÑcates, at fair value, are subsequently measured

on a fair value basis. All changes in the fair value of recognized GAs are reÖected in earnings as a component

of Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair value.'' All guarantee-related

compensation that is received over the life of the loan in cash is reÖected in earnings as a component of

Management and guarantee income.

Accounting For Guarantee Obligations Ì GOs are initially measured as the greater of (a) fair value or

(b) the contingent liability amount required by SFAS 5 to be recognized at inception of an executed

guarantee. The fair value of a recognized GO is estimated using an expected cash Öow approach consistent

with CON 7. Such liabilities are valued independently of corresponding GAs that are recognized in

connection with such transactions. That portion of Freddie Mac's estimated guarantee liability that relates to

its non-contingent obligation to stand ready to perform under a PC guarantee is recognized as Guarantee

obligation for Participation CertiÑcates, while that portion of its estimated guarantee liability that relates to its

contingent obligation to make payments under its guarantee is recognized for consolidated balance sheet

purposes as Reserve for guarantee losses on Participation CertiÑcates.

Freddie Mac subsequently measures recognized GOs by amortizing such liabilities into earnings in

proportion to the rate of the unpaid principal balance decline of securitized mortgage loans. Periodic

amortization of recognized GOs is reÖected in earnings as a component of Income on ""Guarantee obligation

for Participation CertiÑcates.'' Freddie Mac subsequently measures its contingent obligation to make

guarantee payments pursuant to the provisions of SFAS 5, which requires that credit losses be recognized in

earnings when assessed as both probable and estimable.

Accounting For Credit Enhancements Ì With respect to those credit enhancements that are received in

connection with Guarantor Swaps and other similar exchange transactions of PCs:

‚ pool insurance is recognized as an Other asset at its fair value;

‚ recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap transactions are recognized at fair value as Other assets; and

‚ PMI is recognized at inception at fair value as a component of recognized GOs.

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Credit enhancements that are separately recognized as Other assets are amortized into earnings as Noninterest expense. Such assets are speciÑcally amortized over related contract terms at the greater of results

calculated by amortizing recognized credit enhancements (a) in proportion to the rate of unpaid principal

balance decline of covered mortgage loans or (b) on a straight-line basis over a credit enhancement's contract

term.

Accounting For Inception DiÅerences Between Consideration Received and Guarantee Obligations

Incurred Ì Because GAs, GOs and credit enhancement-related assets that are recognized at the inception of

an executed Guarantor Swap are valued independently of each other, net diÅerences between such recognized

assets and liabilities may exist at inception. Net positive diÅerences between such amounts are deferred on

Freddie Mac's consolidated balance sheet as a component of Guarantee obligation for Participation

CertiÑcates and are hereinafter referred to as ""Deferred Guarantee Income''. Net negative diÅerences

between GAs, GOs and credit enhancement-related assets that are recognized at the inception of executed

Ñnancial guarantees are expensed immediately to earnings as a component of Non-interest expense Ì Other

expenses.

Deferred Guarantee Income is amortized into earnings at a rate that is commensurate with the observed

decline in the unpaid principal balance of securitized mortgage loans. Periodic amortization of recognized

Deferred Guarantee Income is reÖected in earnings as a component of Income on ""Guarantee obligation for

Participation CertiÑcates.''

Accounting For Buy-Ups, Buy-Downs and Credit Fees Ì Cash payments that are made or received in

connection with Buy-Ups and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee

Income. Likewise, Credit Fees that Freddie Mac received at inception are also recognized as adjustments of

recognized Deferred Guarantee Income.

MultiLender Swap-Based Issuances of PCs

Freddie Mac issues PCs through its MultiLender Program that are backed by mortgage loans delivered to

Freddie Mac by more than one third party. Freddie Mac may itself contribute mortgage loans to MultiLender

pools from which PCs are then issued and delivered to third parties (and to Freddie Mac, to the extent that

Freddie Mac contributed mortgage loans to a MultiLender pool). Freddie Mac accounts for its contributions

of mortgage loans to a MultiLender pool as partial sales of those assets, the sold portion of which is dependent

upon the contribution of collateral made by Freddie Mac relative to third parties. The portion of a

MultiLender Swap transaction that qualiÑes as a sale is accounted for in the same manner as transfers

described above that are accounted for as sales. The remaining portion of such PC issuances and transfers are

accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Program (as

described above).

PC-for-Structured Security Swap Transactions

Freddie Mac issues and transfers Structured Securities to third parties in exchange for PCs and nonFreddie Mac mortgage-related securities. Freddie Mac cannot freely pledge or exchange the securities that are

delivered to it by third parties in these exchanges. As a result, Freddie Mac does not view such exchanges as

triggering sale accounting recognition under SFAS 125/140. Additionally, Freddie Mac does not account for

such exchanges pursuant to the requirements of FIN 45 given that the guarantees on newly-issued Structured

Securities constitute guarantees of Freddie Mac's own performance associated with guarantees on PCs or

Structured Securities that underlie the newly-issued Structured Securities (guarantees of one's own performance are exempt from the requirements of FIN 45). As a result, Freddie Mac does not recognize any

incremental GAs or GOs on such transactions. Rather, Freddie Mac defers and amortizes into income on a

straight-line basis that portion of the transaction fee that Freddie Mac receives on such transactions that

relates to the estimated fair value of the company's future administrative responsibilities for issued Structured

Securities. In cases where Freddie Mac retains portions of the Structured Securities, a portion of this fee is

deferred under the requirements of SFAS 91. The balance of transaction fees received, which relates to

compensation earned in connection with structuring-related services rendered by Freddie Mac to third parties,

is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.

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153
Purchases of PCs or Structured Securities for Which Recognized GAs and GOs Exist

The purchase of a PC or Structured Security prompts the extinguishment of a corresponding, recognized

GO. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the

unamortized balance of Deferred Guarantee Income, Buy Downs and Credit Fees.

Freddie Mac records the de-recognition of an extinguished GO against earnings as a component of Gains

(losses) on investment activity. Correspondingly, recognized GAs are reduced by an amount equal to the-then

fair value of an extinguished GO, an adjustment of which is also reÖected in earnings as a component of Gains

(losses) on investment activity. All recognized GAs in this case are then reclassiÑed on Freddie Mac's

consolidated balance sheets as a component of ""Participation CertiÑcate residuals, at fair value'' (""PC

Residuals'').

The unamortized balance of Deferred Guarantee Income, Buy-Downs and Credit Fees received are

extinguished as a basis adjustment to the recognized value of purchased PCs. Like purchase discounts, such

basis adjustments are subsequently amortized into earnings as Interest income pursuant to the requirements of

SFAS 91 using the eÅective interest method.

PC Residuals

PC residuals relate to certain PCs or Structured Securities held by Freddie Mac and represent the fair

value of the expected future cash Öows associated with the guarantee contracts that are inherent within such

securities.

A PC residual is recognized by Freddie Mac in connection with PCs or Structured Securities held by

Freddie Mac that (a) were previously transferred to third parties as part of transactions that were accounted

for either as sales pursuant to the provisions of SFAS 125/140 sale or as guarantee transactions that are

subject to the provisions of FIN 45 (such that a GA and GO was previously-established for held PCs or

Structured Securities), (b) were formed from mortgage loans purchased through Freddie Mac's Cash

Window (""Cash Window Purchases'') and that were never transferred to third parties, (c) were purchased by

Freddie Mac from third parties in contemplation of the related issuance of such PCs through the Guarantor

Program or (d) relate to Buy-Ups paid in connection with purchased PCs that had not previously been

included as part of a transfer that was accounted for as a sale under SFAS 125/140 or as part of a guarantee

transaction that was subject to the provisions of FIN 45.

Like a recognized GA, a PC residual is accounted for like a debt security and is classiÑed as either

available-for-sale or trading under SFAS 115. PC residuals relating to PCs or Structured Securities that

previously went through either a SFAS 125/140 sale or were accounted for pursuant to FIN 45 are classiÑed

as trading under SFAS 115. PC residuals relating to PCs held in portfolio that were formed from Cash

Window Purchases and that were never transferred to third parties are generally classiÑed as available-for-sale

under SFAS 115. The same treatment applies to PC residuals that correspond to PCs purchased by Freddie

Mac from third parties in contemplation of their issuance through the Guarantor Program, except that any

portions of these PC residuals that relate to Buy-Ups paid by Freddie Mac are accounted for as trading

investments.

All changes in the fair value of PC residuals that are designated as trading are reÖected in earnings as a

component of Gains (losses) on investment activity. All changes in the fair value of PC residuals that are

accounted for as available-for-sale are reÖected as a component of Accumulated other comprehensive income

(loss), net of taxes (""AOCI''), a component of Stockholders' equity.

Recognized PC residuals consist of a variety of cash Öows that are primarily recorded through interest

income. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED

ASSETS'' for a discussion of the attribution of GA and PC Residual-related cash Öows.

Due to Participation CertiÑcate Investors

Timing diÅerences between Freddie Mac's receipt of scheduled and unscheduled principal and interest

payments from seller/servicers on mortgages underlying PCs and the subsequent pass through of those

payments on PCs owned by third-party investors results in the liability Due to Participation CertiÑcate

investors. In those cases, payments from seller/servicers are generally received in a given month, yet the PC

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154
balance is not reduced for payments of principal until the Ñrst day of the next month and Freddie Mac releases

the cash (principal and interest) to the PC investor on the Ñfteenth day of that next month. The company

generally invests these principal and interest amounts received in short-term investments from the time

Freddie Mac receives the amounts until the time Freddie Mac pays the PC investor. Interest income resulting

from investment of principal and interest payments from seller/servicers is reported in interest income over

the period earned.

For unscheduled principal prepayment amounts, these timing diÅerences result in an expense accrual

upon prepayment of the mortgage as the related PCs continue to bear interest to the PC investor at the PC

coupon rate from the date of prepayment until the date the PC security balance is reduced, while generally no

interest is received from the mortgage on that prepayment amount during that same time period. The expense

recognized upon prepayment is reported in Interest expense Ì Due to Participation CertiÑcate investors.

Freddie Mac reports PC coupon interest amounts relating to its investment in PCs consistent with the

accounting practices generally applied by third party investors in PCs. Accordingly, the PC coupon interest on

prepayments of a mortgage pending remittance on PCs held by Freddie Mac is reported as both Interest

Income Ì Mortgage-related securities in the Retained portfolio and Interest expense Ì Due to Participation

CertiÑcate investors. Scheduled and unscheduled principal payments received by Freddie Mac that relate to

its investment in PCs are reported as a reduction to its investment in PCs on the consolidated balance sheets.

Mortgage Loans

Mortgage loans that management may sell are classiÑed as held-for-sale. If a decision is made to retain

the loan, the loans are transferred to the held-for-investment portfolio. Loans transferred to the held-forinvestment portfolio are transferred at lower of cost or market value. Lower-of-cost-or-market value

adjustments, in this case, are treated as basis adjustments of such mortgage loans and are subsequently

amortized into interest income over the period held.

Held-for-sale mortgages are included in the Retained portfolio and reported at lower of cost or market

value, on a portfolio basis, with losses reported in Gains (losses) on investment activity. Consistent with

SFAS No. 65, ""Accounting for Certain Mortgage Banking Activities'' (""SFAS 65''), premiums and discounts

on loans classiÑed as held-for-sale are not amortized as interest revenue during the period that such loans are

classiÑed as held-for-sale.

For a description of how Freddie Mac determines the fair value of its held-for-sale mortgage loans, see

""NOTE 16: FAIR VALUE DISCLOSURES.''

Mortgage loans that management has the ability and intent to hold for the foreseeable future or to

maturity are classiÑed as held-for-investment. These mortgage loans are reported at their outstanding principal

balances, net of deferred fees and costs (including premiums and discounts). These deferred items are

amortized into interest income over the estimated lives of the mortgages using the eÅective interest method.

The company uses actual prepayment experience and estimates of future prepayments to determine the

constant yield needed to apply the eÅective interest method. For purposes of estimating future prepayments,

the mortgages are aggregated by similar characteristics such as origination date, coupon and maturity.

The company recognizes interest income on mortgage loans on an accrual basis, except when management believes the collection of principal or interest is doubtful.

Reserves for Losses on Mortgage Loans Held-for-Investment and Losses on PCs

Freddie Mac maintains a Reserve for losses on mortgage loans held-for-investment to provide for credit

losses inherent in that portfolio. The Reserve for losses on mortgage loans held-for-investment is determined

pursuant to the provisions of SFAS 5 and SFAS No. 114, ""Accounting by Creditors for Impairment of a

Loan Ì an Amendment of FASB Statements No. 5 and 15'' (""SFAS 114'') as more fully described below.

Freddie Mac also maintains a Reserve for guarantee losses on Participation CertiÑcates to provide for losses

incurred on mortgages underlying PCs or Structured Securities held by third parties. The Reserve for

guarantee losses on Participation CertiÑcates is determined pursuant to the provisions of SFAS 5 and

SFAS 114. The Reserve for losses on mortgage loans held-for-investment and Reserve for guarantee losses on

Participation CertiÑcates are collectively referred to as ""loan loss reserves.'' Increases in loan loss reserves are

reÖected in earnings as a component of the (Provision) beneÑt for credit losses. Decreases in loan loss reserves

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155
are reÖected through either (a) charging-oÅ such balances (net of recoveries) where realized losses are

recorded or (b) a reduction in the (Provision) beneÑt for credit losses.

Loan loss reserves are also increased upon the sale of PCs and Structured Securities for which Freddie

Mac incurred losses on the underlying mortgage loans while such securities were held by Freddie Mac. From

an earnings perspective, such incurred losses are recognized as a component of Gains (losses) on investment

activity through, where applicable (a) the subsequent measurement of corresponding PC residuals that are

classiÑed as trading (and to which such PCs or Structured Securities relate), (b) the recognition of

impairment-related losses on such securities (i.e., to the extent that such securities do not have recognized PC

residual balances associated with them that are classiÑed as trading) or (c) as a component of gain (loss) on

sale of such securities. Upon the sale of such PCs or Structured Securities, incurred losses are classiÑed on the

consolidated balance sheets as Reserve for guarantee losses on Participation CertiÑcates.

Single-family loan portfolio

In accordance with SFAS 5, Freddie Mac estimates incurred credit losses on homogeneous pools of

single-family loans using statistically-based models that evaluate a variety of factors, resulting in a range of

probable losses related to impaired single-family mortgage loans at the balance sheet date. The homogeneous

pools of single-family mortgage loans are determined based on common underlying characteristics including

year of origination, loan-to-value ratio and geographic region. In determining the loan loss reserves for singlefamily loans, Freddie Mac determines the point within the range of probable losses that represents the best

estimate of incurred losses.

The factors used to estimate incurred losses at period-end include:

‚ actual and estimated loss severity trends for similar loans;

‚ actual and estimated default experience;

‚ actual and estimated proceeds from PMI and other credit enhancements;

‚ actual and estimated pre-foreclosure real estate taxes and insurance;

‚ the year of the loan origination;

‚ geographic location; and

‚ estimated selling costs should the underlying property ultimately be foreclosed upon and sold.

Freddie Mac frequently validates and updates the models and factors to capture changes in actual loss

experience, as well as changes in underwriting practices and in its loss mitigation strategies. Freddie Mac also

considers macroeconomic and other factors including:

‚ regional housing trends;

‚ applicable home price indices;

‚ unemployment and employment dislocation trends;

‚ consumer credit statistics;

‚ recent changes in credit underwriting practices;

‚ extent of third party insurance; and

‚ other measurable factors that inÖuence the quality of the portfolio at the balance sheet date.

Favorable trends in these macroeconomic and other factors produce a reserve requirement toward the

lower end of the range; adverse trends in these factors produce a reserve requirement toward the higher end of

the range. Management then adjusts the level of loan loss reserves to the level required based on its best

assessment of these factors.

Multifamily loan portfolio

Freddie Mac also estimates a range of incurred credit losses on the multifamily loan portfolio.

Management considers all available evidence in determining this range including: adequacy of third-party

credit enhancements and an evaluation of the repayment prospects of, and fair value of collateral underlying

the individual loans. The review of the repayment prospects and value of collateral underlying individual loans

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156
occurs within the context of property-speciÑc and market-level risk characteristics including apartment

vacancy rates, apartment rental rates, and property sales information, under several scenarios. Management

reviews the range of probable losses and selects the point within the range that represents the best estimate of

incurred losses. Loans individually evaluated for impairment include loans that become 60 days past due for

principal and interest, certain loans with observable collateral deÑciencies and loans whose contractual terms

were modiÑed due to credit concerns. When loan loss reserves for individual loans are established,

consideration is given to all available evidence such as present value of discounted expected future cash Öows,

fair value of collateral and credit enhancements.

Non-performing Loans

Non-performing loans consist of (a) loans that were previously delinquent whose terms have been

modiÑed and, therefore, are now considered part of Freddie Mac's impaired loan population (""troubled debt

restructurings'' or ""TDRs''), (b) serious delinquencies and (c) nonaccrual loans. Serious delinquencies are

those single-family loans that are 90 days or more past due, and multifamily loans that are more than 60 days

but less than 90 days past due. Also included in this category are multifamily loans greater than 90 days past

due but where principal and interest are being paid to Freddie Mac under the terms of a credit enhancement

agreement. Non-performing loans generally accrue interest in accordance with their contractual terms unless

they are in nonaccrual status. Nonaccrual loans are loans where interest income is recognized on a cash basis,

and only include multifamily loans greater than 90 days past due. For nonaccrual loans, any existing accruals

are reversed against interest income unless they are both well secured and in the process of collection. For

single-family loans greater than 90 days past due, interest income is accrued; however, reserves for

uncollectible interest on single-family loans are estimated using statistical models, which quantify accrued but

uncollectible interest. Freddie Mac reports this reserve as a reduction to the accrued loan interest balance in

Accounts and other receivables, net.

Impaired loans include single-family loans, both performing and non-performing, that are TDRs.

Multifamily impaired loans are deÑned as performing and non-performing TDRs, loans 60 days or more past

due (except for certain credit-enhanced loans) and certain mortgage loans with real estate collateral values

less than the outstanding unpaid principal balances. See ""Table 6.2 Ì Impaired Loans'' in ""NOTE 6: LOAN

LOSS RESERVES'' for further discussion.

Freddie Mac has the option to purchase mortgage loans out of PC pools under certain circumstances,

such as to resolve an existing or impending delinquency or default. Freddie Mac's general practice is to

purchase the mortgage loans out of pools when the loans are 120 days delinquent. These repurchased loans are

recorded on Freddie Mac's consolidated balance sheets at their purchase price (i.e., the mortgage loan's

unpaid principal balance), as adjusted for the eÅects of (a) the related amount of recognized GAs, PC

residuals and security premiums and discounts (where applicable) and (b) the extinguishment of a

proportionally related amount of recognized Buy-Downs, Credit Fees, GOs and Day One DiÅerences (where

applicable). Additionally, that portion of amounts classiÑed in Reserve for guarantee losses on Participation

CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-forinvestment.

Charge-OÅs

The loan loss reserves are reduced for charge-oÅs when a loss is speciÑcally identiÑed and is virtually

certain of occurring. For both single-family and multifamily mortgages where the original terms of the

mortgage loan agreement are modiÑed for economic or legal reasons related to the borrower's Ñnancial

diÇculties, losses are recorded at the time of modiÑcation in accordance with SFAS 114 and the loans are

accounted for as TDRs. For mortgages that are foreclosed upon and thus transferred to Real estate owned, net

or involved in a pre-foreclosure sale, losses at the time of transfer or pre-foreclosure sale are charged-oÅ

against Reserve for losses on mortgage loans held-for-investment. In the case of real estate owned (""REO'')

transfers, losses arise when the carrying basis of the loan (including accrued interest) exceeds the fair value of

the foreclosed property (after deduction for estimated selling costs and consideration of third-party insurance

or other credit enhancements). REO gains arise and are recognized immediately in earnings when the fair

market value of the acquired asset (after deduction for estimated disposition costs) exceeds the carrying value

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157
of the mortgage (including accrued interest). REO gains and losses (subsequent to foreclosure) are included

in REO operations income (expense).

Investments in Securities

The company classiÑes mortgage-related securities and non-mortgage-related securities as available-forsale or trading, as deÑned in SFAS 115. Freddie Mac currently does not classify any securities as held to

maturity although the company may elect to do so in the future. Securities classiÑed as available-for-sale and

trading are reported at fair value with changes in fair value included in AOCI and Gains (losses) on

investment activity, respectively. See ""NOTE 16: FAIR VALUE DISCLOSURES'' for more information on

how Freddie Mac determines the fair value of securities.

The company records forward purchases and sales of securities that are speciÑcally exempt from the

requirements of SFAS 133 on a trade date basis. Securities underlying forward purchases and sales contracts

that are not exempt from the requirements of SFAS 133 are recorded on contractual settlement date.

For most of the company's investments in securities, interest income is recognized using the retrospective

eÅective interest method in accordance with SFAS 91. Deferred items, including premiums, discounts and

other basis adjustments, are amortized into interest income over the estimated lives of the securities. The

company uses actual prepayment experience and estimates of future prepayments to determine the constant

yield needed to apply the eÅective interest method. The company recalculates the constant eÅective yield

based on changes in estimated prepayments as a result of changes in interest rates and other factors. When the

constant eÅective yield changes, an adjustment to interest income is made for the amount of amortization that

would have been recorded if the new eÅective yield had been applied since the mortgage assets were acquired.

For certain of the company's investments in securities, interest income is recognized using the prospective

eÅective interest method in accordance with EITF No. 99-20 ""Recognition of Interest Income and

Impairment on Purchased and Retained BeneÑcial Interests in Securitized Financial Assets''

(""EITF 99-20''). The company speciÑcally applies such guidance to beneÑcial interests (including undivided

interests which are similar to beneÑcial interests) in securitized Ñnancial assets that (a) can contractually be

prepaid or otherwise settled in such a way that the company may not recover substantially all of its recorded

investment (such as interest-only strips) or (b) are not of high credit quality at the acquisition date.

EITF 99-20 requires that the company recognize as interest income (throughout the life of a retained

interest) the excess of all estimated cash Öows attributable to these interests over its principal amount using

the eÅective yield method. The company updates its estimates of expected cash Öows periodically and

recognizes changes in calculated eÅective yield on a prospective basis.

Freddie Mac reviews securities for other-than-temporary impairment whenever the security's fair value is

less than its amortized cost. Impairment is evaluated considering a number of indicators which include the

severity of the decline in fair value, credit ratings and the length of time the investment has been in an

unrealized loss position. In addition to these indicators, Freddie Mac recognizes impairment when qualitative

factors indicate that the company may not recover the unrealized loss. When evaluating the impairment

indicators and qualitative factors, Freddie Mac considers its intent and ability to hold the investment until a

point in time at which recovery can be reasonably expected to occur. Impairment losses on manufactured

housing securities exclude the eÅects of separate Ñnancial guarantee contracts that are not embedded in the

securities since the beneÑts of such contracts are not recognized until claims become probable of recovery

under the contracts. When a security is deemed to be impaired, the cost basis of the security is written down to

fair value, with the loss recorded to Gains (losses) on investment activity. The security cost basis is not

changed for subsequent recoveries in fair value. For securities within the scope of EITF 99-20, as described

above, other-than-temporary impairments are deÑned as occurring whenever there is an adverse change in

estimated cash Öows coupled with a decline in fair value below the amortized cost basis.

Gains and losses on the sale of securities are included in Gains (losses) on investment activity, including

those gains (losses) reclassiÑed into earnings from AOCI. The company uses the speciÑc identiÑcation

method for determining the cost of a security in computing the gain or loss.

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158
Repurchase and Resale Agreements

Freddie Mac enters into repurchase and resale agreements primarily as an investor or to Ñnance its

security positions. Freddie Mac also enters into (a) ""dollar roll'' transactions, which consist of simultaneous

agreements with the same counterparty to sell a security and purchase similar securities at a future date at an

agreed-upon price and (b) ""reverse dollar roll'' transactions, which consist of simultaneous agreements with

the same counterparty to purchase a security and sell similar securities at a future date at an agreed-upon

price. These transactions are accounted for pursuant to SFAS 125/140. In this regard, such transactions are

accounted for as purchases and sales when the transferor relinquishes control over transferred securities. These

transactions are accounted for as secured Ñnancings when the transferor does not relinquish control over

transferred securities. Freddie Mac's policy is to take possession of securities purchased under agreements to

resell and reverse dollar roll transactions. The amount of mortgage-related and non-mortgage-related

securities pledged and that may be repledged under repurchase agreements and dollar roll transactions is

presented parenthetically in the relevant securities captions in the consolidated balance sheets.

Debt Securities Issued

Debt securities issued by Freddie Mac are classiÑed as either Due within one year or Due after one year

based on their remaining contractual maturity. The classiÑcation of interest expense on debt securities as

either short-term or long-term is based on the original contractual maturity of the debt security. Deferred

items, including premiums, discounts, issuance costs and hedging-related basis adjustments, are amortized

and reported through interest expense using the eÅective interest method over the period during which the

related indebtedness is outstanding or, for callable debt, over the period during which the related indebtedness

is expected to be outstanding. For callable debt, changes in the expected call date are reÖected prospectively as

an adjustment to the eÅective yield on the debt. Amortization of hedging-related basis adjustments is initiated

upon the termination of the related hedge relationship, whereas amortization of premiums, discounts and

issuance costs begins at the time of debt issuance. Deferred items, including premiums, discounts and

hedging-related basis adjustments are reported as a component of Debt securities, net whereas issuance costs

are reported as a component of Other assets. Debt securities denominated in a foreign currency are translated

into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any gains/losses are reported

in Non-interest income (loss) Ì Other income.

Contemporaneous exchanges of cash between the company and a creditor in connection with the issuance

of a new debt obligation and satisfaction of an existing debt obligation are accounted for as extinguishments

with recognition of gains or losses in earnings if the debt instruments have substantially diÅerent terms. If the

debt instruments do not have substantially diÅerent terms, the transaction is accounted for as an exchange

rather than an extinguishment. In this case, the fees associated with the new debt obligation, along with the

existing unamortized premium, discount or other basis adjustments on the existing debt obligation, are

considered a basis adjustment on the new debt obligation and are amortized as an adjustment of interest

expense over the remaining term of the new debt obligation.

Derivatives

Generally, derivatives are Ñnancial instruments with little or no initial net investment in comparison to

their notional amount and whose value is based upon an underlying asset, index, reference rate or other

variable. They may be privately negotiated contractual agreements that can be customized to meet speciÑc

needs, including certain commitments to purchase and sell mortgage loans, mortgage-related securities and

debt securities, or they may be standardized contracts executed through organized exchanges. All derivatives

are reported at their fair value on the consolidated balance sheets. The fair value of derivatives is generally

reported net by counterparty, provided that a legally enforceable master netting agreement exists. Derivatives

in a net asset position are reported as Derivative assets, at fair value. Similarly, derivatives in a net liability

position are reported as Derivative liabilities, at fair value.

Currently, the majority of the company's derivatives are not designated in hedge accounting relationships.

For those derivatives not designated as an accounting hedge, fair value gains and losses are reported as

Derivative gains (losses) in the consolidated statements of income. For purchase and sale commitments of

securities classiÑed as trading under SFAS 115, fair value gains and losses are reported as Gains (losses) on

investment activity in the consolidated statements of income.

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159
Subject to certain qualifying conditions, Freddie Mac may designate a derivative as either a hedge of the

cash Öows of a variable-rate instrument or forecasted transaction (""cash Öow hedge''), a hedge of the fair

value of a Ñxed-rate instrument (""fair value hedge'') or a foreign-currency fair value or cash Öow hedge

(""foreign currency hedge''). In order to be designated as an accounting hedge, the derivative must initially be

expected to be highly eÅective in oÅsetting the changes in cash Öows or fair value of the hedged item resulting

from the hedged risk. In addition, the documentation of the hedging designation must include identiÑcation of

the hedged item, the hedging instrument, the risk exposure and corresponding risk management objective,

how eÅectiveness will be assessed and how ineÅectiveness will be measured.

For a derivative qualifying as a cash Öow hedge, Freddie Mac reports changes in the fair value of these

instruments in AOCI to the extent the hedge is eÅective. The remaining ineÅective portion, calculated using

the hypothetical derivative method, is reported as Hedge accounting gains (losses). This method requires the

company to develop a hypothetical derivative whose terms match those of the hedged item and compare

estimated changes in the fair value of the hypothetical derivative to changes in the fair value of the hedging

derivative. In general, Freddie Mac recognizes the associated amounts reported in AOCI as Income

(expense) related to derivatives during the period or periods in which the hedged item aÅects earnings. If the

hedged item relates to a forecasted issuance of debt, Freddie Mac reclassiÑes the associated amount reported

in AOCI into earnings as Net interest income over the periods when the debt is issued and aÅects earnings.

Amounts reported in AOCI related to changes in the fair value of commitments to purchase or sell securities

that are designated as cash Öow hedges are recognized as interest income for assets held and Gains (losses) on

investment activity for assets sold.

If the hedged item in a cash Öow hedge is the forecasted issuance of debt, and the occurrence of the

forecasted transaction becomes probable of not occurring, the amount in AOCI is reclassiÑed to earnings

immediately. If Freddie Mac expects at any time that continued reporting of a net loss in AOCI would lead to

recognizing a net loss on the combination of a hedging instrument and the hedged transaction (and related

asset acquired or liability incurred) in one or more future periods, the loss is reclassiÑed immediately into

earnings for the amount that is not expected to be recovered.

For a derivative qualifying as a fair value hedge, Freddie Mac reports changes in the fair value of the

derivative as Hedge accounting gains (losses) along with the changes in the fair value of the hedged item

attributable to the risk being hedged. When the hedge is terminated or redesignated, the fair value adjustment

to the carrying amount of the hedged asset or liability is amortized to earnings as a component of the hedged

item's interest income or expense over the remaining life of the hedged item using the eÅective yield method.

If a derivative no longer qualiÑes as a cash Öow or fair value hedge, the company discontinues hedge

accounting prospectively. Freddie Mac continues to carry the derivative on the consolidated balance sheets at

fair value and records further fair value gains and losses in the consolidated statements of income as Derivative

gains (losses) until the derivative is terminated or redesignated.

The periodic interest cash Öows related to derivative contracts currently accrued, which are derived

primarily from interest-rate swap contracts, are classiÑed as Income (expense) related to derivatives for

derivatives in hedge relationships and as Derivative gains (losses) for derivatives not in hedge accounting

relationships.

Inception gains or losses associated with commitments to purchase mortgage loans are deferred. With

respect to those purchase commitments that have been designated as cash Öow hedges, inception gains or

losses are considered together with that portion of the cumulative change in fair value of such derivative

instruments that are recognized in AOCI for the purpose of determining whether a net deferred loss exists

that, as described above, should be reclassiÑed to earnings. Additionally, and similar to derivative-related gains

that are recognized as a component of AOCI, deferred inception-based gains on mortgage purchase

commitments will be reclassiÑed into earnings in the same period or periods during which acquired mortgage

loans aÅect earnings. SpeciÑcally, inception gains or losses are:

‚ Recognized as a component of the gain or loss on sale of corresponding mortgage loans (either in

whole loan or securitized form); or

‚ Recognized as interest income over the life of the corresponding mortgage loans at the point that,

where applicable, such mortgage loans are reclassiÑed as held-for-investment.

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160
Real Estate Owned

REO is carried at the lower of cost or fair value (after deduction for estimated disposition costs).

Amounts expected to be received from third-party insurance or other credit enhancements are reported when

the claim is Ñled and are recorded as a component of Accounts and other receivables, net in the consolidated

balance sheets. Material development and improvement costs relating to REO are capitalized. Operating

expenses on the properties, net of any rental or other income, are included in REO operations income

(expense). Estimated declines in REO fair value that result from ongoing valuation of the properties are

provided for and charged to REO operations income (expense) when identiÑed. The resulting valuation

allowance is treated as a lower of cost or fair value adjustment to the basis of the properties. Any gains and

losses on REO dispositions are included in REO operations income (expense).

Income Taxes

Freddie Mac uses the asset and liability method of accounting for income taxes pursuant to

SFAS No. 109, ""Accounting for Income Taxes'' (""SFAS 109''). Under the asset and liability method,

deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing

temporary diÅerences between the Ñnancial reporting and the tax reporting basis of assets and liabilities using

enacted statutory tax rates. To the extent tax laws change, deferred tax assets and liabilities are adjusted, when

necessary, in the period that the tax change is enacted. Valuation allowances are recorded to reduce deferred

tax assets when it is more likely than not that a tax beneÑt will not be realized. For all periods presented, no

such valuation allowance was deemed necessary by management. Reserves are recorded for income tax and

contingent interest where the potential for loss is probable and reasonably estimable in accordance with

SFAS 5.

Income tax expense includes (a) deferred tax expense, which represents the net change in the deferred

tax asset or liability balance during the year plus any change in a valuation allowance and (b) current tax

expense, which represents the amount of tax currently payable to or receivable from a tax authority plus

amounts accrued for expected tax deÑciencies (including both tax and interest). Income tax expense excludes

the tax eÅects related to adjustments recorded to AOCI.

Stock-Based Compensation

In December 2002, FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation Ì

Transition and Disclosure Ì An Amendment of FASB Statement No. 123'' (""SFAS 148''). This statement

provides alternative methods of transition for a voluntary change to the fair value expense recognition method

of accounting for stock-based employee compensation under SFAS No. 123, ""Accounting for Stock-Based

Compensation'' (""SFAS 123''). The annual disclosure provisions of SFAS 148 are eÅective for Ñscal years

ending after December 15, 2002, and the interim disclosure provisions are eÅective for interim periods

beginning after December 15, 2002.

Freddie Mac initially adopted the fair value compensation expense provisions of SFAS 123 prospectively

for awards granted, modiÑed or settled on or after January 1, 2002, in accordance with SFAS 123's original

transition provision. However, as permitted by SFAS 148, Freddie Mac elected to adopt SFAS 123

retroactively to January 1, 1995. Accordingly, Freddie Mac records compensation expense equal to the

estimated fair value of the stock-based compensation on the grant date, amortized on a straight-line basis over

the vesting period, which is generally three to Ñve years for options, restricted stock and restricted stock units

and, starting in 2003, three months for the Employee Stock Purchase Plan (""ESPP''). The oÅset to the

recorded compensation expense is an adjustment to Additional paid-in capital in Freddie Mac's consolidated

balance sheets.

The fair value of options to purchase shares of Freddie Mac common stock, including options issued

pursuant to the ESPP, is estimated using a Black-Scholes option pricing model, taking into account the

exercise price and expected life of the option, the market value of the underlying stock and its expected

volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option.

The fair value of restricted stock and restricted stock unit awards is based on the grant-date fair value of

Freddie Mac's common stock.

As discussed in ""NOTE 11: STOCK-BASED COMPENSATION,'' awards under the company's stock

compensation plans, including employee stock options, restricted stock units (""RSUs'') and restricted stock,

generally provide for dividend-equivalent rights. For employee stock options, the dividend-equivalent feature is

Freddie Mac

161
contemplated in the fair value estimate by using a dividend yield of zero as a Black-Scholes model input.

Accordingly, compensation expense for these dividend-equivalents is recognized through amortization expense

recognition. For restricted stock and RSUs, the value of the dividend-equivalents is reÖected in the market

price of a share of common stock. The fair value of restricted stock and RSUs on the grant date is recognized

as compensation expense over the vesting period.

Incremental compensation expense related to modiÑcation of awards is based on a comparison of the fair

value of the modiÑed award with the fair value of the original award before modiÑcation (measured using the

shorter of the remaining or revised term). Furthermore, the company generally expects to settle its stockbased compensation awards in shares. In the limited cases in which an award may be cash-settled only in the

event of a contingency such as involuntary termination, Freddie Mac accounts for the award as an equity

award until the contingency becomes probable, when liability accounting is triggered. Under SFAS 123,

liabilities are initially measured at intrinsic value with changes in intrinsic value recognized as earnings.

For stock-based compensation granted prior to 1995, Freddie Mac continues to apply the provisions of

Accounting Principles Board Opinion (""APB'') No. 25, ""Accounting for Stock Issued to Employees''

(""APB 25''). Under APB 25, typically no compensation expense is recorded if the option exercise price is

equal to the market price of the stock on the date of grant. Freddie Mac recognized compensation expense for

restricted stock grants and dividend-equivalent rights associated with stock options. Furthermore, no

compensation expense was recognized for the ESPP since it is a qualifying plan under tax regulations.

Earnings Per Common Share

Basic earnings per common share is computed as net income available to common stockholders divided

by the weighted average common shares outstanding for the period. Diluted earnings per common share is

determined using the weighted average number of common shares during the period, adjusted for the dilutive

eÅect of common stock equivalents. Dilutive common stock equivalents reÖect the assumed issuance of

additional common shares pursuant to certain of the company's stock-based compensation plans that could

potentially reduce or ""dilute'' earnings per share, based on the treasury stock method as deÑned in

SFAS No. 128, ""Earnings per Share'' (""SFAS 128'').

Comprehensive Income

Comprehensive income, as deÑned in SFAS No. 130, ""Reporting Comprehensive Income''

(""SFAS 130''), is the change in equity, on a net of tax basis, resulting from transactions and other events and

circumstances from non-owner sources during a period. It includes all changes in equity during a period,

except those resulting from investments by owners and distributions to owners. For Freddie Mac, comprehensive income is composed of net income plus changes in the unrealized gains and losses on available-for-sale

securities, the eÅective portion of derivatives accounted for as cash Öow hedge relationships, and changes in

the minimum pension liability.

Reportable Segments

Freddie Mac has one business segment for Ñnancial reporting purposes because the company did not

meet the criteria for reporting business segments that are prescribed in SFAS No. 131, ""Disclosures About

Segments of an Enterprise and Related Information'' (""SFAS 131''), for any period presented in the

consolidated Ñnancial statements.

Recently Adopted Accounting Standards and Accounting Changes

Consolidation of Variable Interest Entities Ì In January 2003, the FASB issued FIN 46. FIN 46

provides guidance for determining when a company must consolidate the assets, liabilities and activities of a

variable interest entity. In addition, various disclosures are required about variable interest entities when an

entity is not the primary beneÑciary but holds a ""signiÑcant variable interest'' in a variable interest entity.

In December 2003, the FASB released FIN 46-R. The revision captured much of the guidance to date

that had been provided by the FASB for implementation of FIN 46, clariÑed FIN 46 and revised certain

eÅective dates for implementation. Freddie Mac adopted FIN 46-R for 2003. The implementation had no

eÅect on the company's consolidated Ñnancial statements in 2004 or 2003. In 2004, the company determined

that Ñve low-income housing tax credit partnerships, West*Mac Associates Limited Partnership

(""West*Mac''), the owner and developer of the company's headquarters, and a reinsurance company should

be consolidated pursuant to the requirements of FIN 46-R. Prior to 2004, Freddie Mac consolidated these

Freddie Mac

162
entities in accordance with other applicable requirements under GAAP. Finally, the company also has

signiÑcant variable interests in certain variable interest entities that are not consolidated because the company

is not the primary beneÑciary. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' for more information

concerning variable interest entities.

Accounting For Financial Guarantees Ì EÅective January 1, 2003, Freddie Mac adopted FIN 45 and

FASB StaÅ Position FIN 45-2, ""Whether FASB Interpretation No. 45, "Guarantor's Accounting and

Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,' Provides

Support for Subsequently Accounting for a Guarantor's Liability at Fair Value'' (""FSP FIN 45-2''). FIN 45

requires that Freddie Mac recognize the fair value of the company's obligation to guarantee the payment of

principal and interest on PCs and other mortgage pass-through certiÑcates that are issued by the company that

are transferred to third parties. Such guidance also requires that the company recognizes the fair value of any

consideration received in connection with the execution of such guarantees, which primarily includes the

company's contractual right to receive guarantee fees. In consideration of FSP FIN 45-2, eÅective January 1,

2003, Freddie Mac subsequently measures that portion of recognized guarantee obligations that relates to the

company's non-contingent obligation to stand ready to perform using a systematic and rational method of

amortization, while the company's contingent obligation to make payments under executed guarantees is

accounted for pursuant to the requirements of SFAS 5. The implementation of FIN 45 and other such

accounting changes in 2003 had a signiÑcant impact on Freddie Mac's accounting for PC guarantees.

Additionally, on January 1, 2003, Freddie Mac reclassiÑed $110 million to Reserve for guarantee losses on

Participation CertiÑcates representing that portion of recognized guarantee obligations that was attributable to

estimated incurred losses on outstanding PCs or Structured Securities on that date.

Accounting For Credit Enhancements Ì EÅective January 1, 2003, Freddie Mac no longer measures

recognized credit enhancements on a fair value basis subsequent to the initial recognition of the credit

enhancement. This change was made in conjunction with the change in the method by which recognized

guarantee obligations are subsequently measured for consolidated Ñnancial statement purposes. This change

necessitated a corresponding modiÑcation in the balance sheet classiÑcation of those credit enhancements that

were previously recognized as a component of GAs and PC residuals since recognized GAs and PC residuals

are subsequently measured on a fair value basis. In this regard, eÅective January 1, 2003, $189 million related

to credit enhancements was reclassiÑed to Other assets ($128 million from the GA and $61 million from PC

residuals) and, correspondingly, is amortized into earnings as a component of Other expenses at the greater of

amounts calculated by amortizing recognized credit enhancements (a) in proportion to the rate of unpaid

principal balance decline of covered mortgage loans or (b) on a straight-line basis over a credit enhancement

contract term. The implementation of FIN 45 also resulted in a change in when credit enhancements were

recognized for consolidated Ñnancial statement purposes. Based upon the view expressed in FIN 45 that

guarantee transactions constitute exchange transactions, Freddie Mac now recognizes the fair value of credit

enhancements as consideration received in connection with Guarantor and MultiLender Swap transactions

(and other, similar transactions) as of the issuance date of those PCs that were issued on or after January 1,

2003. Prior to January 1, 2003, Freddie Mac did not recognize credit enhancements for consolidated balance

sheet purposes until a PC or Structured Security to which such credit enhancements related was included in a

transfer that qualiÑed as a sale under SFAS 125/140.

Derivative Instruments and Hedging Activities Ì On July 1, 2003, Freddie Mac adopted SFAS No. 149

""Amendment of Statement 133 on Derivative Instruments and Hedging Activities'' (""SFAS 149'').

SFAS 149 amended and clariÑed the Ñnancial accounting and reporting for derivatives to incorporate

decisions made by the FASB and the FASB's Derivative Implementation Group subsequent to the original

issuance of SFAS 133 and in connection with other FASB projects. Under SFAS 149, purchase commitments

for certain loans to be classiÑed as held-for-investment must be accounted for as derivatives. The implementation of SFAS 149 did not have a material eÅect on the consolidated Ñnancial statements.

In September 2003, the OÇce of the Chief Accountant of the Securities and Exchange Commission

(""SEC'') published interpretive guidance on SFAS 133. To be consistent with the SEC guidance published at

that time, Freddie Mac is reporting the income statement eÅects of derivatives not currently designated in

hedge accounting relationships under SFAS 133 in a single line item on the company's consolidated

statements of income, Derivative gains (losses) for all periods presented. Prior to 2003, the accrual for

periodic cash settlements in accordance with the contractual terms of derivatives not in hedge accounting

Freddie Mac

163
relationships was recorded in Net interest income as a component of Income (expense) related to derivatives.

Therefore, for periods prior to 2003, the impact of the accrual for these periodic derivative cash settlements

has been reclassiÑed from Income (expense) related to derivatives to Derivative gains (losses). The eÅect of

this reclassiÑcation on the company's consolidated statements of income was to increase Net interest income

by $639 million for 2002 and decrease Non-interest income by the same amounts. These reclassiÑcations had

no eÅect on net income.

Recently Issued Accounting Standards

Certain Loans or Debt Securities Acquired in a Transfer Ì In December 2003, the Accounting Standards

Executive Committee of the American Institute of CertiÑed Public Accountants, (""AICPA''), issued

SOP No. 03-3, ""Accounting for Certain Loans or Debt Securities Acquired in a Transfer'' (""SOP 03-3'').

SOP 03-3 addresses the accounting for diÅerences between the contractual cash Öows and the cash Öows

expected to be collected from purchased loans or debt securities if those diÅerences are attributable, in part, to

credit quality. The scope of SOP 03-3 is limited to purchased loans or debt securities with evidence of

deterioration of credit quality since origination acquired by completion of a transfer for which it is probable, at

acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3

requires purchased loans and debt securities to be recorded initially at acquisition cost (typically fair value in

an arms-length purchase). SOP 03-3 is eÅective for certain loans and debt securities acquired after

December 31, 2004. The adoption of SOP 03-3 is not expected to be material to the company's Ñnancial

position or results of operations.

Other-than-Temporary Impairment Ì In September 2004, the FASB voted unanimously to delay certain

portions of EITF 03-1, ""The Meaning of Other-Than-Temporary Impairment and Its Application to Certain

Investments'' (""EITF 03-1''), subject to further consideration. Subsequently, the FASB deferred this

consideration pending resolution of other related matters. The deferral applies to both debt and equity

securities and speciÑcally applies to impairments caused by interest rate and sector spreads. In addition, the

provisions of EITF 03-1 that have been deferred relate to the requirements that a company declare its intent to

hold the security to recovery and designate a recovery period in order to avoid recognizing an other-thantemporary impairment charge through earnings. The FASB may address other-than-temporary impairments

further in a future project. The FASB's actions to defer the impairment measurement consensus did not

change the separate disclosure consensus in EITF 03-1, which remains eÅective. The incremental disclosures

required by EITF 03-1 are included in ""NOTE 5: RETAINED PORTFOLIO AND CASH AND

INVESTMENTS PORTFOLIO.''

Stock-Based Compensation Ì In December 2004, the FASB issued SFAS No. 123 (Revised 2004),

""Share-Based Payment'' (""SFAS 123-R''), which replaces the existing SFAS 123 and supercedes APB 25.

Also, in March 2005, the SEC issued StaÅ Accounting Bulletin No. 107 (""SAB 107'') which provides

additional guidance on the application of SFAS 123-R. SFAS 123-R requires companies to measure and

record compensation expense for stock options and other share-based payments based on the instruments' fair

values. SFAS 123-R is eÅective for interim and annual reporting periods beginning after June 15, 2005. As

noted above in ""Stock-Based Compensation,'' the company has applied the fair value compensation expense

provisions of SFAS 123 retroactively to January 1, 1995. The impact of the adoption of SFAS 123-R is not

expected to be material to the company's Ñnancial position or results of operations.

Implicit Variable Interests Ì In March 2005, the FASB issued FASB StaÅ Position No. FIN 46(R)-5,

""Implicit Variable Interests Under FASB Interpretation No. 46 (Revised December 2003)''

(""FSP FIN 46(R)-5''). FSP FIN 46(R)-5 provides guidance on when an indirect relationship could be

deemed an implicit variable interest that should be considered in assessing whether or not to consolidate

certain entities. Determination as to whether an implicit variable interest exists should be based on whether

the company, through its relationship with the related party, will absorb the variability of the variable interest

entity. FSP FIN 46(R)-5 is eÅective for the company beginning April 1, 2005. The impact of adoption is not

expected to be material to the company's Ñnancial position or results of operations.

Freddie Mac

164
NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS

Types of Securitization Transactions Executed By Freddie Mac

Freddie Mac issues two types of mortgage-related securities: Mortgage Participation CertiÑcates

(""PCs'') and Structured Securities. PCs represent undivided interests in pools of mortgage loans that are

secured by either single-family or multifamily loans. Similarly, Structured Securities represent undivided

interests in PCs or other mortgage-related securities that are issued by either Ginnie Mae or non-agency

issuers. Freddie Mac guarantees the payment of principal and interest on all issued PCs and Structured

Securities.

Freddie Mac issues PCs in several diÅerent ways:

‚ Single-family mortgage loans that are purchased by Freddie Mac through its Cash Window are

either retained by Freddie Mac in its Retained portfolio or are sold through auction in the form of

issued PCs. Some single-family mortgage loans in the Retained portfolio are securitized and,

therefore, are held as investments in the form of PCs. Mortgage loans that are purchased through

the Cash Window and not retained by Freddie Mac are pooled together with other single-family

mortgage loans that are received in connection with PC swap-based transactions that it executes

with various lenders (and which Freddie Mac refers to as ""MultiLender Swaps''). In this case,

issued PCs that are not delivered to third party lenders in connection with MultiLender Swap

transactions are sold by Freddie Mac for cash consideration through an auction.

‚ Freddie Mac commonly issues PCs to third parties through PC-swap-based transactions where

either single-family or multifamily mortgage loans are delivered to Freddie Mac in exchange for

PCs backed by such pools of mortgage loans. In this regard, and unlike MultiLender Swap

transactions, the pools of mortgage loans formed in this case relate exclusively to mortgage loans

that are delivered to Freddie Mac by a single lender.

Freddie Mac sells PCs that are held in its Retained portfolio in resecuritized form as Structured

Securities. More speciÑcally, Freddie Mac issues single and multi-class Structured Securities that are backed

by PCs and other mortgage-related securities held in portfolio and subsequently transfers such Structured

Securities to third parties in exchange for cash consideration. Freddie Mac also commonly issues Structured

Securities in exchange for PCs and other mortgage-related securities that are delivered to it by third party

dealers who, in turn, sell such Structured Securities to retail and institutional investors.

Retained Interests Created Through The Securitization Process

Freddie Mac's retained interests in securitized and resecuritized mortgage-related assets include the

following:

‚ PCs retained by Freddie Mac that are backed by conforming single-family mortgage loans and

multifamily mortgage loans for which Freddie Mac paid cash consideration.

‚ Structured Securities retained by Freddie Mac in connection with the resecuritization of PCs and

mortgage-related securities that are issued by Ginnie Mae and non-agency entities.

‚ Freddie Mac's contractual right to receive a negotiated fraction of the interest-related cash Öows

of securitized mortgage loans which relates to compensation due Freddie Mac in connection with

its guarantee and administration of payments of principal and interest on issued PCs. This

retained, undivided interest is referred to as a GA.

‚ PC residuals, which relate to certain PCs and Structured Securities held by Freddie Mac and

represent the fair value of the expected net future cash Öows of guarantee and bond administration

cash Öows that are contractually distinct from that of such corresponding PCs or Structured

Securities.

Freddie Mac

165
Unpaid Principal Balances of Issued PCs and Structured Securities

Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities as of

December 31, 2004 and 2003.

Table 2.1 Ì Issued PCs and Structured Securities Based on Unpaid Principal Balances(1)(2)

December 31,

2004 2003

(dollars in millions)

PCs and Structured Securities:

Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 852,270 $ 752,164

Held by Freddie Mac in the:

Retained portfolio(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 356,698 393,135

Cash and investments portfolio(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 16,769

Total issued PCs and Structured Securities(5)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,208,968 $1,162,068

(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2) Due to the nature of security program remittance cycles of issued PCs and Structured Securities, the unpaid principal balances of the

underlying mortgage loans do not equal the unpaid principal balances of issued PCs and Structured Securities. See

""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors'' for more

information.

(3) With respect to mortgage loans purchased through Freddie Mac's Cash Window that were internally securitized as PCs and held as

available-for-sale investments in the Retained portfolio, the company recognized losses of $1 million and $178 million for the years

ended December 31, 2004 and 2003, respectively, that correspond to permanent lower-of-cost-or-market value adjustments that were

recognized in connection with such mortgage loans. Such lower-of-cost-or-market value adjustments were treated as basis

adjustments to such issued PCs and, as such, are amortized into interest income over the holding period of such securities.

(4) Represents PCs and Structured Securities held by Freddie Mac in connection with PC market-making and support activities, which

are reÖected in Investments on the consolidated balance sheets. In the fourth quarter of 2004, Freddie Mac ceased its PC marketmaking and support activities accomplished through its Securities Sales & Trading Group business unit and its external Money

Manager program.

(5) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' these amounts include:

‚ $3,015 million and $4,729 million of Structured Securities backed by Ginnie Mae CertiÑcates at December 31, 2004 and 2003,

respectively.

‚ $5,432 million and $5,044 million at December 31, 2004 and 2003, respectively, that pertain to Freddie Mac's guarantee of (a) the

payment of principal and interest on (i) tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates

issued by third parties; and (ii) multifamily mortgage loans that are originated and held by state and municipal housing Ñnance

agencies to support tax-exempt multifamily housing revenue bonds; and (b) Freddie Mac pass-through certiÑcates which are

backed by tax-exempt multifamily housing revenue bonds and related taxable bonds and/or loans together with scheduled

principal payments on such bonds and/or loans.

‚ $1,806 million and $2,278 million at December 31, 2004 and 2003, respectively, of single-family mortgage loans held by third

parties for which Freddie Mac provided a credit guarantee.

(6) PCs and Structured Securities exclude $723,429 million and $637,491 million at December 31, 2004 and 2003, respectively, of

Structured Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured

Securities do not increase Freddie Mac's credit related exposure and consist of single-class Structured Securities backed by PCs,

Real Estate Mortgage Investment Conduits, or REMICs and principal-only strips. The notional balance of interest-only strips of

$105,703 million and $91,192 million at December 31, 2004 and 2003, respectively, is excluded because this table is based on unpaid

principal balances. Also excluded are modiÑable and combinable REMIC tranches and interest and principal classes, which

collectively total $1,097,336 million and $988,600 million at December 31, 2004 and 2003, respectively, where the holder has the

option to exchange the security tranches for other pre-deÑned security tranches.

At December 31, 2004 and 2003, approximately 86 percent and 78 percent, respectively, of issued PCs

and Structured Securities (excluding securities issued by Freddie Mac and backed by Ginnie Mae CertiÑcates

or non-agency mortgage-related securities and other securities guaranteed by Freddie Mac) had corresponding GAs, GOs or PC residuals recognized on Freddie Mac's consolidated balance sheets. The percentage of

these PCs and Structured Securities that had corresponding GAs, GOs or PC residuals due to the adoption of

FIN 45 accounting on January 1, 2003 was 39 percent and 30 percent, at December 31, 2004 and 2003,

respectively. As of December 31, 2004 and 2003, 87 percent and 81 percent, respectively, of PCs and

Structured Securities held by third parties had a related GA and GO established.

Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales

Freddie Mac recognized pre-tax gains of approximately $356 million, $711 million and $874 million for

the years ended December 31, 2004, 2003 and 2002, respectively, on transfers of PCs and Structured

Freddie Mac

166
Securities that were accounted for as sales under SFAS 125/140. In connection with the derivation of such

gains (losses), Freddie Mac has:

‚ developed and consistently applied a methodology for determining the order in which to record

extinguishments of GOs and the recognition of retained interests because PCs within an individual

CUSIP are fungible in nature;

‚ de-recognized for Ñnancial statement purposes the carrying value of the sold portion of securitized

assets as of the end of the month in which a sale has occurred; and

‚ recorded extinguishments of GOs as of the beginning of the month in which the purchase of

corresponding PCs or Structured Securities has occurred.

Key Valuation Assumptions Associated with Recognized GAs, GOs, Credit Enhancements and PC

Residuals that Correspond to PCs or Structured Securities Backed by Single-Family Mortgages

Freddie Mac recognizes GAs and GOs for PCs backed by residential mortgage loans and multifamily

mortgage loans in conjunction with transfers accounted for as sales under SFAS 125/140 as well as, beginning

on January 1, 2003, transactions that do not qualify as sales, but are accounted for as guarantees pursuant to

the requirements of FIN 45. At December 31, 2004 and 2003, GAs totaled $4,516 million and $3,686 million

on Freddie Mac's consolidated balance sheets and of these amounts, approximately $88 million (or

approximately 2 percent) and $24 million (or less than 1 percent), respectively, related to guarantees of

multifamily mortgage loans. Consequently, the following discussion of key valuation assumptions and

corresponding sensitivity analysis of recognized GAs, GOs, credit enhancements and PC residuals focuses

solely on PCs and Structured Securities backed by single-family mortgage loans.

Recognized GAs

Fair values of recognized GAs were calculated using an expected cash Öow approach. SpeciÑcally, Monte

Carlo simulations were used to project monthly prepayment and default rates across 300 house price and

interest rate scenarios. Through December 31, 2002, Monte Carlo simulations were also used to project

monthly loss severity rates because recognized GAs for those periods included the fair value of pool insurance,

recourse and indemniÑcations. As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' Freddie Mac discontinued the inclusion of these credit enhancements as components of

recognized GAs eÅective January 1, 2003 and monthly loss severity rates are no longer included as part of

Monte Carlo simulations used to project future cash Öows associated with GAs. Monte Carlo projections were

used to forecast GA-related future cash Öows associated with approximately 360,000, 330,000 and 210,000

groups of mortgage loans for 2004, 2003 and 2002, respectively, that are distinguished based upon diÅering

combinations of various loan attributes (these groups of loans are referred to as ""Loan Group''). Freddie Mac

then discounted their forecasted cash Öows using factors that were derived from modeled forward interest rates

(for each scenario path) to which Freddie Mac then applied a trailing average option-adjusted spread of up to

24 months that was based on spot interest-only security prices. The trailing average option-adjusted spreads

ranged between 127 and 313 basis points from January 1, 2004 to December 31, 2004, and between 313 and

766 basis points from January 1, 2003 to December 31, 2003.

Based upon the foregoing, Freddie Mac recognized as GAs the average of the present value of the GArelated cash Öows generated for each Loan Group for each of the referenced scenarios. EÅective January 1,

2003, Freddie Mac modiÑed the composition of GA-related cash Öows used to derive fair value as a result of

changes to its accounting policies (which are further described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'').

Recognized GOs

GOs are recognized at fair value at the inception of an executed guarantee. The fair value of a GO

constitutes a component of the valuation of a PC residual (where a recognized PC residual is eÅectively

equivalent to the net fair value of the underlying GA and GO). Like the cash Öows associated with recognized

GAs, GO-related future cash Öows associated with each referenced Loan Group are estimated using Monte

Freddie Mac

167
Carlo simulation. The components of estimated future cash Öows associated with GOs include: (a) estimates

of expected future credit losses using statistically based models that evaluate a variety of factors (such as

default experience and loss severity trends), as well as an estimated risk premium for the uncertainty in

expected credit losses that would be required to be paid to a third party with a credit standing similar to

Freddie Mac; (b) estimates of the costs to administer the collection and distribution of payments on the

mortgage loans underlying a PC; and (c) expected net cash Öows due to security program cycles. When

deriving the present value of GO-related cash Öows for each scenario for each Loan Group, Freddie Mac uses

a convention that is similar to the methodology described above to discount GA-related future cash Öows,

except that a London Interbank OÅered Rate (""LIBOR'') rate is generally used to discount such cash Öows.

Additionally, projected credit related costs that are factored into the GO-related cash Öows are benchmarked

periodically to the non-conforming loan securitization market.

Like recognized GAs, Freddie Mac recognized as GOs the average of the present value of the GOrelated cash Öows generated for each Loan Group for each of the scenarios.

Recognized PC residuals

PC residuals relate to certain PCs and Structured Securities held by Freddie Mac in its Retained

portfolio and Cash and investments portfolio and represent the fair value of the future cash Öows of guarantee

contracts that speciÑcally correspond to such PCs. By the end of 2004, the company had ceased certain PC

market-making and support activities and the Cash and investments portfolio no longer held mortgage-related

securities. Since the future cash Öows associated with such guarantee contracts are represented by those that

deÑne a PC's corresponding GA and GO, the fair value of a recognized PC residual is eÅectively equivalent to

the fair value of a GA less that of a corresponding GO. Accordingly, the fair value of recognized PC residuals

is determined in a manner that is reÖective of the methodologies described above for recognized GAs and

GOs.

Recognized Credit Enhancements

Many of the credit enhancements that Freddie Mac employs in connection with securitized mortgage

loans are recognized at fair value at the inception of each contract. Future credit enhancement-related cash

Öows associated with each referenced Loan Group are estimated using a Monte Carlo simulation. More

speciÑcally, based upon the terms of a credit-enhancement contract, the portion of the total GO-related future

cash Öows estimated for each Loan Group that would be reimbursed to Freddie Mac by a third party (e.g., a

mortgage insurer) are identiÑed as the estimated future cash inÖows due Freddie Mac on each of such

contracts. These projected cash inÖows are then discounted using a LIBOR rate.

Freddie Mac recognizes as an Other asset the average of the present value of the credit enhancementrelated cash Öows generated for each Loan Group for each of the scenarios related to pool insurance, recourse

and indemniÑcations. The average of the present value of the credit enhancements-related cash Öows

generated for each Loan Group for each of the scenarios related to primary mortgage insurance is recognized

at inception at fair value as a reduction of recognized GOs.

Credit enhancements that were recognized as Other assets had a carrying value of approximately

$232 million and $200 million at December 31, 2004 and 2003, respectively.

Other Retained Interests

Other Retained Interests (as deÑned in footnote 3 to ""Table 2.3 Ì Sensitivity Analysis'') are valued

based upon observed market or matrix-based prices (for the latter, prices for comparable securities, as

adjusted for product-speciÑc attributes, are used as a basis to value such interests). Because these interests are

not model-valued, the corresponding valuation assumptions are not provided in Table 2.2 below. Sensitivity

analysis of these interests (as shown in ""Table 2.3 Ì Sensitivity Analysis'') is estimated using a company

model that is not the source of the actual valuation used to determine their carrying value.

Freddie Mac

168
Table 2.2 summarizes the key assumptions Freddie Mac used in fair value measurements of recognized

GAs, GOs and PC residuals.

Table 2.2 Ì Key Assumptions Utilized in Fair Value Measurements(1)

2004 2003 2002

GA, GO and PC residual GA, GO and PC residual GA, GO and PC residual

Assumptions Range(6) Mean(7) Range(6) Mean(7) Range(6) Mean(7)

Internal rates of return(2)

GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.4)% - 13.6% 6.7% 4.5% - 15.1% 9.4% 5.9% - 15.7% 9.4%

GO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.3% - 9.4% 5.3% 1.9% - 9.5% 5.6% 3.8% - 8.2% 6.0%

PC residual ÏÏÏÏÏÏÏÏÏÏÏ 0.0% - 11.9% 6.1% 4.0% - 12.2% 7.6% 5.1% - 11.8% 7.4%

Prepayment rates(3)ÏÏÏÏÏÏÏ 6.8% - 58.6% 18.8% 7.5% - 62.9% 22.6% 8.8% - 54.6% 22.5%

Default rates(4) ÏÏÏÏÏÏÏÏÏÏ 0.1% - 8.5% 1.1% 0.1% - 8.5% 1.2% 0.1% - 8.1% 1.2%

Loss severity rates(5) ÏÏÏÏÏÏ 4.0% - 46.0% 23.9% 4.0% - 46.0% 24.6% 3.6% - 48.4% 22.9%

(1) The assumptions included in this table relate to those used to measure the fair value of single-family GAs, GOs and PC residuals at

the time of securitization and the subsequent fair value measurements, which occurred throughout each of the years presented.

Additionally, the range of assumptions used to facilitate the valuation of recognized credit enhancements was consistent with those

provided above for recognized GOs.

(2) The internal rates of return (""IRR'') reported above represent a duration weighted average of the discount rates used to value

recognized GAs and GOs. Such rates were derived by determining a single rate that equated (a) the simple average of future cash

Öows (for all 300 scenario paths described above) of the GA and GO for each Loan Group with that of (b) the calculated fair value

of the GA and GO for each Loan Group. With respect to PC residuals, IRRs reported above represent the weighted average of the

derived IRR values for corresponding GAs and GOs (where weightings are based upon the fair values of corresponding GAs and

GOs). Negative IRRs can occur when suÇciently large negative option adjusted spreads are applied to LIBOR. When Freddie Mac

calibrates its modeled discounted cash Öows to the traded price of an interest-only security, a negative option-adjusted spread can

result when the traded price exceeds the implied market value of the modeled discounted cash Öows. A negative option-adjusted

spread is necessary to calibrate the implied market value of the modeled discounted cash Öows to the traded price.

(3) Scenario average Prepayment rates are simulated on a monthly frequency, although rates reported above represent an unpaid

principal balance weighted average of annualized values of such Prepayment rates.

(4) Default rates are simulated on a monthly frequency, although Default rates reported above represent simple averages of cumulative

default rates determined for each of the 300 scenarios for each Loan Group.

(5) Loss severity rates reported above represent the ratio of (a) the simple average of cumulative credit losses generated for each

scenario to (b) defaulted unpaid principal balance for each Loan Group.

(6) The lowest value in each presented range represents the Ñrst percentile IRRs, prepayment rates, default rates and loss severity rates

throughout 2004, 2003 and 2002. Likewise, the highest value in each range represents the 99th percentile IRRs, prepayment rates,

default rates and loss severity rates throughout 2004, 2003 and 2002.

(7) Reported values represent the weighted average value of all IRRs, prepayment rates, default rates and loss severity rates throughout

the 2004, 2003 and 2002 periods.

Weighted average lives of GAs and PC residuals during 2004, 2003 and 2002 ranged between 1.2 Ó

8.7 years, 1.0 Ó 8.6 years and 1.5 Ó 7.8 years, respectively, while the average derived weighted average lives of

GAs and PC residuals for the same periods were 5.2, 4.8 and 5.0 years, respectively. Such derived weighted

average lives are reÖective of prepayment speed assumptions cited in Table 2.2 above.

The sensitivity analysis in Table 2.3 below illustrates estimated changes in the fair value at December 31,

2004 of recognized GAs, PC residuals and other retained interests (which are further described below) based

upon:

‚ 100 basis point and 200 basis point increases and decreases in discount rate assumptions;

‚ 10% and 20 increases and decreases in prepayment rate assumptions;

‚ 10% and 20% increases in default rate assumptions; and

‚ 10% and 20% increases in loss severity rate assumptions.

GOs are not included in the sensitivity analysis in Table 2.3 since such items are not subsequently

measured on a fair value basis in the consolidated balance sheets.

Freddie Mac

169
Table 2.3 Ì Sensitivity Analysis

At December 31, 2004

Other

retained

PC residual(1) GA(2) interests(3)

(dollars in millions)

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 845 $4,516 $ 713(4)

Weighted average IRR assumptions:ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.8% 6.1% 10.8%

Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (28) $ (161) $ (23)

Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (54) $ (312) $ (44)

Impact on fair value of 100 bps downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 29 $ 172 $ 25

Impact on fair value of 200 bps downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 59 $ 348 $ 52

Weighted average prepayment rate assumptions:ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.0% 19.5% 14.3%

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (16) $ (207) $ (28)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (32) $ (393) $ (53)

Impact on fair value of 10% downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17 $ 231 $ 32

Impact on fair value of 20% downward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36 $ 490 $ 68

Weighted average default rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.0% 1.0% N/A(5)

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (65) $ (3) N/A(5)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(130) $ (7) N/A(5)

Weighted average loss severity rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.0% N/A(6) N/A(5)

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (86) N/A(6) N/A(5)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(174) N/A(6) N/A(5)

(1) At December 31, 2004 and 2003, approximately $107 million and $47 million, respectively, of recognized PC residuals were classiÑed

as available-for-sale representing, as a function of the unpaid principal balances of related PCs or Structured Securities,

approximately 17 percent of recognized PC residuals. Therefore, approximately 83 percent of the future changes in fair value of

recognized PC residuals would be recognized in earnings, while the balance of such future changes in fair value would be reÖected in

AOCI, net of taxes.

(2) At December 31, 2004, GAs totaled $4,516 million on Freddie Mac's consolidated balance sheet and of that amount, approximately

$88 million (or approximately 2 percent), relates to PCs backed by multifamily mortgage loans. The sensitivity analysis presented in

Table 2.3 relates solely to GAs associated with PCs backed by single-family mortgage loans.

(3) Includes interest-only securities that were issued by Freddie Mac as part of a resecuritization transaction for which sale accounting

treatment was applied, and Freddie Mac securities that were (a) purchased at a premium (to par) of 10 percent or greater and

(b) associated with either a securitization or resecuritization transaction for which sale accounting treatment was applied. Also

included are Freddie Mac securities held by the company for which securitized / resecuritized mortgage-related assets were (a) not

of high credit quality and (b) associated with either a securitization or resecuritization transaction for which sale accounting

treatment was applied.

(4) Includes accrued interest.

(5) Sensitivities of reported fair value to changes in default and loss severity rates associated with Other retained interests for which a

recognized PC residual exists are captured in the corresponding column entitled PC residual. Otherwise, with respect to Other

retained interests for which a PC residual was not recognized, such securities are valued for consolidated Ñnancial statement purposes

at the observed market price for such securities, which reÖect inherent credit protection provided by Freddie Mac. In this case,

changes in the reported fair value of such securities would not be aÅected by variations in default and loss severity assumptions and,

as a result, a corresponding sensitivity analysis was not prepared.

(6) Severity of loss has no impact on the underlying cash Öows of the guarantee asset or the resultant fair values.

The sensitivity analysis in the preceding table is hypothetical. Each of the calculated eÅects summarized

above was determined by adjusting only one assumption at a time, as opposed to having determined a

hypothetical eÅect on fair value based upon assumed, correlating changes in more than one assumption

(where, in reality, a change in one assumption would generally result in changes to one or more of the other

speciÑed assumptions). Additionally, any corresponding hedge transactions executed by Freddie Mac were not

considered in determining the hypothetical eÅects summarized above. Results provided above should not be

extrapolated to either (a) other sensitivity analyses in which changes in other assumptions are made or (b) to

other securities held by Freddie Mac.

Freddie Mac

170
Periodic Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests

Table 2.4 below summarizes:

‚ cash Öows received by Freddie Mac in connection with transfers of PCs and Structured Securities

to third parties that were accounted for as sales and where retained interests related to guarantee

activities were initially recognized or resulted from a resecuritization transaction;

‚ contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized

GAs (as further discussed below);

‚ contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized

PC residuals (as further discussed below);

‚ receipts of payments of principal and interest on Other retained interests; and

‚ amounts paid by Freddie Mac to repurchase delinquent mortgage loans that back PCs and

Structured Securities.

Table 2.4 Ì Details of Cash Flows

Year Ended December 31,

2004 2003(1) 2002

(dollars in millions)

Cash Öows from:

Transfers of Freddie Mac securities that were accounted for as sales $152,662 $347,874 $241,214

Cash Öows received on retained interests:

GAs(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,086 891 771

PC residuals(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 524 449 325

Other Retained Interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 491 810 654

Purchases of delinquent or foreclosed loans(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,931) (5,822) (5,039)

(1) Certain cash Öow amounts previously reported for the year ended December 31, 2003 have been revised to reÖect current year

quantiÑcation methods.

(2) Amounts speciÑcally correspond to guarantee fee-related cash Öows of recognized GAs and PC residuals, and do not reÖect cash

Öows received in connection with certain credit enhancements whose fair value in 2002 was also reported as GAs or PC residuals or

certain GO-related cash Öows whose value was reported as a component of recognized PC residuals. Total cash Öows received on

recognized GAs during 2004, 2003 and 2002 were $1,086 million, $891 million and $820 million, respectively. Total net cash Öows

received on recognized PC residuals during 2004, 2003 and 2002 were $227 million, $140 million and $169 million, respectively.

Total GA cash Öows and total net cash Öows received on PC residuals in 2004 are exclusive of proceeds received in connection with

credit enhancements.

(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.

(4) Subsequent to the release of Freddie Mac's Information Statement dated September 24, 2004, the company revised the methodology

for disclosing the Purchases of delinquent or foreclosed loans. The eÅect of this was a $473 million decrease and an $87 million

decrease in the balances for the years ended December 31, 2003 and 2002, respectively.

Attribution of GA- and PC Residual-Related Cash Flows

As previously discussed, GAs and PC residuals are Ñnancial assets accounted for on a fair value basis.

Similar to other Ñnancial assets, cash Öows received in connection with GAs and PC residuals represent both a

return on such assets (i.e., imputed interest) as well as a return of such assets (i.e., return of principal).

Freddie Mac receives cash Öows on these assets related to contractual guarantee fees. Additionally, Freddie

Mac receives or pays other cash Öows associated with PC residuals that relate to the PC guarantee contract,

such as credit-related expenses and administrative expenses.

Rather than recording a portion of the cash Öows associated with GAs and PC residuals as a reduction of

their respective recorded amounts, similar to a return of principal, the related income and expense amounts

are recorded directly on the consolidated statements of income based on the nature of such cash Öows. For

example, guarantee-related cash inÖows are recorded as Management and guarantee income. As these cash

Öows are received, the remaining cash Öows (and the related GA and PC residual fair values) decrease. These

decreases related to the GA and PC residuals are reÖected in the Gains (losses) on Guarantee asset for

Participation CertiÑcates, at fair value and Gains (losses) on investment activity, respectively.

Freddie Mac

171
Recognized GAs Ì Guarantee Fee-Related Cash Flows

Freddie Mac recorded $1,086 million, $891 million and $771 million of income associated with

guarantee-related cash Öows received during 2004, 2003 and 2002, respectively. These amounts were recorded

as Management and guarantee income. Of such amounts, approximately $257 million, $244 million and

$242 million, respectively, related to imputed interest. The remaining portion related to return of principal,

which totaled $829 million, $647 million and $529 million for 2004, 2003 and 2002, respectively.

Recognized GAs Ì All Cash Flows

As noted above, Freddie Mac discontinued the inclusion of credit enhancements as a component of

recognized GAs eÅective January 1, 2003. As a result, imputed interest amounts reported above for 2004 and

2003 do not consider cash Öows received that relate to credit enhancements that were previously recorded as a

component of recognized GAs. With respect to amounts reported in 2002, Freddie Mac recorded total income

of $820 million associated with recognized GAs. Approximately $259 million of such amounts constitute

imputed interest, while the remaining portion, which totaled $561 million, related to return of principal for

2002.

Recognized PC Residuals

Freddie Mac recorded $524 million, $449 million and $325 million of income associated with guaranteerelated cash Öows received in connection with the GA component of recognized PC residuals during 2004,

2003 and 2002, respectively. These amounts were recorded as interest income. Of these amounts, approximately $117 million, $109 million and $96 million during 2004, 2003 and 2002, respectively, related to

imputed interest. The remaining portion related to return of principal, which totaled $407 million, $340 million

and $229 million during 2004, 2003 and 2002, respectively.

Considering all cash Öows related to recognized PC residuals (i.e., related to both the GA and GO

components of recognized PC residuals), the amount of imputed interest on PC residuals was approximately

$67 million, $66 million and $73 million during 2004, 2003 and 2002, respectively. Consistent with the

description above, however, cash Öows used to derive the imputed interest for 2004 and 2003 were exclusive of

proceeds received in connection with credit enhancements.

Freddie Mac

172
NOTE 3: VARIABLE INTEREST ENTITIES

The company is a party to numerous entities that are considered to be variable interest entities (""VIEs'')

under FIN 46-R. These VIEs include low-income housing tax credit partnerships, West*Mac, certain assetbacked investment trusts, certain Structured Securities transactions and a mortgage reinsurance company. In

addition, Freddie Mac buys the highly-rated senior securities in certain mortgage securitization trusts that are

VIEs. Highly-rated senior securities issued by these securitization trusts are not designed to absorb a

signiÑcant portion of the variability created by the assets/collateral in the trusts. Freddie Mac's investments in

these securities do not represent a signiÑcant variable interest in the securitization trusts. Further, Freddie

Mac invests in securitization entities that are qualifying special purpose entities (""QSPEs'') as described in

SFAS 125/140. Interests in these QSPEs are exempt from FIN 46-R because of the company's inability to

unilaterally liquidate or change the QSPE. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for further information regarding FIN 46-R.

Low-Income Housing Tax Credit Partnerships

Freddie Mac invests as a limited partner in low-income housing tax credit partnerships formed for the

purpose of providing funding for aÅordable multifamily rental properties. These low-income housing tax credit

partnerships invest directly in limited partnerships that develop or rehabilitate multifamily rental properties.

Completed properties are rented to qualiÑed low-income tenants, allowing the properties to be eligible for

federal tax credits. A general partner operates the partnership, identifying investments and obtaining debt

Ñnancing as needed to Ñnance partnership activities. Although these partnerships generate operating losses,

Freddie Mac realizes a return on its investment through reductions in income tax expense that result from tax

credits and the deductibility of the operating losses. The partnership agreements are typically structured to

meet a required 15-year period of occupancy by qualiÑed low-income tenants. These investments were made

between 1989 and 2004. At December 31, 2004, Freddie Mac did not guarantee any obligations of these

partnerships and Freddie Mac's exposure is limited to the amount of its investments.

West*Mac

Freddie Mac is one of two general partners in West*Mac, which was formed in 1986. The purpose of

West*Mac is to acquire, develop and manage certain real property located in McLean, Virginia. This real

property is Freddie Mac's corporate headquarters.

Asset-Backed Investment Trusts

Freddie Mac invests in a variety of non-mortgage-related, asset-backed investment trusts. These

investments represent interests in trusts consisting of a pool of receivables or other Ñnancial assets, typically

credit card receivables, auto loans or student loans. The trusts act as vehicles to allow originators to securitize

assets. The originators of the Ñnancial assets or the underwriters of the deal create the trusts and typically own

the residual interest in the trust assets.

Securities are structured from the underlying pool of assets to provide for varying degrees of risk. Primary

risks include potential loss from the credit risk and interest rate risk of the underlying pool. Freddie Mac

invests in these securities to manage its cash Öows, create a diverse source of liquidity and achieve proÑtable

investment returns. These investments were made between 2000 and 2004.

Structured Securities Ì T-Series Transactions

In T-Series transactions (or alternative collateral deals), a seller or sellers of mortgage loans transfers

mortgage loans to a trust speciÑcally for the purpose of issuing securities collateralized by the mortgage loans.

These T-Series transactions issue various senior and subordinated interests. Freddie Mac guarantees and

purchases certain of the senior interests. Simultaneous with this guarantee and purchase, Freddie Mac issues

and guarantees Structured Securities. These Structured Securities represent an interest in the senior interests

of the T-series transactions. The subordinated interests are generally either held by the seller or other party or

sold in the capital markets.

Freddie Mac

173
Mortgage Reinsurance Company

In May 1998, Freddie Mac transferred credit risk to a consolidated special purpose entity in a reinsurance

transaction.

Consolidated VIEs

As of December 31, 2004, the company had investments in Ñve low-income housing tax credit

partnerships, West*Mac and the mortgage reinsurance company referred to above, of which Freddie Mac was

the primary beneÑciary. These are consolidated pursuant to the requirements of FIN 46-R. Prior to 2004,

Freddie Mac consolidated these in accordance with other applicable requirements under GAAP. Table 3.1

represents the carrying amounts and classiÑcation of consolidated assets that are collateral for the consolidated

VIEs.

Table 3.1 Ì Assets of Consolidated VIEs

Consolidated Balance Sheets Line ItemDecember 31, 2004

(dollars in millions)

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 51

Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 239

Total assets of consolidated VIEs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $460

The investors in the obligations of consolidated VIEs have recourse only to the assets of those VIEs and

do not have recourse to the company.

VIEs Not Consolidated

As of December 31, 2004, the company had unconsolidated investments in 149 low-income housing tax

credit partnerships in which Freddie Mac had a signiÑcant variable interest. The size of these partnerships at

December 31, 2004, as measured in total assets, was $7.5 billion. These partnerships are accounted for using

the equity method, as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'' As a limited partner, Freddie Mac's maximum exposure to loss equals the book value of its equity

investment. As of December 31, 2004, Freddie Mac's maximum exposure to loss on unconsolidated lowincome housing tax credit partnerships, in which Freddie Mac had a signiÑcant variable interest, was

$2.9 billion.

At December 31, 2004, the company had investments in three trusts related to non-mortgage-related,

asset-backed securities in which Freddie Mac had a signiÑcant variable interest. These trusts had total assets

of $12.8 billion. At December 31, 2003, the company had investments in 15 trusts related to non-mortgagerelated, asset-backed securities in which Freddie Mac had a signiÑcant variable interest. These trusts had total

assets of $7.9 billion. As an investor, Freddie Mac's maximum exposure to loss consisted of the book value of

its investment. As of December 31, 2004, Freddie Mac's maximum exposure to loss on non-mortgage-related,

asset-backed investment trusts in which Freddie Mac had a signiÑcant variable interest was approximately

$3.4 billion. As of December 31, 2003, Freddie Mac's maximum exposure to loss on non-mortgage-related,

asset-backed investment trusts in which Freddie Mac had a signiÑcant variable interest was approximately

$1.8 billion. These investments are typically senior interests rated A1 and P1 by Standard & Poor's and

Moody's, respectively, which is the short-term equivalent to between A and AAA in typical long-term rating

scales.

At both December 31, 2004 and 2003, the company had investments or guarantees related to two

T-Series transactions in which Freddie Mac had a signiÑcant variable interest. Freddie Mac's involvement in

the T-Series transactions began in 1996 and 2002, respectively. The size of these transactions at December 31,

2004 and 2003, as measured in total assets, was $170 million and $367 million, respectively. As of

December 31, 2004 and 2003, Freddie Mac's maximum exposure to loss on T-Series transactions in which

Freddie Mac had a signiÑcant variable interest was $147 million and $339 million, respectively, consisting of

the book value of the company's investments plus incremental guarantees of the senior interests that are held

by third parties.

Freddie Mac

174
NOTE 4: FINANCIAL GUARANTEES

Freddie Mac executes a variety of Ñnancial guarantees. Each of the principal types of such guarantees,

including relevant qualitative and quantitative information associated with such items, is further discussed

below.

Principal and Interest Guarantees of PCs and Structured Securities

As is further discussed in ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS,'' Freddie Mac issues two types of mortgage-related securities: PCs and

Structured Securities. PCs represent undivided interests in pools of mortgage loans that are secured by either

single-family or multifamily mortgage loans. Similarly, Structured Securities represent undivided interests in

PCs or other mortgage-related securities that are issued by either Ginnie Mae or non-agency issuers. Freddie

Mac guarantees the payment of principal and interest on all issued PCs and Structured Securities. Freddie

Mac's guarantees related to Structured Securities include its guarantees on PCs or any non-Freddie Mac

mortgage-related securities that underlie these Structured Securities.

Depending upon the manner by which Freddie Mac transferred PCs or Structured Securities to third

parties in 2004 and 2003, all such transfers, which totaled $365,108 million and $713,787 million, respectively,

were accounted for pursuant to the requirements of FIN 45 and SFAS 125/140. Upon completion of the

transfer of PCs or Structured Securities to third parties, Freddie Mac recognizes the fair value of its obligation

to make guarantee payments. The methods by which Freddie Mac accounts for its guarantees of PCs and

Structured Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

The maximum potential amount of future principal payments Freddie Mac could be required to make in

connection with the unpaid principal balance of all PCs and Structured Securities held by third parties totaled

$852 billion and $752 billion at December 31, 2004 and 2003, respectively. Included in these amounts are

$5.4 billion and $5.0 billion at December 31, 2004 and 2003, respectively, that pertain to guarantees related to

multifamily housing revenue bonds that come in three principal forms. First, Freddie Mac provides a

guarantee of the payment of principal and interest on tax-exempt multifamily housing revenue bonds that

support pass-through certiÑcates issued by third parties. These housing revenue bonds are collateralized by

mortgage loans on low- and moderate-income multifamily housing projects. Second, Freddie Mac issues passthrough certiÑcates which are backed by tax-exempt multifamily housing revenue bonds and related taxable

bonds and/or loans. Freddie Mac guarantees all scheduled principal on the bonds or loans, and guarantees

interest on the certiÑcates. And third, Freddie Mac guarantees the payment of principal and interest related to

low- and moderate-income multifamily mortgage loans that are originated and held by state and municipal

agencies to support tax-exempt multifamily housing revenue bonds. Additionally, Freddie Mac provided credit

guarantees of $1.8 billion and $2.3 billion at December 31, 2004 and 2003, respectively, of single-family

mortgage loans held by third parties.

As part of these guarantee arrangements, Freddie Mac also provides a commitment to advance funds,

commonly referred to as ""liquidity guarantees,'' totaling $5.0 billion and $4.5 billion, at December 31, 2004

and 2003, respectively, to enable the repurchase by others of tendered tax-exempt pass-through certiÑcates

and housing revenue bonds that are unable to be remarketed. Any repurchased securities would be pledged to

Freddie Mac as collateral for such funding until such time as the securities could be remarketed. There have

been no payments made to date by Freddie Mac under this type of loan commitment.

Generally, the contractual terms of Freddie Mac's guarantees on PCs and Structured Securities are 15 to

30 years. However, the actual term of each guarantee may be signiÑcantly less than the contractual terms due

to the prepayment characteristics of the mortgage-related assets that back PCs and Structured Securities.

Maximum potential interest payments Freddie Mac could be required to make associated with these

guarantees are not expected to signiÑcantly exceed 120 days of interest at the certiÑcate rate, given that

Freddie Mac generally begins a process to purchase the defaulted mortgages when they have been delinquent

for 120 consecutive days.

In connection with PCs or Structured Securities backed by single-family mortgage loans, Freddie Mac

had maximum coverage totaling $27.2 billion and $27.1 billion in primary mortgage insurance at

Freddie Mac

175
December 31, 2004 and 2003, respectively, $3.5 billion and $4.1 billion in pool insurance and other credit

enhancements at December 31, 2004 and 2003, respectively, and $4.1 billion and $4.6 billion in recourse to

lenders at December 31, 2004 and 2003, respectively. In addition, $2.6 billion and $4.1 billion of outstanding

Structured Securities relate to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the

U.S. government, at December 31, 2004 and 2003, respectively. With respect to PCs and Structured

Securities backed by multifamily mortgage loans, Freddie Mac had maximum combined credit enhancements

totaling $9.1 billion and $9.5 billion at December 31, 2004 and 2003, respectively.

At December 31, 2004, Freddie Mac had a recognized Guarantee obligation for Participation CertiÑcates

on the consolidated balance sheets of $4.1 billion, which included $1.3 billion of Deferred Guarantee Income.

At December 31, 2003, the Guarantee obligation for Participation CertiÑcates totaled $2.9 billion, which

included $0.8 billion of Deferred Guarantee Income. In addition, the company had a Reserve for Guarantee

Losses on Participation CertiÑcates that totaled $150 million and $125 million at December 31, 2004 and

2003, respectively, for incurred credit losses that were recognized in conjunction with PCs and Structured

Securities held by third parties.

Guarantees of Stated Final Maturity of Issued Structured Securities

Freddie Mac commonly issues Structured Securities with stated Ñnal maturities that are shorter than the

stated maturity of the underlying mortgage loans. If the assets that back such Structured Securities have not

fully matured as of the stated Ñnal maturity date of such securities, either Freddie Mac will sponsor an auction

of the underlying assets or a third party who holds a par-based call option on such underlying assets will

exercise its option to purchase such underlying assets (an option which, if exercised, would provide cash Öows

that Freddie Mac would pass through to investors in such Structured Securities). If an auction occurs, Freddie

Mac would pass through proceeds received to investors of such Structured Securities. To the extent, however,

that auction proceeds are insuÇcient to cover unpaid principal amounts due to investors in such Structured

Securities, Freddie Mac is obligated to fund such principal. With respect to such guarantees of stated Ñnal

maturity, Freddie Mac eÅectively writes a cash-settled put option to investors in such Structured Securities.

Such guarantees are accounted for as derivative instruments pursuant to the requirements of SFAS 133.

As of December 31, 2004 and 2003, the maximum potential amount of payments Freddie Mac could be

required to make under such guarantees was $9.2 billion and $8.4 billion, respectively, which represents the

outstanding unpaid principal balance of the underlying mortgage loans. At both December 31, 2004 and 2003,

the total fair value of recognized liabilities concerning such guarantees was $1.0 million. The longest

remaining contractual maturity of any outstanding written put option was 15 years and 16 years at

December 31, 2004 and 2003, respectively; however, the actual terms may be signiÑcantly less than the

contractual terms as the amortizing notional balance is linked to prepayable mortgage loans.

IndemniÑcations

In connection with various business transactions, Freddie Mac provides indemniÑcation to counterparties

for breaches of standard representations and warranties in contracts entered into in the normal course of

business. It is diÇcult to estimate Freddie Mac's maximum exposure under these indemniÑcation agreements

since in many cases there are no stated or notional amounts included in the indemniÑcation clauses. However,

the contingencies triggering the obligation to indemnify have not occurred. Freddie Mac's assessment is that

the risk would be remote. Such representations and warranties pertain to hold harmless clauses, adverse

changes in tax laws and potential claims from third parties related to items such as actual or alleged

infringement of intellectual property. At December 31, 2004 and 2003, there were 14 and 13 identiÑed

transactions, respectively, that contain intellectual property related indemniÑcations, as deÑned by FASB StaÅ

Position No. 45-1, ""Accounting for Intellectual Property Infringement IndemniÑcations under FASB

Interpretation No. 45.'' Freddie Mac had not recorded any liabilities related to these indemniÑcations in its

consolidated balance sheets as of December 31, 2004 and 2003 because it was not probable that the company

would be required to make payments under these contractual agreements on those dates.

Freddie Mac

176
Other Guarantees

Freddie Mac has guaranteed the performance of interest-rate swap contracts in two circumstances. First,

as part of a resecuritization transaction, Freddie Mac transferred certain swaps and related assets to a third

party. Freddie Mac guaranteed that interest income generated from the assets would be suÇcient to cover the

required payments under the interest-rate swap contracts. In the other circumstance, Freddie Mac guaranteed

that a customer would perform under an interest-rate swap contract linked to the customer's variable rate

mortgage. The maximum remaining terms of any of these guarantees at December 31, 2004 and 2003 was

29 years and 27 years, respectively; however, the actual terms may be signiÑcantly less than the contractual

terms as the amortizing notional balance of the swaps is linked to prepayable mortgage loans. The maximum

potential amount of future payments under the guarantees was $50 million and $136 million at December 31,

2004 and 2003, respectively. The company has not established a liability on its consolidated balance sheets at

December 31, 2004 and 2003 because it was not probable that it would be required to make payments under

these contractual arrangements on those dates.

Freddie Mac provides guarantees to reimburse servicers for premiums paid to acquire servicing in

situations where Freddie Mac requires the original seller to repurchase the loan and the original seller is

unable to perform under a separate agreement to reimburse the servicer for those servicing premiums. Freddie

Mac's servicing related premium guarantees are payable according to a vesting schedule for up to Ñve years

from the date of purchase of servicing rights. Freddie Mac's servicing-related premium guarantees issued

in 2003 and 2004 extend through 2008 and 2009, respectively. The maximum potential amount of future

payments under the guarantees was $113 million and $151 million at December 31, 2004 and 2003,

respectively. The company has not established a liability on its consolidated balance sheets at December 31,

2004 and 2003 because it was not probable that it would be required to make payments under these

contractual arrangements on those dates.

Freddie Mac

177
NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO

Table 5.1 summarizes amortized cost, estimated fair values and corresponding gross unrealized gains and

gross unrealized losses by major security type for available-for-sale mortgage-related securities held in the

Retained portfolio and available-for-sale non-mortgage-related securities held in the Cash and investments

portfolio at December 31, 2004 and 2003, respectively.

Table 5.1 Ì Available-For-Sale Securities

December 31, 2004

Gross Gross

Amortized Unrealized Unrealized

Cost Gains Losses Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $348,034 $5,506 $(1,438) $352,102

Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,922 950 (353) 59,519

Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,677 86 (1) 1,762

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,738 1,700 (380) 168,058

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 8,751 301 (32) 9,020

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584,122 8,543 (2,204) 590,461

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,668 120 (55) 21,733

Obligations of states and political subdivisions ÏÏÏÏÏÏÏ 8,098 Ì (1) 8,097

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ 29,766 120 (56) 29,830

Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $613,888 $8,663 $(2,260) $620,291

December 31, 2003

Gross Gross

Amortized Unrealized Unrealized

Cost Gains Losses Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $378,956 $ 7,010 $(1,540) $384,426

Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,705 1,524 (385) 76,844

Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,785 134 (1) 2,918

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107,522 2,152 (265) 109,409

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 7,449 306 (26) 7,729

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 572,417 11,126 (2,217) 581,326

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,209 394 (7) 16,596

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,698 230 (4) 4,924

Obligations of states and political subdivisions ÏÏÏÏÏÏÏ 9,494 Ì Ì 9,494

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150 Ì Ì 150

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 Ì Ì 64

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ 30,615 624 (11) 31,228

Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $603,032 $11,750 $(2,228) $612,554

In 2004, 2003 and 2002, Freddie Mac received proceeds of$85,583 million, $142,167 million and

$172,964 million, respectively, from the sale of securities from its available-for-sale portfolio. The proceeds

received resulted in gross realized gains of $800 million and gross realized losses of $203 million in 2004, gross

realized gains of $1,903 million and gross realized losses of $1,077 million in 2003 and gross realized gains of

$1,575 million and gross realized losses of $257 million in 2002.

Management has determined that the $2,260 million of gross unrealized losses on the company's

available-for-sale mortgage-related and non-mortgage-related securities at December 31, 2004 are not other

Freddie Mac

178
than temporary in nature. Management conducts periodic reviews to identify and evaluate investments that

have indications of impairment. Impairment losses related to investments are recognized in earnings if fair

value is less than amortized cost and the decline is considered other than temporary. See ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for additional information about the

company's impairment accounting policies.

Table 5.2 below shows the fair value of available-for-sale securities in a gross unrealized loss position at

December 31, 2004 and how long they have been in that position.

Table 5.2 Ì Available-For-Sale Securities in a Gross Unrealized Loss Position at December 31, 2004

Less than 12 months 12 months or Greater Total

Gross Gross Gross

Unrealized Unrealized Unrealized

Fair Value Losses Fair Value Losses Fair Value Losses

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $103,976 $ (713) $34,161 $ (725) $138,137 $(1,438)

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,727 (134) 9,913 (219) 30,640 (353)

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77 Ì 52 (1) 129 (1)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,398 (268) 4,323 (112) 59,721 (380)

Obligations of states and political

subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,025 (17) 591 (15) 1,616 (32)

Total mortgage related-securities ÏÏÏÏÏÏ 181,203 (1,132) 49,040 (1,072) 230,243 (2,204)

Cash and investments portfolio

Non-mortgage related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,242 (51) 205 (4) 9,447 (55)

Obligations of states and political

subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582 (1) 7 Ì 589 (1)

Total non-mortgage related securitiesÏÏÏ 9,824 (52) 212 (4) 10,036 (56)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $191,027 $(1,184) $49,252 $(1,076) $240,279 $(2,260)

At December 31, 2004, gross unrealized losses on available-for-sale securities were $2,260 million, or

approximately one percent of the fair value of such securities in an unrealized loss position, as noted in

Table 5.1 and Table 5.2. The gross unrealized losses relate to approximately 54 thousand individual lots

representing approximately 10 thousand separate securities. Freddie Mac routinely purchases multiple lots of

individual securities at diÅerent times and at diÅerent costs. The company determines gross unrealized gains

and gross unrealized losses by speciÑcally identifying investment positions at the lot level; therefore, Freddie

Mac often holds several lots of one security including both unrealized gain and unrealized loss positions,

depending upon the amortized cost of the speciÑc lot.

The following is a summary of management's analysis of why available-for-sale securities in an unrealized

loss position are not considered other than temporarily impaired:

‚ Freddie Mac securities. The unrealized losses on Freddie Mac securities are primarily a result of

movements in interest rates. The extent and duration of the decline in fair value relative to the

amortized cost have not met the company's criteria that are used to indicate other-than-temporary

impairment as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES.'' The company reviews the estimated credit exposure of the mortgages underlying

these securities. As a result of this review, management has determined that these securities are

not other than temporarily impaired. See ""NOTE 2: TRANSFERS OF SECURITIZED

INTERESTS IN MORTGAGE-RELATED ASSETS'' for further information on Freddie

Mac's estimates of credit exposure and credit support.

‚ Fannie Mae securities and Obligations of states and political subdivisions. The unrealized

losses on Fannie Mae securities and Obligations of states and political subdivisions are primarily a

result of movements in interest rates. The extent and duration of the decline in fair value relative

to the amortized cost have not met the company's criteria that are used to indicate other-thantemporary impairment and no other facts or circumstances existed to suggest that the decline was

other than temporary. The issuer guarantees related to these securities have led management to

conclude that any credit risk is minimal.

Freddie Mac

179
‚ Other securities in the Retained portfolio and Asset-backed securities. The unrealized losses on

mortgage-related securities included in Other and Asset-backed securities are principally a result

of movements in interest rates. The extent and duration of the decline in fair value relative to the

amortized cost have not met the company's criteria that are used to indicate other-than-temporary

impairment. These securities are all investment grade (i.e., rated BBBÓ or better on a Standard &

Poor's (""S&P'') equivalent scale).

Table 5.3 summarizes the estimated fair values by major security type for trading securities at

December 31, 2004 and 2003, respectively.

Table 5.3 Ì Trading Securities

December 31,

2004 2003

Fair Value Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,398 $17,590

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 385 586

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 24

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,842 18,200

Cash and investments portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 17,266

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 15,052

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 490

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 32,817

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 52

Debt securities issued by the U.S. Treasury and other U.S. government

corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 479

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 341

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 437

Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,314

Total trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,842 $52,331

In the fourth quarter of 2004, as part of an effort to realign the company's business around its mission and

core business, Freddie Mac decided to cease its PC market making and support activities accomplished through

the company's Securities Sales & Trading Group business unit and its external Money Manager program. In

connection with ceasing these activities, the trading securities held in the Cash and investments portfolio were

disposed of by the end of 2004. During the periods these trading assets were held, they were reported at fair value

with the changes in fair value included in Gains (losses) on investment activity. Interest income on these trading

assets was included in Net interest income. The Net proceeds from purchases and sales of trading securities

reported in the company's consolidated statement of cash flows for 2004 of approximately $39.0 billion was

primarily driven by the disposition of securities classified as trading from the Cash and investments portfolio. In

connection with ceasing these activities, Freddie Mac incurred approximately $18 million of employee severance

and related costs and approximately $5 million of other expenses during the fourth quarter of 2004.

In addition, Freddie Mac's investments in mortgage-related securities held by its Securities Sales &

Trading Group business unit were generally hedged by entering into forward sales of mortgage-related

securities. When determining the fair value of these positions, the held investment was valued at the current

market, or spot, price, while the forward sale commitment was valued at the discounted sales, or forward,

price. The spot-forward diÅerence between the trading security and the forward sale commitment resulted in a

loss in Gains (losses) on investment activities that was oÅset by Net interest income on the held position. This

spot-forward diÅerence was $976 million, $981 million and $938 million in 2004, 2003, and 2002, respectively.

Freddie Mac

180
The portion of Gains (losses) on investment activity that relates to trading securities held in the trading

portfolio at December 31, 2004, 2003 and 2002 is $(240) million, $(402) million and $1,293 million,

respectively.

Issuers Greater than 10 Percent of Stockholders' Equity

At December 31, 2004, Freddie Mac held available-for-sale and trading securities with a fair value of

$59,904 million guaranteed by Fannie Mae that represented 191% of Total stockholders' equity. No other

individual issuer at the individual trust level exceeded 10 percent of Total stockholders' equity at December 31, 2004.

Table 5.4 summarizes, by major security type, the remaining contractual maturities and weighted average

yield of available-for-sale mortgage-related and non-mortgage-related securities at December 31, 2004.

Table 5.4 Ì Maturities and Weighted Average Yield of Available-For-Sale Securities

December 31, 2004 Amortized Cost Fair Value Weighted Average Yield(1)

(dollars in millions)

Retained portfolio

Total mortgage-related securities(2)

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 81 $ 81 3.22%

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,187 5,380 5.31

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,362 19,042 5.66

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 560,492 565,958 4.54

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584,122 590,461 4.58

Cash and investments portfolio

Non-mortgage-related securities

Asset-backed securities(2)

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 47 2.68

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,115 14,166 3.27

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,679 6,692 2.76

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 828 828 2.48

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,668 21,733 3.08

Obligations of states and political subdivisions

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,103 1,102 1.81

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 36 1.95

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72 72 1.94

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,887 6,887 2.04

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,098 8,097 2.01

Total non-mortgage-related securities

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,149 1,149 1.84

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,151 14,202 3.27

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,751 6,764 2.75

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,715 7,715 2.09

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,766 29,830 2.79

Total available-for-sale securities

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,230 1,230 1.94

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,338 19,582 3.82

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,113 25,806 4.87

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 568,207 573,673 4.50

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $613,888 $620,291 4.49%

(1) The weighted average yield is calculated based on a yield for each individual security held at the balance sheet date. The numerator

for the individual security yield consists of the sum of (a) the year-end interest coupon rate multiplied by the year-end unpaid

principal balance and (b) the annualized amortization income or expense calculated for December 2004 (excluding any adjustments

recorded for changes in the eÅective rate). The denominator for the individual security yield consists of the year-end amortized cost

of the security excluding eÅects of other-than-temporary impairments.

(2) Information provided for mortgage-related securities and asset-backed securities is based on contractual maturities, which may not

represent their expected lives. Obligations underlying these securities may be prepaid at any time without penalty.

Freddie Mac

181
Table 5.5 presents the changes in AOCI, net of taxes, related to available-for-sale securities. The Net

unrealized holding (losses) gains, net of tax (beneÑt) expense line represents the net fair value adjustments

recorded on available-for-sale securities throughout the year after the eÅects of the company's statutory tax

rate of 35 percent. The Net reclassiÑcation adjustment for realized (gains) losses included in net income, net

of tax (expense) represents the amount of those fair value adjustments, after the eÅects of the company's

statutory tax rate of 35 percent, that have been recognized in earnings due to a sale of an available-for-sale

security or the recognition of an impairment loss. See ""NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES'' for further information regarding the component of AOCI related to availablefor-sale securities.

Table 5.5 Ì AOCI, Net of Taxes, Related to Available-For-Sale Securities

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,349 $12,217 $ 4,200

Net unrealized holding (losses) gains, net of tax (beneÑt) expense of

$(920), $(3,107) and $4,583, respectivelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,709) (5,770) 8,512

Net reclassiÑcation adjustment for realized (gains) losses included in

net income, net of tax (expense) of $(162), $(53) and $(267),

respectively(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (301) (98) (495)

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,339 $ 6,349 $12,217

(1) Includes impairment losses on available-for-sale securities, where the decline in fair value is considered to be other than temporary,

of $72 million, $438 million and $422 million, net of tax for the years ended December 31, 2004, 2003 and 2002, respectively.

Freddie Mac

182
Collateral Pledged

Freddie Mac enters into several types of secured Ñnancing transactions, including interest-rate swap,

repurchase and resale agreements. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES'' for more information regarding secured Ñnancing transactions.

Freddie Mac's counterparties are required to pledge collateral for reverse repurchase transactions and

most interest-rate swap agreements after giving consideration to collateral posting thresholds, which are

generally related to a counterparty's credit rating. Even though it is Freddie Mac's practice not to repledge

assets held as collateral, based on master agreements, a portion of the collateral can be repledged. At

December 31, 2004 and 2003, the fair value amount of collateral held by Freddie Mac under secured lending

transactions and interest-rate swap agreements that was available for repledging was approximately $3 million

and $8,200 million, respectively. This decrease was primarily a result of the company ceasing operations of its

PC market-making and support activities accomplished through its Securities Sales & Trading Group business

unit and external Money Manager program during the fourth quarter of 2004.

Freddie Mac is also required to pledge collateral for margin requirements with some custodians in

connection with secured Ñnancing and daily trade activities. Based on agreements between Freddie Mac and

the custodians, as illustrated in Table 5.6, some collateral may be permitted by contract to be repledged by the

custodian. Freddie Mac has parenthetically disclosed on the consolidated balance sheets the fair value of

assets pledged as collateral with the right to repledge. Table 5.6 summarizes all assets pledged as collateral by

the company including assets that the secured party can repledge and those that cannot be repledged.

Table 5.6 Ì Collateral Pledged

December 31,

2004 2003

(dollars in millions)

Assets pledged with ability for secured party to repledge (parenthetically

disclosed on the consolidated balance sheets)

Available for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 194 $282

Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 61

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194 343

Assets pledged without ability for secured party to repledge

Available for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221 558

Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 28

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221 586

Total assets pledged ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 415 $929

Cash and Cash Equivalents

Table 5.7 summarizes the components of Cash and cash equivalents for the years ended December 31,

2004 and 2003, respectively.

Table 5.7 Ì Cash and Cash Equivalents

December 31,

2004 2003

(dollars in millions)

Interest-bearing(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,199 $23,100

Non-interest-bearing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 42

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,253 $23,142

(1) Includes collateral that Freddie Mac holds when its exposure to its derivative counterparties exceeds mutually agreed upon limits.

Interest earned on the collateral is paid to the counterparties at the contractual rate, while Freddie Mac retains any interest earned

above the contractual rate.

Freddie Mac

183
NOTE 6: LOAN LOSS RESERVES

Freddie Mac maintains separate loan loss reserves for mortgage loans in the Retained portfolio that it

classiÑes as held-for-investment and for credit-related losses associated with certain mortgage loans that

underlie PCs held by third parties.

Table 6.1 summarizes loan loss reserve activity during 2004, 2003 and 2002.

Table 6.1 Ì Detail of Loan Loss Reserves Balance

December 31,

2004 2003 2002

Reserves related to: Reserves related to: Reserves related to:

Total Loan Total Loan Total Loan

Retained PCs Loss Retained PCs Loss Retained PCs Loss

Mortgages Outstanding Reserves Mortgages Outstanding Reserves Mortgages Outstanding Reserves

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 174 $125 $ 299 $ 177 $ 88 $ 265 $ 103 $121 $ 224

Provision (beneÑt) for credit

losses(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111 32 143 76 (81) (5) 146 (24) 122

Charge-oÅs(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) Ì (300) (224) Ì (224) (171) Ì (171)

Recoveries(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 Ì 160 145 Ì 145 99 Ì 99

Adjustment for change in

accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 110 110 Ì Ì Ì

Transfers-out during the

period(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (20) (20) Ì (11) (11) Ì (9) (9)

Other transfers, net, during the

period(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) 13 (18) Ì 19 19 Ì Ì Ì

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114 $150 $ 264 $ 174 $125 $ 299 $ 177 $ 88 $ 265

(1) Freddie Mac reclassiÑed certain income for the full years ended December 31, 2003 and 2002 from REO operations income

(expense) to Provision (beneÑt) for credit losses to conform with the 2004 presentation. In addition, it reclassiÑed certain expenses

related to uncollectible interest on PCs held by third parties from Management and guarantee income to Provision (beneÑt) for

credit losses to conform with the 2004 presentation. This resulted in a $15 million decrease and a $6 million decrease in Provision

(beneÑt) for credit losses during 2003 and 2002, respectively. As a result of these reclassiÑcations, it increased recoveries by

$26 million and $15 million for the full years ended December 31, 2003 and 2002, respectively.

(2) It is Freddie Mac's practice to purchase mortgage loans from the pools that underlie PCs principally at the point the mortgage loan is

identiÑed as being 120 days past due. Upon repurchase, that portion of amounts classiÑed in Reserve for guarantee losses on

Participation CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-for-investment.

since all credit losses related to oÅ-balance sheet PCs are preceded by the purchase of a delinquent mortgage loan from the PC pool,

all charge-oÅs or recoveries are presented in the Retained Mortgages columns above.

(3) On January 1, 2003, $110 million of recognized guarantee obligations that was attributable to estimated incurred losses on

outstanding PCs or Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.

(4) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured

Securities which is included as an oÅset to the related receivable balance within Accounts and other receivables, net on the

consolidated balance sheets.

(5) Represents the reclassiÑcation of the portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that

corresponds to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition

of a guarantee obligation. In addition, the 2004 amount includes a reduction of loan loss reserves of $31 million related to prior period

adjustments for which the related income was recorded in Other income.

Impaired Loans

Total loan loss reserves, as presented in ""Table 6.1 Ì Detail of Loan Loss Reserves Balance,'' consists of

a speciÑc valuation allowance related to impaired loans, which are presented in Table 6.2, and an additional

reserve for other probable incurred losses which equaled $261 million, $289 million and $240 million at

December 31, 2004, 2003 and 2002, respectively. The company's recorded investment in impaired loans and

the related valuation allowance are summarized in Table 6.2.

Freddie Mac

184
Table 6.2 Ì Impaired Loans(1)

December 31,

2004 2003 2002

Recorded SpeciÑc Net Recorded SpeciÑc Net Recorded SpeciÑc Net

Investment(2) Reserve Investment Investment(2) Reserve Investment Investment(2) Reserve Investment

(dollars in millions)

Impaired loans having:

Related-valuation allowance ÏÏÏÏÏÏÏÏÏÏ $ 46 $(3) $ 43 $ 60 $(10) $ 50 $ 169 $(25) $ 144

No related-valuation allowance(3)ÏÏÏÏÏÏ 2,261 Ì 2,261 2,309 Ì 2,309 2,077 Ì 2,077

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,307 $(3) $2,304 $2,369 $(10) $2,359 $2,246 $(25) $2,221

(1) Single-family impaired loans include performing and non-performing TDRs. Multifamily impaired loans are deÑned as performing

and non-performing TDR loans, loans 60 days or more delinquent except for certain credit enhanced loans and certain mortgage

loans with real estate collateral values less than the outstanding unpaid principal balances. For more details on multifamily impaired

loans, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

(2) Recorded Investment includes the unpaid principal balance of mortgage loans plus other amortized basis adjustments, which are

modiÑcations to their carrying value.

(3) Impaired loans with no related valuation allowance primarily represent performing single-family TDR loans.

For the years ended December 31, 2004, 2003 and 2002, the average recorded investment in impaired

loans was $2,310 million, $2,330 million and $2,029 million, respectively.

Interest income on multifamily impaired loans is recognized on an accrual basis for loans performing

under the original or restructured terms and on a cash basis for non-performing loans, which collectively

totaled approximately $13 million, $16 million and $22 million for the years ended December 31, 2004, 2003

and 2002, respectively. For single-family performing and non-performing loans, Freddie Mac recognizes

interest income on an accrual basis and establishes reserves for estimated accrued, but uncollectible, interest

for these loans as of the consolidated balance sheet dates. Gross interest income on impaired single-family

loans totaled $157 million, $160 million and $129 million for the years ended December 31, 2004, 2003 and

2002, respectively.

Delinquency Rates

Table 6.3 summarizes the delinquency rates for Freddie Mac's Total mortgage portfolio, excluding

non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is backed by

Ginnie Mae CertiÑcates at December 31, 2004, 2003 and 2002.

Table 6.3 Ì Delinquency Performance(1)

December 31,

2004 2003 2002

Delinquencies, end of period

Single-family:(2)

Credit-enhanced portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.75% 2.96% 2.07%

Non-credit-enhanced portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.24% 0.27% 0.28%

Total portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.73% 0.86% 0.77%

Multifamily(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.06% 0.05% 0.13%

(1) Based on the Total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured

Securities that is backed by Ginnie Mae CertiÑcates.

(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(3) Includes alternative collateral deals.

(4) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.

Freddie Mac

185
NOTE 7: REAL ESTATE OWNED

Table 7.1 provides a summary of Freddie Mac's REO activity.

Freddie Mac obtains REO properties when it is the highest bidder at foreclosure sales of properties that

collateralize non-performing single-family and multifamily mortgage loans owned by the company. Upon

acquiring single-family properties, Freddie Mac establishes a marketing plan to sell the property as soon as

practicable by either listing it with a sales broker or by other means, such as arranging a real estate auction.

Upon acquiring multifamily properties, Freddie Mac may operate them with third-party property-management Ñrms for a period to stabilize value and then sell the properties through commercial real estate brokers.

For each of the three years ended December 31, 2004, the weighted average holding period for single-family

disposed REO properties was less than one year and the weighted average holding period for multifamily

disposed REO properties was about two years.

Table 7.1 Ì Real Estate Owned

REO, Valuation REO,

Gross Allowance Net

(dollars in millions)

Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 505 $ (58) $ 447

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,197 (70) 1,127

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,032) 52 (980)

Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 670 (76) 594

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,663 (93) 1,570

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,422) 53 (1,369)

Balance, December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 911 (116) 795

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,641 (95) 1,546

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,685) 85 (1,600)

Balance, December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 867 $(126) $ 741

Freddie Mac recognized losses of $67 million, $50 million, and $5 million on REO dispositions for the

years ended December 31, 2004, 2003 and 2002, respectively, which are included in REO operations income

(expense). Valuation allowance includes impairment write-downs on fair value of assets and selling expenses

related to REO property holdings. This allowance is shown as part of REO operations income (expense) on

the consolidated statements of income. Freddie Mac reclassiÑed certain components of REO operations

income (expense) for the years ended December 31, 2003 and 2002 to (Provision) beneÑt for credit losses to

conform with the 2004 presentation.

Freddie Mac

186
NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS

Debt securities are classiÑed as either Due within one year or Due after one year based on their remaining

contractual maturity. Table 8.1 summarizes the balances and eÅective interest rates at December 31, 2004 and

2003 for debt securities, as well as subordinated borrowings.

Table 8.1 Ì Total Debt Securities, Net

December 31,

2004 2003

Balance, EÅective Balance, EÅective

Net(1) Rate(2) Net(1) Rate(2)

(dollars in millions)

Senior debt, due within one year:

Short-term debt securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $196,639 2.05% $212,035 1.11%

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,664 3.33 83,227 3.61

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 282,303 2.44 295,262 1.81

Senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 443,772 4.36 438,738 4.34

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,622 6.15 5,613 6.15

Senior and subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏ 449,394 4.38 444,351 4.36

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731,697 $739,613

(1) Includes unamortized discounts and premiums. Current portion of long-term debt, and Senior and subordinated debt, due after one

year, also include foreign-currency-related and hedging-related basis adjustments.

(2) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums

and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

(3) EÅective rate previously reported for December 31, 2003 has been revised.

Freddie Mac Ñnances the purchase of mortgage loans and mortgage-related securities primarily through

the issuance of Senior debt and Subordinated debt.

Senior Debt, Due Within One Year

As indicated in Table 8.2, a majority of Senior debt, due within one year (excluding current portion of

long-term debt) consisted of discount notes, paying only principal at maturity. Discount notes and mediumterm notes are unsecured general obligations. Certain medium-term notes that have original maturities of one

year or less are classiÑed as Short-term debt securities. Securities sold under agreements to repurchase are

eÅectively collateralized borrowing transactions where Freddie Mac sells securities with an agreement to

repurchase such securities. These agreements require the underlying securities to be delivered to the dealers

who arranged the transactions. Federal funds purchased are unsecuritized borrowings from commercial banks

that are members of the Federal Reserve System.

Freddie Mac

187
Table 8.2 provides additional information related to Freddie Mac's debt securities due within one year.

Table 8.2 Ì Senior Debt, Due Within One Year

2004

Average Outstanding

At December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance, Net(2) EÅective Rate(3) Month End

(dollars in millions)

Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $180,198 2.04% $184,834 1.40% $212,715

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 2.51 4,289 1.31 5,320

Securities sold under agreements to

repurchase and Federal funds purchased Ì Ì 801 1.37 3,046

Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,279 2.24 13,549 1.36 16,279

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,639

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 85,664

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ $282,303

2003

Average Outstanding

At December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance, Net(2) EÅective Rate(3) Month End

(dollars in millions)

Discount notes(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $188,309 1.12% $207,374 1.21% $264,370

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,300 1.18 1,243 1.32 5,300

Securities sold under agreements to

repurchase and Federal funds

purchased(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,611 0.96 2,283 0.94 8,296

Swap collateral obligations(6) ÏÏÏÏÏÏÏÏÏÏÏÏ 16,082 1.02 11,694 1.13 16,082

Securities sold, not yet purchased ÏÏÏÏÏÏÏÏ 733

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,035

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 83,227

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏ $295,262

(1) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums

and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

(2) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on the

consolidated balance sheets.

(3) Represents the approximate weighted average eÅective rate during the period, which includes the amortization of discounts or

premiums and issuance costs, but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

(4) Maximum Balance, Net Outstanding at Any Month End for 2003 has been revised to conform with the 2004 presentation.

(5) Balance, Net and Weighted Average EÅective Rate for Average Outstanding During the Year for 2003 have been revised for

Securities sold under agreements to repurchase and Federal funds purchased to conform with the 2004 presentation.

(6) Weighted Average EÅective Rate at December 31, 2003 has been revised to conform with the 2004 presentation.

Freddie Mac

188
Senior and Subordinated Debt, Due After One Year

Table 8.3 summarizes Freddie Mac's Senior and Subordinated debt, due after one year at December 31,

2004 and 2003.

Table 8.3 Ì Senior and Subordinated Debt, Due After One Year

December 31,

2004 2003

Contractual Balance Interest Balance Interest

Maturity(1) Outstanding(2) Rates Outstanding(2) Rates

(dollars in millions)

Senior debt, due after one year(3):

Fixed-rate:

Medium-term notes Ì Callable(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2029 $180,957 1.63% - 8.05% $159,939 1.30% - 9.00%

Medium-term notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2028 8,587 1.00% - 7.69% 6,460 1.00% - 8.12%

U.S. dollar-denominated Reference Notes»

securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2032 167,622 1.88% - 7.00% 181,901 1.50% - 7.00%

4Reference Notes» securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2014 28,967 3.50% - 5.75% 24,954 3.50% - 5.75%

Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A Ì N/A 6 12.10% - 12.90%

Floating-rate:

Medium-term notes Ì Callable(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2030 33,041 Various 28,412 Various

Medium-term notes Ì Non-callable(5)(7) ÏÏÏÏÏÏÏÏÏÏ 2007 - 2026 1,207 Various 16,440 Various

Zero-coupon(8):

Medium-term notes Ì Callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2014 - 2034 7,078 0% 6,608 0%

Medium-term notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2034 1,968 0% 1,723 0%

Foreign-currency-related and hedging-related basis

adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,345 12,295

Total senior debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 443,772 438,738

Subordinated debt, due after one year:

Fixed-rate(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2011 - 2016 5,547 5.25% - 8.25% 5,545 5.25% - 8.25%

Zero-coupon(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2019 75 0% 68 0%

Total subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏ 5,622 5,613

Total senior and subordinated debt, due after one year ÏÏ $449,394 $444,351

(1) Represents contractual maturities at December 31, 2004.

(2) Represents unpaid principal balance of long-term debt securities and subordinated borrowings, net of associated discounts or

premiums.

(3) For debt denominated in a currency other than the U.S. dollar, the outstanding balance is based on the exchange rate at the date of

the debt issuance. Subsequent changes in exchange rates are reÖected in Foreign-currency-related and hedging-related basis

adjustments.

(4) Includes callable Estate NotesSM and Freddie NotesSM of $11,850 million and $11,041 million at December 31, 2004 and 2003,

respectively. These debt instruments represent medium-term notes that permit persons acting on behalf of deceased beneÑcial

owners to require Freddie Mac to repay principal prior to their contractual maturity date.

(5) Amounts for 2003 have been revised to conform with the 2004 presentation.

(6) Includes callable Estate NotesSM and Freddie NotesSM of $6,142 million and $4,132 million at December 31, 2004 and 2003,

respectively. See related footnote (4) above concerning the nature of these debt instruments.

(7) Includes medium-term notes of $800 million and $700 million at December 31, 2004 and 2003, respectively, which are repayable in

whole or in part at the option of the beneÑcial owner, acting through the holder, on or after November 22, 2002 and prior to

November 20, 2007 at 100% of the principal amount plus accrued interest.

(8) Balance outstanding is net of associated discounts of $32,649 million and $37,870 million as of December 31, 2004 and 2003,

respectively.

(9) Includes callable subordinated debt of $3,491 million and $3,490 million at December 31, 2004 and 2003, respectively.

Freddie Mac

189
A portion of Freddie Mac's long-term debt is callable. Callable debt gives Freddie Mac the option to

redeem the debt security on one or more speciÑed call dates or at any time on or after a speciÑed call date.

Table 8.4 summarizes the maturities, balances and eÅective interest rates at December 31, 2004 for callable

debt (including current portion of callable debt and callable debt due after one year) by estimated call period.

Table 8.4 Ì Callable Debt, Due After One Year (including current portion of callable debt)

Contractual Balance EÅective

Estimated Call Period Maturity Outstanding(1) Rate(2)

(dollars in millions)

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 - 2022 $ 20,255 2.84%

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 - 2021 39,316 2.63

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2019 37,425 3.15

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 - 2019 23,953 3.46

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 - 2019 26,798 4.03

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010 - 2034 91,512 5.09

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $239,259 3.91%

(1) Represents unpaid principal balance of callable long-term debt securities and subordinated borrowings. However, callable zerocoupon debt is reÖected on a net basis (i.e., net of associated discounts of $28,825 million) and its estimated call period is based on

contractual maturity.

(2) Represents the weighted-average eÅective rate at the end of the period, which includes the amortization of discounts or premiums

and issuance costs but excludes the amortization of foreign-currency-related and hedging-related basis adjustments.

Table 8.5 summarizes the contractual maturities of long-term debt securities (including current portion

of long-term debt) and subordinated borrowings outstanding at December 31, 2004, assuming callable debt is

paid at contractual maturity.

Table 8.5 Ì Senior and Subordinated Debt, Due After One Year (including current portion of

long-term debt)

Contractual

Annual Maturities Maturity(1)(2)

(dollars in millions)

2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 83,625

2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,447

2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,838

2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,092

2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,574

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 218,131

Total(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 551,707

Net premiums, discounts, and foreign-currency-related and hedging-related basis

adjustments(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16,649)

Senior and subordinated debt, due after one year, including current portion of longterm debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $535,058

(1) Represents unpaid principal balance of long-term debt securities and subordinated borrowings.

(2) For debt denominated in a currency other than the U.S. dollar, the outstanding balance is based on the exchange rate at the date of

the debt issuance. Subsequent changes in exchange rates are reÖected in Net premiums, discounts, and foreign-currency-related and

hedging-related basis adjustments.

Freddie Mac records gains and losses on debt repurchases that are accounted for as extinguishments of

debt based on the diÅerence between the principal amount of the debt securities repurchased (adjusted for

deferred premiums, discounts, and hedging gains and losses) and current market prices, and the write-oÅ of

related deferred debt issuance costs. Freddie Mac incurred pre-tax losses of $327 million, $1,775 million and

$674 million on the repurchase of approximately $14.5 billion, $27.3 billion and $20.3 billion in principal

amount of debt outstanding in 2004, 2003 and 2002, respectively.

Freddie Mac

190
NOTE 9: STOCKHOLDERS' EQUITY

Preferred Stock

During 2004 and 2003, Freddie Mac completed no preferred stock oÅerings (see ""Table 9.1 Ì Preferred

Stock'' for more information). All 17 classes of preferred stock outstanding at December 31, 2004 have a par

value of $1 per share. The company has the option to redeem these shares, on speciÑed dates, at their

redemption price plus dividends accrued through the redemption date. In addition, all 17 classes of preferred

stock are perpetual and non-cumulative, and carry no signiÑcant voting rights or rights to purchase additional

Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged

to Additional paid-in capital.

Table 9.1 provides a summary of Freddie Mac's preferred stock outstanding at December 31, 2004.

Table 9.1 Ì Preferred Stock

Total Redemption Total

Shares Shares Par Price per Outstanding Redeemable(2) NYSE

Issue Date Authorized Outstanding Value Share Balance(1) On or After Symbol(3)

(shares and dollars in millions, except redemption price per share)

1996 Variable-rate(4) ÏÏÏ April 26, 1996 5.00 5.00 $ 5.00 $50.00 $ 250 June 30, 2001 FRE.prB

6.14% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 3, 1997 12.00 12.00 12.00 50.00 600 June 30, 2002 FRE.prD

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 27, 1997 3.00 3.00 3.00 50.00 150 October 27, 1998 (5)

5% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 23, 1998 8.00 8.00 8.00 50.00 400 March 31, 2003 FRE.prF

1998 Variable-rate(6) ÏÏÏ September 23 and 29, 1998 4.40 4.40 4.40 50.00 220 September 30, 2003 FRE.prG

5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 23, 1998 8.00 8.00 8.00 50.00 400 September 30, 2003 FRE.prH

5.3% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 28, 1998 4.00 4.00 4.00 50.00 200 October 30, 2000 (5)

5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 19, 1999 3.00 3.00 3.00 50.00 150 March 31, 2004 (5)

5.79% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 21, 1999 5.00 5.00 5.00 50.00 250 June 30, 2009 FRE.prK

1999 Variable-rate(7) ÏÏÏ November 5, 1999 5.75 5.75 5.75 50.00 287 December 31, 2004 FRE.prL

2001 Variable-rate(8) ÏÏÏ January 26, 2001 6.50 6.50 6.50 50.00 325 March 31, 2003 FRE.prM

2001 Variable-rate(9) ÏÏÏ March 23, 2001 4.60 4.60 4.60 50.00 230 March 31, 2003 FRE.prN

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 23, 2001 3.45 3.45 3.45 50.00 173 March 31, 2011 FRE.prO

6% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 30, 2001 3.45 3.45 3.45 50.00 173 June 30, 2006 FRE.prP

2001 Variable-rate(10)ÏÏÏ May 30, 2001 4.02 4.02 4.02 50.00 201 June 30, 2003 FRE.prQ

5.7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 30, 2001 6.00 6.00 6.00 50.00 300 December 31, 2006 FRE.prR

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 29, 2002 6.00 6.00 6.00 50.00 300 March 31, 2007 (5)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92.17 92.17 $92.17 $4,609

(1) Amounts stated at redemption value.

(2) As long as the capital monitoring framework established by the OÇce of Federal Housing Enterprise Oversight (""OFHEO'') in

January 2004 remains in eÅect, any preferred stock redemption will require prior approval by OFHEO. See ""NOTE 10:

REGULATORY CAPITAL'' for more information.

(3) Preferred Stock is listed on the New York Stock Exchange (""NYSE''), unless otherwise noted.

(4) The dividend rate resets quarterly and is equal to the sum of the three-month LIBOR plus one percent divided by 1.377, and is

capped at 9.00 percent.

(5) Not listed on any exchange.

(6) The dividend rate resets quarterly and is equal to the sum of the three-month LIBOR rate plus one percent divided by 1.377, and is

capped at 7.50 percent.

(7) Initial dividend rate is 5.97 percent per annum through December 31, 2004. Dividend rate resets on January 1, 2005 and on

January 1 every Ñve years thereafter based on a Ñve-year constant maturity Treasury (""CMT'') rate which is capped at

11.00 percent. Optional redemption on December 31, 2004 and on December 31 every Ñve years thereafter.

(8) Dividend rate resets on April 1 every two years after April 1, 2003 based on the two-year CMT rate plus 0.10 percent and is capped

at 11.00 percent. Optional redemption on March 31, 2003 and on March 31 every two years thereafter.

(9) Dividend rate resets on April 1 every year based on the 12-month LIBOR rate minus 0.20 percent and is capped at 11.00 percent.

Optional redemption on March 31, 2003 and on March 31 every year thereafter.

(10) Dividend rate resets on July 1 every two years after July 1, 2003 based on the two-year CMT rate plus 0.20 percent and is capped at

11.00 percent. Optional redemption on June 30, 2003 and on June 30 every two years thereafter.

Common Stock Repurchase Program

In September 1997, Freddie Mac's Board of Directors authorized the company to repurchase up to Ñve

percent, or approximately 34 million shares, of its common stock outstanding as of September 5, 1997. Under

this authorization, Freddie Mac repurchased no outstanding shares in 2004 and 2003 and 9.1 million

outstanding shares in 2002. At December 31, 2004, approximately 13 million common shares remained

available for repurchase under this authorization. Common stock repurchases are considered (assuming

current Ñnancial reporting) when Freddie Mac is adequately capitalized and other more attractive investment

opportunities are not available. Under OFHEO's January 29, 2004 framework for monitoring Freddie Mac's

capital, Freddie Mac is currently required to obtain prior written approval from the Director of OFHEO before

engaging in certain capital transactions, including the repurchase of any shares of common stock. See

""NOTE 10: REGULATORY CAPITAL'' for more information.

Freddie Mac

191
NOTE 10: REGULATORY CAPITAL

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (""GSE Act'') established

risk-based, minimum and critical capital standards for Freddie Mac and Fannie Mae.

The risk-based capital standard determines the amount of capital that Freddie Mac must hold to absorb

projected losses resulting from future adverse interest-rate and credit-risk conditions speciÑed by the GSE

Act, plus 30 percent mandated by the GSE Act to cover management and operations risk. The risk-based

capital standard is based on stress test results calculated under two interest-rate scenarios prescribed by the

GSE Act, one in which 10-year Treasury yields rise by as much as 75 percent (up-rate scenario) and one in

which they fall by as much as 50 percent (down-rate scenario). The credit component of the stress tests

simulates the performance of Freddie Mac's mortgage portfolio based on loss rates for the Benchmark Region.

The criteria for the Benchmark Region are set forth by the GSE Act and are intended to capture the region

that experienced the highest historical rates of default and severity of mortgage losses for two consecutive

origination years. The risk-based capital requirement is the amount of Total capital needed to absorb the stress

test losses in the most adverse scenario, plus 30 percent of that amount to cover management and operations

risk. Total capital includes Core capital and general reserves for mortgage and foreclosure losses and any other

amounts available to absorb losses that OFHEO includes by regulation. Core capital consists of the par value

of outstanding common stock (common stock issued less common stock held in treasury), the par value of

outstanding perpetual noncumulative preferred stock, additional paid-in capital and retained earnings, as

determined in accordance with GAAP.

The minimum capital standard requires Freddie Mac to hold an amount of Core capital that is generally

the sum of 2.50 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and

approximately 0.45 percent of outstanding mortgage-related securities guaranteed by Freddie Mac and other

aggregate oÅ-balance sheet obligations. As discussed below, in 2004 OFHEO implemented a framework for

monitoring Freddie Mac's capital adequacy, which includes a targeted capital surplus of 30 percent of its

minimum capital requirement.

The critical capital standard requires Freddie Mac to hold an amount of Core capital that is generally the

sum of 1.25 percent of aggregate on-balance sheet assets, as determined in accordance with GAAP, and

approximately 0.25 percent of outstanding mortgage-related securities guaranteed by Freddie Mac and other

aggregate oÅ-balance sheet obligations.

OFHEO is required to classify Freddie Mac's capital adequacy not less than quarterly.

To be classiÑed as ""adequately capitalized,'' Freddie Mac must meet both the risk-based and minimum

capital standard. If Freddie Mac fails to meet the risk-based capital standard, it cannot be classiÑed higher

than ""undercapitalized.'' Under OFHEO regulations, the company will be deemed ""signiÑcantly undercapitalized'' if it fails to meet the minimum capital requirement but exceeds the critical capital requirement. If

Freddie Mac fails to meet the critical capital standard, Freddie Mac must be classiÑed as ""critically

undercapitalized.'' OFHEO retains discretion to reduce Freddie Mac's capital classiÑcation by one level if

OFHEO determines that Freddie Mac is engaging in conduct not approved by OFHEO that could result in a

rapid depletion of Core capital or that the value of property subject to mortgage loans held or secured by

Freddie Mac has decreased signiÑcantly.

OFHEO has never classiÑed Freddie Mac as other than ""adequately capitalized,'' the highest possible

classiÑcation. When Freddie Mac is classiÑed as adequately capitalized, the company can generally pay a

dividend on its common or preferred stock without prior OFHEO approval so long as the payment would not

decrease Total capital to an amount less than its risk-based capital requirement and would not decrease the

company's Core capital to an amount less than the minimum capital requirement.

If Freddie Mac were classiÑed as undercapitalized, the company would be prohibited from making a

capital distribution (which includes common and preferred dividend payments, common stock repurchases

and preferred stock redemptions) that would decrease its Core capital to an amount less than the minimum

capital requirement. Freddie Mac also would be required to submit a capital restoration plan for OFHEO

approval, which could adversely aÅect its ability to make capital distributions.

Freddie Mac

192
If Freddie Mac were classiÑed as signiÑcantly undercapitalized, the company would be able to make a

capital distribution only if OFHEO determined that the distribution satisÑed certain statutory standards.

Under these circumstances, Freddie Mac would be prohibited from making any capital distribution that would

decrease its Core capital to less than the critical capital level, and OFHEO also could take action to limit

Freddie Mac's growth, require it to acquire new capital or restrict it from activities that create excessive risk.

Freddie Mac also would be required to submit a capital restoration plan for OFHEO approval, which could

adversely aÅect its ability to make capital distributions.

If Freddie Mac were classiÑed as critically undercapitalized, OFHEO would be required to appoint a

conservator for the company unless OFHEO made a written Ñnding that it should not do so and the Secretary

of the Treasury concurred in that determination.

Factors that may adversely aÅect the adequacy of Freddie Mac's regulatory capital include declines in

GAAP income, increases in the company's risk proÑle, and changes in the economic environment, such as

large interest-rate or implied volatility moves or house price declines. In particular, interest-rate levels or

implied volatility can aÅect the amount of Freddie Mac's Core capital, even if Freddie Mac is economically

well hedged against interest-rate changes, because certain gains or losses are recognized through GAAP

earnings while other oÅsetting gains or losses may not be.

Table 10.1 summarizes the company's regulatory capital requirements and surpluses at December 31,

2004 and 2003. Amounts for 2004 are as currently reported to OFHEO.

Table 10.1 Ì Regulatory Capital Requirements

December 31,

2004 2003

(dollars in millions)

Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,131 $23,774

Core capital(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,009 32,985

Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,878 9,211

Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,308 12,097

Core capital(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,009 32,985

Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,701 20,888

Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,108 5,426

Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,691 33,436

Risk-based capital surplus(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,583 28,010

(1) OFHEO is the authoritative source of the capital calculations that underlie the company's capital classiÑcations. For 2004, Freddie

Mac amended the minimum and critical capital requirements, core capital and surplus amounts previously reported to OFHEO to

incorporate adjustments reÖected in Freddie Mac's consolidated Ñnancial statements. The 2004 minimum and critical capital

requirements, core capital and surplus amounts are estimates and have been revised to reÖect changes related to a closing agreement

entered into with the Internal Revenue Service (""IRS'') concerning the company's REIT subsidiaries. See ""NOTE 14: INCOME

TAXES'' for further information.

(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par

value of outstanding perpetual noncumulative preferred stock, additional paid-in capital and retained earnings, as determined in

accordance with GAAP.

(3) Risk-based and Total capital amounts are those calculated by OFHEO prior to the issuance of Freddie Mac's 2004 and 2003

Ñnancial results. OFHEO determined not to recalculate the risk-based capital amounts given that the minimum capital requirement

remained the determining requirement for Freddie Mac's classiÑcation as adequately capitalized.

(4) Total capital includes Core capital and general reserves for mortgage and foreclosure losses.

On January 29, 2004, OFHEO announced the creation of a framework for monitoring Freddie Mac's

capital due to the temporarily higher operational risk arising from the company's current inability to produce

timely Ñnancial statements in accordance with GAAP. The framework includes a target capital surplus of

30 percent of Freddie Mac's minimum capital requirement, subject to certain conditions and variations;

weekly monitoring; and prior approval of certain capital transactions, to verify that appropriate levels of capital

are maintained. At December 31, 2004, Freddie Mac's estimated surplus in excess of the target surplus was

approximately $3.6 billion. Had the target capital surplus been in eÅect at December 31, 2003, Freddie Mac's

estimated surplus in excess of the target surplus would have been approximately $2.1 billion.

Freddie Mac

193
A failure by Freddie Mac to meet the target capital surplus would result in discussions between Freddie

Mac and OFHEO concerning the reason for such failure. If OFHEO were to determine, based on these

discussions and weekly monitoring, that Freddie Mac had unreasonably deviated from the framework

established by OFHEO, the company would be required to submit a remedial plan or take other remedial

steps.

In addition, Freddie Mac is required to obtain prior written approval from the Director of OFHEO before

engaging in certain capital transactions, including the repurchase of any shares of common stock, redemption

of any preferred stock or payment of preferred stock dividends above stated contractual rates. Freddie Mac

also must submit a written report to the Director of OFHEO after the declaration, but before the payment, of

any dividend on its common stock. The report must contain certain information on the amount of the

dividend, the rationale for the payment and the impact on Freddie Mac's capital surplus.

OFHEO indicated that this framework is temporary and will be lifted when the Director of OFHEO

determines that it should expire, based on Freddie Mac's reduction of operational risks, resumption of timely

regulatory reporting that complies with GAAP and certain other factors.

Management believes that this monitoring framework will provide OFHEO with a mechanism to ensure

that the company manages its business with continued prudence and appropriate levels of capital, taking into

account that the company is not currently able to produce timely Ñnancial statements.

Freddie Mac

194
NOTE 11: STOCK-BASED COMPENSATION

Freddie Mac has three stock-based compensation plans under which grants are currently being made: the

ESPP, as amended and restated in 2004, the 2004 Stock Compensation Plan (the ""2004 Employee Plan'')

and the 1995 Directors' Stock Compensation Plan, as amended and restated in 1998 (""Directors' Plan'').

Prior to the stockholder approval of the 2004 Employee Plan on November 4, 2004, employee stock-based

compensation was awarded in accordance with the terms of the stockholder-approved 1995 Stock Compensation Plan (the ""1995 Employee Plan''). Freddie Mac collectively refers to the 2004 Employee Plan and 1995

Employee Plan as the ""Employee Plans.''

Common stock delivered under these plans may be shares currently held by Freddie Mac as treasury

stock, shares purchased by Freddie Mac in the open market or authorized but previously unissued shares.

ESPP: Freddie Mac has established a stockholder-approved ESPP that is qualiÑed under Internal

Revenue Code (""IRC'') Section 423. Under the ESPP, substantially all full-time and part-time employees

may purchase shares of common stock at a discount. During 2004, 2003 and 2002, the annual maximum

market value of stock available for purchase was $20,000 per employee as determined on the subscription

(grant) date. For grants made through 2004, the purchase price was equal to 85 percent of the average price of

the stock on the subscription (grant) date or the average price of the stock on the purchase (exercise) date,

whichever was lower.

The maximum number of shares of common stock authorized to be granted to employees under the

ESPP prior to the eÅective date of the 2004 amendment and restatement was 12 million shares. At

December 31, 2004, approximately 8.8 million shares had been issued under the ESPP and approximately

3.2 million shares remained available for grant. Grants under the ESPP in eÅect prior to its amendment and

restatement ceased pursuant to its terms on December 31, 2004. On November 4, 2004, stockholders approved

the amendment and restatement of the ESPP eÅective as of January 1, 2005. The restated ESPP authorizes

granting 3.6 million shares in addition to the remaining 3.2 million shares discussed above. The amended and

restated ESPP changes the expiration date to January 1, 2015.

Table 11.1 provides a summary of activity related to the ESPP.

Table 11.1 Ì Summary of ESPP Activity

Year Ended December 31,

2004 2003 2002

Shares pledged(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250,899 145,866 1,000,370

Fair value on grant date(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.23 $ 10.72 $ 13.53

Shares purchased(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,625 355,485 351,629

Purchase price(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50.53 $ 41.76 $ 51.74

(1) Beginning in August 2003, employees pledged to purchase shares every three months with the purchase occurring three months later.

Prior to August 2003, employees pledged to purchase shares on August 1 with purchase occurring on July 31 of the following year.

As such, a portion of the shares purchased in a given year may relate to shares pledged in the previous year.

(2) Represents the fair value of ESPP options granted to employees. The 2004 fair value is the weighted average of the fair values on four

separate grant dates. The 2003 fair value is the weighted average of the fair values on two separate grant dates and the 2002 fair value

is the fair value on a single grant date.

(3) The 2004 purchase price is the weighted average of the purchase prices on four separate purchase dates. The 2003 purchase price is

the weighted average of the purchase prices on two separate purchase dates and the 2002 purchase price is the purchase price on a

single purchase date.

Employee Plans: Under the 2004 Employee Plan, Freddie Mac is permitted to grant to employees stockbased awards, including stock options with dividend equivalent rights, Restricted Stock Units (""RSUs'') with

dividend equivalent rights, restricted stock and Stock Appreciation Rights (""SARs''). Such awards are

generally forfeitable for at least one year after the date of grant, with vesting provisions contingent upon service

requirements. In addition, Freddie Mac has the right to impose performance conditions with respect to any

awards under the 2004 Employee Plan. As of December 31, 2004, no SARs had been granted under the

Employee Plans.

‚ Stock options granted under the Employee Plans allow for the purchase of Freddie Mac's common

stock at an exercise price equal to the fair value of the common stock on the grant date. Options

generally may be exercised for a period of 10 years from the grant date, subject to a vesting schedule

Freddie Mac

195
commencing on the grant date. Dividend equivalent rights provide participants with the right to

receive, at the time stock options are exercised or upon expiration, an amount equal to the accumulated

dividends declared on the stock from the date the options were granted.

‚ Each RSU entitles the participant to receive one share of common stock at a speciÑed future date.

RSUs do not have voting rights, but do have dividend equivalent rights, which are paid to the RSU

holder as and when dividends on common stock are declared.

‚ Restricted stock entitles participants to all the rights of a stockholder, including dividends, except that

the shares awarded are subject to a risk of forfeiture and may not be disposed of by the participant until

the end of the restriction period established by Freddie Mac at the grant of the restricted stock.

The maximum number of shares of common stock authorized to be granted to employees under the 2004

Employee Plan is 12.9 million shares, which includes approximately 2.8 million remaining shares plus any

future forfeited, cancelled or surrendered shares from the 1995 Employee Plan. At December 31, 2004, fewer

than 0.1 million shares had been issued and approximately 12.9 million shares remained available for grant.

Grants under the 2004 Employee Plan will cease upon the earlier of the exhausting of the authorized share

pool or November 4, 2014.

Directors' Plan: Under the stockholder-approved Directors' Plan, Freddie Mac is permitted to grant

stock options with dividend equivalent rights, restricted stock and RSUs with dividend equivalent rights to

non-employee members of the Board of Directors (""Directors'').

Under the Directors' Plan, on the date of the annual meeting, each reelected or reappointed Director is

granted an option to purchase shares of Freddie Mac's common stock with a market value of approximately

$150,000 on the date of the grant. Each such Director also receives restricted stock units relating to common

stock with a market value of approximately $65,000 on the date of the award. The number of restricted stock

units and shares subject to a stock option are calculated by dividing the dollar amount of the award by the

market value of Freddie Mac's common stock on the date of grant. Through 2004, vesting with respect to both

stock options and restricted stock units occurred in even increments over Ñve terms on the Board, with

20 percent vesting at the end of every term of oÇce, unless vesting was accelerated under certain

circumstances including death, disability or retirement from the Board. A term is deÑned as the period

between annual stockholders' meetings. EÅective January 1, 2005 and thereafter, vesting occurs in even

increments over four terms.

Through 2004, on the date of the annual meeting (or for new Directors elected by the Board or appointed

by the President between annual meetings, the Ñrst meeting attended after their election or appointment),

newly elected and newly appointed Directors received an option to purchase shares with a market value of

approximately $300,000 and restricted stock units relating to common stock with a market value on the date of

grant of approximately $130,000. During their second term of service, those Directors were not eligible to

receive any additional grants. Beginning in 2005, newly elected or appointed Directors will receive the same

grants as other Directors and they will be eligible to receive similar grants in their second term.

For Directors, stock options and restricted stock units have dividend equivalent rights that entitle the

grantee to dividend equivalents on each share subject to the grant in the amount of dividends per share payable

on Freddie Mac's outstanding shares of common stock. Dividend equivalents on stock options are accrued and

are payable in cash upon exercise or expiration of the option. Dividend equivalents on restricted stock units are

accrued as additional restricted stock units to be settled at the same time as the underlying restricted stock

units.

The maximum number of shares of common stock authorized for grant to Directors under the Directors'

Plan is 2.4 million shares. At December 31, 2004, a total of approximately 0.8 million shares had been issued

and approximately 1.6 million shares remained available for grant. Grants under the Directors' Plan will cease

upon the earlier of exhaustion of the authorized share pool or Freddie Mac's Annual Meeting of Stockholders

in 2008.

See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' for a description of

the accounting treatment for employee stock-based compensation, including grants under the ESPP and

Freddie Mac

196
Employee Plans. The accounting for stock options with dividend equivalent rights, restricted stock and RSUs

granted under the Directors' Plan is identical to that of the Employee Plans.

Table 11.2 provides a summary of activity related to stock options under the Employee Plans and the

Directors' Plan.

Table 11.2 Ì Employee Plans and Directors' Plan Stock Options Activity

Year Ended December 31,

2004 2003 2002

Stock Weighted Average Stock Weighted Average Stock Weighted Average

Options Exercise Price Options Exercise Price Options Exercise Price

Outstanding, beginning

of year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,656,340 $46.89 9,231,105 $44.21 8,721,962 $37.56

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,343,554 61.09 1,216,442 53.28 1,686,285 64.12

ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,861,617) 29.06 (1,052,156) 23.12 (997,127) 18.44

Forfeited or expired ÏÏÏÏ (510,336) 58.84 (739,051) 57.18 (180,015) 51.52

Outstanding, end of year 7,627,941 $52.94 8,656,340 $46.89 9,231,105 $44.21

Options exercisable at

year-endÏÏÏÏÏÏÏÏÏÏÏÏ 4,018,666 $47.46 4,755,640 $38.23 4,508,095 $29.60

Weighted-average fair

value of options

granted during year ÏÏ $ 25.04 $ 21.84 $ 28.13

Table 11.3 provides a summary of activity related to restricted stock and RSUs under the Employee Plans

and the Directors' Plan.

Table 11.3 Ì Employee Plans and Directors' Plan Restricted Stock and RSU Activity

Year Ended December 31,

2004 2003 2002

Restricted Restricted Restricted Restricted Restricted Restricted

Stock Stock Units Stock Stock Units Stock Stock Units

Outstanding,

beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 566,635 1,295,722 1,089,327 359,227 1,478,779 51,632

Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 698,587 Ì 1,146,164 Ì 325,902

Lapse of restrictions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (240,514) (145,340) (381,103) (114,240) (383,199) (10,457)

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (161,340) (224,341) (141,589) (95,429) (6,253) (7,850)

Outstanding,

end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 164,781 1,624,628 566,635 1,295,722 1,089,327 359,227

Weighted-average fair value of awards

granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 62.97 $ 55.01 $ 64.22

(1) RSUs granted under the Employee Plans were 673,720, 1,143,810 and 313,740 in 2004, 2003 and 2002, respectively. RSUs granted

under the Directors' Plan were 24,867, 2,354 and 12,162 in 2004, 2003 and 2002, respectively.

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197
Table 11.4 provides additional information for stock options outstanding under the Employee Plans and

the Directors' Plan at December 31, 2004 by range of exercise prices.

Table 11.4 Ì Employee Plans and Directors' Plan Stock Options Outstanding

Options Outstanding Options Exercisable

Weighted Average Weighted Weighted

Outstanding at Remaining Contract Average Exercisable at Average

Range of Exercise Prices December 31, 2004 Life in Years Exercise Price December 31, 2004 Exercise Price

$9.00 to 14.99 ÏÏÏÏÏÏÏÏÏÏ 7,960 0.2 $14.67 7,960 $14.67

15.00 to 24.99 ÏÏÏÏÏÏÏÏÏÏ 648,812 1.1 19.81 648,812 19.81

25.00 to 34.99 ÏÏÏÏÏÏÏÏÏÏ 369,271 2.4 34.22 369,271 34.22

35.00 to 44.99 ÏÏÏÏÏÏÏÏÏÏ 919,490 5.0 41.56 695,809 41.60

45.00 to 54.99 ÏÏÏÏÏÏÏÏÏÏ 1,610,027 6.0 50.69 679,337 47.54

55.00 to 64.99 ÏÏÏÏÏÏÏÏÏÏ 3,102,483 7.1 62.13 1,057,661 62.38

65.00 to 68.99 ÏÏÏÏÏÏÏÏÏÏ 969,898 5.3 67.66 559,816 67.70

7,627,941 5.6 $52.94 4,018,666 $47.46

Compensation Expense: Compensation expense related to stock-based compensation plans charged to

Salaries and employee beneÑts was $59 million, $65 million and $66 million for the years ended December 31,

2004, 2003 and 2002, respectively. The recognition of compensation expense aÅects Additional paid-in capital

and, for awards that are probable of cash settlement, Other liabilities.

Table 11.5 summarizes the weighted-average assumptions used in determining the fair value of options

granted under Freddie Mac's stock-based compensation plans using a Black-Scholes option pricing model.

Table 11.5 Ì Assumptions Used to Determine the Fair Value of Options

Employee Stock Employee and Directors' Stock

Purchase Plan Compensation Plans

2004 2003 2002 2004 2003 2002

Dividend yield(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.85% 2.01% 1.56% Ì Ì Ì

Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 months 3 months 1 year 7 years 7 years 7 years

Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.8% 35.0% 21.0% 31.5% 32.0% 32.0%

Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.33% 0.95% 1.75% 3.55% 3.40% 4.75%

(1) The dividend yield assumption is zero percent for the Employee Plans and Directors' Plan since options granted under these plans

include dividend equivalent rights; thus, the fair value of these options would not be reduced for foregone dividends.

Freddie Mac

198
NOTE 12: DERIVATIVES

Freddie Mac principally uses the following types of derivatives:

‚ LIBOR-Based Interest-Rate Swaps: Interest-rate swaps are contractual agreements between two

parties for the exchange of periodic payments based on a pre-determined amount (""notional'') and

agreed-upon Ñxed and Öoating interest rates.

‚ LIBOR- and Treasury-Based, Exchange-Traded Futures Contracts: Futures contracts are exchange-traded agreements that obligate one party to sell and another party to purchase a speciÑed

amount of a designated Ñnancial instrument at a speciÑed price and date.

‚ LIBOR- and Treasury-Based Options and Swaptions: Options are exchange-traded or over-thecounter (""OTC'') agreements in which the holder pays a one-time up-front premium to another party

in exchange for the right, but not the obligation, to buy or sell a speciÑed asset or enter into a contract

at a speciÑed price during a speciÑed period of time. Option holders will generally exercise their options

only if there is an economic advantage in doing so. Swaptions are OTC options to execute an interestrate swap at a speciÑc date and speciÑc rates.

‚ LIBOR- and Treasury-Based Interest-Rate Caps and Floors: Interest-rate caps and Öoors are OTC

agreements in which the holder pays a one-time up-front premium to another party in exchange for the

right to receive interest payments based on a particular notional amount and the amount, if any, by

which the agreed-upon index rate exceeds a speciÑed maximum (""cap'') or by which the agreed-upon

index is below a speciÑed minimum (""Öoor'') rate.

‚ Foreign-Currency Swaps: Currency swaps are contractual agreements between two parties for the

exchange of a speciÑed amount of a designated foreign currency for a speciÑed amount of U.S. dollars

at the inception and termination of the contract. Each party will also make periodic interest payments

on the currency it receives in the swap at agreed-upon Ñxed or Öoating interest rates.

‚ Forward Purchase and Sale Commitments: Forward purchase and sale commitments are OTC

agreements that obligate one party to purchase (sell) and another party to sell (purchase) a speciÑed

amount of a designated Ñnancial instrument at a speciÑed price and date.

‚ Other: Certain other agreements entered into are accounted for as derivatives in accordance with

SFAS 133 or SFAS 149. These include (a) a prepayment management agreement in which Freddie

Mac is partially compensated for the adverse impacts caused by disproportionately higher mortgage

prepayments on certain mortgage pools; (b) credit risk-sharing agreements where Freddie Mac remits

or receives payments based upon the default performance of certain mortgage loans; and (c) swap

guarantee derivatives where Freddie Mac guarantees the sponsor's or the borrower's performance as a

counterparty on certain interest-rate swaps.

Hedging Activity

Derivative instruments are reported at their fair value as either Derivative assets, at fair value, or

Derivative liabilities, at fair value, on the consolidated balance sheets.

No hedge designation

At December 31, 2004, most of the company's derivatives portfolio, except for a portion of interest-rate

swaps, foreign-currency swaps and forward purchase and sale commitments, was not designated in hedge

accounting relationships. Freddie Mac reports changes in the fair value of these derivatives as Derivative gains

(losses) on the consolidated statements of income. For interest-rate swaps that are not designated in hedge

accounting relationships, the associated interest received or paid is recognized on an accrual basis and

recorded in Derivative gains (losses) on the consolidated statements of income.

EÅective as of the beginning of the second quarter of 2004, Freddie Mac determined that substantially all

pay-Ñxed interest-rate swaps and other derivatives that previously had been in cash Öow hedge accounting

relationships no longer met the hedged item shared risk exposure requirement and hedge eÅectiveness

Freddie Mac

199
assessment as required by SFAS 133. Consequently, Freddie Mac discontinued hedge accounting treatment

for these relationships for Ñnancial reporting purposes eÅective as of the beginning of the second quarter of

2004, resulting in pay-Ñxed swaps with a notional balance of approximately $108 billion being moved from the

cash Öow hedge designation to no hedge designation.

Freddie Mac voluntarily discontinued hedge accounting treatment for a signiÑcant amount of its receiveÑxed interest-rate swaps eÅective November 1, 2004, resulting in receive-Ñxed interest-rate swaps with a

notional balance of approximately $50 billion being moved from a fair value hedge designation to no hedge

designation.

Fair value hedges

Fair value hedges represent hedges of exposure to foreign currency Öuctuations and changes in the fair

value of a recognized liability. Freddie Mac uses interest-rate swaps, futures and foreign-currency swaps to

hedge against the changes in fair value of Ñxed rate debt due to changes in benchmark interest rates, either the

rate on U.S. Treasury obligations or LIBOR, or foreign currency Öuctuations, or a combination of both. These

derivatives may be executed to manage interest-rate risk at an aggregate portfolio level or at an individual debt

instrument level. For accounting purposes, Freddie Mac ultimately links these derivatives to speciÑc debt

positions. Where derivatives were executed to manage interest-rate risk at an aggregate portfolio level, Freddie

Mac frequently reset the amount of Ñxed-rate debt being hedged in order to maintain highly eÅective

accounting hedges in this strategy. To accomplish this, the accounting hedges were typically terminated at the

time of reset and the derivatives were contemporaneously redesignated in new hedge accounting relationships

of Ñxed-rate debt. These derivatives were moved to no hedge designation eÅective November 1, 2004 as part

of the voluntary discontinuance of hedge accounting treatment, as discussed above. Alternatively, when

derivatives are executed for speciÑc debt instruments, redesignation is typically not necessary to maintain

highly eÅective accounting hedges. For 2004 and 2003, no amounts have been excluded from the assessment

of eÅectiveness for derivatives designated as fair value hedges. For 2002, pre-tax losses of $103 million were

excluded from the assessment of eÅectiveness for derivatives designated as fair value hedges. The excluded

component represents the change in fair value related to the diÅerence between the spot price and the forward

price on certain sale commitments used as hedges of existing mortgage-related securities.

For a derivative qualifying as a fair value hedge, Freddie Mac reports changes in the fair value of the

derivative as Hedge accounting gains (losses) on the consolidated statements of income along with the

changes in the fair value of the hedged item attributable to the risk being hedged. Hedge ineÅectiveness arises

when the fair value change of a derivative is not equal to the fair value change of the hedged item. For 2004,

2003 and 2002, hedge ineÅectiveness related to fair value hedges was a net $742 million gain, $697 million

gain and $241 million gain, respectively, on a pre-tax basis, and was reported in Hedge accounting gains

(losses). Hedge accounting gains (losses) will vary from period to period based on the notional amount of

derivatives accounted for in hedge accounting relationships and the extent to which diÅerences in the

characteristics or terms of the derivative and the hedged item result in fair value changes that are not exactly

oÅset. For example, a portion of derivatives in Freddie Mac's fair value hedges are forward starting and valued

using forward rates while the hedged debt is valued using spot rates. Therefore, the diÅerence between the spot

rate and the forward rate generally produces ineÅectiveness in these fair value hedges.

Cash Öow hedges

Cash Öow hedges represent hedges of exposure to the variability in the cash Öows of a forecasted

transaction. Freddie Mac uses interest-rate swaps, futures, foreign-currency swaps and forward purchase and

sale commitments to hedge the changes in cash Öows associated with the forecasted issuances of debt,

forecasted purchase or sale of mortgage-related assets, and foreign currency Öuctuations.

For a derivative qualifying as a cash Öow hedge, changes in fair value are generally reported in AOCI, net

of taxes, on the consolidated balance sheets to the extent the hedge is eÅective. The remaining ineÅective

portion is reported as Hedge accounting gains (losses) on the consolidated statements of income. For 2004,

2003 and 2002, hedge ineÅectiveness related to cash Öow hedges was a net $1 million gain, $53 million loss

Freddie Mac

200
and $54 million loss, respectively. No amounts have been excluded from the assessment of eÅectiveness for

derivatives designated as cash Öow hedges for 2004, 2003 and 2002.

At December 31, 2004, the maximum remaining length of time over which Freddie Mac has hedged the

exposure related to the variability in future cash Öows on forecasted transactions is 29 years. However, over

90 percent of the AOCI, net of taxes, balance at December 31, 2004 relating to cash Öow hedges is

attributable to cash Öow hedges of the exposure related to the variability in future cash Öows on forecasted

transactions occurring in the next 10 years. The occurrence of forecasted transactions may be satisÑed by

either periodic issuances of short-term debt over the required time period or longer term debt, such as

Reference Notes» securities, with maturities covering all or part of the remaining hedge time period.

AOCI amounts are reclassiÑed to earnings as the associated hedged forecasted issuance of debt and

forecasted mortgage purchase transaction aÅects earnings. During 2004, 2003 and 2002, pre-tax amounts

reclassiÑed into earnings also include net gains of $2 million, $29 million and $116 million, respectively,

resulting from the determination that it was probable that forecasted transactions related to certain mortgage

purchases and sales would not occur. At December 31, 2004, the total AOCI, net of taxes, related to cash-Öow

hedge relationships was a loss of $7.9 billion. The $7.9 billion in hedging losses related to cash-Öow hedges was

composed of less than $0.1 billion in net unrealized losses on open cash Öow hedges and approximately

$7.9 billion in deferred net losses on closed cash Öow hedges. The unrealized fair value losses on open cash

Öow hedges can change substantially due to future changes in interest rates. Closed cash Öow hedges involve

derivatives that have been terminated or are no longer designated as cash Öow hedges. Fluctuations in

prevailing market interest rates have no impact on the deferred portion of AOCI relating to losses on closed

cash Öow hedges. The company estimates that approximately $1.6 billion, net of taxes, of the $7.9 billion of

hedging losses in AOCI, net of taxes, at December 31, 2004 will be reclassiÑed into earnings during 2005.

Table 12.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Öow

hedges. The Net change in fair value related to cash Öow hedging activities, net of tax beneÑt line represents

the net changes in the fair value of the derivatives that were designated as cash-Öow hedges throughout the

year, after the eÅects of Freddie Mac's statutory tax rate of 35 percent, to the extent the hedges were eÅective.

The Net reclassiÑcations of losses to earnings, net of tax beneÑt line represents the AOCI amount, after the

eÅects of Freddie Mac's statutory tax rate of 35 percent, that was recognized in earnings as the originally

hedged forecasted transactions aÅected earnings unless it was deemed probable that the forecasted transaction

would not occur. If it is probable that the forecasted transaction will not occur, then the entire deferred gain or

loss associated with the hedge related to the forecasted transaction is reclassiÑed into earnings immediately.

Table 12.1 Ì AOCI, net of taxes, Related to Cash Flow Hedge Relationships

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Beginning Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,837) $(9,877) $(4,757)

Net change in fair value related to cash Öow hedging activities, net of

tax beneÑt of $(1,089), $(352) and $(4,516), respectively(2)ÏÏÏÏÏÏÏÏÏ (2,021) (653) (8,388)

Net reclassiÑcations of losses to earnings, net of tax beneÑt of $1,042,

$1,450 and $1,760, respectively(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,934 2,693 3,268

Ending Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,924) $(7,837) $(9,877)

(1) Represents the eÅective portion of the fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred

gains and losses on closed (i.e., terminated or redesignated) cash Öow hedges.

(2) Net reclassiÑcations to earnings, net of tax expense includes the accrual of periodic cash settlements in accordance with the

contractual terms of the derivatives designated in cash Öow hedge relationships for all periods presented above.

Freddie Mac

201
NOTE 13: LEGAL CONTINGENCIES

Freddie Mac is involved as a party to a variety of legal proceedings arising from time to time in the

ordinary course of business including, among other things, contractual disputes, personal injury claims,

employment-related litigation and other legal proceedings incidental to the company's business. Freddie Mac

is frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. Freddie Mac is also

involved in proceedings arising from its termination of a seller/servicer's eligibility to sell mortgages to, and

service mortgages for, the company. In these cases, the former seller/servicer sometimes seeks damages

against Freddie Mac for wrongful termination under a variety of legal theories. In addition, Freddie Mac is

sometimes sued in connection with the origination or servicing of mortgages. These suits generally involve

claims alleging wrongful actions of seller/servicers. Freddie Mac's contracts with its seller/servicers generally

provide for them to indemnify the company against liability arising from their wrongful actions.

Freddie Mac is now subject to various legal proceedings, including regulatory investigations and

administrative and civil litigation, arising from the restatement of its previously issued consolidated Ñnancial

statements for the years 2000 and 2001 and the Ñrst three quarters of 2002 and the revision of fourth quarter

and full-year consolidated Ñnancial statements for 2002 (collectively referred to as the ""restatement'').

Freddie Mac believes that a loss in connection with the proceedings arising from the restatement is probable

and currently estimates the range of minimum loss to be from $75 million to $100 million. Freddie Mac has

established a reserve of $75 million for this loss contingency in the second quarter of 2003, the period in which

many of the legal proceedings were initiated. The ultimate resolution of these proceedings could result in

losses lower than or in excess of the estimated range of minimum loss. Litigation and claims resolution are

subject to many uncertainties and are not susceptible to accurate prediction. It is not possible for the company

to reasonably estimate the upper end of the range of any additional losses that might result from the adverse

resolution of any of these legal proceedings, or their potential eÅect on the company's Ñnancial condition or

results of operations.

Securities Class Action Lawsuits. In June 2003, and thereafter, securities class action lawsuits were

brought in three separate federal district courts against Freddie Mac and certain former executive oÇcers in

connection with the restatement. While most of the cases were voluntarily dismissed by the plaintiÅs, the two

remaining ones were consolidated and are now pending in the U.S. District Court for the Southern District of

New York.

In essence, the plaintiÅs in the consolidated action, claim that the defendants improperly managed

earnings to create a misleading impression of steady earnings by Freddie Mac. PlaintiÅs further allege that

defendants engaged in a number of improper transactions that violated GAAP and that they made false and

misleading statements regarding Freddie Mac's Ñnancial status. The complaint, which covers the period from

June 15, 1999 through June 6, 2003, seeks unspeciÑed compensatory damages, costs and expenses.

In March 2004, the plaintiÅs in one of the cases, the Ohio Public Employees Retirement System and the

State Teachers Retirement System, were appointed lead plaintiÅs for the consolidated action. Freddie Mac

Ñled a motion to dismiss the action in April, which was denied by the court on July 19, 2004. The case is now

in the discovery phase.

Shareholder Derivative Lawsuits. Two shareholder derivative lawsuits were Ñled during 2003 against

Freddie Mac and certain former and current executives and, in one of the suits, members of Freddie Mac's

Board of Directors alleging breach of Ñduciary duty and seeking indemniÑcation in connection with the

restatement. Both cases were ultimately assigned to the same judge in New York who is handling the

securities class action lawsuits described above. In July 2003, all of the then current Board members were

dismissed from the lawsuits in which they were named with the consent of the plaintiÅ. On January 16, 2004,

Freddie Mac moved to dismiss one of the lawsuits brought by the Ester Sadowsky Testamentary Trust

because of the plaintiÅ's failure to make a pre-suit demand. The court dismissed the case without prejudice on

July 19, 2004. The other lawsuit is still pending, awaiting a response to the plaintiÅ's pre-suit demand notice

by a Special Litigation Committee of Freddie Mac's Board of Directors. Subsequently, the Sadowsky plaintiÅ

sent a demand notice to Freddie Mac and on March 4, 2005, Ñled a new complaint in an action in the same

court.

Freddie Mac

202
The complaint was purportedly brought on Freddie Mac's behalf (as a nominal defendant) as a derivative

action by a purported shareholder to recover damages Freddie Mac allegedly suÅered in connection with

certain events underlying the restatement of its Ñnancial statements. The defendants in the action include

former oÇcers, the current Board of Directors, ten former Directors, and Ñve counterparties to transactions

Freddie Mac executed. The plaintiÅ subsequently has amended its complaint by, among other actions,

dropping Messrs. Syron and McQuade from the list of defendants. The plaintiÅ alleges claims for breach for

Ñduciary duties, indemniÑcation, waste of corporate assets, unjust enrichment, and aiding and abetting breach

of Ñduciary duties. The Special Litigation Committee of Freddie Mac's Board of Directors is considering the

allegations raised by this complaint.

Freddie Mac was also served on February 11, 2005, with an amended derivative complaint Ñled by

shareholder E.L. GreenÑeld against the lead engagement partner of Arthur Andersen, Freddie Mac's former

outside auditor, alleging breach of contract for failing to properly conduct audits of the company's Ñnancial

statements. No ruling is sought against Freddie Mac, which is named as a nominal party to that suit.

ERISA Lawsuits. Two class action lawsuits were Ñled in 2003 in the U.S. District Court for the

Southern District of Ohio against Freddie Mac, certain individuals, and the company's Retirement Committee

alleging violations of the Employee Retirement Income Security Act (""ERISA''). Both actions were

consolidated and transferred to the same judge in New York who is handling the securities and derivative

lawsuits described above. In July 2004, Freddie Mac and the other defendants Ñled a motion to dismiss the

consolidated ERISA lawsuit. That motion was denied on February 7, 2005, and the company along with the

individual defendants have Ñled a motion for interlocutory appeal which is pending.

OFHEO Proceedings. In June 2003, OFHEO commenced a special investigation of the company in

connection with the restatement. As part of this investigation, OFHEO took the testimony of certain Freddie

Mac employees and directors, external third parties and former employees. OFHEO also requested and

received documents from the company.

On December 9, 2003, Freddie Mac and OFHEO entered into a consent order and settlement which

concluded OFHEO's investigation of the company. Under the terms of the consent order, Freddie Mac agreed

to pay a civil money penalty of $125 million, which was recorded in the second quarter of 2003 (the period in

which OFHEO commenced its special investigation), as well as to undertake certain remedial actions relating

to governance, corporate culture, internal controls, accounting practices, disclosure and oversight. In agreeing

to the consent order, Freddie Mac made no admission regarding any wrongdoing or any asserted or implied

Ñndings.

In December 2003, OFHEO Ñled administrative notices of charges against Freddie Mac and

Messrs. Brendsel and Clarke, two former executive oÇcers of Freddie Mac. In its charge against Freddie Mac,

OFHEO seeks to have Freddie Mac take certain actions in connection with these individuals' salaries and

compensation as well as their termination status with the company. Freddie Mac and Messrs. Brendsel and

Clarke moved, among other things, to dismiss the OFHEO administrative charges. These motions are

pending. On February 18, 2005, OFHEO Ñled an amended notice of charges against Messrs. Brendsel and

Clarke, who opposed the amended notice on several grounds. On April 26, 2005, the Administrative Law

Judge presiding over the OFHEO administrative proceeding ruled that the amended notice of charges against

Messrs. Brendsel and Clarke did not clearly identify the factual and legal issues, and consequently ordered

OFHEO to Ñle a second amended notice of charges that must clearly set forth the factual and legal bases for

the charges and satisfy several other requirements identiÑed by the judge. The parties are also engaged in the

discovery phase of the case.

In a separate action, the U.S. District Court for the District of Columbia issued orders Ñnding that

OFHEO lacked the authority to freeze the compensation and beneÑts provided under Mr. Brendsel's and

Mr. Clarke's employment agreements. Freddie Mac was not a party to these actions. OFHEO has appealed

these orders. Freddie Mac has paid Messrs. Brendsel and Clarke the compensation and beneÑts that were due

them in accordance with the U.S. District Court's orders.

SEC Investigation. In June 2003, the SEC initiated a formal investigation of Freddie Mac in

connection with the restatement. As part of the investigation, the SEC subpoenaed company documents and

took the sworn testimony of various present and former Freddie Mac employees and directors, as well as third

parties.

Freddie Mac

203
On August 18, 2004, Freddie Mac announced that it had received a ""Wells Notice'' from the staÅ of the

SEC. The Wells Notice advised the company that the SEC staÅ is considering recommending that the SEC

initiate a civil injunctive action against the company for possible violations of federal securities laws, including

Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5, as well as Sections 17(a)(1), (2) and (3) of the Securities Act of 1933. The Wells Notice also indicated that the SEC staÅ

may seek a permanent injunction and a civil money penalty in connection with the contemplated action.

Freddie Mac continues to cooperate fully with the SEC's investigation as the company evaluates its response

to the Wells Notice.

U.S. Attorney's Investigation. In June 2003, the U.S. Attorney's OÇce in Alexandria, Virginia

commenced an investigation of Freddie Mac surrounding the restatement. As part of its investigation, the U.S.

Attorney's OÇce requested and received documents and information from Freddie Mac, interviewed certain

Freddie Mac employees and possibly other parties and took testimony before the grand jury. The investigation

is still pending and Freddie Mac will continue to cooperate with the U.S. Attorney's OÇce.

Department of Labor Investigation. In July 2003, the Department of Labor (""DOL'') began an

investigation of Freddie Mac's Thrift/401(k) Savings Plan in relation to the restatement. In connection with the

investigation, the DOL sought and received documents from the company as well as interviewed certain individuals

who served as members of Freddie Mac's Retirement Committee. The investigation is still pending and Freddie

Mac continues to cooperate fully with the DOL.

FEC Investigation. In March 2004, Freddie Mac provided certain information to the Federal Election

Commission (the ""FEC'') concerning compliance with federal election laws. The FEC has been conducting

an investigation into this matter and, in November 2004, subpoenaed documents and responses to interrogatories from Freddie Mac, which Freddie Mac subsequently provided. The FEC has also interviewed certain

present and former Freddie Mac employees. The investigation is still pending and Freddie Mac will continue

to cooperate with the FEC.

Antitrust Lawsuits. Since January 18, 2005, Freddie Mac and Fannie Mae have been named in

multiple lawsuits alleging violations of federal and state antitrust laws and state consumer protection laws. All

of the suits essentially allege that the defendants conspired to establish and maintain artiÑcially high guarantee

fees. One suit contains additional allegations of price Ñxing in connection with other mortgage fees, as well as a

claim of illegally maintaining a monopoly in the market for conforming mortgages and the market for

securitization of conforming mortgages. At present, it is not possible for Freddie Mac to predict the probable

outcome of these lawsuits or any potential impact on Freddie Mac's business, Ñnancial condition or results of

operations.

Other Inquiries. Freddie Mac receives inquires from the IRS in connection with its regular audits of

Freddie Mac's tax returns for prior years, some of which relate to matters connected with the restatement.

Freddie Mac continues to respond to these inquiries. See ""NOTE 14: INCOME TAXES'' for more

information. The Committee on Energy and Commerce of the House of Representatives also sent Freddie

Mac an inquiry relating to the restatement. Freddie Mac has responded to the Committee's inquiry.

Freddie Mac

204
NOTE 14: INCOME TAXES

Freddie Mac is exempt from state and local income taxes. Table 14.1 presents the components of the

company's provision for income taxes.

Table 14.1 Ì Provision for Income Taxes

Year Ended December 31,

2004 2003 2002

(dollars in millions)

Current tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,136 $1,465 $2,023

Deferred tax provision (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (346) 737 2,690

Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 790 $2,202 $4,713

Table 14.2 summarizes Freddie Mac's deferred tax assets and liabilities.

Table 14.2 Ì Deferred Tax Assets/(Liabilities)

December 31,

2004 2003

(dollars in millions)

Deferred tax assets:

Deferred fees related to securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,612 $ 1,550

Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 195

Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 Ì

Employee compensation and beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166 141

Cash Öow hedge deferrals and unrealized (gains) losses related to available-forsale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,930 801

Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,713 2,687

Deferred tax liabilities:

Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,961) (1,958)

Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (502) Ì

Basis diÅerences related to derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,478) (3,468)

Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2)

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (43) (5)

Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,984) (5,433)

Net deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,271) $(2,746)

Included in deferred taxes is the tax eÅect on the (a) net unrealized (gain) loss on available-for-sale

securities and (b) net (gain) loss related to derivatives designated in cash Öow hedge relationships, which are

both reported in AOCI, net of taxes.

A valuation allowance has not been established against Freddie Mac's deferred tax assets at December 31, 2004 or 2003, as Freddie Mac has determined that it is more likely than not that all such tax assets will

be realized in the future.

Freddie Mac

205
Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate.

Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate

Year Ended December 31,

2004 2003 2002

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%

Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4.7) (2.1) (1.2)

Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7.3) (3.0) (1.1)

Provision (beneÑt) related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.0) 0.4 (1.0)

OFHEO civil money penalty and loss contingency accrual ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.0 Ì

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.2 0.1 0.1

EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.2% 31.4% 31.8%

Impact of tax issues. The IRS has a policy to examine the income tax returns of large corporate

taxpayers, including Freddie Mac, generally every year. Management believes that an adequate provision in

accordance with SFAS 5 has been made for contingencies related to all income taxes and related interest.

However, the ultimate outcome of these tax contingencies could result in a tax beneÑt or tax provision that

could be material to Freddie Mac's quarterly or annual results of operations. Based on current knowledge and

after consultation with outside counsel, management does not believe that liabilities arising from these

matters, if any, will have a material adverse eÅect on Freddie Mac's consolidated Ñnancial condition.

Tax Years 1985 through 1990. In 1998, the IRS issued Freddie Mac a Statutory Notice which asserts

income tax deÑciencies for the company's Ñrst two tax years, 1985 and 1986. In the Ñrst quarter of 1999,

Freddie Mac Ñled a petition in the United States Tax Court (the ""Court'') to contest the deÑciencies. In the

third quarter of 1999, the IRS issued a Statutory Notice for Freddie Mac's tax years 1987 through 1990, and

Freddie Mac Ñled a petition in the Court. Subsequently, the Court combined the 1985 through 1990 tax years

into one case. The principal matters in controversy in the case involve questions of tax law as applied to

Freddie Mac's transition from non-taxable to taxable status in 1985 and primarily involve the amortization of

certain intangible assets, the two most signiÑcant of which are:

‚ Favorable Financing. A number of Ñnancing arrangements where the contract rates of interest

were less than the market rates of interest as of January 1, 1985 due to an increase in interest rates

since the date on which Freddie Mac had entered into the respective arrangements; and

‚ Customer Relationships. Freddie Mac's business relationships with a substantial number of

mortgage originating institutions that sold mortgages to Freddie Mac on a regular basis.

Tax Court Rulings. On September 4, 2003 and September 29, 2003, the Court decided favorably for

Freddie Mac on two preliminary motions involving questions of law in the case. On September 4, the Court

ruled favorably for Freddie Mac on the question whether Freddie Mac's intangibles are amortizable using, as

the adjusted basis, the higher of (a) the regular adjusted cost basis or (b) the fair market value on January 1,

1985. On September 29, the Court ruled favorably for Freddie Mac on the question whether, as a matter of

law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this case, Freddie

Mac claimed, and the court agreed, that the economic beneÑt of this below-market Ñnancing as of January 1,

1985 is an intangible asset subject to amortization. In October 2003, the Court ruled unfavorably on two other

less signiÑcant issues in the case.

While signiÑcant, the Court's rulings do not dispose of all of the matters in controversy in the case, which,

upon Ñnal resolution by the Court of all such matters, are subject to appeal by the parties. In addition, Freddie

Mac still must demonstrate that the intangible assets in question have an ascertainable value and have a

limited useful life, the duration of which can be ascertained with reasonable accuracy. A trial on the value and

useful life of Favorable Financing began in early June 2005.

In view of the favorable rulings described above and in accordance with GAAP, Freddie Mac recorded in

the fourth quarter of 2002 a reduction in its tax reserves in the amount of $155 million. If the IRS were to

Freddie Mac

206
appeal the Court decisions and an adverse ruling resulted, Freddie Mac may reconsider its reserves related to

this matter.

If Freddie Mac's tax position on the customer relationship amortization issue described above is upheld

through the administrative and legal process, Freddie Mac will be able to recognize additional tax beneÑts that

could be material in the quarter during which they are recognized. However, Freddie Mac is unable to provide

assurances that any such tax beneÑts will be realized.

Tax Years 1991 through 1993. The IRS examination of Freddie Mac's federal income tax returns for

the years 1991 through 1993 has been completed. In December 2001, the IRS issued a Statutory Notice for

these years. In the Ñrst quarter of 2002, Freddie Mac Ñled a petition in the Court to contest the deÑciencies.

The principal matters in controversy in this case are the same questions at issue in the 1985 through 1990 case

as applied to years 1991 to 1993, plus an additional question of tax law regarding the timing of taxation of

Freddie Mac's management and guarantee fee income.

Tax Years 1994 through 1997. In the second quarter of 2002, the IRS completed its examination of

Freddie Mac's federal income tax returns for the years 1994 through 1997. Freddie Mac is involved in

discussions with the IRS Appeals Division regarding the company's disagreement with certain aspects of the

examination report. The principal matter in controversy, other than the same questions at issue in the 1985

through 1993 cases, involve the character of losses on dispositions of mortgage-related securities.

Tax Treatment of REITs. In February 1997, Freddie Mac formed two REIT subsidiaries that issued a

total of $4.0 billion in step-down preferred stock to investors. Under the IRS regulations in eÅect when the

REITs were formed, the company believed that the dividend payments by the REITs to holders of the REITs'

step-down preferred stock were fully tax deductible. In 1997, subsequent to the formation of Freddie Mac's

REIT subsidiaries, the Department of the Treasury announced its intention to propose regulations that would

retroactively limit the tax beneÑts attributable to the REITs, preferred stock and eÅectively eliminate the

potential tax advantages of REITs that issued step-down preferred stock. On January 7, 2000, the Treasury

issued Ñnal regulations that retroactively deny certain tax beneÑts attributable to Freddie Mac's REIT

preferred stock for tax years ending on or after February 27, 1997. Based upon this guidance, the IRS

challenged Freddie Mac's position that the REIT dividends were fully deductible. The company has since

changed its position that the REIT dividends are fully deductible. Freddie Mac announced on May 12, 2005

that it entered into a closing agreement with the IRS that resolves issues related to the tax treatment of

dividends paid on the step-down preferred stock. Freddie Mac and the IRS have agreed that Freddie Mac will

only be entitled to deductions attributable to the step-down preferred stock transactions as if it had borrowed

directly from the REITs' preferred shareholders. As a result of this closing agreement, Freddie Mac recorded

a reduction in tax reserves of $94 million. See ""NOTE 18: MINORITY INTERESTS'' for more information

concerning the REITs.

Tax Years 1998 through 2002. The IRS is currently examining Freddie Mac's tax returns for the years

1998 through 2002. This examination includes the years for which Freddie Mac has restated its Ñnancial

reporting.

Tax Treatment of Linked Swaps. In August and September of 2001, Freddie Mac entered into a series

of nine sets of paired swap transactions. Freddie Mac has reported and paid tax treating each pair of those

swap transactions as a single integrated transaction for federal income tax purposes. In addition, two additional

swaps were executed in November 2001. Although the facts and circumstances surrounding these swaps were

diÅerent from the earlier swaps, Freddie Mac also reported and paid tax treating these swaps as a single

integrated transaction for federal income tax purposes. There is a risk that the IRS could challenge Freddie

Mac's tax treatment of all of these transactions (""the Linked Swaps'') and make an adverse determination

relating to this tax treatment. If this should occur, the potential aggregate additional tax liability could be as

much as approximately $750 million plus interest.

Freddie Mac has not provided reserves for any tax issues related to these transactions because

management has determined that the potential for loss does not meet the criteria for recognition under

SFAS 5. The IRS is currently examining Freddie Mac's 2001 and 2002 tax returns, including the Linked

Swaps transactions. The company does not know whether the IRS will assert a tax deÑciency related to these

Freddie Mac

207
transactions as part of the current examination and if so, what the Ñnal resolution of those issues will be. If the

IRS were to propose the maximum potential aggregate assessment and that additional tax liability was upheld

through the administrative and legal process, the recognition of such additional liability could have a material

adverse impact on Freddie Mac's results of operations in the quarter in which it was recognized. Based on

current knowledge and after consultation with counsel, management does not currently believe that the Ñnal

resolution of any issues that may arise from the Linked Swaps transactions will result in IRS adjustments that

would have a material adverse impact on Freddie Mac's consolidated Ñnancial condition.

Freddie Mac

208
NOTE 15: EMPLOYEE BENEFITS

DeÑned BeneÑt Plans

Freddie Mac maintains a tax-qualiÑed deÑned beneÑt pension plan (""Pension Plan'') covering substantially all of its employees. Pension Plan beneÑts are based on years of service and the employee's highest

average compensation (up to legal plan limits) over any consecutive 36 months of employment. Freddie Mac's

general practice is to contribute to the Pension Plan an amount equal to at least the minimum required

contribution, if any, but no more than the maximum amount deductible for federal income tax purposes each

year. Based on a preliminary analysis, Freddie Mac currently believes that under applicable law no minimum

contribution will be required and no tax-deductible contribution will be permitted for 2005. Therefore, Freddie

Mac does not currently expect to contribute to its Pension Plan in 2005. Pension Plan assets are held in trust

and investments consist primarily of listed stocks and corporate bonds. In addition to the Pension Plan,

Freddie Mac maintains nonqualiÑed, unfunded deÑned beneÑt pension plans for oÇcers and certain other

employees of the company (the ""non-qualiÑed pension plans''). The related retirement beneÑts for the

nonqualiÑed pension plans are paid from Freddie Mac's general assets. These nonqualiÑed and qualiÑed

deÑned beneÑt pension plans are collectively referred to in this NOTE 15 as ""deÑned beneÑt pension plans.''

Freddie Mac maintains a deÑned beneÑt post-retirement health care plan (""Retiree Health Plan'') that

generally provides post-retirement health care beneÑts on a contributory basis to retired employees age 55 or

older who rendered at least ten years of service (Ñve years of service if retiree is eligible to retire prior to

March 1, 2007) and who, upon separation or termination, immediately elected to commence beneÑts under

the Pension Plan in the form of an annuity. The company's Retiree Health Plan is currently unfunded and the

beneÑts are paid from Freddie Mac's general assets. This plan, along with the deÑned beneÑt pension plans,

are collectively referred to in this NOTE 15 as ""deÑned beneÑt plans.''

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (""Medicare Part D'')

was signed into law on December 8, 2003. Medicare Part D authorizes a federal subsidy for sponsors of retiree

health care plans with prescription drug beneÑts that are at least actuarially equivalent to the prescription drug

beneÑts available under Medicare Part D. In May 2004, the FASB issued FASB StaÅ Position

(""FSP'') 106-2, ""Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,

Improvement and Modernization Act of 2003,'' which supersedes FSP 106-1 of the same title. FSP 106-2

clariÑed the accounting for beneÑts provided by the new government subsidies. Freddie Mac, in consultation

with its actuaries, has determined that the prescription drug beneÑts provided to participants by the Retiree

Health Plan are at least actuarially equivalent to those available under Medicare Part D. Therefore, in

accordance with the FSP 106-2 transition provisions, the eÅects of the future Medicare Part D subsidies are

reÖected as an actuarial gain, included in Net actuarial loss (gain) in Table 15.1, that reduces the year-end

accumulated post-retirement beneÑt obligation for 2004 by $12 million. No determination has yet been made

with respect to actuarially equivalent beneÑts provided to participants' spouses and dependents. The ongoing

eÅect of the subsidy under Medicare Part D is to reduce the current service cost.

For Ñnancial reporting purposes, Freddie Mac uses a September 30 valuation measurement date for all of

its deÑned beneÑt plans. The company is required to accrue the estimated cost of retiree beneÑts as employees

render the services necessary to earn their pension and post-retirement health beneÑts. Freddie Mac's pension

and post-retirement health care costs related to these deÑned beneÑt plans for 2004, 2003 and 2002 presented

in the following tables were calculated using assumptions as of September 30, 2003, 2002 and 2001,

respectively. The funded status of Freddie Mac's pension and post-retirement health care deÑned beneÑt plans

for 2004, 2003 and 2002 presented in the following tables was calculated using assumptions as of

September 30, 2004, 2003 and 2002, respectively.

Freddie Mac

209
Table 15.1 sets forth the changes in the beneÑt obligations and plan assets for the twelve months ended

September 30, 2004 and 2003, the funded status at September 30, 2004 and 2003 and the amounts recognized

in the consolidated balance sheets for the deÑned beneÑt plans at December 31, 2004 and 2003.

Table 15.1 Ì DeÑned BeneÑt Plan Obligations and Funded Status

PostRetirement

Pension Health

BeneÑts(1) BeneÑts

2004 2003 2004 2003

(dollars in millions)

Change in BeneÑt Obligation:

BeneÑt obligation at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $339 $230 $102 $ 54

Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 16 10 6

Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 16 6 3

Net actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 80 (15) 39

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (3) (1) Ì

BeneÑt obligation at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $385 $339 $102 $102

Change in Plan Assets:

Fair value of plan assets at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 160

Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 26

Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 46

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (3)

Fair value of plan assets at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $260 $229

Funded Status:

Funded status at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (125) (110) (102) (102)

Unrecognized net actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 120 40 60

Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 2 (6) (6)

Initial unrecognized net transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 Ì Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(11) $ 13 $(68) $(48)

Amounts Recognized in the Consolidated Balance Sheets:

Other assets:

Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 29 $ Ì $ Ì

Intangible and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 1 Ì Ì

Other liabilities:

Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25) (27) (68) (48)

AOCI:

Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 10 Ì Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(11) $ 13 $(68) $(48)

(1) The beneÑt obligations refer to projected beneÑt obligations (""PBO''). The measurement of the PBO includes assumptions about the

rate of future compensation increases.

The accumulated beneÑt obligation (""ABO'') for all deÑned beneÑt pension plans was $282 million and

$248 million at September 30, 2004 and 2003, respectively. The ABO represents the actuarial present value of

future expected beneÑts, assuming current salary levels remain in eÅect.

The change in the minimum pension liability recognized in AOCI, net of taxes, was a $2 million decrease

for the year ended December 31, 2004 and a $10 million increase for year ended December 31, 2003.

Freddie Mac

210
Table 15.2 provides additional information for deÑned beneÑt pension plans.

Table 15.2 Ì Additional Information for DeÑned BeneÑt Pension Plans

2004 2003

Pension Non-qualiÑed Pension Non-qualiÑed

Plan Pension Plans Plan Pension Plans

(dollars in millions)

PBOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $356 $29 $301 $38

ABO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $262 $20 $221 $27

Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 Ì 229 Ì

ABO over (under) fair value of plan assets ÏÏÏÏ $ 2 $20 $ (8) $27

Table 15.3 presents the components of the net periodic beneÑt costs with respect to pensions and postretirement health beneÑts for the years ended December 31, 2004, 2003 and 2002. Net periodic beneÑt costs

are included in the line Salaries and employee beneÑts on the company's consolidated statements of income.

Table 15.3 Ì Net Periodic BeneÑt Cost Detail

Post-Retirement

Pension BeneÑts Health BeneÑts

Year Ended Year Ended

December 31, December 31,

2004 2003 2002 2004 2003 2002

(dollars in millions)

Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 24 $ 16 $ 12 $10 $ 6 $ 4

Interest cost on beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 16 14633

Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (12) (13) Ì Ì Ì

Recognized net actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 3Ì521

Recognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (1) (1) (1)

Net periodic beneÑt costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 35 $ 23 $ 13 $20 $10 $ 7

Tables 15.4 and 15.5 summarize the weighted average assumptions used to determine the beneÑt

obligations at September 30, 2004 and 2003 and net periodic beneÑt costs recognized for the years ended

December 31, 2004, 2003 and 2002, respectively.

Table 15.4 Ì Weighted Average Assumptions Used to Determine Projected and Accumulated BeneÑt

Obligations

PostPension Retirement

BeneÑts Health BeneÑts

September 30, September 30,

2004 2003 2004 2003

Major Assumptions:

Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.75% 6.00% 5.75% 6.00%

Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.50% 4.50% Ì Ì

Table 15.5 Ì Weighted Average Assumptions Used to Determine Net Periodic BeneÑt Cost

Post-Retirement

Pension BeneÑts Health BeneÑts

Year Ended Year Ended

December 31, December 31,

2004 2003 2002 2004 2003 2002

Major Assumptions:

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.00% 7.00% 7.50% 6.00% 7.00% 7.50%

Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.50% 4.50% 4.50% Ì Ì Ì

Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.00% 7.25% 9.00% Ì Ì Ì

Freddie Mac

211
For the 2004 and 2003 beneÑt obligations, Freddie Mac used the Moody's Aa Corporate Bond Rate

Index as a basis for selecting the discount rate shown in Table 15.4. The expected long-term rate of return on

plan assets for 2004 and 2003 is estimated using a portfolio return calculator model. The model considers the

historical returns and the future expectations for returns for each asset class in the company's deÑned beneÑt

plans in conjunction with Freddie Mac's target investment allocation to arrive at the expected rate of return.

The assumed health care cost trend rates used in measuring the accumulated post-retirement beneÑt

obligation as of September 30, 2004 are 13 percent in 2005, gradually declining to an ultimate rate of

Ñve percent in 2011 and remaining at that level thereafter.

Table 15.6 sets forth the eÅect on the accumulated post-retirement health beneÑt obligation as of

September 30, 2004, and the sum of the service-cost and interest-cost components of the net periodic postretirement health beneÑt costs that would result from a one percent increase or decrease in the assumed health

care cost trend rate.

Table 15.6 Ì Selected Data Regarding the Retiree Health Plan

One One

Percent Percent

Increase Decrease

(dollars in millions)

EÅect on the accumulated post-retirement beneÑt obligation for health

care beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24 $(19)

EÅect on the net periodic post-retirement health beneÑt cost components 4 (3)

Plan Assets

Table 15.7 sets forth Freddie Mac's Pension Plan weighted average asset allocations, based on fair value,

at September 30, 2004 and 2003, and target allocation by asset category.

Table 15.7 Ì Pension Plan Assets by Category

Plan Assets at Target September 30, Allocation

Asset Category 2003 - 2004 2004 2003

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65.0% 61.2% 51.7%

Debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 34.0% 28.0%

Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4.8% 20.3%

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0% 100.0% 100.0%

(1) Consists of cash contributions made in the third quarter of 2004 and 2003 that were not fully invested by September 30th of that

year.

Freddie Mac's Retirement Committee has Ñduciary responsibility for establishing and overseeing the

Pension Plan's investment policies and objectives. The Retirement Committee reviews the appropriateness of

the Pension Plan's investment strategy on an ongoing basis. Freddie Mac's Pension Plan employs a total return

investment approach whereby a diversiÑed blend of equities and Ñxed income investments are used to

maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through

careful consideration of plan liabilities, plan funded status, and corporate Ñnancial condition. Furthermore,

equity investments are diversiÑed across U.S. and non-U.S. listed companies with small and large capitalizations. Derivatives may be used to gain market exposure in an eÇcient and timely manner; however, derivatives

may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment

risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual

liability measurements and periodic asset/liability studies.

The Pension Plan assets did not include any direct ownership of Freddie Mac securities at September 30,

2004 and 2003.

Contributions

As discussed above, Freddie Mac does not currently expect to contribute to its Pension Plan in 2005. Any

contributions to the company's Retiree Health Plan will be in the form of beneÑt payments since it is an

unfunded plan.

Freddie Mac

212
Estimated Future BeneÑt Payments

Table 15.8 sets forth estimated future beneÑt payments expected to be paid for the deÑned beneÑt plans.

The expected beneÑts are based on the same assumptions used to measure Freddie Mac's beneÑt obligation at

September 30, 2004.

Table 15.8 Ì Estimated Future BeneÑt Payments

Post-Retirement

Pension BeneÑts Health BeneÑts

(dollars in millions)

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3.7 $0.9

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.3 1.2

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.2 1.6

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.1 1.9

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.5 2.4

Years 2010-2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70.9 20.4

DeÑned Contribution Plans

Freddie Mac's Thrift/401(k) Savings Plan, a tax-qualiÑed deÑned contribution pension plan (the

""Savings Plan''), is oÅered to all eligible employees. Employees were permitted to contribute from 1 percent

to 15 percent of their annual salaries to the Savings Plan, subject to limits set by the IRC. The company also

maintains a non-qualiÑed deÑned contribution plan for oÇcers of the company designed to make up for

beneÑts lost due to limitations on eligible compensation imposed by the IRC. Freddie Mac matches

employees' contributions up to 6 percent of their salaries per pay period; the percentage matched depends

upon the length of service. Employee contributions and Freddie Mac's matching contributions are immediately vested. In addition, Freddie Mac has discretionary authority to make additional contributions to the

Savings Plan that are allocated uniformly on behalf of each eligible employee, based on salary level.

Employees become vested in Freddie Mac's discretionary contributions after 5 years. Freddie Mac incurred

costs of $29 million, $28 million and $22 million for the years ended December 31, 2004, 2003 and 2002,

respectively, related to these plans. These expenses were included in Salaries and employee beneÑts on the

consolidated statements of income.

See ""NOTE 13: LEGAL CONTINGENCIES'' for more information regarding civil litigation and a

DOL investigation of Freddie Mac's Thrift/401(k) Savings Plan in relation to the restatement.

Executive Deferred Compensation Plan

The Executive Deferred Compensation Plan is an unfunded, non-qualiÑed plan that allows certain key

employees to elect to defer a portion of their annual salary and cash bonus, and certain key management

employees to defer the settlement of restricted stock units received from Freddie Mac, as well as a portion of

their annual salary and cash bonus, for any number of years speciÑed by the employee, but under no

circumstances may the period elected exceed his or her life expectancy. Deferred salary, cash bonus and stock

units are credited to an employee's account as of the date such amounts or units would have otherwise been

paid or settled by delivery of shares to the employee. Subject to provisions for hardship withdrawals and

certain terminations of employment, deferred distributions are payable at the end of the deferral period in

lump sums or installments over Ñve, ten or Ñfteen years. Distributions are paid from Freddie Mac's general

assets. Freddie Mac records a liability equal to the accumulated deferred salary, cash bonus and accrued

interest as set forth in the plan, net of any related distributions made to plan participants. Freddie Mac

recognizes expense equal to the interest accrued on deferred salary and bonus throughout the year. Expense

associated with unvested deferred restricted stock units is recognized as part of stock-based compensation.

Freddie Mac

213
NOTE 16: FAIR VALUE DISCLOSURES

The consolidated fair value balance sheets in Table 16.1 present Freddie Mac's estimates of the fair value

of the company's recorded assets and liabilities and oÅ-balance sheet Ñnancial instruments as of December 31,

2004 and 2003. The fair value information on the consolidated fair value balance sheets includes the fair

values of all items recorded in the consolidated balance sheets prepared in accordance with GAAP, as well as

all oÅ-balance sheet Ñnancial instruments that represent assets or liabilities of Freddie Mac that are not

recorded in the GAAP consolidated balance sheets. These oÅ-balance sheet items predominantly consist of

the unrecognized guarantee assets and obligations associated with a portion of Freddie Mac PCs issued

through the Guarantor Program as well as commitments to purchase multifamily and single-family mortgage

loans that will be classiÑed as held-for-investment in the GAAP Ñnancial statements and insurance contracts

on manufactured housing investments. The valuations of Ñnancial instruments on the consolidated fair value

balance sheets are in accordance with GAAP fair value guidelines prescribed by SFAS No. 107, ""Disclosures

about Fair Value of Financial Instruments'' (""SFAS 107'') and other relevant pronouncements.

Table 16.1 Ì Consolidated Fair Value Balance Sheets(1)

December 31,

2004 2003

Carrying Fair Carrying Fair

Amount(2) Value(3) Amount(2) Value

(dollars in billions)

Assets

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61.3 $ 63.3 $ 60.2 $ 62.5

Mortgage-related securities(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 603.2 603.4 600.2 600.4

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 664.5 666.7 660.4 662.9

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.3 35.3 23.1 23.1

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.8 29.8 65.4 65.4

Securities purchased under agreements to resell and Federal

funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.2 32.2 20.6 20.6

Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.3 15.3 16.2 16.2

Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.5 5.0 3.7 4.5

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.7 13.3 14.0 13.2

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795.3 $797.6 $803.4 $805.9

Liabilities and minority interest

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731.7 $737.0 $739.6 $749.8

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏ 4.1 2.1 2.9 2.4

Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.2 0.2 0.4 0.4

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏ 0.2 Ì 0.1 Ì

Other liabilities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.2 25.7 27.0 23.9

Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.5 1.7 1.9 2.1

Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 763.9 766.7 771.9 778.6

Net assets attributable to stockholders

Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6 4.1 4.6 4.4

Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.8 26.8 26.9 22.9

Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.4 30.9 31.5 27.3

Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795.3 $797.6 $803.4 $805.9

(1) The consolidated fair value balance sheets do not purport to present the net realizable, liquidation or market value of Freddie Mac as

a whole. Furthermore, amounts Freddie Mac ultimately realizes from the disposition of the assets or settlement of liabilities may vary

signiÑcantly from the fair values presented.

(2) Carrying amounts equal the amounts reported on Freddie Mac's GAAP consolidated balance sheets.

(3) Methodologies employed to calculate fair values are periodically changed on a prospective basis to reÖect improvements in the

underlying estimation processes. The estimated impact of these improvements resulted in net after-tax changes to Total net assets of

approximately $0.6 billion at December 31, 2004. The most signiÑcant of these changes occurred in the fourth quarter when Freddie

Mac began using newly available market prices received from broker/dealers and reliable third-party pricing providers for the

valuation of a greater portion of its debt instruments.

(4) The fair value of Mortgage-related securities reported in this table exceeds the carrying value because the fair value includes PC

residuals related to Participation CertiÑcates held in the Retained portfolio that are not recognized under GAAP because such PCs

were issued prior to the implementation of FIN 45 in 2003.

(5) Fair values include estimated income taxes on the diÅerence between the consolidated fair value balance sheets pre-tax net assets

and the consolidated GAAP balance sheets pre-tax net assets.

Freddie Mac

214
Limitations

The consolidated fair value balance sheets do not capture all elements of value that are implicit in

Freddie Mac's operations as a going concern since the consolidated fair value balance sheets only capture the

values of the current investment and securitization portfolios. For example, the consolidated fair value balance

sheets do not capture the value of new investment and securitization business that would likely replace

prepayments as they occur. In addition, the consolidated fair value balance sheets do not capture the value

associated with future growth opportunities in Freddie Mac's investment and securitization portfolios. Thus,

the fair value of net assets attributable to stockholders presented in the consolidated fair value balance sheets

does not represent an estimate of the net realizable, liquidation or market value of Freddie Mac as a whole.

Freddie Mac reports assets and liabilities that are not Ñnancial instruments (such as property, plant and

equipment and deferred taxes), as well as certain Ñnancial instruments that are not covered by the SFAS 107

disclosure requirements (such as pension liabilities) at their GAAP carrying amounts in the consolidated fair

value balance sheets. Management believes these items do not have a signiÑcant impact on Freddie Mac's

overall Ñnancial condition or fair value results.

Valuation Methods and Assumptions

Fair value is generally based on independent price quotations obtained from third-party pricing services,

dealer marks or direct market observations, where available. However, certain Ñnancial instruments are less

actively traded and, therefore, are not always able to be valued based on prices obtained from third parties. If

quoted prices or market data are not available, fair value is based on internal valuation models using market

data inputs or internally developed assumptions, where appropriate.

The following methods and assumptions were used to estimate the fair value of assets and liabilities at

December 31, 2004 and 2003.

Mortgage loans

Mortgage loans represent single-family and multifamily whole loans held in Freddie Mac's Retained

portfolio. For GAAP purposes, management must determine the fair value of these mortgage loans to

calculate lower-of-cost-or-market value adjustments for mortgages classiÑed as held-for-sale. Management

uses this same approach when determining the fair value of all whole loans, including those held for

investment, for fair value balance sheet purposes.

Freddie Mac determines the fair value of mortgage loans based on comparisons to actively traded

mortgage-related securities with similar characteristics, with adjustments for yield, credit and liquidity

diÅerences. SpeciÑcally, Freddie Mac aggregates mortgage loans into pools by product type, coupon and

maturity and then converts the pools into notional mortgage-related securities based on their speciÑc

characteristics. Freddie Mac then calculates fair values for these notional mortgage-related securities using

the process that is described in the ""Mortgage-related securities'' section, below.

As described above, the fair value of these mortgage loans also includes adjustments for yield, credit and

liquidity diÅerences. To accomplish this, the fair value of the single-family whole loans includes an adjustment

representing the estimated present value of the additional cash Öows on the mortgage coupon of the whole loan

in excess of the coupon expected on the notional mortgage-related securities. For multifamily whole loans, the

fair value adjustment is estimated by calculating the net present value of guarantee fees expected to be

retained by Freddie Mac. This retained guarantee fee is estimated by subtracting the expected cost of funding

and securitizing a multifamily whole loan of a comparable maturity and credit rating from the coupon on the

whole loan at the time of purchase.

The implied guarantee fee is also net of the related credit and other components inherent in the

company's guarantee obligation. For single-family whole loans, the process for estimating the related credit

and other guarantee obligation components is described in the ""Guarantee obligation for Participation

CertiÑcates'' section. For multifamily whole loans, the process for estimating the related credit and other

guarantee obligation components employs a market-based approach to estimate the potential credit obligation.

This obligation is estimated by extracting the credit risk premium that multifamily whole loan investors

require from market prices on similar securities. This credit risk premium is net of expected funding, liquidity

and other risk premiums that are embedded in the market price of the reference securities.

Freddie Mac

215
Mortgage-related securities

Mortgage-related securities represent passthroughs and other mortgage-related securities classiÑed as

available-for-sale and trading, which are already reÖected at fair value on the GAAP consolidated balance

sheets. Mortgage-related securities consist of securities issued by Freddie Mac, Fannie Mae and Ginnie Mae

as well as non-agency mortgage-related securities.

The fair value of securities with readily available third-party market prices is generally based on market

prices obtained from broker/dealers or reliable third-party pricing service providers. Fair value may be

estimated by using third-party quotes for similar instruments, adjusted for diÅerences in contractual terms.

For other securities, a market option-adjusted spread approach based on observable market parameters is used

to estimate fair value. Option-adjusted spreads for certain securities are estimated by deriving the optionadjusted spread for the most closely comparable security with an available market price, using proprietary

interest-rate and prepayment models. If necessary, management judgment is applied to estimate the impact of

diÅerences in prepayment uncertainty or other unique cash Öow characteristics related to that particular

security. Fair values for these securities are then estimated by using the estimated option-adjusted spread as

an input to the interest-rate and prepayment models, and estimating the net present value of the projected

cash Öows. The remaining instruments are priced using other modeling techniques or by using other securities

as proxies.

Mortgage-related securities also include PC residuals related to PCs held by Freddie Mac and reported in

the mortgage-related securities line item. PC residuals are reported at fair value on Freddie Mac's

consolidated balance sheets. Fair value for PC residuals is estimated in the same manner as described for

guarantee assets and guarantee obligations for PCs below.

Cash and cash equivalents

Cash and cash equivalents largely consist of highly liquid investment securities with an original maturity

of three months or less used for cash management purposes, as well as cash collateral posted by Freddie Mac's

derivative counterparties. Given that these assets are short-term in nature with limited market value volatility,

the carrying amount on the GAAP consolidated balance sheets is presumed to be a reasonable approximation

of fair value.

Investments

At December 31, 2004, Investments consists solely of non-mortgage-related securities, which are

reported at fair value on Freddie Mac's consolidated balance sheets. At December 31, 2003, Investments

included non-mortgage-related securities and mortgage-related securities held in connection with PC market

making and support activities, which were reported at fair value on Freddie Mac's consolidated balance sheets.

Freddie Mac ceased its PC market making and support activities accomplished through the Securities Sales &

Trading Group business unit and the external Money Manager program during the fourth quarter of 2004. The

fair values of Investments are estimated using the methods described above in ""Mortgage-related securities.''

Securities purchased under agreements to resell and Federal funds sold

Securities purchased under agreements to resell and Federal funds sold principally consists of short-term

contractual agreements such as reverse repurchase agreements involving Treasury and agency securities,

Federal funds sold and Eurodollar time deposits. Given that these assets are short-term in nature, the carrying

amount on the GAAP consolidated balance sheets is presumed to be a reasonable approximation of fair value.

Guarantee assets for Participation CertiÑcates

At December 31, 2004 and 2003, Freddie Mac established guarantee assets for approximately 87 percent

and 81 percent, respectively, of PCs and Structured Securities held by third parties. For more information

regarding the accounting for guarantee assets related to PCs and Structured Securities, see ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

For fair value balance sheet purposes, guarantee assets are reÖected for all PCs and Structured Securities

held by third parties and are valued using the same method as used for GAAP fair value purposes. For a

description of how Freddie Mac determines the fair value of its guarantee assets, see ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.''

Freddie Mac

216
Derivative assets

Derivative assets, at fair value largely consists of interest-rate swaps, option-based derivatives, futures,

and forward purchase and sale commitments that Freddie Mac accounts for as derivatives, which are reÖected

at fair value on the GAAP consolidated balance sheets. The fair values of interest-rate swaps are determined

by using the appropriate yield curves to calculate and discount the expected cash Öows for both the Ñxed-rate

and Öoating-rate components of the swap contracts. Option-based derivatives, which principally include call

and put swaptions, are valued using an option-pricing model. This model uses market interest rates and

market-implied option volatilities, where available, to calculate the option's fair value. Market-implied option

volatilities are based on information obtained from broker/dealers. The fair value of exchange-traded futures

is based on end-of-day closing prices obtained from third-party pricing services. Derivative forward purchase

and sale commitments are valued using the methods described for mortgage-related securities valuation,

above.

The fair value of derivative assets considers the impact of institutional credit risk in the event that the

counterparty does not honor its payment obligation. Freddie Mac's fair value of derivatives is not adjusted for

expected credit losses because management obtains collateral from most counterparties typically within one to

three business days of the daily market value calculation and substantially all of Freddie Mac's credit risk

arises from counterparties with investment-grade credit ratings of A- or above.

Other assets

Other assets consists of accrued interest and other receivables, investments in qualiÑed LIHTC limited

partnerships that are eligible for federal tax credits, Ñnancial guarantee contracts for additional credit

protection on certain manufactured housing asset-backed securities, real estate owned, property, plant and

equipment, and other miscellaneous assets.

The receivables are Ñnancial instruments and are required to be measured at fair value for disclosure

purposes pursuant to SFAS 107. Because these receivables are short-term in nature, management believes the

carrying amount on the GAAP consolidated balance sheets is a reasonable approximation of their fair values.

For the LIHTC partnerships, the fair value of expected tax beneÑts is estimated using expected cash Öows

discounted at a market-based yield. For the credit enhancements on manufactured housing asset-backed

securities, the fair value is based on the diÅerence between the market price of non-credit impaired

manufactured housing securities and credit-impaired manufactured housing securities that are likely to

produce future credit losses, as adjusted for management's estimate of a risk premium attributable to the

Ñnancial guarantee contracts. The value of the contracts, over time, will be determined by the actual creditrelated losses incurred and, therefore, may have a value that is higher or lower than management's marketbased estimate.

The other categories of assets that comprise Other assets are not Ñnancial instruments required to be

valued at fair value under SFAS 107, such as REO properties. The fair market value of REO properties is

calculated using a model-based approach, incorporating market sales data, that estimates a discount to full fair

market value for a comparable property that has not been subject to foreclosure proceedings. This adjustment

is intended to capture the sale price discount generally evidenced in the market for properties that have been

subject to a foreclosure sale.

Other non-Ñnancial assets included in Other assets represent an insigniÑcant portion of the GAAP

consolidated balance sheets. Because any change in their fair value would not be a meaningful part of Freddie

Mac's fair value of net assets business results, Freddie Mac has not adjusted the carrying amount on the

GAAP consolidated balance sheets for estimates of the fair value of these non-Ñnancial assets.

Total debt securities, net

Total debt securities, net represents short-term and long-term debt used to Ñnance Freddie Mac's assets

and, for GAAP presentation, is net of deferred items, including premiums, discounts and hedging-related basis

adjustments. It includes both non-callable and callable debt as well as short-term zero coupon discount notes.

The fair value of the short-term zero coupon discount notes is based on a discounted cash Öow model with

market inputs. The valuation of other debt securities is generally based on market prices obtained from

broker/dealers, reliable third-party pricing service providers, or direct market observations. In the fourth

quarter of 2004, Freddie Mac began using newly available market prices received from broker/dealers and

Freddie Mac

217
reliable third-party pricing services for the valuation of a greater portion of its debt instruments. Previously the

calculation of the fair value of these instruments was based primarily on an internal model using available

market inputs.

Guarantee obligation for Participation CertiÑcates

Freddie Mac does not establish guarantee obligations for all PCs and Structured Securities held by third

parties for GAAP purposes. In addition, guarantee obligations are not carried at fair value for GAAP

purposes. For fair value balance sheet purposes, guarantee obligations reÖect the fair value of Freddie Mac's

guarantee obligation on all PCs held by third parties. Additionally, for fair value balance sheet purposes,

guarantee obligations are valued using the same method as used for GAAP to determine the guarantee

obligation's initial fair value. For information concerning the company's valuation methodologies and

accounting policies related to guarantee-related credit losses, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' and ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS

IN MORTGAGE-RELATED ASSETS.''

Reserve for guarantee losses on Participation CertiÑcates

The carrying amount of the Reserve for guarantee losses on Participation CertiÑcates on the GAAP

consolidated balance sheets represents GAAP loan loss reserves for oÅ-balance sheet PCs that are not already

accounted for under SFAS 125/140. This line item has no basis in the consolidated fair value balance sheets,

because the estimated fair value of all expected default losses is included in the guarantee obligation reported

on the consolidated fair value balance sheets, as discussed above.

Derivative liabilities

See discussion under ""Derivative assets'' above.

Other liabilities

Other liabilities principally consists of amounts due to PC investors (i.e., principal and interest), funding

liabilities associated with investments in LIHTC partnerships, accrued interest payable on debt securities and

other miscellaneous obligations of less than one year. Management believes the carrying amount of these

liabilities is a reasonable approximation of their fair value, except for funding liabilities associated with

investments in LIHTC partnerships, for which fair value is estimated using expected cash Öows discounted at

a market-based yield. Also, management adjusts the GAAP-basis deferred taxes for consolidated fair value

balance sheets purposes. Fair values include estimated income taxes on the diÅerence between the

consolidated fair value balance sheets pre-tax net assets and the consolidated GAAP balance sheets pre-tax

net assets.

Minority interests in consolidated subsidiaries

Minority interests in consolidated subsidiaries primarily represent preferred stock interests that third

parties hold in Freddie Mac's two majority-owned REIT subsidiaries. In accordance with GAAP, Freddie

Mac consolidated the REITs. The fair value of the third-party minority interests in these REITs was based on

the estimated value of the underlying REIT preferred stock determined by management based on a valuation

model adjusted to consider the impact of embedded call options, using market-based information to the extent

available.

Net assets attributable to preferred stockholders

To determine the preferred stock fair value, Freddie Mac uses a market-based approach incorporating

quoted dealer prices.

Net assets attributable to common stockholders

Net assets attributable to common stockholders is equal to the fair value of net assets (the diÅerence

between the fair value of Freddie Mac's assets and the fair value of liabilities and minority interest), less the

fair value of net assets attributable to preferred stockholders.

Freddie Mac

218
NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS

Mortgages and Mortgage-Related Securities

Table 17.1 summarizes the geographical concentration of mortgages and mortgage-related securities that

are held by Freddie Mac or that are collateral for PCs and Structured Securities excluding:

‚ $3,015 million and $4,729 million of mortgage-related securities issued by Ginnie Mae that back

Structured Securities at December 31, 2004 and 2003, respectively, because these securities do

not expose Freddie Mac to meaningful amounts of credit risk;

‚ $59,715 million and $77,289 million of agency mortgage-related securities at December 31, 2004

and 2003, respectively, because these securities do not expose Freddie Mac to meaningful

amounts of credit risk;

‚ $175,163 million and $114,772 million of non-agency mortgage-related securities held in the

Retained portfolio at December 31, 2004 and 2003, respectively, because geographic information

regarding these securities is not available. With respect to these securities, Freddie Mac looks to

third party credit enhancements (e.g., bond insurance) or other credit enhancements resulting

from the securitization structure (e.g., subordination levels) supporting such securities as a

primary means of managing credit risk; and

‚ $29,830 million and $48,585 million of non-Freddie Mac mortgage-related securities and

mortgage-related securities held in its Cash and investments portfolio that are important to

Freddie Mac's Ñnancial management and the company's ability to provide liquidity and stability to

the mortgage market at December 31, 2004 and 2003, respectively. These securities are excluded

because Freddie Mac tends to hold them for a short time period and the geographic information

regarding these securities is not available. In fourth quarter 2004, Freddie Mac ceased its PC

market-making and support activities accomplished through its Securities Sales & Trading Group

business unit and its external Money Manager program, which was a component of the $48,585

million balance at December 31, 2003.

See ""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for more

information about the securities Freddie Mac holds.

Freddie Mac

219
Table 17.1 Ì Concentration of Credit Risk

December 31,

2004 2003

Amount(1) Percentage Amount(1) Percentage

(dollars in millions)

By Region(2)

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 309,344 24% $ 288,865 24%

WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 296,390 23 295,349 24

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 280,618 22 271,339 22

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220,858 18 210,570 17

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160,249 13 151,486 13

$1,267,459 100% $1,217,609 100%

By State

CaliforniaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 171,209 14% $ 175,030 14%

Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,879 6 70,970 6

Illinois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65,750 5 63,497 5

New York ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65,344 5 56,013 5

All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 889,277 70 852,099 70

$1,267,459 100% $1,217,609 100%

(1) Calculated as Total mortgage portfolio less mortgage-related securities issued by Ginnie Mae that back PCs and Structured

Securities as well as agency and non-agency mortgage-related securities held in the Retained portfolio.

(2) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH,

NJ, NY, PR, PA, RI, VI, VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY,

MS, NC, SC, TN); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).

Mortgage Lenders

A signiÑcant portion of Freddie Mac's single-family mortgage purchase volume is generated from several

key mortgage lenders that have entered into special business arrangements with Freddie Mac. These

individually negotiated arrangements characteristically involve a lender's commitment to sell a high proportion

of its conforming mortgage origination volume to Freddie Mac. During 2004, the four most signiÑcant of these

arrangements together accounted for almost 63 percent of Freddie Mac's volume. Wells Fargo Home

Mortgage, Inc. was the largest source and accounted for approximately 33 percent of the company's mortgage

purchase volume in 2004 while Chase Home Finance LLC, the second largest source, accounted for

approximately 14 percent of the company's mortgage purchase volume. Freddie Mac is exposed to the risk

that it could lose purchase volume to the extent these agreements are terminated or modiÑed without

replacement from other lenders.

Derivative Portfolio

On an ongoing basis, Freddie Mac reviews the credit fundamentals of all of its derivative counterparties to

conÑrm that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are

assigned to each counterparty based on quantitative and qualitative analysis, and are updated and monitored

on a regular basis. Additional reviews are completed when market conditions or events aÅecting an individual

counterparty occur.

Derivative Counterparties. Freddie Mac's use of derivatives exposes the company to counterparty credit

risk. Exchange-traded derivatives, such as futures contracts, do not measurably increase the company's

counterparty credit risk because changes in the value of open exchange-traded contracts are settled daily

through a Ñnancial clearinghouse established by each exchange. OTC derivatives, however, expose the

company to counterparty credit risk because transactions are executed and settled between Freddie Mac and

the counterparty. Freddie Mac's standards for entering into OTC derivative agreements for interest-rate

swaps, option-based derivatives and foreign-currency swaps include rigorous internal credit and legal reviews.

Freddie Mac's derivative counterparties carry external credit ratings among the highest available from major

rating agencies. All of these counterparties are major Ñnancial institutions and are experienced participants in

the OTC derivatives market.

Freddie Mac

220
Master Netting and Collateral Agreements. Freddie Mac uses master netting and collateral agreements

to reduce its credit risk exposure to its active OTC derivative counterparties for interest-rate swaps, optionbased derivatives and foreign-currency swaps. Master netting agreements provide for the netting of amounts

receivable and payable from an individual counterparty, which reduces Freddie Mac's exposure to a single

counterparty in the event of default. For example, if Freddie Mac has a gain position on one derivative and a

loss position on another derivative with the same counterparty, then the gain can be netted with the loss to

determine the amount of the company's net exposure to the counterparty. On a daily basis, the market value of

each counterparty's derivatives outstanding is calculated to determine the amount of the company's net credit

exposure, which is equal to derivatives in a net gain position by counterparty after giving consideration to

collateral posted. Freddie Mac's collateral agreements require most counterparties to post collateral for the

amount of the company's net exposure to them above the applicable threshold. Collateral posting thresholds

are generally tied to a counterparty's credit rating. Derivative exposures and collateral amounts are monitored

on a daily basis using both internal pricing models and dealer price quotes. Freddie Mac's derivative

counterparties typically transfer collateral within one to three business days based on the values of the related

derivatives. This time lag in posting collateral can aÅect Freddie Mac's net uncollateralized exposure to

derivative counterparties.

The collateral posted by counterparties serves to protect Freddie Mac against the risk of counterparty

credit losses. Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury

securities, agency securities or other mortgage-related securities. In the event a counterparty defaults on its

obligations under the derivatives agreement and the default is not remedied in the manner prescribed in the

agreement, Freddie Mac has the right under the agreement to direct the custodian bank to transfer the

collateral to the company or, in the case of non-cash collateral, to sell the collateral and transfer the proceeds

to the company.

Freddie Mac's uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based

derivatives and foreign-currency swaps, after applying netting agreements and collateral, was $601 million and

$796 million at December 31, 2004 and 2003, respectively. In the extremely unlikely event that all of Freddie

Mac's counterparties for these derivatives were to have defaulted simultaneously on December 31, 2004, the

maximum loss to Freddie Mac for accounting purposes would have been approximately $601 million.

Freddie Mac's exposure to counterparties for OTC forward purchase and sale commitments treated as

derivatives was $40 million and $101 million as of December 31, 2004 and 2003, respectively. Since the typical

maturity for OTC commitments is less than one year, Freddie Mac does not require master netting and

collateral agreements for the counterparties of these commitments. Therefore, Freddie Mac's exposure to its

OTC commitments counterparties is uncollateralized. Similar to counterparties for its OTC interest-rate

swaps, option-based derivatives and foreign-currency swaps, Freddie Mac monitors the credit fundamentals of

its OTC commitments counterparties on an ongoing basis to ensure that they continue to meet internal riskmanagement standards.

Freddie Mac

221
NOTE 18: MINORITY INTERESTS

The equity and net earnings attributable to the minority stockholder interests in consolidated subsidiaries

are reported in the consolidated balance sheets as Minority interests in consolidated subsidiaries and in the

consolidated statements of income as Minority interests in earnings of consolidated subsidiaries, respectively.

The majority of the balances in these accounts relate to the company's two majority-owned REITs.

In February 1997, Freddie Mac formed two majority-owned REIT subsidiaries funded through the

issuance of common stock (99.9 percent of which is held by Freddie Mac) and a total of $4.0 billion of

perpetual, step-down preferred stock issued to outside investors. The dividend rate on the step-down preferred

stock is 13.3 percent from initial issuance through 2006 (the ""initial term''). Beginning in 2007, the dividend

rate will step-down to 1.0 percent. Dividends on this preferred stock accrue in arrears. The balance of the two

step-down preferred stock issuances as recorded within Minority interests in consolidated subsidiaries on the

consolidated balance sheets totaled $1.5 billion and $1.9 billion at December 31, 2004 and 2003, respectively.

The preferred stock is redeemable by the REITs under certain circumstances described in the preferred stock

oÅering documents as a ""tax event redemption.'' Additionally, after an initial period ending December 31,

2006, the REITs may be able to retire the preferred stock under favorable Ñnancing terms in accordance with

the terms of the preferred stock. The REITs may decide to redeem the preferred stock in the future depending

on market conditions and other factors. See ""NOTE 14: INCOME TAXES'' for more information

concerning the REITs.

Freddie Mac

222
NOTE 19: EARNINGS PER COMMON SHARE

Basic earnings per common share are computed as Net income available to common stockholders divided

by the weighted average common shares outstanding (Weighted average common shares outstanding-basic)

for the period. Diluted earnings per common share are computed as Net income available to common

stockholders divided by the weighted average common shares outstanding considering the eÅect of dilutive

common equivalent shares outstanding (Weighted average common shares outstanding-diluted) for the

period. Dilutive common equivalent shares reÖect the assumed issuance of additional common shares

pursuant to certain of the company's stock-based compensation plans (see ""NOTE 11: STOCK-BASED

COMPENSATION'') that could potentially reduce or ""dilute'' earnings per share, based on the treasury

stock method.

Table 19.1 provides computations of Freddie Mac's basic and diluted earnings per common share.

Table 19.1 Ì Earnings Per Common Share Ì Basic and Diluted

Year Ended December 31,

2004 2003 2002

(dollars in millions

and shares in thousands)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $ 10,090

Preferred stock dividends and issuance costs on redeemed preferred

stock (including $0, $0 and $5 of issuance costs on redeemed

preferred stock) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210) (216) (239)

Net income available to common stockholders(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,727 $ 4,600 $ 9,851

Weighted average common shares outstanding Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 689,282 687,094 692,727

Dilutive potential common shares(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,239 1,581 2,389

Weighted average common shares outstanding Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏ 691,521 688,675 695,116

Basic earnings per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96 $ 6.69 $ 14.22

Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.94 $ 6.68 $ 14.17

(1) Net income available to common stockholders is not aÅected by dilutive potential common shares for the years ended December 31,

2004, 2003 and 2002.

(2) The eÅect of dilutive common equivalent shares outstanding includes: (a) the weighted average shares related to stock options

(including the ESPP) that have an exercise price lower than the average market price during the period; (b) the weighted average of

non-vested restricted shares; and (c) all restricted stock units. Such items are excluded from weighted average common shares

outstanding Ì basic.

Options to purchase 2.4 million, 3.4 million and 2.5 million shares of common stock were excluded from

the computation of Diluted earnings per common share at December 31, 2004, 2003 and 2002, respectively,

because the options' exercise price exceeded the average market price of the common stock for the years

ended December 31, 2004, 2003 and 2002, respectively.

Freddie Mac

223
DIRECTORS AND EXECUTIVE OFFICERS

Directors

Information on our Directors is set forth under ""Proposal 1: Election of Directors Ì Nominees for

Election'' of our Proxy Statement for our annual meeting to be held on July 15, 2005, and is incorporated

herein by reference.

Executive OÇcers

As of June 1, 2005, our executive oÇcers are as follows:

Year of

Name Age AÇliation Position

Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏ 61 2003 Chairman and Chief Executive OÇcer

Eugene M. McQuade ÏÏÏÏÏÏÏ 56 2004 President and Chief Operating OÇcer

Martin F. Baumann ÏÏÏÏÏÏÏÏÏ 57 2003 Executive Vice President, Finance and Chief Financial

OÇcer

Ralph F. Boyd, Jr. ÏÏÏÏÏÏÏÏÏÏ 48 2004 Executive Vice President, Community Relations

Patricia L. CookÏÏÏÏÏÏÏÏÏÏÏÏ 52 2004 Executive Vice President, Investments

Joseph A. Smialowski ÏÏÏÏÏÏÏ 56 2004 Executive Vice President, Operations and Technology

David A. AndrukonisÏÏÏÏÏÏÏÏ 47 1980 Senior Vice President and Chief Enterprise Risk OÇcer*

Margaret A. ColonÏÏÏÏÏÏÏÏÏÏ 47 1983 Senior Vice President and Chief Administrative OÇcer

Adrian B. CorbiereÏÏÏÏÏÏÏÏÏÏ 60 1999 Senior Vice President, Multifamily Sourcing

Joan E. Donoghue ÏÏÏÏÏÏÏÏÏÏ 48 2001 Senior Vice President, General Counsel and Corporate

Secretary

Stanley J.D. Martin ÏÏÏÏÏÏÏÏÏ 58 2004 Senior Vice President and General Auditor

Timothy J. McBride ÏÏÏÏÏÏÏÏ 46 2005 Senior Vice President, Government and Industry Relations

Hollis S. McLoughlin ÏÏÏÏÏÏÏ 54 2004 Senior Vice President and Chief of StaÅ

Robert Y. Tsien ÏÏÏÏÏÏÏÏÏÏÏÏ 52 2000 Senior Vice President, Mission Oversight and Development

Jerry Weiss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 2003 Senior Vice President and Chief Compliance OÇcer

John F. Woods ÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 2002 Senior Vice President, Corporate Controller and Principal

Accounting OÇcer

* Mr. Andrukonis announced his intention to leave Freddie Mac eÅective at the end of June 2005.

The following is a brief biographical description of each of our executive oÇcers.

Richard F. Syron was appointed Chairman and Chief Executive OÇcer in December 2003. Prior to

joining us, Mr. Syron was Executive Chairman of Thermo Electron Corporation, a position he assumed in

November 2002. He joined Thermo Electron in June 1999 as its Chief Executive OÇcer and became its

Chairman of the Board in January 2000. Prior to that, he was Chairman and Chief Executive OÇcer of the

American Stock Exchange for Ñve years, President of the Federal Reserve Bank of Boston for Ñve years and

President of the Federal Home Loan Bank of Boston for three years.

Eugene M. McQuade was appointed President and Chief Operating OÇcer eÅective September 1, 2004.

Before joining us, Mr. McQuade was President of Bank of America Corporation. He also served as President

and Chief Operating OÇcer of FleetBoston Financial Corp., which merged with Bank of America on April 1,

2004. Mr. McQuade joined Fleet in 1992 and became Chief Financial OÇcer in 1993, Vice Chairman in

1997, and President and Chief Operating OÇcer in 2002. Prior to joining Fleet, Mr. McQuade was Executive

Vice President and Controller of Manufacturers Hanover Corp.

Martin F. Baumann was appointed Executive Vice President, Finance in April 2003 and Chief Financial

OÇcer in June 2003. Prior to joining us, Mr. Baumann worked at PricewaterhouseCoopers since 1969, where

he was a partner from 1980. At PricewaterhouseCoopers, he performed a variety of functions, including

serving as the Deputy Chairman Ì World Financial Services Practice and as the Global Banking Leader. He

also served on PricewaterhouseCoopers U.S. and World Financial Services Executive Committees.

Freddie Mac

224
Ralph F. Boyd, Jr. was appointed Executive Vice President, Community Relations in February 2005.

Prior to holding his current position, he served as our Executive Vice President, General Counsel and

Corporate Secretary. Prior to joining us, Mr. Boyd was a senior partner with the law Ñrm Alston & Bird LLP

since August 2003 and was U.S. assistant attorney general and head of the Justice Department's Civil Rights

Division from July 2001 through July 2003. From 1997 to 2001, Mr. Boyd was a trial partner with Goodwin

Procter LLP, and before that, he served for six years as an Assistant U.S. Attorney in Boston. He also was an

associate at the law Ñrm of Ropes & Gray in Boston from 1987 to 1991.

Patricia L. Cook was appointed Executive Vice President, Investments, eÅective August 2, 2004. Prior to

joining us, Ms. Cook was Managing Director and Chief Investment OÇcer, Global Fixed Income at

JPMorgan Fleming Asset Management (""JP Morgan Fleming'') since May 2003. Prior to joining JP Morgan

Fleming, she was Managing Director and Chief Investment OÇcer, Fixed Income at Prudential Investment

Management. From June 1991 to July 2001, Ms. Cook was Managing Director at Fisher Francis Trees and

Watts. Prior to that, she worked in various management positions at Salomon Brothers, Inc. from January

1979 to June 1991.

Joseph A. Smialowski was named Freddie Mac's Executive Vice President of Operations and Technology

in December 2004. Before joining Freddie Mac, Mr. Smialowski was Executive Vice President at Fleet Boston

Financial from December 1998. Prior to that, he was Chief Information OÇcer at Sears, Roebuck and Co.

from September 1993. Early in his career, Mr. Smialowski held increasingly responsible management,

technology and operations positions at Dennison Manufacturing, Xerox and The Hartford.

David A. Andrukonis was appointed Senior Vice President and Chief Enterprise Risk OÇcer in

October 2003. Prior to that he served as Senior Vice President of Single-Family Capital Deployment from

September 2001 through October 2003. He also served as Senior Vice President and Chief Credit OÇcer from

August 1998 through September 2001. Prior to that, he held various positions at our company since joining us

in 1980, including Senior Vice President and General Manager of the Seller Division, Vice President of

Mortgage Finance, Manager of Product Development and Pricing and Senior Economist.

Margaret A. Colon was named Senior Vice President and Chief Administrative OÇcer in October 2003.

Prior to that, Ms. Colon served as Senior Vice President of Infrastructure Initiatives Program Management

from July 2002 to October 2003 and as Senior Vice President and Single-Family Chief Operating OÇcer from

June 2000 through June 2002. Prior to June 2000, she also has served in various other positions at our

company, including Senior Vice President Ì Servicer, Vice President of Corporate Finance Operations, Vice

President and Assistant to the President, Vice President and Multifamily Controller. Prior to joining us in

1983, Ms. Colon was a senior auditor with Deloitte Haskins and Sells.

Adrian B. Corbiere was named Senior Vice President, Multifamily Sourcing in August 1999. Before

joining Freddie Mac, Mr. Corbiere was a managing director at Allstate Insurance Corp., responsible for all

real estate, mortgage and CMBS investments. Prior to his position at Allstate, he was Senior Vice President of

Ñxed-income investments, including mortgages and private placement bonds, at New England Mutual Life

Insurance Company and held various real estate Ñnance positions at both Cigna and Phoenix Mutual

Insurance Companies.

Joan E. Donoghue was named Freddie Mac's Senior Vice President, General Counsel and Corporate

Secretary in February 2005. Ms. Donoghue had previously served as Senior Vice President and Principal

Deputy General Counsel since April 2004. She joined Freddie Mac in 2001 as Associate General Counsel and

later served as Vice President and Acting General Counsel. Prior to joining Freddie Mac, Ms. Donoghue held

positions of increasing importance with the U.S. Department of State including Deputy Legal Adviser. She

also served as deputy general counsel at the U.S. Department of the Treasury. She also served as visiting

professor at Boalt Hall School of Law, University of California at Berkeley, where she was a Council on

Foreign Relations International AÅairs Fellow. She began her legal career as an associate attorney with

Covington and Burling.

Stanley J.D. Martin was appointed Senior Vice President and General Auditor in June 2004. Immediately prior to his appointment, Mr. Martin had served as interim General Auditor since February 2004. Before

that, Mr. Martin served as Executive Vice President and then as a consultant to HSBC Bank USA from 2000

Freddie Mac

225
to April 2003. From 1998 to 2000, he was Chief Financial OÇcer and Executive Vice President of Republic

New York Corporation. Prior to that, Mr. Martin was a Partner at KPMG LLP from 1982 to 1998.

Timothy J. McBride was appointed Freddie Mac's Senior Vice President, Government and Industry

Relations in January 2005. Prior to Freddie Mac, Mr. McBride served as Vice President, External AÅairs/

Public Policy for Daimler Chrysler Corporation, where he was responsible for directing Chrysler's federal

lobbying and formulating public policy on a variety of issues. Before that, he worked at Sun Company,

Incorporated as director of communications. Mr. McBride also held key positions with the Administration of

former president George H.W. Bush where he served as Assistant to the President and Director of White

House Management and Administration. During his tenure, he also held the positions of Assistant Secretary

of Commerce for Trade Development and Special Assistant to the President. He also worked for a number of

years in the OÇce of the Vice President of the United States for George H. W. Bush.

Hollis S. McLoughlin was named Senior Vice President and Chief of StaÅ in April 2004. Since 1998,

Mr. McLoughlin has been Chief Operating OÇcer of two private equity-backed operating companies. Before

that, he was one of the founding partners of Darby Overseas, a private equity partner based in Washington,

D.C. He has also been a senior executive at Purolator Courier, the overnight delivery company and a privately

held transportation company. From 1989 through 1992, Mr. McLoughlin served as Assistant Secretary of the

Treasury under former president George H. W. Bush. He served as Chief of StaÅ to Sen. Nicholas Brady, RN.J., in 1982 and to Rep. Millicent Fenwick, R-N.J., from 1975 to 1979.

Robert Y. Tsien was appointed Senior Vice President, Mission Oversight and Development in April 2004.

Prior to that, he served as Senior Vice President, Production in the Multifamily Division from October 2003,

and as our Chief Credit OÇcer from September 2001 to October 2003. Mr. Tsien joined us as Vice President

of Multifamily Risk Management in April 2000. Prior to joining us, Mr. Tsien was director of risk

management and securitization pricing at Titanium Investment Company.

Jerry Weiss was appointed Senior Vice President and Chief Compliance OÇcer in October 2003. Prior to

joining us, Mr. Weiss worked from 1990 at Merrill Lynch Investment Managers, most recently as First Vice

President and Global Head of Compliance. From 1982 to 1990, Mr. Weiss was with a national law practice in

Washington, D.C., where he specialized in securities regulation and corporate Ñnance matters.

John F. Woods was named Senior Vice President and Principal Accounting OÇcer in October 2003 and

Corporate Controller in February 2005. Prior to that, Mr. Woods served as Senior Vice President, Control and

Accounting in Funding and Investments from April 2002 to October 2003. Prior to joining us, Mr. Woods was

a consulting partner at Arthur Andersen.

Freddie Mac

226
EXECUTIVE COMPENSATION

Information regarding executive compensation is set forth under the section titled ""Executive Compensation'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15, 2005 and is

incorporated by reference into this Information Statement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Management

Information regarding the beneÑcial ownership of our common stock by each of our directors, certain

executive oÇcers and by all directors and executive oÇcers as a group is set forth under the section titled

""Corporate Governance Ì Stock Ownership by Directors and OÇcers'' of our Proxy Statement for our annual

meeting of stockholders to be held on July 15, 2005 and is incorporated by reference into this Information

Statement.

Security Ownership of Certain BeneÑcial Owners

Information regarding the beneÑcial ownership of our common stock by each director nominee and

certain beneÑcial owners is set forth under the section titled ""Corporate Governance Ì Stock Ownership by

Directors and OÇcers'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15,

2005 and is incorporated by reference into this Information Statement.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is set forth under the section titled

""Proposal 1: Election of Directors Ì Transactions with Institutions Related to Directors'' of our Proxy

Statement for our annual meeting of stockholders to be held on July 15, 2005 and is incorporated by reference

into this Information Statement.

INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS,

OFFICERS AND EMPLOYEES

Information concerning indemniÑcation and reimbursement arrangements is set forth under the section

titled ""Proposal 1: Election of Directors Ì IndemniÑcation and Other Reimbursements of Directors, OÇcers

and Employees'' of our Proxy Statement for our annual meeting of stockholders to be held on July 15, 2005

and is incorporated by reference into this Information Statement.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services is set forth under the section titled

""Proposal 2: RatiÑcation of Appointment of Independent Auditors'' of our Proxy Statement for our annual

meeting of stockholders to be held on July 15, 2005 and is incorporated by reference into this Information

Statement.

Freddie Mac

227
CERTIFICATION*

I, Richard F. Syron, certify that:

1. I have reviewed this Information Statement of Freddie Mac;

2. Based on my knowledge, this Information Statement does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect to the period covered

by this Information Statement; and

3. Based on my knowledge, the consolidated Ñnancial statements, and other Ñnancial information

included in this Information Statement, fairly present in all material respects the Ñnancial condition,

results of operations and cash Öows of Freddie Mac as of, and for, the periods presented in this

Information Statement.

Date: June 14, 2005

/s/ RICHARD F. SYRON

Richard F. Syron

Chairman and Chief Executive OÇcer

CERTIFICATION*

I, Martin F. Baumann, certify that:

1. I have reviewed this Information Statement of Freddie Mac;

2. Based on my knowledge, this Information Statement does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect to the period covered

by this Information Statement; and

3. Based on my knowledge, the consolidated Ñnancial statements, and other Ñnancial information

included in this Information Statement, fairly present in all material respects the Ñnancial condition,

results of operations and cash Öows of Freddie Mac as of, and for, the periods presented in this

Information Statement.

Date: June 14, 2005

/s/ MARTIN F. BAUMANN

Martin F. Baumann

Executive Vice President and Chief Financial OÇcer

* These certiÑcations do not address our internal control over Ñnancial reporting or disclosure controls and procedures because a

comprehensive evaluation of the eÅectiveness of these controls and procedures was not performed as of December 31, 2004.

Freddie Mac

228
RATIO OF EARNINGS TO FIXED CHARGES

Year Ended December 31,

2004 2003 2002 2001 2000

(dollars in millions)

Income before cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $10,090 $ 3,115 $ 3,666

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 790 2,202 4,713 1,339 1,504

Minority interests in earnings of consolidated

subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 157 184 208 231

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,566 26,509 26,876 27,577 25,483

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5 5 5 5

Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì 1 1 1

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,429 $33,689 $41,869 $32,245 $30,890

Fixed charges:

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,566 $26,509 $26,876 $27,577 $25,483

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5 5 5 5

Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì 1 1 1

Total Ñxed charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,573 $26,514 $26,882 $27,583 $25,489

Ratio of earnings to Ñxed charges(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.15 1.27 1.56 1.17 1.21

(1) Subsequent to the issuance of our Information Statement dated September 24, 2004, we revised the capitalized interest to conform to

2004 presentation for 2003, 2002, 2001 and 2000. This resulted in a $2 million, $2 million and $1 million decrease in capitalized

interest for 2003, 2002 and 2001, respectively.

(2) Ratio of earnings to Ñxed charges is computed by dividing Earnings, as adjusted by Total Ñxed charges.

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND 

PREFERRED STOCK DIVIDENDS

Year Ended December 31,

2004 2003 2002 2001 2000

(dollars in millions)

Income before cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,937 $ 4,816 $10,090 $ 3,115 $ 3,666

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 790 2,202 4,713 1,339 1,504

Minority interests in earnings of consolidated

subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 129 157 184 208 231

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,566 26,509 26,876 27,577 25,483

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5 5 5 5

Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì 1 1 1

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,429 $33,689 $41,869 $32,245 $30,890

Fixed charges:

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,566 $26,509 $26,876 $27,577 $25,483

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5 5 5 5

Capitalized interest(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì 1 1 1

Preferred stock dividends(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266 315 351 310 252

Total Ñxed charges including preferred stock dividends $26,839 $26,829 $27,233 $27,893 $25,741

Ratio of earnings to combined Ñxed charges and

preferred stock dividends(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.13 1.26 1.54 1.16 1.20

(1) Subsequent to the issuance of our Information Statement dated September 24, 2004, we revised the capitalized interest to conform to

2004 presentation for 2003, 2002, 2001 and 2000. This resulted in a $2 million, $2 million and $1 million decrease in capitalized

interest for 2003, 2002 and 2001, respectively.

(2) Preferred stock dividends represent pre-tax earnings required to cover any preferred stock dividend requirements using our eÅective

tax rate for the relevant periods.

(3) Ratio of earnings to combined Ñxed charges and preferred stock dividends is computed by dividing Earnings, as adjusted by Total

Ñxed charges including preferred stock dividends.

Freddie Mac

229
ADDITIONAL FINANCIAL INFORMATION CORPORATE HEADQUARTERS

8200 Jones Branch Drive For more information about Freddie Mac stock contact: McLean, Virginia 22102-3110

Freddie Mac (703) 903-2000

Mailstop D4O NEW YORK CITY OFFICE 1551 Park Run Drive 575 Lexington Avenue, Suite 1800 McLean, Virginia 22102-3110 New York, New York 10022-6102 Investor Relations: (571) 382-4732 (212) 418-8900 Toll Free: (800) FREDDIE

On the Internet: http://www.FreddieMac.com/investors NORTH CENTRAL REGION

333 West Wacker Drive, Suite 2500

ANNUAL MEETING Chicago, Illinois 60606-1287

(312) 407-7400 The annual meeting of Freddie Mac's stockholders will be

held: NORTHEAST REGION

1410 Spring Hill Road, Suite 600 July 15, 2005 Post OÇce Box 50122 9:00 a.m. eastern time

McLean, Virginia 22102-8922 8000 Jones Branch Drive

McLean, Virginia 22102 (703) 902-7700

SOUTHEAST REGION Proxy material will be mailed to stockholders of record by North Tower, Suite 200 the company's transfer agent in accordance with Freddie

Mac's bylaws and New York Stock Exchange 2300 Windy Ridge Parkway SE

Atlanta, Georgia 30339-5665 requirements. (770) 857-8800

DIVIDEND PAYMENT SOUTHWEST REGION

Approved by Freddie Mac's Board of Directors, dividends 5000 Plano Parkway

on the company's common stock and non-cumulative Carrollton, Texas 75010-4902

preferred stock in 2004 and the Ñrst Ñve months of 2005 (972) 395-4000

were paid on: WESTERN REGION

March 31, 2004 21700 Oxnard Street, Suite 1900

June 30, 2004 Woodland Hills, California 91367-3642

September 30, 2004 (818) 710-3000

December 31, 2004

March 31, 2005

Subject to approval by Freddie Mac's Board of Directors,

dividends on the company's common stock and noncumulative preferred stock in the last seven months of 2005

are expected to be paid on:

June 30, 2005

September 30, 2005

December 31, 2005

Freddie Mac

230
INDEX OF ACRONYMS

We are providing this index of acronyms used in this Information Statement for the convenience of the

reader. All of the acronyms listed below are deÑned at their Ñrst use in this document.

ABO Accumulated beneÑt obligation

AICPA American Institute of CertiÑed Public Accountants

AOCI Accumulated other comprehensive income (loss), net of taxes

APB Accounting Principles Board

ARM Adjustable-Rate Mortgage

CMT Constant Maturity Treasury

CON Statements of Financial Accounting Concepts

DOL Department of Labor

EITF Emerging Issues Task Force

ERISA Employee Retirement Income Security Act

ESPP Employee Stock Purchase Plan

Fannie Mae Federal National Mortgage Association

FASB Financial Accounting Standards Board

FHA Federal Housing Administration

FICO Credit scores initially developed by Fair, Issac and Co., Inc.

FIN Financial Accounting Standards Board Interpretation

Freddie SUBS Subordinated debt securities issued by Freddie Mac

FSP Financial Accounting Standards Board StaÅ Position

GA Guarantee Asset

GAAP Generally Accepted Accounting Principles

Ginnie Mae Government National Mortgage Association

GO Guarantee Obligation

GSE Government-Sponsored Enterprise

GSE ACT The Federal Housing Enterprises Financial Safety and Soundness Act of 1992

HUD Department of Housing and Urban Development

IRC Internal Revenue Code

IRR Internal Rates of Return

IRS Internal Revenue Service

LIBOR London Interbank OÅered Rate

LIHTC Low-Income Housing Tax Credit

LTV Loan-to-Value

MD&A Management's Discussion and Analysis of Financial Condition and Results of

Operations

NPV Net Present Value

NYSE New York Stock Exchange

OFHEO OÇce of Federal Housing Enterprise Oversight

OTC Over-the-Counter

PBO Projected beneÑt obligation

PC Mortgage Participation CertiÑcate

PMI Primary Mortgage Insurance

PMVS Portfolio Market Value Sensitivity

PMVS-L Portfolio Market Value Sensitivity Level

PMVS-YC Portfolio Market Value Sensitivity Yield Curve

PwC PricewaterhouseCoopers LLP

REIT Real Estate Investment Trust

REMIC Real Estate Mortgage Investment Conduit

REO Real Estate Owned

RHS Rural Housing Service

RSU Restricted Stock Units

QFA Quarterly Funding Announcement

Freddie Mac

231
QSPE Qualifying Special Purpose Entities

S&P Standard & Poor's

SAR Stock Appreciation Rights

SEC Securities and Exchange Commission

SFAS Statement of Financial Accounting Standards

SOP The AICPA's Statement of Position

TBA To Be Announced

TDR Troubled Debt Restructuring

U.S. United States

VA Department of Veterans AÅairs

VIE Variable Interest Entity

Freddie Mac

232