INFORMATION STATEMENT

AND

ANNUAL REPORT TO STOCKHOLDERS

For the Ñscal year ended December 31, 2005

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 28, 2006
TABLE OF CONTENTS

Page

BUSINESSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1

REGULATION AND SUPERVISION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6

RISK FACTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

FORWARD-LOOKING STATEMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

SELECTED FINANCIAL DATAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

EXECUTIVE SUMMARY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

CONSOLIDATED RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

CONSOLIDATED BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36

CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45

LIQUIDITY AND CAPITAL RESOURCES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48

RISK MANAGEMENT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53

Operational Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53

Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56

Credit Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63

OFF-BALANCE SHEET ARRANGEMENTSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77

CRITICAL ACCOUNTING POLICIES AND ESTIMATES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78

PORTFOLIO BALANCES AND ACTIVITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84

QUARTERLY SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89

RISK MANAGEMENT AND DISCLOSURE COMMITMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148

CONTROLS AND PROCEDURES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148

DIRECTORS AND EXECUTIVE OFFICERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148

BOARD OF DIRECTORS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149

EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150

PRINCIPAL ACCOUNTING FEES AND SERVICES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150

CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151

RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES

AND PREFERRED STOCK DIVIDENDSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152

INDEX OF ACRONYMS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154

i Freddie Mac
This Information Statement and Annual Report includes forward-looking statements, which may include expectations

and objectives for our operating results, Ñnancial condition, business, and trends and other matters that could aÅect our

business. You should not unduly rely on our forward-looking statements. Actual results might diÅer signiÑcantly from our

forecasts and expectations due to several factors that involve risks and uncertainties, including those described in

""BUSINESS,'' ""RISK FACTORS'' and ""FORWARD-LOOKING STATEMENTS.'' These forward-looking 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.

BUSINESS

Overview

Freddie Mac is a stockholder-owned company chartered by Congress in 1970 to stabilize the nation's residential

mortgage markets and expand opportunities for homeownership and aÅordable rental housing. We are one of the largest

purchasers of mortgage loans in the U.S. We bring innovation and eÇciency to the mortgage lending process.

Our mission is to provide liquidity, stability and aÅordability to the U.S. housing market. We fulÑll our mission by

purchasing residential mortgages and mortgage-related securities in the secondary mortgage market. We purchase mortgages

that meet our underwriting and product standards, then bundle them into mortgage-related securities that can be sold to

investors. We can use the proceeds to purchase additional mortgages from primary market mortgage lenders, thus

providing them with a continuous Öow of funds. We also purchase mortgage loans and mortgage-related securities for our

investment portfolio, which we Ñnance primarily by issuing a variety of debt instruments in the capital markets.

Though we are chartered by Congress, our business is funded completely with private capital. We are responsible for

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

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

obligations.

Our Charter and Mission

The Federal Home Loan Mortgage Corporation Act, which we refer to as our charter, forms the framework for our

business activities, shapes the products we bring to market, and drives the services we provide to the nation's residential

housing and mortgage industries. Our charter also prescribes the terms and principal amounts of mortgage loans that we

are permitted to purchase, as described in ""Business Activities Ì Types of Mortgages We Purchase.'' 

Our statutory purposes, as stated in our charter, 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 activities relating to

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

than the return earned 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.

To facilitate our statutory purposes, our charter provides us with special attributes including:

‚ exemption from the registration and reporting requirements of the Securities Act and the Exchange Act (we are

subject to the general antifraud provisions of the federal securities laws and have committed to the voluntary

registration of our common stock with the Securities and Exchange Commission under the Exchange Act);

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

‚ discretionary authority of the Secretary of the Treasury to purchase up to $2.25 billion of our securities; and

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

Our activities in the secondary mortgage market beneÑt consumers by providing lenders a steady Öow of low-cost

mortgage funding. This Öow of funds helps moderate cyclical swings in the housing market, equalizes the Öow of mortgage

funds regionally throughout the U.S. and provides for the availability of mortgage funds in a variety of economic conditions.

In addition, the supply of cash made available to lenders through this process drives down mortgage rates on loans within

the dollar limits set under our charter. These lower rates help make homeownership aÅordable for more families and

individuals than would be possible without our participation in the secondary mortgage market.

1 Freddie Mac
Residential Mortgage Debt Market

We compete in the large and growing U.S. residential mortgage debt market. This market consists of a primary

mortgage market that links homebuyers and lenders, and a secondary mortgage market that links lenders and investors. At

December 31, 2005, our Total mortgage portfolio was $1.7 trillion, while the total U.S. residential mortgage debt

outstanding was estimated to be approximately $9.9 trillion.

The residential mortgage market has grown substantially in recent years, as low interest rates and a strong housing

market have resulted in record levels of mortgage loan originations, including reÑnancings of existing residential mortgage

debt. As interest rates have increased, reÑnancings have declined. Throughout 2005, short-term interest rates increased

signiÑcantly as a result of the actions of the Board of Governors of the Federal Reserve System, or the Federal Reserve,

which regulates the supply of money and credit in the U.S.; however, the Federal Reserve's actions had less of an impact on

long-term interest rates. Consequently, the slope of the ""yield curve'' Ì or the spread between short-term and long-term

interest rates Ì continued to Öatten throughout the year. Despite the rise in interest rates, mortgage rates remained low by

historical standards and continued to contribute to demand in the residential mortgage market.

As indicated in Table 1, house prices appreciated nationwide at a rate of approximately 13 percent in 2005 with some

regional variation. However, this appreciation rate is expected to moderate. Total residential mortgage debt outstanding in

the U.S. grew at an estimated annual rate of 14 percent in both 2005 and 2004. We expect the amount of total residential

mortgage debt outstanding will continue to rise in 2006, though at a slower rate than in the past few years.

Table 1 Ì Mortgage Market Indicators

Year-Ended December 31,

2005 2004 2003

Home sale units (in thousands)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,462 7,162 6,529

House price appreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13% 12% 8%

Single-family mortgage originations (in billions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,828 $2,911 $3,860

ARM share of single-family mortgage originations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31% 34% 19%

ReÑnancing share of single-family mortgage originations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44% 46% 65%

U.S. residential mortgage debt outstanding (in billions)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,851 $8,642 $7,581

(1) Includes sales of new and existing detached single-family homes in the U.S. and excludes condos/co-ops. Source: National Association of Realtors

news release dated May 25, 2006 (sales of existing homes) and U.S. Census Bureau news release dated May 24, 2006 (sales of new homes).

(2) Debt outstanding at year-end, not seasonally-adjusted. Source: Federal Reserve Flow of Funds Accounts of the United States dated June 8, 2006.

Growth in the U.S. residential mortgage debt market is aÅected by several factors, including changes in interest rates,

employment rates in various regions of the country, home ownership rates, house price appreciation, and borrower

preferences concerning the portion of his or her home's value to Ñnance with mortgage debt. The amount of residential

mortgage debt available for us to purchase and the mix of available loan products are also aÅected by several factors,

including the volume of single-family mortgages within the loan limits imposed under our charter and the purchase and

securitization activity of other Ñnancial institutions. See ""RISK FACTORS.''

Primary Mortgage Market Ì Our Customers

Our customers are predominantly lenders in the primary mortgage market that originate mortgages for homebuyers.

These lenders include mortgage banking companies, commercial banks, savings banks, community banks, credit unions, state

and local housing Ñnance agencies, and savings and loan associations. A lender that originates a mortgage can either hold

the mortgage in its own portfolio, securitize the mortgage or sell the mortgage to a secondary mortgage market investor, such

as Freddie Mac.

We buy a signiÑcant portion of our mortgages from several large mortgage lenders. During 2005, three mortgage lenders

each accounted for 10 percent or more of our mortgage purchase volume and in the aggregate they accounted for

approximately 47 percent of this volume. These three lenders are among the largest mortgage loan originators in the United

States. We have contracts with a number of mortgage lenders, including some large lenders, that include a commitment by

the lender to sell us a minimum percentage or dollar amount of its mortgage origination volume. These contracts typically

last for one year. If a mortgage lender fails to meet its contractual commitment, we have a variety of contractual remedies,

including the right to assess certain fees. As the mortgage industry has been consolidating, we, as well as our competitors,

have been seeking business from a decreasing number of key lenders. See ""RISK FACTORS Ì Competitive and Market

Risks.'' We are working to diversify our customer base and thus reduce the risk of losing a key customer.

Secondary Mortgage Market

We participate in the secondary mortgage market generally by buying whole loans (i.e., mortgage loans that have not

been securitized) and mortgage-related securities for our Retained portfolio and by issuing guaranteed mortgage-related

securities. We do not lend money directly to homebuyers. Our principal competitors are the Federal National Mortgage

Association, or Fannie Mae, a similarly chartered government-sponsored enterprise, or GSE, the Federal Home Loan Banks,

2 Freddie Mac
and other Ñnancial institutions that retain or securitize mortgages, such as banks, dealers and thrift institutions. We compete

primarily on the basis of price, products, structure and service.

The dramatic increases in housing prices over the last few years have resulted in the origination of a greater proportion

of alternative mortgage products, including initial interest-only loans and option adjustable-rate mortgage loans, or Option

ARMs. We have historically purchased limited amounts of these alternative products through our securitization programs.

However, recently we have increased our purchases of these products consistent with the increase in their prevalence in the

market. We are continuing to explore ways in which we can become more involved with these products and we expect our

participation in these products to grow over the coming years. See ""MANAGEMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, or MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies.'' In addition, we believe

the recent rise in short-term interest rates relative to long-term interest rates will increase the proportion of 30-year Ñxedrate mortgages originated.

Business Activities

We generate income primarily through two business activities Ì portfolio investment activities and credit guarantee

activities Ì operating in one business segment. For a summary and description of our Ñnancial performance and Ñnancial

condition, see ""MD&A'' and ""CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA''

and the accompanying notes to our consolidated Ñnancial statements. At December 31, 2005, we had total assets of

$806.2 billion, and total stockholders' equity of $27.2 billion, and for the year ended December 31, 2005, we reported net

income of $2.1 billion. At June 1, 2006, we had 4,905 full-time and 133 part-time employees. Our principal oÇces are

located in McLean, Virginia.

Types of Mortgages We Purchase

Our charter establishes general parameters for the terms and principal amounts of the mortgages we may purchase, as

described below. We also purchase mortgage-related securities that are backed by single-family or multifamily mortgages.

Within our charter parameters, the residential mortgage loans we purchase or that underlie mortgage-related securities we

purchase generally fall into one of two categories:

‚ Single-Family Mortgages. Single-family mortgages are secured by one- to four-family properties. The types of

single-family mortgages we purchase include 30-year, 20-year, 15-year and 10-year Ñxed-rate mortgages, interestonly mortgages, ARMs, and balloon/reset mortgages.

‚ Multifamily Mortgages. Multifamily mortgages are secured by structures with Ñve or more residential rental units.

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

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

Conforming Loan Limits. Our charter places a dollar amount cap, called the ""conforming loan limit,'' on the size of

the original principal balance of single-family mortgage loans we purchase. This limit is established annually pursuant to a

methodology prescribed by our safety and soundness regulator, the OÇce of Federal Housing Enterprise Oversight, or

OFHEO, based on year-to-year changes in the national average price of a one-family residence, as surveyed by the Federal

Housing Finance Board each October. For 2006, 2005 and 2004, the conforming loan limits for a one-family residence were

set at $417,000, $359,650 and $333,700, respectively. Higher limits apply to two- to four-family residences. The

conforming loan limits are also 50 percent higher for mortgages secured by properties in Alaska, Guam, Hawaii and the U.S.

Virgin Islands. No comparable limits apply to our purchases of multifamily mortgages.

Loan-to-Value Ratios and Mortgage Insurance. Under our charter, mortgages that are not guaranteed or insured by

any agency or instrumentality of the U.S. government are referred to as ""conventional mortgages.'' Our charter requires that

we have additional credit protection if the unpaid principal balance of a conventional single-family mortgage that we

purchase exceeds 80 percent of the value of the property securing the mortgage. See ""MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risks Ì Mortgage Credit Risk Management Strategies Ì Credit Enhancements'' for more information regarding the credit enhancements and other credit protections we obtain.

Loan Quality. Under our charter, our mortgage purchases are limited, so far as practicable, to mortgages we deem to

be of a quality, type and class that generally meet the purchase standards of private institutional mortgage investors.

To manage credit risks with respect to our mortgage purchases, we have developed internal credit policies and appraisal,

underwriting and other purchase policies and guidelines set forth in our Single-family Seller/Servicer Guide and our

Multifamily Seller/Servicer Guide. We design 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 in

an eÅort to ensure their eÅectiveness and to address the needs of the changing marketplace Ì including the needs of

minorities, low- and moderate-income borrowers and other borrowers who are underserved by the traditional housing Ñnance

3 Freddie Mac
system. See ""MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risks Ì Mortgage Credit Risk

Management Strategies Ì Underwriting Requirements and Quality Control Standards'' for additional information.

Investment and Funding Activities

We purchase mortgage loans and mortgage-related securities and hold them in our Retained portfolio for investment

purposes. We invest in mortgage-related securities issued by GSEs or government agencies, referred to as agency securities.

We also invest in non-agency mortgage-related securities. Our portfolio purchases replenish the capital available for

mortgage lending. We face competition from other Ñnancial institutions that are aggressively buying mortgage-related

securities backed by both GSE and non-agency issuers.

We manage our Retained portfolio through a strategy of long-term capital deployment. We apply our expertise in

mortgage markets and mortgage assets to support attractive and timely asset selection while managing our interest-rate risk.

We issue short-, medium- and long-term debt securities, subordinated debt securities and equity securities to Ñnance

purchases of mortgages and mortgage-related securities and other business activities. Our debt funding program is designed

to oÅer liquid securities to the global capital markets in a transparent and predictable manner. By diversifying our investor

base and the types of debt securities we oÅer, we believe we enhance our ability to maintain continuous access to the debt

markets under a variety of conditions. We manage our debt funding costs by issuing debt of various maturities that is either

callable (i.e., redeemable at our option at one or more times before its scheduled maturity) or non-callable. Recently, our

funding costs compared to the London Interbank OÅered Rate, or LIBOR, have improved. Our funding mix also helps us

manage our interest-rate risk by closely matching the interest obligations on our debt with the expected cash inÖows from

our mortgage-related investments. To further manage interest-rate risks, we use a variety of derivatives. We also use

Structured Securities, described below, to restructure cash Öows from mortgage-related securities, retaining a portion of

these restructured cash Öows. See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''

for more information.

Because of our GSE status and the special attributes granted to us under our charter, noted above in ""Our Charter and

Mission,'' our debt securities and those of other GSE issuers trade in the so-called ""agency sector'' of the debt markets. This

highly liquid market segment exhibits its own yield curve reÖecting our ability to borrow at lower rates than many other

corporate debt issuers. As a result, we mainly compete for funds in the debt issuance markets with Fannie Mae and the

Federal Home Loan Banks, who issue debt securities of comparable quality and ratings. The demand for, and liquidity of,

our debt securities, and those of other GSEs, also beneÑt from their status as permitted investments for banks, investment

companies and other Ñnancial institutions under their regulatory framework. Other investors also Ñnance portfolio

investments in mortgage assets. Competition for funding with these entities can vary with economic, Ñnancial market and

regulatory environments.

For additional information about our debt securities, see ""MD&A Ì LIQUIDITY AND CAPITAL RESOURCES Ì Liquidity Ì Debt Securities.''

Credit Guarantee Activities

We guarantee the payment of principal and interest on mortgage-related securities in exchange for a fee, which we refer

to as a guarantee fee. The types of mortgage-related securities we guarantee include the following:

‚ mortgage Participation CertiÑcates, or PCs, we issue;

‚ single-class and multi-class Structured Securities we issue; and

‚ securities related to tax-exempt multifamily housing revenue bonds.

We have recently increased our share of the GSE securitization market by improving our customer service, diversifying

our customer base, tailoring securities to a broader group of global investors, expanding the types of mortgages that we

guarantee and introducing program enhancements, new forms of Structured Securities, such as the Reference REMICSM

securities, and through other initiatives.

We support our credit guarantee business volume by adjusting our guarantee fee or other transaction fees. For example,

if the price performance of, and demand for, our PCs is not comparable to Fannie Mae's securities on future mortgage

deliveries by sellers, we may use market-adjusted pricing where we provide guarantee fee or other transaction fee price

adjustments to partially oÅset weaknesses in prevailing security prices. We believe these price-adjustment features 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.

Guarantees of PCs. We issue single-class mortgage-related securities that represent undivided interests in pools of

mortgages we have purchased. We refer to these mortgage-related securities as PCs. We guarantee the payment of principal

and interest on all of our PCs. We issue most of our PCs in transactions in which our customers sell us mortgage loans in

4 Freddie Mac
exchange for PCs. Investors in PCs may include the lenders that sold us the underlying mortgages, as well as pension funds,

insurance companies, securities dealers and other Ñxed-income investors. Investors may choose to hold these PCs in their

portfolios or sell them to others. Our guarantee increases the marketability of our PCs, providing additional liquidity to the

mortgage market.

Guarantees of Structured Securities. We also issue securities representing beneÑcial interests in pools of PCs and

certain other types of mortgage-related assets. We refer to these mortgage-related securities as Structured Securities. We

guarantee the payment of principal and interest on most of the Structured Securities we issue. By issuing Structured

Securities, we seek to provide liquidity to alternative segments of the mortgage market. We issue many of our Structured

Securities in transactions in which securities dealers or investors sell us the mortgage-related assets underlying the

Structured Securities in exchange for the Structured Securities. We also sell Structured Securities to securities dealers or

investors in exchange for cash.

We issue single-class Structured Securities and multi-class Structured Securities. Single-class Structured Securities

pass through the cash Öows on the underlying mortgage-related assets. Multi-class Structured Securities divide the cash

Öows of the underlying mortgage-related assets into two or more classes that meet the investment criteria and portfolio needs

of diÅerent investors. Our principal multi-class Structured Securities qualify for tax treatment as Real Estate Mortgage

Investment Conduits, or REMICs. For purposes of this Information Statement, multi-class Structured Securities include

Structured Securities backed by non-agency mortgage-related securities.

Guarantees Related to Tax-Exempt Multifamily Housing Revenue Bonds. We guarantee 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. In addition, we guarantee the payment of principal and interest related to low- and moderate-income multifamily

mortgage loans underlying tax-exempt multifamily housing revenue bonds.

PC and Structured Securities Support Activities. We support the liquidity and depth of the market for PCs through a

variety of activities, including educating dealers and investors about the merits of trading and investing in PCs, and

introducing new mortgage-related securities products and initiatives. We support the price performance of our PCs through

a variety of strategies, including the issuance of Structured Securities and the purchase and sale by our Retained portfolio of

PCs and other agency securities, including Fannie Mae securities. While some purchases of PCs may result in a return on

equity substantially below our normal thresholds, this strategy is not expected to have a material eÅect on the long-term

value of the company. Depending upon market conditions, including the relative prices, 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. 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.

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

ceased our PC market making and support activities accomplished through our Securities Sales & Trading Group, or

SS&TG, and our external Money Manager program. For more information, see ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì Net Interest Income.''

The To Be Announced Market. In connection with our credit guarantee activities, we issue PCs that represent pools of

mortgages with similar characteristics. Because these PCs are homogeneous and are issued in high volume, they are highly

liquid and trade with similar securities on a ""generic'' basis, also referred to as trading in the To Be Announced, or TBA,

market. A TBA trade in Freddie Mac securities 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 thus the speciÑc

characteristics of the mortgages underlying those PCs, are not known (i.e., ""announced'') at the time of the trade, but only

shortly before the trade is settled. During 2005, we issued approximately $282.0 billion of PCs backed by single-family

mortgage loans that were eligible to be delivered to settle TBA trades, representing approximately 71 percent of our total

guaranteed PC and Structured Security issuances. 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.

Available Information

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

website at www.FreddieMac.com. (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 (the Audit; Finance and Capital Deployment; Mission and Sourcing; Governance, Nominating and

5 Freddie Mac
Risk Oversight; and Compensation and Human Resources Committees) are also available on our website. Printed copies of

these documents may be obtained upon request from our Investor Relations department.

REGULATION AND SUPERVISION

Department of Housing and Urban Development

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

including power over new programs, aÅordable housing goals and fair lending.

Housing Goals

We are subject to aÅordable housing goals set by HUD. The goals, which are set as a percentage of the total number of

dwelling units underlying our total mortgage purchases, have risen steadily since they became permanent in 1995. The goals

are intended to expand housing opportunities for low- and moderate-income families, low-income families living in lowincome areas and very low-income families, and families living in HUD-deÑned underserved areas. The goal relating to lowincome families living in low-income areas and very low-income families is referred to as the ""special aÅordable'' housing

goal. This special aÅordable housing goal also includes a multifamily subgoal that sets an annual minimum dollar volume

of qualifying multifamily mortgage purchases.

EÅective January 1, 2005, HUD:

‚ established new and increasing aÅordable housing goal levels for the years 2005 through 2008;

‚ established three new subgoals for mortgages that count towards the goals and that Ñnance purchases of single-family,

owner-occupied properties located in metropolitan areas;

‚ increased the multifamily special aÅordable volume target to $3.92 billion, based on HUD's established formula; and

‚ required the certiÑcation of information provided in Freddie Mac's Annual Mortgage Report and Annual Housing

Activities Report submitted to HUD.

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 special aÅordable volume target, as summarized in Table 2 below.

Table 2 Ì Housing Goals and Home Purchase Subgoals for 2005 through 2008(1)

Housing Goals

2008 2007 2006 2005

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

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 38 38 37

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 25 23 22

Multifamily special aÅordable volume target (dollars in billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3.92 $3.92 $3.92 $3.92

Home Purchase Subgoals(2)

2008 2007 2006 2005

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

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 33 33 32

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 18 17 17

(1) An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal percentages will be determined

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

(2) These home purchase subgoals are expressed as percentages of the total number of mortgages we purchased that Ñnance the purchase of single-family,

owner-occupied properties located in metropolitan areas.

Meeting these goals and subgoals in future years will be challenging and there can be no assurance that we will do so.

See ""RISK FACTORS Ì Legal and Regulatory Risks.'' However, we view the purchase of mortgage loans beneÑting lowand moderate-income families and neighborhoods as a principal part of our mission and business, and we are committed to

fulÑlling the needs of these borrowers and markets.

We have reported to HUD that we achieved each of the aÅordable housing goals and subgoals as applicable to 2005,

2004 and 2003. HUD has determined that we met the goals for 2004 and 2003, and is evaluating our performance with

6 Freddie Mac
respect to the goals and subgoals for 2005. Our performance with respect to the goals and subgoals, as reported to HUD, is

set forth in Table 3 below.

Table 3 Ì Housing Goals and Home Purchase Subgoals and Reported Results(1)

Housing Goals and Reported Results

Year Ended December 31,

2005 2004 2003

Goal Result Goal Result(2) Goal Result(2)

Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52% 54.1% 50% 51.6% 50% 51.2%

Underserved areas goalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 42.2 31 32.3 31 32.7

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 24.5 20 22.7 20 21.4

Multifamily special aÅordable volume target (dollars in billions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3.92 $11.41 $2.11 $7.77 $2.11 $8.79

Home Purchase Subgoals and Reported Results

Year Ended

December 31, 2005

Subgoal Result

Low- and moderate-income subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45% 46.9%

Underserved areas subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 35.4

Special aÅordable subgoal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 17.8

(1) An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal 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 or subgoals.

(2) The 2004 and 2003 results reÖected in this table have been revised from the numbers reÖected in our Information Statement dated June 14, 2005 to

reÖect adjustments and corrections to the information we originally reported to HUD for those years.

We are engaged in ongoing discussions with HUD regarding interpretive issues relating to the purchase and counting of

mortgages for purposes of housing goals performance for 2005. If the Secretary of HUD were to Ñnd that we failed, or that

there was a substantial probability that we would fail, to meet a housing goal and that achievement of the housing goal was

feasible, the Secretary could require us to submit a housing plan. The housing plan would describe the actions we would take

to achieve the goal in the future. HUD also has the authority to take enforcement actions against us, including issuing a

cease and desist order or assessing civil money penalties, if we: (a) fail to submit a required housing plan or fail to make a

good faith eÅort to comply with a plan approved by HUD; or (b) fail to submit certain data relating to our mortgage

purchases, information or reports required by law.

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, prohibits discriminatory practices in our mortgage

purchase activities, requires us to submit data to HUD to assist it in its fair lending investigations of primary market lenders,

and requires us to undertake remedial actions against lenders found to have engaged in discriminatory lending practices. In

addition, HUD periodically reviews and comments on our underwriting and appraisal guidelines for consistency with the Fair

Housing Act and the GSE Act.

Predatory Lending

A core component of our mission is to facilitate the Ñnancing of aÅordable housing for low- and moderate-income

families. Predatory lending is in direct opposition to our mission, our goals and our practices. Since 2000, we have taken a

number of voluntary steps to combat predatory lending and support responsible lending. We have instituted anti-predatory

lending policies intended to prevent the purchase or assignment of mortgage loans with unacceptable terms or conditions or

resulting from unacceptable practices. In accordance with these policies, we will not 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

‚ subprime mortgages originated on or after August 1, 2004 with mandatory arbitration clauses.

In addition to the purchase policies we have instituted, we promote consumer education and Ñnancial literacy eÅorts to help

borrowers avoid abusive lending practices and we provide competitive mortgage products to reputable mortgage originators

so that borrowers have a greater choice of Ñnancing options.

We also require our servicers to report all borrower credit information, including monthly mortgage payments. Several

states have enacted laws aimed at curbing predatory lending practices, generally with regard to loans exceeding thresholds

based on annual percentage rates or Ñnancing costs. These loans are typically referred to as ""high-cost home loans.'' The

high-cost home loan thresholds trigger state law liabilities for subsequent purchasers or assignees of such loans that may be

7 Freddie Mac
broader than liabilities imposed upon such purchasers or assignees under the Home Ownership and Equity Protection Act.

Currently, we do not purchase high-cost home loans in 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.

New Program Approval

We are required under our charter and the GSE Act to 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 have been approved by HUD or that were approved or engaged in before the

date the GSE Act was enacted; or that represents an expansion of programs above limits expressly contained in any prior

approval regarding the dollar volume or number of mortgages or securities involved. HUD must approve any new program

unless the Secretary determines that the new program is not authorized under our charter or that the program is not in the

public interest. Recently, HUD announced that it will soon initiate a review of certain of our investments and other assets

and liabilities to ensure conformity with our charter and investment guidelines.

OÇce of Federal Housing Enterprise Oversight

OFHEO is the safety and soundness regulator for Freddie Mac and Fannie Mae. The GSE Act established OFHEO as

a separate oÇce within HUD, substantially independent of the HUD Secretary. OFHEO is headed by a Director who is

appointed by the President. The OFHEO Director is responsible for ensuring that Freddie Mac and Fannie Mae are

adequately capitalized and operating safely in accordance with the GSE Act.

OFHEO's authority with regard to Freddie Mac and Fannie Mae includes authority to:

‚ issue regulations to carry out its responsibilities;

‚ conduct examinations;

‚ require reports of Ñnancial condition and operation;

‚ develop and apply critical, minimum and risk-based capital standards, including classifying the capital levels not less

than quarterly;

‚ prohibit excessive executive compensation under prescribed standards; and

‚ impose temporary and Ñnal cease-and-desist orders and civil money penalties, provided certain conditions are met.

OFHEO also has exclusive administrative enforcement authority that is generally similar to that of other federal

Ñnancial regulators. That authority can be triggered by a failure to meet regulatory capital requirements; a violation of our

charter, the GSE Act, OFHEO regulations or a written agreement with OFHEO; or conduct or conditions that signiÑcantly

threaten our core capital.

In June 2003, OFHEO commenced a special investigation of the company in connection with the revision and

restatement of our Ñnancial results for 2002, 2001 and 2000. On December 9, 2003, we entered into a consent order and

settlement with OFHEO that concluded OFHEO's investigation of the company. Under the terms of the consent order, we

agreed to pay a civil money penalty as well as to undertake certain remedial actions relating to governance, corporate

culture, internal controls, accounting practices, disclosure and oversight. We have taken actions to comply with the terms of

the consent order and OFHEO continues to monitor our progress. For additional information concerning OFHEO's

enforcement actions and regulatory proceedings in which we have been involved, see ""NOTE 13: LEGAL CONTINGENCIES'' to our consolidated Ñnancial statements. OFHEO is considering whether additional remedial actions may be

appropriately applied to us, and has asked us to consider agreeing to limitations on our portfolio activities for some period of

time.

Capital Standards

OFHEO's oversight of our safety and soundness includes the implementation, monitoring and enforcement of capital

standards. OFHEO's regulatory capital requirements include ratio-based minimum and critical capital requirements and a

risk-based 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 always

classiÑed us as ""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, if a dividend payment on our common or preferred stock would cause us to fail to meet our minimum

capital or risk-based capital requirements, we would not be able to make the payment without prior written approval from

OFHEO. For additional information about our regulatory capital requirements, see ""NOTE 10: REGULATORY

CAPITAL'' to our consolidated Ñnancial statements.

8 Freddie Mac
In a letter dated January 28, 2004, OFHEO created a framework for monitoring our capital due to our higher

operational risk, including our inability to produce timely Ñnancial statements in accordance with GAAP. The letter directed

that we maintain a mandatory target capital surplus of 30 percent over our minimum capital requirement, subject to certain

conditions and variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of

certain capital transactions. We do not expect the current OFHEO framework to adversely aÅect our ability to grow in most

market scenarios. However, our portfolio activities may be aÅected by OFHEO's assertion of further regulatory authority.

For additional information about the OFHEO mandatory target capital surplus framework, see ""NOTE 10: REGULATORY CAPITAL'' to our consolidated Ñnancial statements. Also, see ""RISK FACTORS Ì Legal and Regulatory

Risks Ì Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or

competitive position,'' for more information.

Department of the Treasury

Under our charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures and

substantially identical types of unsecured debt obligations (including the interest rates and maturities of 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 performed this debt securities approval function

by coordinating GSE debt oÅerings with Treasury funding activities. Recently, Treasury announced that it will conduct a

review of its process for approving our debt oÅerings.

Securities and Exchange Commission

While we are exempt from the Securities Act and Exchange Act registration and reporting 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 the

requirement to Ñle with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on

Form 8-K. After we resume regular quarterly reporting, we will begin the process of registering our common stock with the

SEC.

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

will 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 considered in Congress. On

October 26, 2005, the House of Representatives passed a bill concerning GSE regulatory oversight. The Senate Committee

on Banking, Housing, and Urban AÅairs passed a bill concerning GSE regulatory oversight on July 28, 2005. The bills that

have been passed by the full House of Representatives and by the Senate Committee on Banking, Housing, and Urban

AÅairs diÅer in various respects, although each in its current form would result in signiÑcant changes in the existing GSE

regulatory oversight structure.

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

legislative proposals would give our regulator substantial authority to regulate the amount and composition of our portfolio

investments and 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.

We believe the enactment into law of these provisions, depending on their Ñnal terms and on how they would be applied

by our regulator, could have a material adverse eÅect on our ability to fulÑll our mission, our future earnings, stock price and

stockholder returns, the rate of growth in our fair value, and our ability to recruit qualiÑed oÇcers and directors. See

""RISK FACTORS Ì Legal and Regulatory Risks Ì Developments aÅecting our legislative and regulatory environment

could materially harm our business prospects or competitive position.''

We believe appropriate GSE regulatory oversight legislation would strengthen market conÑdence and promote our

mission. While we continue to work toward enactment of appropriate regulatory oversight legislation, we cannot predict the

prospects for the enactment, timing or content of any Ñnal legislation or its impact on our Ñnancial prospects.

RISK FACTORS

Before you invest in our securities, you should know that making such an investment involves risks, including the risks

described below and in ""BUSINESS,'' ""FORWARD-LOOKING STATEMENTS,'' ""MD&A'' and elsewhere in this

9 Freddie Mac
Information Statement. The risks that we have highlighted here are not the only ones that we face. If any of the risks

actually occur, our business, Ñnancial condition and/or results of operations could be adversely aÅected. In that case, the

trading price of our securities could decline, and you may lose all or part of your investment. Some of these risks are

managed under the risk management framework, as described in ""MD&A Ì RISK MANAGEMENT.'' We may also

encounter risks of which we are currently not aware or that we currently deem immaterial. These risks also may impair our

business operations, Ñnancial results, or your investment in our securities.

Business and Operational Risks

Material weaknesses and other control deÑciencies related to Ñnancial reporting could result in errors and a loss of

market conÑdence in our reported results.

EÅective internal controls are an important component of the process for producing timely, reliable Ñnancial reports,

preventing fraud and operating successfully as a publicly traded company. If we cannot provide reliable Ñnancial reports or

prevent fraud, our reputation and operating results could be adversely aÅected. We have discovered, and may in the future

discover, material weaknesses and signiÑcant deÑciencies in our internal controls that require remediation. Due to these

weaknesses and deÑciencies, management determined that, as of December 31, 2005, our internal control over Ñnancial

reporting was not eÅective. Although we are not an SEC registrant, our classiÑcation of internal control deÑciencies is

consistent with the deÑnitions established under standards adopted by the Public Company Accounting Oversight Board, or

PCAOB. Under the PCAOB standards, a ""material weakness'' is a signiÑcant deÑciency or combination of signiÑcant

deÑciencies that results in a more than remote likelihood that a material misstatement of the annual or interim Ñnancial

statements will not be prevented or detected. A ""signiÑcant deÑciency'' is a control deÑciency or combination of control

deÑciencies that adversely aÅects a company's ability to initiate, authorize, record, process, or report external Ñnancial data

reliably in accordance with GAAP such that there is a more than remote likelihood that a misstatement of our annual or

interim Ñnancial statements that is more than inconsequential will not be prevented or detected. For a description of our

existing material weaknesses and certain of our signiÑcant deÑciencies and our eÅorts to mitigate and remediate them, see

""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''

We have not completed our evaluation of our internal control over Ñnancial reporting. Accordingly, we are unable to

determine whether additional weaknesses or deÑciencies that require remediation exist. We face continuing challenges

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

revised and new accounting policies that we have adopted in recent years. Our ability to identify, manage, mitigate and/or

remedy internal control weaknesses and deÑciencies and other risks may continue to delay our return to regular, timely

reporting.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of

achieving the desired control objectives. Furthermore, we cannot be certain that our eÅorts to improve our control

environment will be successful or that we will be able to maintain adequate controls over our Ñnancial processes and

reporting in the future. A failure to establish and maintain an adequate control environment could result in a material error in

our reported Ñnancial results and additional delay in our Ñnancial reporting timeline, and could have a material adverse

aÅect on our business depending on the nature of the failure and any required remediation. An ineÅective control

environment, including our disclosure controls and procedures, could also cause investors to lose conÑdence in our reported

Ñnancial information, which would likely have an adverse eÅect on the trading price of our securities. If we fail to meet our

reporting obligations, this could aÅect our ability to maintain the listing of our securities on the New York Stock Exchange,

or the NYSE. Further, OFHEO could seek to require us to implement a remediation plan, hold additional capital, limit the

growth of our Retained portfolio or take other actions. In addition, a failure to eÅectively and timely implement the

remediation plan undertaken as a result of the prior restatement of our consolidated Ñnancial statements and the consent

order entered into with OFHEO, including particular initiatives relating to technical infrastructure and internal control over

Ñnancial reporting, could similarly adversely aÅect our business.

We rely on internal models for Ñnancial accounting and reporting purposes, to make business decisions, and to manage

risks, and our business could be adversely aÅected if those models fail to produce reliable results.

We make signiÑcant use of business and Ñnancial models for Ñnancial accounting and reporting purposes and to manage

risk. For example, we use models in determining the fair value of Ñnancial instruments for which independent price

quotations are not available or reliable or to extrapolate third-party values to our portfolio. We also use models to measure

and monitor our exposures to interest-rate and other market risks and credit risk. The information provided by these models

is also used in making business decisions relating to strategies, initiatives, transactions and products.

Models are inherently imperfect predictors of actual results because they are based on assumptions about future

performance. Our models could produce unreliable results for a number of reasons, including invalid or incorrect

assumptions underlying the models during periods of market stress and economic change or in general. The valuations, risk

10 Freddie Mac
metrics, amortization results and loan loss reserve estimations produced by our internal models may be very diÅerent from

actual results, which could adversely aÅect our business results, cash Öows, fair value of net assets, business prospects and

future earnings. Changes in any of our models or in any of the assumptions, judgments or estimates used in the models may

cause the results generated by the model to be materially diÅerent. The diÅerent results could cause a revision or

restatement of previously reported Ñnancial results or condition, depending on how and when the change to the model,

judgment or assumption is implemented. Changes may also cause diÇculties in comparisons of the Ñnancial results or

condition of prior or future periods. If our models are not reliable we could also make poor business decisions, including loan

purchase decisions, guarantee fee pricing decisions or other decisions, which could result in an adverse Ñnancial impact.

Furthermore, any strategies we employ to attempt to manage the risks associated with our use of models may not be

eÅective. See ""MD&A Ì CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Fair Value Measurement''

and ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more information on our use of models.

A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our

business, damage our reputation and cause losses.

Shortcomings or failures in our internal processes, people or systems could lead to impairment of our liquidity, Ñnancial

loss, disruption of our business, liability to customers, legislative or regulatory intervention or reputational damage. For

example, our business is highly dependent on our ability to process a large number of transactions on a daily basis. The

transactions we process have become increasingly complex and are subject to various legal and regulatory standards. Our

Ñnancial, accounting, data processing or other operating systems and facilities may fail to operate properly or become

disabled, adversely aÅecting our ability to process these transactions. The inability of our systems to accommodate an

increasing volume of transactions or new types of transactions or products could constrain our ability to pursue new business

initiatives. In addition, as a result of our existing material weaknesses, we have delayed implementation of some pending

systems initiatives.

We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or

other Ñnancial intermediaries we use to facilitate our securities and derivatives transactions. Any such failure or termination

could adversely aÅect our ability to eÅect transactions, service our customers and manage our exposure to risk.

Despite the contingency plans and facilities we have in place, our ability to conduct business may be adversely impacted

by a disruption in the infrastructure that supports our business and the communities in which we are located. Potential

disruptions may include those involving electrical, communications, transportation or other services we use or that are

provided to us. If a disruption occurs and our employees are unable to occupy our oÇces or communicate with or travel to

other locations, our ability to service and interact with our customers may suÅer and we may not be able to successfully

implement contingency plans that depend on communication or travel.

Our operations rely on the secure processing, storage and transmission of conÑdential and other information in our

computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances

warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other

malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could

jeopardize conÑdential and other information processed and stored in, and transmitted through, our computer systems and

networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or

counterparties, which could result in signiÑcant losses or reputational damage. We may be required to expend signiÑcant

additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and

we may be subject to litigation and Ñnancial losses that are not fully insured. For a discussion of our material weaknesses

related to our information technology and systems and our plans to remediate such weaknesses, see ""MD&A Ì RISK

MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''

We rely on third parties for certain functions that are critical to Ñnancial reporting, our Retained portfolio activity and

mortgage loan underwriting. Any failures by those vendors could disrupt our business operations.

We outsource certain key functions to external parties, including processing functions for trade capture, market risk

management analytics, and asset valuation (Blackrock Financial Management, Inc.), and processing functions for mortgage

loan underwriting (Electronic Data Systems Corporation). We may enter into other key outsourcing relationships 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, our business operations could be disrupted or otherwise negatively impacted. Our use of vendors

also exposes us to the risk of a loss of intellectual property or of conÑdential information or other harm. Financial or

operational diÇculties of an outside vendor could also hurt our operations if those diÇculties interfere with the vendor's

ability to provide services to us. In addition, because of a material weakness in our systems integration, including those that

connect us with external service providers, we are exposed to an increased risk of errors in our Ñnancial reporting. See

""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting'' for a description

11 Freddie Mac
of this material weakness. Also, we use a process of delegated underwriting for the single-family mortgages we purchase or

securitize. In this process, we provide originators with a series of mortgage underwriting guidelines and they represent and

warrant to us that the mortgages sold to us meet these guidelines. See ""MD&A Ì RISK MANAGEMENT Ì Credit

Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Underwriting Requirements and Quality

Control Standards'' and ""Ì Institutional Credit Risk Ì Mortgage Seller/Servicers'' for information about how we mitigate

the risks associated with delegated underwriting.

Our risk management eÅorts may prove to be ineÅective at mitigating the risks we seek to manage.

We must eÅectively identify, manage, monitor and mitigate operational risks, interest-rate and other market risks and

credit risks related to our business. Although we have devoted signiÑcant resources to develop our risk management policies

and procedures and expect to continue to do so in the future, our risk management policies, procedures and techniques may

not be suÇcient to mitigate the risks we have identiÑed or to appropriately identify additional risks to which we are subject.

In the area of operational risk, we have identiÑed a number of material weaknesses and signiÑcant deÑciencies in our

internal control over Ñnancial reporting. We may identify additional weaknesses and deÑciencies. In addition, there are a

number of risk factors that may impede our eÅorts to remediate our internal control weaknesses and deÑciencies, including:

the complexity associated with the interdependent nature of the remediation activities; uncertainty regarding the quality

and sustainability of newly established controls; potentially ineÅective compensating controls; the number of simplifying

assumptions; and controls remediation work that is focused on controls related to Ñnancial reporting and not on other nonÑnancial statement related controls. See ""MD&A Ì RISK MANAGEMENT'' for a discussion of our approach to

managing the risks we face. Furthermore, there is a risk that we may not have suÇcient personnel or personnel with

suÇcient training in these key roles.

Our inability to hire, train and retain qualiÑed employees could impair our business and operations.

Our continued success depends, in large part, on our ability to hire and retain highly qualiÑed people. Our business is

complex and many of our positions require speciÑc skills. Our turnover rates have been high in recent periods and have

strained our existing resources. If we continue to experience high turnover rates or are unable to attract, train and retain

talented people, our business and operations could be impaired or disrupted. Competition for highly qualiÑed personnel is

intense and there can be no assurances that we will retain our key personnel or that we will be successful in attracting,

training or retaining other highly qualiÑed personnel in the future. See ""MD&A Ì RISK MANAGEMENT Ì Operational Risks'' for a description of deÑciencies and weaknesses related to our staÇng and turnover.

Legal and Regulatory Risks

Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or

competitive position.

Developments aÅecting our applicable legislative or regulatory environment, including our charter, aÅordable housing

goals, or regulatory capital requirements (including the 30 percent mandatory target capital surplus OFHEO imposed on us

in January 2004), the interpretation of these requirements by our regulators, the adequacy of internal systems, controls and

processes related to these requirements, the exercise or assertion of regulatory or administrative authority beyond current

practice, or the enactment of proposed legislation (in whole or in part) as discussed in ""BUSINESS Ì REGULATION

AND SUPERVISION Ì GSE Regulatory Oversight Legislation'' could adversely aÅect: our ability to fulÑll our mission;

our ability to meet our aÅordable housing goals; our ability or intent to retain investments; the size and growth of our

mortgage portfolios; our future earnings, stock price and stockholder returns; the value of our assets; the rate of growth of the

fair value of our assets; and our ability to recruit qualiÑed oÇcers and directors. OFHEO is considering whether additional

remedial actions may be appropriately applied to us, and has asked us to consider agreeing to limitations on our portfolio

activities for some period of time. See ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì Gains

(Losses) on Investment Activity Ì Total security impairments'' for a description of OFHEO's directive to divest certain

mortgage-backed securities. HUD has also indicated that it will soon initiate a review of certain of our investments and other

assets and liabilities to ensure conformity with our charter and investment guidelines. In addition, Treasury announced that

it will conduct a review of its process for approving our debt oÅerings.

We are also exposed to the risk that weaknesses in our internal systems, controls and processes could aÅect the accuracy

of the data we provide to HUD or OFHEO or our compliance with legal requirements, and could ultimately lead to

regulatory actions (by HUD, OFHEO or both) or other adverse impacts on our business (including our ability or intent to

retain investments).

Furthermore, we could be required, or may Ñnd it advisable, to change the nature or extent of our business activities if

our various exemptions and special attributes were modiÑed or eliminated, new or additional fees or substantive regulation of

our business activities were imposed, our relationship to the federal government were altered or eliminated, or our charter,

12 Freddie Mac
the GSE Act, or other federal legislation aÅecting us were signiÑcantly amended. Any of these changes could have a

material adverse eÅect on the scope of our activities, Ñnancial condition and results of operations. For example, such changes

could (a) reduce the supply of mortgages available to us, (b) limit a signiÑcant revenue source by restricting the size of our

Retained portfolio or (c) make us less competitive by otherwise limiting our business activities or our ability to create new

products. We cannot predict when or whether any potential legislation will be enacted or regulation will be promulgated or

the eÅect that any such legislation or regulation would have on our Ñnancial condition or results of operations.

We are making certain changes to our business to meet HUD's new housing goals and subgoals, which may adversely

aÅect our proÑtability.

We are making signiÑcant adjustments to our mortgage sourcing and purchase strategies in an eÅort to meet the

housing goals and subgoals made eÅective in 2005, including changes to our underwriting guidelines and the expanded use of

targeted initiatives to reach underserved populations. For example, we may have to purchase loans that oÅer lower expected

returns on our investment and increase our exposure to credit losses. In addition, our purchases of goal-eligible loans will

need to increase as a percentage of total new mortgage purchases, which may cause 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. See ""REGULATION AND SUPERVISION Ì

Department of Housing and Urban Development'' for additional information about HUD's regulation of our business.

We are involved in legal proceedings that could result in the payment of substantial damages or otherwise harm our

business.

We are a party to various legal actions. In addition, former directors, oÇcers and employees are involved in legal

proceedings for which they may be entitled to reimbursement for the costs and expenses of the proceedings. The defense of

these or any future claims or proceedings could divert management's attention and resources from the needs of the business.

We may be required to make substantial payments in the event of adverse judgments or settlements of any such claims,

investigations or proceedings. Any legal proceeding, even if resolved in our favor, could result in negative publicity or cause

us to incur signiÑcant legal and other expenses. Furthermore, developments in, outcomes of, impacts of, and costs, expenses,

settlements and judgments related to these legal proceedings may diÅer from our expectations and exceed any amounts for

which we have reserved or require adjustments to such reserves. See ""NOTE 13: LEGAL CONTINGENCIES'' to our

consolidated Ñnancial statements for information about our ongoing legal proceedings and related reserves.

Legislation or regulation aÅecting the Ñnancial services industry generally may adversely aÅect our business activities.

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 adverse eÅect on our business results. In addition, our business could also

be adversely aÅected by any modiÑcation, reduction or repeal of the federal income tax deductibility of mortgage interest

payments.

Competitive and Market Risks

Changes in general business and economic conditions may adversely aÅect our business and earnings.

Our business and earnings may be adversely aÅected by changes in general business and economic conditions. These

conditions include employment rates, Öuctuations in both debt and equity capital markets, the value of the U.S. dollar as

compared to foreign currencies, and the strength of the U.S. economy and the local economies in which we conduct

business. An economic downturn or increase in the unemployment rate could result in an increase in mortgage delinquencies

or defaults and a higher level of credit-related losses than we estimated, which could reduce our earnings. Various factors

could cause the economy to slow down or even recede, including higher energy costs, higher interest rates, pressure on

housing prices, reduced consumer or corporate spending, natural disasters such as hurricanes, terrorist activities, military

conÖicts, and the normal cyclical nature of the economy.

13 Freddie Mac
A general decline in U.S. housing prices or in activity in the U.S. housing market could negatively impact our earnings.

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 increased the values of properties underlying the mortgages in our portfolio. A reversal of

this strong house price appreciation in any of the geographic markets we serve could result in an increase in delinquencies

or defaults and a higher level of credit-related losses, which could reduce our earnings. For more information, see

""MD&A Ì RISK MANAGEMENT Ì Credit Risks.''

Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the

size of the U.S. residential mortgage market. If the rate of growth in total outstanding U.S. residential mortgage debt were

to decline, there could be fewer mortgage loans available for us to purchase. This decline could reduce our earnings and

margins, as we could face more competition to purchase a smaller number of loans.

Competition from banking and non-banking companies may harm our business.

We operate in a highly competitive environment and we expect competition to increase as Ñnancial services companies

combine to produce larger companies that are able to oÅer similar mortgage-related products at competitive prices. Our

principal competitors in the secondary mortgage market are Fannie Mae, the Federal Home Loan Banks and other Ñnancial

institutions that retain or securitize mortgages, such as banks, dealers and thrift institutions. Increased competition in the

secondary mortgage market may make it more diÇcult for us to purchase mortgages to meet our mission objectives while

providing favorable returns for our business. Furthermore, competitive pricing pressures may make our products less

attractive in the market and negatively impact our proÑtability.

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 changes in economic, Ñnancial market and

regulatory environments. Increased competition for low-cost debt funding may result in a higher cost to Ñnance our business,

which could decrease our net income.

We may face limited availability of Ñnancing, variation in our funding costs and uncertainty in our securitization

Ñnancing.

The amount, type and cost of our funding, including Ñnancing from other Ñnancial institutions and the capital markets,

directly impacts our interest expense and results of operations and can therefore aÅect our ability to grow our assets. A

number of factors could make such Ñnancing more diÇcult to obtain, more expensive or unavailable on any terms, both

domestically and internationally (where funding transactions may be on terms more or less favorable than in the U.S.),

including adverse Ñnancial results, speciÑc events that adversely impact our reputation, changes in the activities of our

business partners, disruptions in the capital markets, speciÑc events that adversely impact the Ñnancial services industry,

counterparty availability, changes in the preferences of the holders of our securities, changes aÅecting our assets, our

corporate and regulatory structure, interest-rate Öuctuations, ratings agencies actions, and the legal, regulatory, accounting

and tax environments governing our funding transactions, the general state of the U.S., Asian and other world economies,

and factors aÅecting those economies.

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. There is a risk that our PC and Structured Securities support activities may not be suÇcient to support the

liquidity and depth of the market for PCs.

A reduction in our credit ratings could adversely aÅect our liquidity.

Ratings agencies play an important role in determining, by means of the ratings they assign to issuers and their debt, the

availability and cost of debt funding. We currently receive ratings from several ratings agencies for our unsecured

borrowings. Our credit ratings are important to our liquidity. Actions by governmental entities or others could adversely

aÅect our credit ratings. A reduction in our credit ratings could adversely aÅect our liquidity, competitive position, or the

supply or cost of equity capital or debt Ñnancing available to us. A signiÑcant increase in our borrowing costs could cause us

to sustain losses and impair our liquidity by requiring us to Ñnd other sources of Ñnancing.

Fluctuations in interest rates could negatively impact our reported net interest income, earnings and fair value of net

assets.

Our portfolio investment activities and credit guarantee activities expose us to interest rate and other market risks.

Changes in interest rates Ì up or down Ì could adversely aÅect our net interest yield. Although the yield we earn on our

assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall

faster than the other, causing our net interest yield to expand or compress. For example, when interest rates rise, our

funding costs may rise faster than the yield we earn on our assets, causing our net interest yield to compress until the eÅect of

the increase is fully reÖected in asset yields. Changes in the slope of the yield curve could also reduce our net interest yield.

14 Freddie Mac
Changes in interest rates could reduce our earnings in material amounts, especially if actual conditions turn out to be

materially diÅerent than our expectations. For example, if interest rates rise or fall faster than we expect or the slope of the

yield curve changes in ways diÅerent than we anticipated, we may incur signiÑcant losses. Changes in interest rates can also

aÅect prepayment assumptions and the fair value of our assets, including investments in our Retained portfolio, our

derivative portfolio and our Guarantee asset. When interest rates fall, borrowers are more likely to prepay their mortgage

loans by reÑnancing them at a lower rate. An increased likelihood of prepayment on the mortgages underlying our mortgagerelated securities may adversely impact the performance of these securities. An increased likelihood of prepayment on the

mortgages we hold may also negatively impact the performance of our Retained portfolio and the fair value of our Guarantee

asset. Interest rates can Öuctuate for a number of reasons, including changes in the Ñscal and monetary policies of the

federal government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly inÖuence

the yield on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative Ñnancial

instruments (such as options and interest-rate and foreign-currency swaps) from acceptable counterparties of the types and

in the quantities needed could also aÅect our ability to eÅectively manage the risks related to our investment funding.

Our strategies and eÅorts to manage our exposures to these risks may not be as eÅective as they have been in the past.

See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for a description of the types of

market risks to which we are exposed and how we manage those risks.

Higher credit losses could require us to increase our allowance for credit losses through a charge to earnings.

We face primarily two types of credit risk Ì mortgage credit risk and institutional credit risk. As described in

""MD&A Ì RISK MANAGEMENT Ì Credit Risks,'' we employ a number of credit risk management strategies.

However, there can be no assurances that our risk management strategies will be eÅective to manage our credit risks or that

our credit losses will not be higher than expected. Higher credit losses on our guarantees could require us to increase our

allowance for credit losses through a charge to earnings and other credit exposures could result in Ñnancial losses. Although

we regularly review credit exposures to speciÑc customers and counterparties, default risk may arise from events or

circumstances that are diÇcult to detect or foresee. In addition, concerns about, or default by, one institution could lead to

signiÑcant liquidity problems, losses or defaults by other institutions. This risk may also adversely aÅect Ñnancial

intermediaries, such as clearing agencies, clearinghouses, banks, securities Ñrms and exchanges with which we interact.

These potential risks could ultimately cause liquidity problems or losses for us as well.

The loss of business volume from one or more key lenders could result in a decline in market share and revenues.

Our business depends on our ability to acquire a steady Öow of mortgage loans from the originators of those loans. We

purchase a signiÑcant percentage of our single-family mortgages from several large mortgage lenders. The mortgage

industry has been consolidating and a decreasing number of large lenders originate most single-family mortgages. We could

lose signiÑcant business volume and may be unable to replace it if one or more of our key lenders signiÑcantly reduces the

volume of mortgages it delivers to us or is acquired or otherwise ceases to exist. 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.

Negative publicity causing damage to our reputation could adversely aÅect our business prospects, earnings or capital.

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.

Negative public opinion could adversely aÅect our ability to keep and attract customers or otherwise impair our customer

relationships; adversely aÅect our ability to obtain Ñnancing or hinder our business prospects. Perceptions regarding the

practices of our competitors or our industry as a whole may also adversely impact our reputation. Adverse reputation impacts

on third parties with whom we have important relationships may impair market conÑdence or investor conÑdence in our

business operations as well. In addition, negative publicity could expose us to adverse legal and regulatory consequences.

Negative public opinion could result from our actual or alleged action or failure to act in any number of activities, including

corporate governance, regulatory compliance, Ñnancial reporting and disclosure, or from actions taken by government

regulators and community organizations in response to our actual or alleged conduct. Adverse impacts on our reputation, or

the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny or adverse regulatory or

legislative changes.

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 this headquarters complex under a

long-term lease from the partnership.

15 Freddie Mac
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, employment-related 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 of our 2002 and prior consolidated Ñnancial statements. In addition, 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 our legal proceedings, see ""NOTE 13: LEGAL CONTINGENCIES'' and ""NOTE 14:

INCOME TAXES'' to our consolidated Ñnancial statements.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following matters were presented for stockholder vote at the July 15, 2005 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; and (b) ratiÑcation of the appointment of PricewaterhouseCoopers LLP as our independent auditors for 2005.

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 Election of Directors

Votes For Votes Withheld

Barbara T. Alexander ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 609,767,531 7,869,236

GeoÅrey T. Boisi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611,270,805 6,365,962

Joan E. Donoghue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 605,739,672 11,897,095

Michelle Engler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611,030,851 6,605,916

Richard Karl Goeltz ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 612,664,614 4,972,153

Thomas S. Johnson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 583,989,898 33,646,869

William M. Lewis, Jr.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 612,128,085 5,508,682

Eugene M. McQuade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,518,568 10,118,199

Shaun F. O'Malley ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582,111,156 35,525,611

Ronald F. Poe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,396,192 10,240,575

Stephen A. Ross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 582,191,897 35,444,870

Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607,489,912 10,146,855

William J. Turner ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 577,712,718 39,924,049

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

Votes for Votes Against Abstentions

613,265,113 874,878 3,496,775

MARKET 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 NYSE and the PaciÑc 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. At December 31, 2005, there

were 692,717,422 shares outstanding of our common stock.

16 Freddie Mac
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

2006 Quarter Ended

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $68.75 $60.64

2005 Quarter Ended

December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $67.49 $54.85

September 30ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66.91 54.50

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67.87 58.51

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73.91 59.74

2004 Quarter Ended

December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $74.20 $64.15

September 30ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.50 61.73

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.62 56.45

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65.15 57.60

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

At June 1, 2006, the closing price for our common stock was $60.66 per share.

Issuer Purchases of Equity Securities

On October 5, 2005, our board of directors authorized us to repurchase up to $2 billion of outstanding shares of our

common stock and to issue up to $2 billion of non-cumulative, perpetual preferred stock, in each case, from time to time

depending on market conditions and other factors. We do not expect the completion of the authorized capital transactions to

have a material impact on our regulatory minimum capital surplus, including the 30 percent mandatory target set in

January 2004 by OFHEO. In accordance with the existing capital monitoring framework established by OFHEO in January

2004, we obtained OFHEO's approval for this common stock repurchase. This repurchase authorization replaces all unused

repurchase authority remaining under the common stock repurchase plan approved by the board of directors in September

1997. We did not repurchase any common stock during 2005.

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

2006 Quarter Ended

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.47

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.47

2005 Quarter Ended

December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.47

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.35

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.35

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.35

2004 Quarter Ended

December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.30

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.30

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.30

March 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.30

We have historically paid dividends to our stockholders in each quarter. Our board of directors will determine the

amount of dividends, if any, declared and paid in any quarter after considering our capital position and earnings and growth

prospects, among other factors. See ""NOTE 10: REGULATORY CAPITAL'' to the consolidated Ñnancial statements for

additional information regarding dividend payments and potential restrictions on such payments and ""NOTE 9:

STOCKHOLDERS' EQUITY'' to the consolidated Ñnancial statements for additional information regarding our preferred

stock dividend rates.

Holders

As of June 1, 2006, we had 2,343 common stockholders of record.

Transfer Agent and Registrar

Computershare Trust Company, N.A.

P.O. Box 43078

Providence, RI 02940-3078

Telephone: 781-575-2879

http://www.computershare.com

17 Freddie Mac
NYSE Corporate Governance Listing Standards

On August 4, 2005, 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 ""forward-looking statements''

pertaining to our current expectations and 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,'' ""promote,'' ""consider,'' ""enables,'' ""currently,'' ""priorities,'' ""remain,'' ""anticipate,'' ""initiative,''

""preliminary,'' ""ongoing,'' ""believes,'' ""expects,'' ""intend,'' ""plan,'' ""future,'' ""seek,'' ""potential,'' ""objectives,'' ""long-term,''

""ultimately,'' ""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 and should also consider all risks, uncertainties and other factors described in this

Information Statement in considering any forward-looking statements. Actual results may diÅer materially from those

discussed as a result of various factors, including those factors described in the ""RISK FACTORS'' section of this

Information Statement. 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:

‚ 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 eÅectively implement our business strategies and manage the risks in our business;

‚ changes in our assumptions regarding rates of growth in our business, spreads we expect to earn, required capital levels, the

timing and impact of capital transactions;

‚ our ability to eÅectively manage and implement changes; developments or impacts of accounting standards and

interpretations;

‚ 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;

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

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

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

‚ preferences of originators in selling into the secondary market;

‚ borrower preferences for Ñxed-rate mortgages or ARMs;

‚ investor preferences for mortgage loans and mortgage-related and debt securities versus other investments;

‚ the occurrence of a major natural or other disaster in geographic areas in which portions of our Total mortgage portfolio

are concentrated;

‚ other factors and assumptions described in this Information Statement, including in the sections titled ""BUSINESS,''

""RISK FACTORS'' and ""MD&A;''

‚ our assumptions and estimates regarding the foregoing; and

‚ market reactions to the foregoing.

We undertake no obligation to update forward-looking statements we make to reÖect events or circumstances after the date

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

18 Freddie Mac
SELECTED FINANCIAL DATA(1)

At or for the Year Ended December 31,

2005 2004 2003 2002 2001

(dollars in millions, except share-related amounts)

Income Statement Data

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,370 $ 9,137 $ 9,498 $ 9,525 $ 7,448

Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 199 (3,039) (244) 7,154 (1,591)

Net income before cumulative eÅect of changes in accounting

principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,189 2,937 4,816 10,090 3,115

Cumulative eÅect of changes in accounting principles, net of taxes ÏÏÏÏ (59) Ì Ì Ì 43

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,130 2,937 4,816 10,090 3,158

Preferred stock dividends and issuance costs on redeemed

preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (223) (210) (216) (239) (217)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,907 $ 2,727 $ 4,600 $ 9,851 $ 2,941

Earnings per common share before cumulative eÅect of changes in

accounting principles:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.84 $ 3.96 $ 6.69 $ 14.22 $ 4.19

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.83 3.94 6.68 14.17 4.17

Earnings per common share after cumulative eÅect of changes in

accounting principles:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.76 $ 3.96 $ 6.69 $ 14.22 $ 4.25

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.75 3.94 6.68 14.17 4.23

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.52 $ 1.20 $ 1.04 $ 0.88 $ 0.80

Weighted average common shares outstanding (in thousands):

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 691,582 689,282 687,094 692,727 692,603

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 693,511 691,521 688,675 695,116 695,973

Balance Sheet Data

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 806,222 $ 795,284 $ 803,449 $ 752,249 $ 641,100

Senior debt, net due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 288,532 282,303 295,262 244,429 264,227

Senior debt, net due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454,627 443,772 438,738 415,662 311,013

Subordinated debt, net due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,633 5,622 5,613 5,605 3,128

Miscellaneous liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,290 30,662 30,420 52,914 40,489

Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 949 1,509 1,929 2,309 2,619

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,191 31,416 31,487 31,330 19,624

Portfolio Balances(3)

Retained portfolio (unpaid principal balances)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 710,017 $ 652,936 $ 645,466 $ 567,272 $ 497,639

Total Guaranteed PCs and Structured Securities issued (unpaid

principal balances)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,335,524 1,208,968 1,162,068 1,090,624 961,511

Total mortgage portfolio (unpaid principal balances) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,684,217 1,505,206 1,414,399 1,316,609 1,150,723

Ratios

Return on average assets(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3% 0.4% 0.6% 1.4% 0.6%

Return on common equity(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.7 10.2 17.2 47.2 20.2

Return on total equity(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.3 9.3 15.3 39.6 17.1

Dividend payout ratio on common stock(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56.4 30.7 15.6 6.2 18.9

Equity to assets ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.7 3.9 4.0 3.7 3.4

(1) EÅective January 1, 2005, we changed our method of accounting for interest expense related to callable debt instruments to recognize interest expense

using an eÅective interest method over the contractual life of the debt and changed our method for determining gains and losses upon the re-sale of

PCs and Structured Securities related to deferred items recognized in connection with our guarantee of those securities. See ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements. EÅective January 1, 2003, we adopted

the provisions of 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 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.'' We also adopted the provisions of Statement of Financial Accounting Standards

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.

(2) Includes (a) Due to Participation CertiÑcate investors, (b) Accrued interest payable, (c) Guarantee obligation, (d) Derivative liabilities, at fair

value, (e) Reserve for guarantee losses on Participation CertiÑcates and (f) Other liabilities, as presented on our consolidated balance sheets.

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

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

sheet caption includes valuation adjustments and deferred balances. See ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì

Table 17 Ì Characteristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio'' for more information.

(5) Excludes Structured Securities where we have resecuritized PCs and other previously issued Structured Securities. These excluded Structured

Securities do not increase our credit-related exposure and consist of single-class Structured Securities backed by PCs, REMICs and principal-only

strips. The notional balances of interest-only strips are excluded because this line item is based on unpaid principal balance. Also excluded from this

line item are modiÑable and combinable REMIC tranches and interest and principal classes where the holder has the option to exchange the

security tranches for other pre-deÑned security tranches.

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

(7) 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.

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

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

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

assets.

19 Freddie Mac
MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Our Business

Freddie Mac is one of the leading institutions Ñnancing residential mortgage loans in the United States. We purchase

residential mortgages and mortgage-related securities in the secondary market and use them to issue our own mortgagerelated securities. We also purchase residential mortgages and mortgage-related securities in the secondary market to hold

for investment purposes in our Retained portfolio. We Ñnance our purchases primarily by issuing a variety of debt

instruments in the capital markets.

In general, our purchases of mortgage loans are driven by the growth in total residential mortgage debt outstanding, the

requirements of our charter, the aÅordable housing goals and subgoals set for us by HUD, the attractiveness of the returns

available to us from securitization and portfolio investment activities and our level of customer service. In 2005, our share

of the total residential mortgage debt market improved as we increased our single-family mortgage purchases and our

purchases of non-agency mortgage-related securities for our Retained portfolio. Our share of the portion of the mortgage

securitization market attributable to the GSEs increased from about 41 percent in 2004 to about 45 percent in 2005. Our

market share will vary from period to period. We continue to seek lasting improvements in our overall market share and our

GSE market share over time by improving customer service, diversifying our customer base and expanding the types of

mortgages we guarantee and products we oÅer.

Our Mission

Our mission is to provide liquidity, stability and aÅordability in the secondary market for residential mortgages. Our

activities contribute to the availability of aÅordable mortgage products in the U.S. We view the purchase of mortgage loans

beneÑting low- and moderate-income families and neighborhoods as an integral part of our mission and business, and we

are committed to fulÑlling the needs of these borrowers and markets. We are also subject to aÅordable housing goals set by

HUD. We have reported to HUD that we achieved each of the aÅordable housing goals and subgoals for 2005, although

HUD will make the Ñnal determination.

Responding to events such as the devastation on the Gulf Coast is at the core of our mission. In the immediate

aftermath of Hurricane Katrina, we provided temporary mortgage payment relief, expedited the release of insurance

proceeds, and modiÑed our policies to accommodate our sellers and servicers, and ultimately the homeowners and renters,

aÅected by the hurricanes. We committed to infuse up to $300 million of liquidity into the aÅected Gulf area and took

humanitarian steps Ì committing more than $10 million to hurricane relief eÅorts and providing temporary housing

assistance to approximately 1,100 families. We are also using our Retained portfolio to buy up to $1 billion in mortgage

revenue bonds, enabling state housing finance authorities to make low-cost mortgages and home repair loans for up to 10,000

low- and moderate-income families.

Fair Value Management

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 substantially all Ñnancial assets and liabilities, rather than an approach that

combines historical cost and fair value measurements, as is the case with our GAAP-based consolidated Ñnancial

statements. Fair value is deÑned as the amount at which an asset or liability could be exchanged between willing parties,

other than in a forced or liquidation sale. We use estimates of fair value on a routine basis to make decisions about our

business activities. In addition, we use fair value derived performance measures to establish corporate objectives and as a

factor in determining management compensation. Our consolidated fair value balance sheets are an important component of

our risk management processes, as we use estimates of the changes in fair value to calculate our Portfolio Market Value

Sensitivity, or PMVS, and duration gap measures. For information about how we estimate the fair value of Ñnancial

instruments, see ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements.

We promote long-term growth in the fair value of net assets primarily by seeking investment portfolio opportunities that

oÅer attractive net mortgage-to-debt option-adjusted spreads and credit guarantee opportunities that oÅer attractive spreads

relative to anticipated credit risks. We actively manage risks to long-term fair value growth inherent in these portfolios. Our

long-term expectation is to generate returns, before capital transactions, over time on the average fair value of net assets

attributable to common stockholders in the low- to mid-teens.

Capital Management

Our objective in managing capital is to preserve our safety and soundness, while maintaining suÇcient capital to take

advantage of new business opportunities and support our mission at attractive long-term returns. If available, we consider

20 Freddie Mac
returning excess capital to stockholders. At December 31, 2005, our estimated regulatory core capital was $36.0 billion,

with an estimated minimum capital surplus of $11.0 billion and an estimated surplus in excess of the 30 percent mandatory

target of approximately $3.5 billion. We expect to be able to maintain a surplus over both our regulatory minimum capital

requirement and the 30 percent mandatory target across a wide range of market conditions.

In 2005, we increased our quarterly common stock dividend on two occasions: a 17 percent increase in the Ñrst quarter

(from $0.30 per share to $0.35 per share) and an additional 34 percent increase in the fourth quarter (from $0.35 per share

to $0.47 per share). In October 2005, our board authorized us to repurchase up to $2 billion of outstanding shares of

common stock and to issue up to $2 billion of non-cumulative perpetual preferred stock. With the release of our 2005

Ñnancial results in May, we have moved forward with the repurchase of common stock and we expect to issue the authorized

preferred stock from time to time depending on market conditions and other factors.

Risk Management

Our portfolio investment and credit guarantee activities expose us to three broad categories of risk: (a) operational risks,

(b) interest-rate and other market risks, and (c) credit risks. Risk management is a critical aspect of our business.

EÅectively managing risk enables us to accomplish our mission and generate revenue and long-term value. Our strategies for

managing these risks are discussed in ""RISK MANAGEMENT.''

Operational Risks and Internal Controls

We have devoted substantial Ñnancial and personnel resources to improving our internal controls. We continue to

remediate material weaknesses and other deÑciencies in internal control over Ñnancial reporting. Although we accelerated a

number of previously planned control initiatives, we have a signiÑcant number of internal control deÑciencies that have not

been fully remediated and considerable challenges remain. See ""RISK MANAGEMENT Ì Operational Risks Ì

Internal Control over Financial Reporting'' and ""RISK FACTORS Ì Business and Operational Risks.''

Interest-Rate Risk

Our interest-rate risk remains low. For all of 2005 and through May of 2006, PMVS and duration gap have averaged

one percent and zero months, respectively. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''

for more information about these risks and our strategies for managing them.

Credit Risk

Our credit losses also remain low. Our single-family delinquency rate declined to 69 basis points at December 31, 2005

from 73 basis points at the end of 2004. At April 30, 2006 our single-family delinquency rate declined further to 56 basis

points. For 2005, our credit losses totaled $149 million or 1.1 basis points of our average Total mortgage portfolio. Our

credit-related expenses, which include changes in our provision for loan losses and expenses related to real estate owned, or

REO, increased in 2005 primarily as a result of Hurricane Katrina. See ""RISK MANAGEMENT Ì Credit Risks'' for

more information about these risks and our strategies for managing them.

Summary of 2005 Financial Results

GAAP Results

Changes in the level and volatility of interest rates continue to cause signiÑcant volatility in our reported Ñnancial results

primarily because only a portion of our balance sheet is marked to fair value. Net income after the cumulative eÅect of a

change in accounting principle was $2,130 million for 2005, down from $2,937 million for 2004. Diluted earnings per

common share after the cumulative eÅect of a change in accounting principle was $2.75 for 2005, down from $3.94 for

2004. The decline in net income for 2005 compared to 2004 was primarily due to lower net interest income as a result of

narrowing spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005, an agreement to

settle the securities class action and shareholder derivative litigation, charges related to Hurricane Katrina, and the net

impact of certain accounting changes, partially oÅset by lower losses related to our derivative instruments not in qualifying

hedge accounting relationships. Our derivatives portfolio continued to be an eÅective component of our risk management

activities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial

statements for information about our changes in accounting principles and changes in estimates.

Fair Value Balance Sheets

During 2005, the fair value of net assets attributable to common stockholders, before capital transactions, increased by

$1.0 billion, which represents a return on the average fair value of net assets attributable to common stockholders of

approximately 3.7 percent. The fair value of net assets attributable to common stockholders at December 31, 2005 was

unchanged, after capital transactions, at $26.8 billion, from December 31, 2004. Subsequent to the issuance of our

Information Statement Supplement dated May 30, 2006, we increased the fair value of net assets at December 31, 2005 by

$0.1 billion to correct an error in the calculation of the fair value of our debt securities issued.

21 Freddie Mac
Looking beyond 2005, our long-term expectation is to generate returns, before capital transactions, on the average fair

value of net assets attributable to common stockholders, in the low- to mid-teens, although period-to-period returns may

Öuctuate substantially due to market conditions. Our expectations are based upon assumptions regarding rates of growth in

our business, spreads we expect to earn on our business, and required capital levels, among other factors. We have assumed

no adverse impacts from legislative or regulatory actions. Our actual results may diÅer materially from our expectations for

a number of reasons, including those discussed in ""RISK FACTORS'' and ""FORWARD-LOOKING STATEMENTS.''

The primary drivers of our fair value results during 2005 were core spread income from the Retained portfolio (deÑned

as the net revenue resulting from the option-adjusted spread, or OAS, between mortgage-related investments and debt) and

fee-based income (including guarantee fees and credit fees related to our guaranteed mortgage-related securities),

substantially oÅset by a decrease from wider net mortgage-to-debt OAS, which we estimate reduced fair value by

approximately $1.3 billion (after-tax). We believe disclosing the estimated impact of changes in OAS on the fair value of net

assets is helpful to understanding our current-period fair value results in the context of our long-term fair value return

expectations. Our estimate of the impact of changes in OAS is discussed further in ""CONSOLIDATED FAIR VALUE

BALANCE SHEETS ANALYSIS Ì Discussion of Fair Value Results.''

Our fair value results also were aÅected by the net eÅect of changes in our approach for estimating the fair values of

certain Ñnancial instruments implemented as of the Ñrst quarter 2005, which we estimate reduced fair value by

approximately $0.5 billion (after-tax). This reduction includes the net eÅect of changes we made to our fair value estimates

for our guarantee-related assets and liabilities, where we implemented an approach that uses more market data for

determining these fair values. We estimate that our improved approach for valuing guarantee-related assets and liabilities

reduced fair value in the Ñrst quarter of 2005 by approximately $0.8 billion (after-tax). Our approach for estimating fair

values and the recent improvements are discussed in more detail in ""NOTE 2: TRANSFERS OF SECURITIZED

INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements. During 2005, we also

improved our approach for estimating the fair values of multifamily whole loans and the minority interests in consolidated

real estate investment trusts, or REITs, as well as other securities by increasing the amount of market data used in the

valuation process.

In addition, our fair value results were aÅected by the agreement to settle the securities class action and shareholder

derivative litigation, the eÅect of which reduced fair value by approximately $0.2 billion (after-tax), and the eÅect of

charges related to Hurricane Katrina, which reduced fair value by approximately $0.2 billion (after-tax).

22 Freddie Mac
CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations should be read in conjunction with our consolidated

Ñnancial statements, including the accompanying notes. Also see ""CRITICAL ACCOUNTING POLICIES AND

ESTIMATES'' for more information concerning the most signiÑcant accounting policies and estimates applied in

determining our reported Ñnancial position and results of operations.

Net Interest Income

Table 7 summarizes our Net interest income and net interest yield and provides an attribution of changes in annual

results to changes in rates or changes in volumes of our interest-earning assets and interest-bearing liabilities. Average

balance sheet information is presented because we believe end-of-period balances are not representative of activity

throughout the periods presented. 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.

Table 7 Ì Average Balance, Net Interest Income and Rate/Volume Analysis

Year Ended December 31,

2005 2004 2003

Interest Interest Interest

Average Income Average Average Income Average Average Income Average

Balance(1)(2) (Expense)(1) Rate(3)(4) Balance(1)(2)(5) (Expense)(1) Rate(3)(4)(5) Balance(1)(2)(5) (Expense)(1) Rate(3)(4)(5)

(dollars in millions)

Interest-earning assets:

Mortgage loans(6)(7)(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,248 $ 4,037 6.59% $ 61,576 $ 4,007 6.51% $ 63,893 $ 4,251 6.65%

Mortgage-related securities(8)(9)ÏÏÏÏÏÏÏ 611,452 29,684 4.85 590,213 28,460 4.82 544,359 29,051 5.34

Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏ 672,700 33,721 5.01 651,789 32,467 4.98 608,252 33,302 5.47

Investments(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,252 1,773 3.33 81,833 2,716 3.32 94,768 3,246 3.43

Securities purchased under agreements

to resell and Federal funds sold ÏÏÏÏÏ 25,344 833 3.28 29,996 420 1.40 49,085 550 1.12

Total interest-earning assets ÏÏÏÏÏÏ $751,296 $ 36,327 4.83 $763,618 $ 35,603 4.66 $752,105 $ 37,098 4.93

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $192,497 $ (6,102) (3.17) $205,072 $ (2,908) (1.42) $226,850 $ (2,785) (1.23)

Long-term debt(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 524,270 (23,246) (4.43) 530,816 (22,950) (4.32) 478,028 (22,083) (4.62)

Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 716,767 (29,348) (4.09) 735,888 (25,858) (3.51) 704,878 (24,868) (3.53)

Due to Participation CertiÑcate

investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,399 (551) (5.30) 12,401 (708) (5.71) 26,234 (1,641) (6.26)

Total interest-bearing liabilities ÏÏÏ 727,166 (29,899) (4.11) 748,289 (26,566) (3.55) 731,112 (26,509) (3.63)

Income (expense) related to

derivatives(12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,058) (0.15) 100 0.01 (1,091) (0.15)

Impact of net non-interest-bearing

funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,130 Ì 0.14 15,329 Ì 0.07 20,993 Ì 0.11

Total funding of interest-earning

assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $751,296 $(30,957) (4.12) $763,618 $(26,466) (3.47) $752,105 $(27,600) (3.67)

Net interest income/yieldÏÏÏÏÏÏÏÏ $ 5,370 0.71 $ 9,137 1.20 $ 9,498 1.26

Fully taxable-equivalent adjustment(13) 339 0.05 267 0.03 227 0.03

Net interest income/yield (fully

taxable-equivalent basis) ÏÏÏÏÏÏ $ 5,709 0.76% $ 9,404 1.23% $ 9,725 1.29%

2005 vs. 2004 Variance 2004 vs. 2003 Variance

Due to Due to(5)

Total Total

Rate(14) Volume(14) Change Rate(14) Volume(14) Change

(in millions)

Interest-earning assets:

Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 51 $ (21) $ 30 $ (92) $ (152) $ (244)

Mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194 1,030 1,224 (2,928) 2,337 (591)

Total Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245 1,009 1,254 (3,020) 2,185 (835)

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 (952) (943) (98) (432) (530)

Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 487 (74) 413 116 (246) (130)

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 741 $ (17) $ 724 $ (3,002) $ 1,507 $(1,495)

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,383) $ 189 $(3,194) $ (406) $ 283 $ (123)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (581) 285 (296) 1,472 (2,339) (867)

Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,964) 474 (3,490) 1,066 (2,056) (990)

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 109 157 133 800 933

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,916) 583 (3,333) 1,199 (1,256) (57)

Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,158) Ì (1,158) 1,191 Ì 1,191

Total funding of interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(5,074) $ 583 $(4,491) $ 2,390 $ (1,256) $ 1,134

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,333) $ 566 $(3,767) $ (612) $ 251 $ (361)

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 (4) 72 38 2 40

Net interest income (fully taxable-equivalent basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,257) $ 562 $(3,695) $ (574) $ 253 $ (321)

(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 on the unpaid principal balances of impaired

securities. For securities in the Retained portfolio classiÑed as trading, we calculate average balances excluding their mark-to-fair-value

23 Freddie Mac
adjustments. For securities in the Cash and investments portfolio classiÑed as trading during 2004 and 2003, we calculated 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 calculated on the historical cost basis, which is not aÅected by the change in fair value

that is reÖected in the Accumulated other comprehensive income, or AOCI, component of Stockholders' equity.

(5) Certain amounts for 2004 and 2003 have been revised to conform with the 2005 presentation.

(6) Non-accrual loans are included in average balances.

(7) Loan fees included in mortgage loan interest income were $371 million, $223 million and $120 million for the years ended December 31, 2005, 2004

and 2003, respectively.

(8) A change in estimate resulted in a net pre-tax reduction in Net interest income of $(166) million in the Ñrst quarter of 2005. Of this amount,

$(92) million relates to Mortgage interest income and $(74) million relates to mortgage-related securities interest income. See ""Net Interest

Income Ì 2005 versus 2004.''

(9) Average rates calculated on a fully taxable-equivalent basis were 4.90 percent, 4.86 percent and 5.37 percent for the years ended December 31, 2005,

2004 and 2003, respectively, based upon related income of $29,966 million, $28,688 million and $29,246 million, respectively.

(10) For 2005, investments consist of Cash and cash equivalents and the Non-mortgage-related securities subtotal of Cash and Investments as reported on

our consolidated balance sheets. 2004 and 2003 also include Mortgage-related securities held in the Cash and Investments portfolio.

(11) Includes current portion of long-term debt. See ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to our consolidated

Ñnancial statements for a reconciliation of Senior debt, due within one year on our consolidated balance sheets.

(12) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in

qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our

consolidated Ñnancial statements for more information.

(13) The determination of Net interest income/yield (fully taxable-equivalent basis), which reÖects fully taxable-equivalent adjustments to interest

income, involves 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 of 35 percent.

(14) Combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.

Table 8 summarizes components of our Net interest income.

Table 8 Ì Net Interest Income

Year Ended December 31,

2005 2004 2003

(in millions)

Contractual amounts of Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,877 $11,746 $12,990

Deferred item amortization expense, net:(1)

Asset-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,003) (1,408) (1,422)

Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,446) (1,301) (979)

Total deferred item amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,449) (2,709) (2,401)

Income (expense) related to derivatives:(2)

Amortization of deferred balances in AOCI, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,966) (1,814) (1,482)

Accrual of periodic settlements of derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 908 1,914 391

Total income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,058) 100 (1,091)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,370 9,137 9,498

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 267 227

Net interest income (fully taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,709 $ 9,404 $ 9,725

(1) Amortization relates to premiums, discounts, deferred fees and other basis adjustments to the carrying value of our Ñnancial instruments and the

reclassiÑcation of previously deferred balances from AOCI for certain derivatives in cash Öow hedge relationships related to individual debt issuances

and mortgage purchase transactions.

(2) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in

qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our

consolidated Ñnancial statements for more information.

2005 versus 2004

Net interest income and net interest yield on a fully taxable-equivalent basis both decreased in 2005 due to narrowing

spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005. Net interest yield declined

47 basis points to 76 basis points for 2005 from 123 basis points for 2004, on a fully taxable-equivalent basis. This

compression of the net interest yield and the decline in Net interest income reÖected the impact of a Öattening yield curve

driven by increases in short-term interest rates. Because the repricing of our variable-rate assets lagged the increase in the

cost of our short-term debt, the impact of the rising short-term rates on our short-term debt was only partially oÅset by the

impact of rising rates on our variable-rate assets. Also, the decline in Net interest income for 2005 reÖected the change in

the asset mix, as the composition of our Retained portfolio shifted to a greater percentage of lower-yielding, variable-rate

assets, and higher interest expense on derivatives in qualifying hedge accounting relationships. Another factor in the decline

in Net interest income for 2005 was the result of our decision to cease the PC market-making and support activities

conducted through our Securities Sales and Trading Group, or SS&TG, business unit and our external Money Manager

program during the fourth quarter of 2004. This result is reÖected in the $28.6 billion, or 35 percent, decline in the average

balance of our Investments portfolio. These negative factors were partially oÅset by a $20.9 billion, or 3 percent, increase in

the average balance of our Retained portfolio.

Interest income related to our Retained portfolio increased by $1,254 million for 2005, as compared to 2004, as a result

of the increase in the average balance of the portfolio as well as the rising rate environment. These positive factors were

partially oÅset by the shift in the composition of the portfolio to lower-yielding, variable-rate non-agency securities. Interest

income for the Retained portfolio in the Ñrst quarter of 2005 also includes the eÅect of enhancements to certain models

24 Freddie Mac
used to estimate prepayment speeds on mortgage-related securities and our approach for estimating uncollectible interest on

single-family mortgages greater than 90 days delinquent. We implemented these enhancements as changes in estimates,

resulting in a net decrease in interest income of $(166) million (pre-tax) during the Ñrst quarter of 2005.

Interest income related to our Investments portfolio declined by $943 million during 2005, as compared to 2004 as the

average balance of this portfolio declined. By the end of 2004, we divested the trading portfolios related to our SS&TG

business unit and our external Money Manager program in the Investments portfolio. This divestiture reduced the interest

expense for funding the Investments portfolio as well as the hedging costs associated with it, which were reÖected in Gains

(losses) on investment activity. Our investments in mortgage-related securities held by our SS&TG business unit and

external Money Manager program were generally hedged by entering into forward sales of mortgage-related securities. To

determine the fair value of these positions, the held investment was valued at the current market, or spot price, while the

forward sale commitments were valued at the discounted sales price, or forward price. For 2004 and 2003, the spot-forward

diÅerence between the trading securities and the related forward sale commitments resulted in a loss of $1,101 million and

$981 million, respectively, in Gains (losses) on investment activity that was oÅset by Net interest income on the held

position.

Interest income related to Securities purchased under agreements to resell and Federal funds sold increased by

$413 million for 2005, as compared to 2004, due to the increase in short-term interest rates discussed above, which more

than oÅset the 16 percent decline in the related average balance of such securities.

Total interest expense on debt securities increased by $3,490 million for 2005, compared to 2004. Interest expense on

short-term debt increased by $3,194 million for 2005, as compared to 2004, due to the increase in short-term interest rates

during 2005. Interest expense related to long-term debt increased by $296 million for 2005, as compared with 2004, as the

increase in rates more than oÅset the decrease in the average balance of long-term debt.

Interest expense related to amounts due on pass through payments to PC investors decreased by $157 million for 2005,

as compared to 2004, as liquidation rates on outstanding guaranteed PCs and Structured Securities declined to 24 percent

for 2005, as compared to 29 percent for 2004, driving the year-over-year decline in the average balance of Due to PC

investors.

Income (expense) related to derivatives in qualifying hedge accounting relationships decreased $1,158 million to an

expense of $1,058 million during 2005, as compared to income of $100 million during 2004, primarily as a result of the

increased interest expense associated with the accrual of periodic settlements related to our receive-Ñxed swaps and foreigncurrency swaps resulting from increases in LIBOR. Also contributing to this change was our decision in 2004 to discontinue

hedge accounting treatment for a signiÑcant amount of our pay-Ñxed interest-rate swaps and receive-Ñxed interest-rate

swaps. The net impact of this decision was that the net interest expense related to these interest-rate swaps was no longer a

component of Net interest income in 2005 but rather a component of Derivative gains (losses).

2004 versus 2003

Net interest income on a fully taxable-equivalent basis decreased by $321 million in 2004, as compared with 2003. Net

interest yield on a fully taxable-equivalent basis decreased by 6 basis points to 123 basis points in 2004 from 129 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 in 2004 due to the Retained portfolio's acquisition of relatively lower-yielding assets and the

liquidation of higher-coupon securities, partially oÅset by an improvement in the yield on our Securities purchased under

agreements to resell and Federal funds sold as short-term interest rates increased during 2004. The yield on interest-bearing

liabilities declined in 2004 due to the maturity and repurchase of higher cost long-term debt and the issuance of new longterm debt at lower rates, coupled with a decrease in interest expense related to amounts due to PC investors. This decline in

yield was partially oÅset by higher short-term debt yields in 2004.

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 increased purchases of

lower-coupon non-agency mortgage-related securities (such as variable-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 additional interest income related to 7 percent

growth in the average unpaid principal balance of our Retained portfolio. We also earned lower interest income related to our

Investments portfolio as well as our Securities purchased under agreements to resell and Federal funds sold during 2004 as

compared to 2003. The average balance of these portfolios declined by 14 percent and 39 percent, respectively, during 2004

as we ceased the PC market-making and support activities conducted through our SS&TG business unit and our external

Money Manager program during the fourth quarter of 2004. The decline in these average balances more than oÅset a

28 basis point increase in the yield we earned on our Securities purchased under agreements to resell and Federal funds sold

during 2004 as compared to 2003, due to a change in the asset mix and increases in short-term interest rates during 2004.

25 Freddie Mac
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 of long-term debt increased by

approximately $53 billion, or 11 percent, compared to 2003. This increase more than oÅset 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 moving certain pay-Ñxed swaps out of hedge accounting relationships. In 2004, we

discontinued hedge accounting treatment for pay-Ñxed swaps with a notional balance of approximately $108 billion, moving

them from cash Öow hedge designation to no hedge designation. This movement had a signiÑcant impact on Net interest

income during 2004 because the net interest expense on these swaps 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 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 the fair

value hedge designation to no hedge designation.

Interest expense related to amounts due to PC investors decreased by $933 million as liquidation rates on outstanding

PCs and Structured Securities declined to 29 percent in 2004 from 63 percent in 2003.

Non-Interest Income (Loss)

Management and Guarantee Income

Table 9 provides summary information about Management and guarantee income. The total management and

guarantee rate consists of the contractual management and guarantee fee rate, and the eÅects of the amortization of certain

pre-2003 deferred fees, including credit fees and buy-down fees. Management and guarantee income is the primary

component of the revenue we earn from our credit guarantee activities. Other guarantee-related revenue is deferred and

recognized over time as a component of Income on Guarantee obligation.

Table 9 Ì Management and Guarantee Income(1)

Year Ended December 31,

2005 2004 2003

Amount Rate Amount Rate Amount Rate

(dollars in millions, rate in basis points)

Contractual management and guarantee feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,431 15.7 $1,303 16.5 $1,229 17.3

Amortization of credit and buy-down fees included in Other liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 0.2 79 1.0 424 6.0

Total management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,450 15.9 $1,382 17.5 $1,653 23.3

Unamortized balance of credit and buy-down fees included in Other liabilities, at period

end(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 186 $ 323 $ 465

(1) Excludes amounts related to PCs we held, which are reported in Net interest income.

(2) Credit and buy-down fees 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.

(3) Previous periods' balances have been revised to conform with the 2005 presentation.

2005 vs. 2004

Management and guarantee income increased in 2005 as compared to 2004 primarily driven by a 15 percent increase in

the average outstanding PCs balance, partially oÅset by lower amortization of deferred fees. The total management and

guarantee fee rate was lower for 2005 at 15.9 basis points as compared to 17.5 basis points for 2004. The contractual

management and guarantee fee rate recognized in 2005 decreased to 15.7 basis points from 16.5 basis points in 2004

reÖecting lower fee rates on new business and the liquidation of existing business with relatively higher fee rates. The lower

fee rates on new business were the result of competitive pricing pressures, an increase in buy-down activity, where lenders

pay a portion of their guarantee fee up-front resulting in a lower contractual guarantee fee rate over the life of the related

PCs, and continued use of market adjusted pricing through which guarantee fees are adjusted upward or downward to

compensate for the strength or weakness of our PC prices relative to competing securities. It is important to note that the

increase in buy-downs generates up-front fees that, beginning in 2003, are deferred and recognized over time as a

component of Income on Guarantee obligation.

26 Freddie Mac
Management and guarantee income includes amortization of pre-2003 deferred credit fees and buy-down fees on our

PCs. The unamortized balance of deferred fees related to outstanding PCs was approximately $186 million, $323 million

and $465 million at December 31, 2005, 2004 and 2003, respectively, and will ultimately be reduced to zero over time. The

portion of the management and guarantee fee rate related to the amortization of deferred fees was 0.2 basis points and

1.0 basis point for 2005 and 2004, respectively. The decrease was primarily driven by higher average interest rates for 2005

compared to 2004, resulting in longer estimated lives of the loans underlying our PCs and a decrease in the pace of

amortization. In addition, during the Ñrst quarter of 2005, we improved our approach for estimating the expected weighted

average lives of mortgages underlying our PCs with related deferred credit fees, which in turn are used to calculate the

recognition of deferred fees based on the eÅective interest method. This change in estimate reduced amortization income for

the Ñrst quarter 2005 by $17 million. The decline in the unamortized balance of credit and buy-down fees between 2005 and

2004 relates primarily to the correction of an error in the calculation of the amortization of this balance in prior periods that

reduced the balance by $103 million with a corresponding increase recorded in Other income in 2005.

2004 vs. 2003

Management and guarantee income decreased in 2004 as compared to 2003. This decrease was primarily driven by an

81 percent decrease in amortization of pre-2003 deferred fees, the eÅect of a change in our approach to amortizing deferred

fees implemented in the Ñrst quarter of 2003, which is discussed below, and the decline in the balance of deferred fees

contributed to this decrease. The total management and guarantee income rate declined to 17.5 basis points in 2004 from

23.3 basis points in 2003. 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 primary drivers of the decrease in amortization of deferred fees in

2004 were higher interest rates in 2004 resulting in longer estimated lives of the loans underlying our PCs and a reduction in

the unamortized balances of deferred fees being amortized through Management and guarantee income.

In the Ñrst quarter of 2003, improvements to our amortization approach with respect to deferred fees resulted in the

recognition of $110 million (i.e., 1.5 basis points) of additional amortization income in Management and guarantee income.

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 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 previously outstanding PCs that were liquidated

during 2004. This rate decline was partly driven by the impact of market adjusted pricing on new business purchases. 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.

Gains (Losses) on Guarantee Asset

The change in fair value of the Guarantee asset reÖects:

‚ reductions related to 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. Two principal factors aÅect the fair value of the Guarantee

asset. First, with the passage of time, actual expected cash Öows are realized when received, resulting in a reduction in the

value of the Guarantee asset. Cash Öows received, which are recorded as Management and guarantee income, represent in

part a reduction of our investment in the Guarantee asset. As shown on ""Table 10 Ì Attribution of Change Ì Gains

(Losses) on Guarantee Asset,'' 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).

Second, the fair value of the Guarantee asset is also aÅected by changes in the fair value of future expected cash Öows.

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. See ""Table 24 Ì Changes in Guarantee Asset'' for additional information about the Guarantee asset.

27 Freddie Mac
Table 10 Ì Attribution of Change Ì Gains (Losses) on Guarantee Asset(1)

Year Ended December 31,

2005 2004 2003

(in millions)

Total cash Öows received(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,270) $(1,086) $ (891)

Portion of cash Öows received related to imputed interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371 257 244

Return of investment in Guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (899) (829) (647)

Change in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (138) (306) (814)

Change in estimate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (27) Ì Ì

Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,064) $(1,135) $(1,461)

(1) Represents the change in fair value of the Guarantee asset related to PCs held by third parties that have previously been sold pursuant to SFAS 140 or

PCs issued through our Guarantor Swap program, where we primarily exchange mortgage loans for PCs.

(2) Represents guarantee fees received related to PCs and Structured Securities held by third parties for which a recognized Guarantee asset exists.

(3) Represents a change in estimate resulting from enhancing our approach for determining the fair value of the Guarantee asset. See ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements for further information.

Losses on the Guarantee asset decreased $71 million, or 6 percent, in 2005 as compared with 2004. The decrease in the

change in fair value of future cash Öows during 2005 reÖects, in part, the new valuation approach implemented for 2005,

which uses more market-based information to determine the fair value of the Guarantee asset. Our new valuation approach

eÅectively equates the majority of the fair value of the Guarantee asset with the current, or ""spot,'' market values quoted by

third-party dealers as if the cash Öows were structured in excess-servicing interest-only securities and uses other market

inputs for valuing the remaining portion. Accordingly, changes in the fair value of the Guarantee asset, which are recorded

in current period earnings through Gains (losses) on Guarantee asset, will reÖect the volatility associated with these

market-based inputs. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED

ASSETS'' to our consolidated Ñnancial statements for more information about this new approach.

The decrease in the change in the fair value of future cash Öows during 2004 was primarily due to a smaller overall

decline in mortgage interest rates in 2004 compared to 2003, which aÅected actual and expected prepayments. Return of

investment for each year was consistent with the growth of the outstanding PCs and Structured Securities, as shown in

""Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs and Structured Securities Issued Based on Unpaid

Principal Balances.''

Income on Guarantee Obligation

Table 11 summarizes our income on Guarantee obligation.

Table 11 Ì Income on Guarantee Obligation

Year Ended December 31,

2005 2004 2003

(dollars in millions)

Amortization income related to:

Credit and buy-down fees received in FIN 45 transactions(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 197 $ 128 $ 57

Other components of recognized Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 723 604 868

Income on Guarantee obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 920 $ 732 $ 925

Components of the Guarantee obligation, at period end:

Unamortized balance that is attributable to credit and buy-down fees received in FIN 45 transactions(1) ÏÏÏÏÏÏÏÏ $1,167 $ 940 $ 612

Unamortized balance that is attributable to the other components of the Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,374 3,125 2,292

Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065 $2,904

Liquidation rate for outstanding PCs and Structured Securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24% 29% 63%

(1) Related to upfront cash payments in the form of credit fees and buy-down payments that are received from counterparties to guarantee transactions

that are accounted for pursuant to FIN 45 (e.g., Guarantor Swaps).

(2) Related to outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and investments portfolio

during 2004 and 2003).

In 2005, Income on Guarantee obligation increased as the balance of the Guarantee obligation increased during the

year, oÅsetting the impact of lower PC and Structured Security liquidation rates. The amortization of the Guarantee

obligation is reduced by lower liquidation rates because the rate of amortization is based on changes in the unpaid principal

balance of the underlying mortgage loans. Amortization of credit fees and buy-downs increased in 2005 and 2004 as deferred

balances increased.

In 2004, our Guarantee obligation increased, but our Income on Guarantee obligation decreased as the 2004 full-year

liquidation rate for our outstanding PCs and Structured Securities was signiÑcantly lower than 2003 resulting in

comparatively lower amortization.

28 Freddie Mac
Derivative Overview

Table 12 shows the notional amount for each of our hedge accounting classiÑcations and the corresponding impact of

those positions on our consolidated Ñnancial statements. The application and eÅectiveness of our hedge accounting

strategies can materially aÅect stockholders' equity and the timing of our recognition of earnings because those strategies

determine the accounting for the derivatives involved.

Table 12 Ì Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions

Consolidated Balance Sheets

December 31, 2005 December 31, 2004

Notional Fair Value AOCI Notional Fair Value AOCI

Description Amount (Pre-Tax)(1) (Net of Taxes)(2) Amount (Pre-Tax)(1) (Net of Taxes)(2)

(in millions)

Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $115,146 $ 3,402 $ Ì $113,101 $12,317 $ Ì

Cash Öow hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 668 (26) 4 21,214 228 (25)

No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 567,558 3,131 Ì 622,463 2,486 Ì

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 683,372 6,507 4 756,778 15,031 (25)

Balance related to closed cash Öow hedges ÏÏ Ì Ì (6,291) Ì Ì (7,899)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $683,372 $ 6,507 $(6,287) $756,778 $115,031 $(7,924)

Consolidated Statements of Income for the Years Ended December 31,

2005 2004 2003

Hedge Hedge Hedge

Derivative Accounting Derivative Accounting Derivative Accounting

Gains Gains Gains Gains Gains Gains

Description (Losses) (Losses)(4) (Losses) (Losses)(4) (Losses) (Losses)(4)

(in millions)

Fair value hedges-open(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 22 $ Ì $742 $Ì $697

Cash Öow hedges-open(5)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25) Ì 2 1 29 (53)

No hedge designation(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,332) Ì (4,477) Ì 10 Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,357) $ 22 $(4,475) $743 $39 $644

(1) The fair values of derivatives (netted by counterparty) are presented as Derivative assets, at fair value, and Derivative liabilities, at fair value, on our

consolidated balance sheets.

(2) Derivatives that meet speciÑc criteria may be accounted for as cash Öow hedges. Changes in the fair value of the eÅective portion 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 included in AOCI, net of taxes, until the related forecasted transaction is determined to be probable of not

occurring or aÅects earnings.

(3) 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 forward purchase and sale commitments of securities classiÑed as trading (with notional balances of approximately

$Ì billion, $Ì billion and $78 billion at December 31, 2005, 2004 and 2003, 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

attributable to the hedged risk. For further information, see ""Hedge Accounting Gains (Losses)'' below and ""NOTE 12: DERIVATIVES'' to our

consolidated Ñnancial statements.

(5) For all derivatives in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in Net interest income on our

consolidated statements of income and therefore, those amounts are not included above. For derivatives not in qualifying hedge accounting

relationships, the accrual of periodic cash settlements is recorded in Derivative gains (losses) on our consolidated statements of income.

(6) Derivative gains (losses) in each period include 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.

As Table 12 shows, the majority of our derivatives were not designated in hedge accounting relationships at

December 31, 2005 and 2004. Derivatives that are not in qualifying hedge accounting relationships generally increase the

volatility of reported Non-interest income (loss) because the fair value gains and losses on the derivatives are recognized in

earnings without the oÅsetting recognition in earnings for the change in value of the economically hedged exposures.

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 our counterparty. Conversely, a pay-Ñxed swap requires us to make a Ñxed interest-rate payment to

our counterparty in exchange for a variable-rate payment from our counterparty. Call and put swaptions are options to enter

into receive- and pay-Ñxed 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 mortgage-related assets in the Retained

portfolio. Generally, receive-Ñxed swaps increase in value and pay-Ñxed swaps decrease in value when interest rates decrease

(with the opposite being true when interest rates increase). The fair values of purchased call and put swaptions are sensitive

to changes in interest rates. 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.

EÅective at 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 hedge

accounting requirements. Consequently, we discontinued hedge accounting treatment for these relationships at that time

29 Freddie Mac
resulting in a move of pay-Ñxed swaps with a notional balance of approximately $108 billion 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 a move of receive-Ñxed swaps with a notional

balance of approximately $50 billion from fair value hedge designation to no hedge designation. EÅective at the beginning

of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward purchase

commitments and the majority of our new commitments to forward sell mortgage-related securities. In addition, eÅective

March 31, 2006, we voluntarily discontinued hedge accounting treatment for all derivatives, with the exception of certain

commitments to forward sell mortgage-related securities and one foreign-currency hedge strategy. We believe that our

voluntary discontinuation of hedge accounting treatment for these derivatives assists us in addressing 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.

Derivative Gains (Losses)

Derivative gains (losses) are aÅected by the change in the fair value of and the accrual of periodic settlements of all

derivatives not in hedge accounting relationships. We experienced signiÑcant income volatility 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,

particularly due to the discontinuation of hedge accounting treatment described above. Table 13 provides a summary of the

period-end notional amounts and the gains and losses related to swaptions, swaps and other derivatives that we used to

manage interest-rate risk, but were not accounted for in hedge accounting relationships.

Table 13 Ì Derivatives Not in Hedge Accounting Relationships

Year Ended December 31,

2005 2004 2003

Derivative Derivative Derivative

Gains Gains Gains

Notional (Losses) Notional (Losses) Notional (Losses)

(in billions)

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $146.6 $(0.4) $189.9 $ 0.4 $216.9 $(0.6)

Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34.7 0.2 25.2 (1.4) 123.1 (0.3)

Receive-Ñxed swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81.2 (1.5) 25.6 (0.4) 13.8 (0.2)

Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181.6 0.6 95.0 (0.8) 47.1 2.8

Other(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 123.5 0.1 286.8 (0.6) 395.4 (0.7)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 567.6 (1.0) 622.5 (2.8) 796.3 1.0

Accrual of periodic settlements(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.4) (1.7) (1.0)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $567.6 $(1.4) $622.5 $(4.5) $796.3 $ Ì

(1) Other consists of basis swaps, certain option-based contracts, futures, foreign-currency swaps, interest-rate caps, commitments, derivatives held as part

of our external Money Manager program (in 2003) and other derivatives not accounted for in hedge accounting relationships, including credit

derivatives, swap guarantee derivatives and a prepayment management agreement.

(2) Derivative gains (losses) in each period include 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 transactions are probable of not occurring.

(3) Composed of receive-Ñxed swaps of $0.4 billion and $0.1 billion and pay-Ñxed swaps of $(0.8) billion and $(1.8) billion for the years ended

December 31, 2005 and 2004, respectively.

During 2005, long-term and short-term interest rates generally rose, with short-term interest rates increasing more

signiÑcantly than long-term interest rates. These interest-rate movements caused our pay-Ñxed swaps, which are primarily

long-term, to increase in fair value and our receive-Ñxed swaps, which are primarily short-term, to decrease in fair value.

The accrual of periodic settlements declined during 2005 compared to 2004 because interest accruals related to our payÑxed and receive-Ñxed swaps not in qualifying hedge accounting relationships largely oÅset one another during 2005, but

only did so for the later part of 2004, following the discontinuation of hedge accounting discussed above.

During 2004, we experienced net losses on our call and put swaption positions as the fair values of these positions were

driven down by changes in swap rates and the decline in implied volatilities of interest rates (i.e., the market's expectation of

potential changes in future interest rates). During 2004, a large portion of our pay-Ñxed swaps not in hedge accounting

relationships were forward-starting. Generally, spot and forward rates move 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. The net loss on our pay-Ñxed portfolio for 2004 was caused by the overall

decline in forward rates.

The movement of the pay-Ñxed and receive-Ñxed swaps to no hedge designation at diÅerent dates during 2004 was the

primary cause of the increase in the accrual of periodic settlements 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 instead been reported as a component of Net interest income (loss). The increase in the

30 Freddie Mac
notional balance of our pay-Ñxed swaps not in hedge accounting relationships contributed to a $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 compared to an increase in interest rates during the third quarter of 2003. As interest rates increased during the third

quarter of 2003, our call swaptions declined in value and we incurred losses on commitments to purchase or sell mortgages

and mortgage-related securities. These losses were partially oÅset by gains on pay-Ñxed swaps.

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 amount of any hedge ineÅectiveness, which is 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. Our net hedge ineÅectiveness gains in 2005 related to derivatives used to manage interest-rate risk associated

with our debt securities, along with other derivatives in other fair value hedge accounting relationships. Net hedge

ineÅectiveness gains in 2004 and 2003 related primarily to our fair value hedge accounting relationships where the derivative

is valued using forward rates while the hedged debt is valued using spot rates. As discussed in ""Derivative Overview'' above,

a substantial portion of our derivatives in fair value hedge accounting relationships were reclassiÑed to no hedge designation

during 2004.

Gains (Losses) on Investment Activity

Table 14 summarizes the components of Gains (losses) on investment activity.

Table 14 Ì Gains (Losses) on Investment Activity

Year Ended December 31,

2005 2004 2003

(in millions)

Gains (losses) on trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(289) $(1,071) $(1,606)

Gains (losses) on PC residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (95) 58 (144)

Gains (losses) on sale of mortgage loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 209 725

Gains (losses) on sale of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 546 584 826

Security impairments:

Mortgage-related interest-only security impairmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (71) (66) (524)

Other security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) (60) (212)

Total security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (371) (126) (736)

Lower-of-cost-or-market adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) (2) (179)

Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(127) $ (348) $(1,114)

(1) Represents mortgage loans sold in connection with securitization transactions.

Gains (losses) on trading securities

The fair value of trading securities in our Retained portfolio declined in 2005 as medium- and long-term interest rates

increased during the year. Prior to 2005, our trading positions related primarily to our SS&TG business unit and external

Money Manager program, both of which ceased operations in the fourth quarter of 2004. The trading activities of our

SS&TG business unit resulted in spot-forward diÅerences, or trading losses, that totaled $1,101 million and $981 million in

2004 and 2003, respectively, which were oÅset by net interest income on the held positions. Absent these spot-forward

diÅerences, our trading gains (losses) netted to a $30 million gain in 2004 and a $625 million loss in 2003. These gains and

losses were primarily caused by changes in the prevailing medium- and long-term market interest rates (i.e., 10-year swap

rate). In 2004, trading losses were adversely impacted by prepayments on mortgage-related securities that we held in the

trading portfolios of our SS&TG business unit and external Money Manager program. In 2003, our trading securities

portfolio experienced losses as a result of prepayments that reduced the fair value of these securities during the Ñrst half of

2003. In addition, during the second half of 2003, the portfolio experienced losses as rising interest rates decreased the value

of these investments.

Gains (losses) on PC residuals, at fair value

Gains (losses) on PC residuals that we classify as trading securities relate to certain PCs and Structured Securities we

hold in our Retained portfolio and represent the net fair value of the future cash inÖows and cash outÖows related to our

guarantee of these securities. The fair value of PC residuals is aÅected by several factors including: (a) changes in interest

rates, which aÅect the expected lives of the related PCs and Structured Securities; (b) default experience and loss severity

trends related to our guarantee and (c) third party information with respect to fair value. In 2005, losses on PC residuals

31 Freddie Mac
were also aÅected by changes in the approach we use to estimate the fair values of our guarantee-related assets and

liabilities, which resulted in net pre-tax losses of $(78) million in the Ñrst quarter of 2005. In addition, PC residual losses in

2005 were aÅected by the impact of Hurricane Katrina, which increased the estimated future credit costs considered in the

valuation of the Guarantee obligation component of the PC residuals. In 2004, expected default costs declined due to

continued house price appreciation, generating gains, partially oÅset by declines in mortgage interest rates that reduced the

expected life of the Guarantee asset, generating losses. We recorded losses in 2003, primarily driven by reductions in

mortgage interest rates.

Gains (losses) on sale of mortgage loans

Gains and losses on the sale of mortgage loans are primarily determined based on the volume of mortgage loan sales and

interest rate movements from the time the loans are purchased until the time they are sold in any given period. Net gains on

sales of mortgage loans have declined since 2003 primarily due to the decline in the volume of loan sales as our guarantee

activities have trended toward a higher proportion of Guarantor Swap transactions as opposed to sales of mortgage loans

from our Retained portfolio. Net gains on the sales of mortgage loans from our Retained portfolio decreased in 2005 and

2004 from 2003 levels as the proceeds from such sales have declined to approximately $24 billion in 2005 from $31 billion

in 2004 and $84 billion in 2003 reÖecting the decline in volume.

Gains (losses) on sale of available-for-sale securities

Proceeds from the sale of available-for-sale securities totaled $95 billion, $86 billion and $144 billion during 2005, 2004

and 2003, respectively, and we recognized net gains during each year. Prior to 2005, we generated a large volume of these

sales through our SS&TG business unit and external Money Manager program, which ceased operations during the fourth

quarter of 2004. During 2005, our sales of available-for-sale securities were primarily from the Retained portfolio reÖecting

structuring activity designed to improve returns and to enhance liquidity by broadening the investor base for our mortgagerelated securities.

Total security impairments

Total security impairments for 2005 were $371 million. Of that amount, approximately $185 million relates to

impairments of certain commercial mortgage-backed securities, or CMBS, which involved cash Öows from mixed pools (i.e.,

mortgage loan pools containing both multifamily residential loans and non-residential commercial loans). In December

2005, HUD determined that such mixed-pool investments are not authorized under our charter. OFHEO concurred with

HUD's determination and subsequently directed us to provide a written plan for the divestiture of these assets, which we

have done. Accordingly, we determined that we no longer had the ability or intent to hold these investments and, pursuant to

relevant accounting guidance, recognized impairments on aÅected CMBS investments with an unrealized loss at

December 31, 2005. Accounting guidance does not permit the recognition of unrealized gains on other aÅected CMBS until

such securities are sold. As such, we anticipate that the sale of the related assets in 2006 would result in a net gain, absent

signiÑcant changes in market prices. Also included within the $371 million in total security impairments in 2005 were

$71 million of impairments of mortgage-related interest-only securities, primarily related to the decline in mortgage interest

rates experienced in the second quarter of 2005, and $115 million of remaining security impairments, mainly associated with

an adverse change in estimated cash Öows on securities in an unrealized loss position.

Impairments in 2004 and 2003 included impairments on manufactured housing securities totaling $44 million and

$208 million, respectively, as a result of the comparatively low credit quality of these securities. In 2003, we also recorded

impairments on mortgage-related interest-only securities totaling $524 million primarily driven by declines in mortgage

interest rates during the Ñrst half of the year.

Lower-of-cost-or-market adjustments

We value mortgage loans classiÑed as held-for-sale at the lower-of-cost-or-market with resulting valuation adjustments,

if any, reÖected in this caption. Increases in mortgage interest rates during 2005, particularly in the Ñrst, third and fourth

quarters, resulted in higher lower-of-cost-or-market adjustments than recorded in 2004. 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-cost-or-market valuation adjustments that totaled

$(178) million in the third quarter of 2003.

Gains (Losses) on Debt Retirement

During 2005, we recognized a pre-tax gain of $206 million on debt repurchases of $11.7 billion. During 2004 and 2003,

we recognized pre-tax losses of $(327) million and $(1,775) million, respectively, on debt repurchases of $14.5 billion and

$27.3 billion, respectively. We repurchase our outstanding debt securities on a regular basis to help preserve the liquidity of

32 Freddie Mac
our debt securities and to manage our mix of assets and liabilities. For example, in early 2005, we executed a tender oÅer for

certain debt securities with expired European call options because the price of those securities had declined relative to other

debt securities. In 2005, we also recorded gains on repurchases of debt originally issued in response to investor requests. See

""LIQUIDITY AND CAPITAL RESOURCES'' for further discussion of our debt management activities. Our 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. In all periods, Gains (losses) on debt retirement include previously deferred amounts

related to cash Öow hedges associated with the repurchased debt securities.

Resecuritization Fees

Table 15 summarizes the components of our single-class and multi-class structured resecuritization activities.

Table 15 Ì Total Resecuritization Fees and Activity

Year Ended December 31,

2005 2004 2003

(in millions)

Resecuritization fees(1):

Multi-classÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 119 $ 149 $ 338

Single-class ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 10 14

Total resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 125 $ 159 $ 352

(1) Represents the portion of resecuritization fee income that we recognize as Resecuritization fees, which relate to resecuritization classes held by third

parties.

Investor demand for multi-class structured cash Öows tends to increase in periods characterized by a steep yield curve

and declining interest rates. Beginning in the second half of 2005, a Öattening of the yield curve accompanied by rising

mortgage interest rates slowed investor demand for our multi-class Structured Securities, particularly REMICs. Conversely,

during 2004 and 2003, investor demand for our multi-class Structured Securities remained high largely due to the

comparatively steep yield curve during these periods.

During 2005, partly in response to competitive market conditions, we began to issue select REMIC products (e.g.,

Reference REMICSM securities, Whole Loan REMIC and alternative collateral deals) and Giant PCs without charging upfront transaction fees, which we previously charged under our normal practice.

Other Income

Other income totaled $24 million, $230 million and $493 million for 2005, 2004 and 2003, respectively. Absent

Öuctuations related to certain prior period accounting errors in 2005, 2004 and 2003 (discussed in more detail below), Other

income would have been $104 million, $172 million and $279 million in 2005, 2004 and 2003, respectively. Other income

declined in 2005 and 2004, primarily due to a decline in the use of Loan Prospector», our automated loan-underwriting tool,

as the proportion of loans underwritten using alternate underwriting tools prior to purchase has increased.

In the process of reviewing our accounting policies and practices during 2005, 2004 and 2003, we identiÑed certain

errors not material to our Ñnancial statements that related to income in previously reported periods. During 2005, 2004 and

2003, we identiÑed approximately $80 million of expense, net ($52 million after-tax), $58 million of income, net

($38 million after-tax) and $214 million of income, net ($139 million after-tax) of such errors, which were recorded in the

Ñrst quarter of each respective year. During 2005, our largest correction related to an error associated with the accrual of

interest income for certain mortgage-related securities during 2001 to 2004, which reduced Other income in 2005 by

approximately $210 million ($137 million after-tax). In addition, we corrected errors related to the ending balance of pre2003 deferred credit and buy-down fees at December 31, 2004 that increased Other income in 2005 by $103 million

($67 million after-tax) as well as other errors that increased Other income in 2005 by $27 million ($18 million after-tax).

33 Freddie Mac
Non-Interest Expense

Table 16 summarizes the components of Non-interest expenses.

Table 16 Ì Non-Interest Expense

Year Ended December 31,

2005 2004 2003

(in millions)

Administrative expenses:

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 805 $ 758 $ 624

Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 386 588 311

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 60 52

Other administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286 144 194

Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,535 1,550 1,181

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 251 143 (5)

REO operations (income) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 (3) 7

Housing tax credit partnershipsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320 281 200

Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 129 157

Other expenses:

Reserve for legal settlementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 Ì 75

Realized losses on certain guaranteesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234 33 60

Amortization of credit enhancementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99 86 134

Selected aÅordable housing transaction fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 41 124

Loan Prospector»-related expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 56 99

OFHEO civil money penaltyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 125

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 55 79

Total other expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 771 271 696

Total Non-interest expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,013 $2,371 $2,236

Administrative Expenses

Salaries and employee beneÑts increased during each of the past three years primarily because we hired additional

employees in support of our Ñnancial reporting and infrastructure-related activities. In addition, we continued to experience

increases in employee incentive compensation costs, such as employee stock compensation, special incentive awards and

annual employee bonuses, in an eÅort to recruit new talent and retain existing employees. The cessation of our SS&TG

business unit and external Money Manager program activities during the fourth quarter of 2004 and related employee

terminations partially oÅset other increases in Salaries and employee beneÑts during 2005. Furthermore, Salary and

employee beneÑts in 2004 included an $18 million charge for employee severance and related costs associated with the

cessation of SS&TG and external Money Manager activities.

Professional services expense Öuctuated with our ongoing Ñnancial reporting and internal control and remediation

activities. Professional services expense declined during 2005 compared to 2004, in part because we were able to replace

consultants with employees, increasing our Salaries and employee beneÑts expense as a consequence.

Other administrative expenses are presented net of certain expenses that we defer related to capitalized software

development activities. The net eÅect of these capitalized software costs, including the write-oÅ of previously capitalized

amounts, was an increase (reduction) to Other administrative expenses totaling $29 million, $(94) million and $(42) million

in 2005, 2004 and 2003, respectively. In addition, Other administrative expenses increased in 2005 compared to 2004 as a

result of higher OFHEO regulatory assessments associated with its oversight responsibilities and charitable contributions,

particularly associated with Hurricane Katrina.

Provision for Credit Losses

The Provision 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 for credit

losses was $251 million and $143 million in 2005 and 2004, respectively, compared to a beneÑt of $5 million in 2003.

The Provision for credit losses increased during 2005 primarily because Hurricane Katrina heavily damaged properties

underlying some of the mortgage loans we hold in the Retained portfolio or that underlie our guaranteed PCs and Structured

Securities. The 2005 provision also includes increases related to the single-family portfolio as we anticipate an increase in

the severity of losses on a per-property basis driven, in part, by the expectation of low or slower home price appreciation in

certain areas and increased incurred losses as delinquencies occur for loans that are expected to experience higher default

rates based on their year of origination. The Provision 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. However, a decrease in

the estimated incurred losses for the multifamily mortgage portfolio, driven primarily by an increase in the estimated fair

value of multifamily properties in certain areas, partially oÅset the increase resulting from the single-family portfolio.

34 Freddie Mac
Housing Tax Credit Partnerships

Operating losses of our housing tax credit partnerships, which are recorded as a component of Non-interest expense,

have increased over the last three years as our investments in these partnerships have increased. The increased investment

in Housing tax credit partnerships have generated related tax beneÑts, which consist of tax credits and the tax deductibility of

the operating losses. See ""Income Tax Expense'' for a description of the impact of these investments on our income tax

expense.

Other Expenses

Reserve for legal settlements

On April 20, 2006, we announced that we reached an agreement in principle to settle the securities class action and

stockholder derivative lawsuits that relate to our restatement. The $339 million expense recorded in 2005 for Reserves for

legal settlements includes this settlement, net of expected insurance proceeds. This expense is in addition to the $75 million

expense we recorded in 2003 for a loss contingency reserve related to legal proceedings arising from the restatement. See

""NOTE 13: LEGAL CONTINGENCIES'' to our consolidated Ñnancial statements for more information.

Realized losses on certain guarantees

The increase in Realized losses on certain guarantees during 2005 resulted primarily from the application of our new

approach for determining the initial fair values of our guarantee-related assets and liabilities that employs more direct

market-based information. Such losses arise in connection with our Guarantor Swap transactions and in 2005 were partly

driven by our eÅorts to meet the aÅordable housing goals and subgoals established by HUD. When determining the fees we

will charge customers with respect to providing our credit guarantee, we consider all of the mortgage loans we expect to

guarantee. However, the recognition of realized losses on certain guarantees or the deferral of guarantee income is

determined based upon the speciÑc loan pools formed that underlie our PCs and Structured Securities. Our new approach

for valuing our guarantee-related assets and liabilities is discussed in ""NOTE 2: TRANSFERS OF SECURITIZED

INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements.

Amortization of credit enhancements

Amortization of our credit enhancement asset accelerates when the related PC or Structured Security liquidates. Total

Guaranteed PCs and Structured Securities Issued liquidated at roughly the same pace in 2005 and 2004, resulting in

relatively Öat amortization expense during these years. These securities liquidated at a much faster pace in 2003 compared to

2004 and 2005 because mortgage interest rates declined during the Ñrst half of 2003, resulting in relatively higher

amortization expense.

Other expenses

Other expenses in 2003 included a $125 million civil money penalty we paid in connection with the OFHEO consent

order. We entered into certain multifamily aÅordable transactions during 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. We did not enter into similar transactions during 2005.

Income Tax Expense

For 2005, 2004 and 2003, our eÅective tax rates were 14 percent, 21 percent and 31 percent, respectively. The decrease

in the eÅective tax rate over the past three years is primarily due to the decline in pre-tax income and year-over-year

increases in tax credits related to our investments in housing tax credit partnerships and interest earned on tax-exempt

securities. Tax beneÑts associated with our investments in housing tax credit partnerships reduced Income tax expense by

$476 million, $378 million and $302 million for 2005, 2004 and 2003, respectively. We expect tax credits resulting from our

investments in housing tax credit partnerships to grow in the future. However, our ability to use all of the tax credits

generated by existing or future investments in housing tax credit partnerships to reduce our federal income tax liability may

be limited, depending on the amount of our future federal income tax liability, which cannot be predicted with certainty.

Our eÅective tax rate for 2004 beneÑted from a $94 million reduction to our tax reserves as a result of a closing

agreement we entered into with the Internal Revenue Service relating to the tax treatment of dividends paid on step-down

preferred stock issued by our two REIT subsidiaries. In 2003, we recorded a non-tax deductible $125 million OFHEO civil

money penalty and a $75 million loss contingency reserve described above in ""Other expenses,'' which increased our

eÅective tax rate.

35 Freddie Mac
CONSOLIDATED BALANCE SHEETS ANALYSIS

The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated

Ñnancial statements, including the accompanying notes. Also see ""CRITICAL ACCOUNTING POLICIES AND

ESTIMATES'' for more information concerning our signiÑcant accounting policies.

Retained Portfolio

Table 17 provides detail regarding the mortgage loans and mortgage-related securities that comprised our Retained

portfolio.

Table 17 Ì Characteristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio

December 31,

2005 2004

Fixed Variable Fixed Variable

Rate Rate(1) Total Rate(2) Rate(1)(2) Total(2)

(in millions)

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 56,458 $ 5,023 $ 61,481 $ 56,530 $ 4,830 $ 61,360

Guaranteed PCs and Structured Securities:(3)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 299,188 61,745 360,933 304,555 51,737 356,292

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 247 144 391 261 145 406

Total Guaranteed PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 299,435 61,889 361,324 304,816 51,882 356,698

Non-Freddie Mac mortgage-related securities:

Agency mortgage-related securities:(4)

Fannie Mae:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,818 13,180 41,998 41,828 14,504 56,332

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,294 41 1,335 1,589 83 1,672

Ginnie Mae:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,045 218 1,263 1,599 81 1,680

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 Ì 30 31 Ì 31

Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,187 13,439 44,626 45,047 14,668 59,715

Non-agency mortgage-related securities:(5)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,795 180,632 186,427 8,243 115,168 123,411

Commercial mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,860 7,627 43,487 36,791 4,393 41,184

Mortgage revenue bonds(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,171 150 11,321 8,945 132 9,077

Manufactured housing(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,183 168 1,351 1,289 202 1,491

Total non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,009 188,577 242,586 55,268 119,895 175,163

Total unpaid principal balance of Retained portfolio(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $441,089 $268,928 710,017 $461,661 $191,275 652,936

Premiums, discounts, deferred fees and other basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,440 4,039

Net unrealized gains (losses) on mortgage-related securities, pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,551) 6,762

Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 597 845

Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (119) (114)

Total Retained portfolio per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $709,384 $664,468

(1) Variable-rate mortgages include mortgages with a current contractual coupon that is scheduled to change prior to contractual maturity, ARMs, and

mortgage-related securities backed by ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods. Mortgage loans also include mortgages with

balloon/reset provisions.

(2) Amounts for 2004 have been revised to conform with the 2005 presentation.

(3) We guarantee the payment of principal and interest on our Guaranteed PCs and Structured Securities and are subject to the credit risk associated with

the underlying mortgage loan collateral.

(4) 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.

(5) Credit rating of most non-agency mortgage-related securities is designated by at least two nationally recognized credit rating agencies.

(6) Consists of obligations of states and political subdivisions. Approximately 66 percent and 72 percent were AAA rated at December 31, 2005 and 2004,

respectively.

(7) At December 31, 2005 and 2004, 51 percent and 43 percent, respectively, of mortgage-related securities backed by manufactured housing were rated

BBB¿ or above. For the same dates, 75 percent and 96 percent, respectively, of these securities were supported by third-party credit enhancements

(e.g., bond insurance) and other credit enhancements (e.g., deal structure through subordination). Approximately 33 percent were AAA rated at

December 31, 2005 and 2004.

(8) Approximately 98 percent and 97 percent were AAA rated at December 31, 2005 and 2004, respectively.

The aggregate carrying value of the loans and securities held in our Retained portfolio increased 7 percent during 2005

while their aggregate unpaid principal balance increased by 9 percent. The aggregate unpaid principal balance of the loans

and securities held in our Retained portfolio 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. The non-agency mortgage-related securities portion of the Retained portfolio grew during 2005 in both unpaid

principal balance and as a percentage of the total Retained portfolio. This growth was a result of the attractive optionadjusted spreads on, and increased supply of, non-agency mortgage-related securities, particularly variable-rate products,

and fewer attractive investment opportunities in agency Ñxed-rate products. During 2005, strong demand from other

investors, combined with fewer mortgage loan originations, generally resulted in unattractive mortgage-to-debt optionadjusted spreads on agency Ñxed-rate products. Net unrealized gains (losses) on mortgage-related securities, pre-tax was a

36 Freddie Mac
loss at December 31, 2005 compared to a gain at December 31, 2004. This change was primarily attributable to rising

interest rates.

Table 18 provides additional detail regarding the fair value of mortgage-related securities in the Retained portfolio.

Table 18 Ì Fair Value of Available-For-Sale and Trading Mortgage-Related Securities in the Retained Portfolio

December 31,

2005 2004 2003

(in millions)

Available-for-sale securities:

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $351,447 $352,102 $384,426

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,306 59,519 76,844

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,115 1,762 2,918

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231,356 168,058 109,409

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,241 9,020 7,729

Total available-for-sale mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 638,465 590,461 581,326

Trading securities:

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,156 11,398 17,590

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 534 385 586

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 204 59 24

Total trading mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,894 11,842 18,200

Total fair value of available-for-sale and trading mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $647,359 $602,303 $599,526

Issuers Greater than 10 Percent of Stockholders' Equity

At December 31, 2005, we held Fannie Mae securities in our Retained portfolio with a fair value of $43.8 billion that

represented 161 percent of Total stockholders' equity. No other individual issuer at the individual trust level exceeded

10 percent of Total stockholders' equity at December 31, 2005.

Cash and Investments

Table 19 provides additional detail regarding the non-mortgage-related securities that comprised our Cash and

investments portfolio.

Table 19 Ì Cash and Investments

December 31,

2005 2004

Average % of Portfolio Average % of Portfolio

Fair Maturity A Rated or Fair Maturity A Rated or

Value (Months) Better(1) Value (Months) Better(1)

(dollars in millions)

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,468 G3 N/A $35,253 G3 N/A

Investments:

Non-mortgage-related securities:

Asset-backed securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,578 N/A 100.0% 21,733 N/A 100.0%

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,823 282 100.0% 8,097 303 99.7%

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,764 G3 100.0% Ì Ì Ì

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,165 100.0% 29,830 99.9%

Federal funds sold and Eurodollars ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,909 G3 N/A 18,647 G3 N/A

Securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,250 G3 N/A 13,550 G3 N/A

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,159 32,197

Total investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,324 62,027

Total Cash and investments per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏ $67,792 $97,280

(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.

The balance of our Cash and investments portfolio at December 31, 2005 decreased by approximately 30 percent from

December 31, 2004. The balance at December 31, 2004 included funds from the liquidation of the portfolios of our SS&TG

business unit and external Money Manager program. The decrease in 2005 was also driven by our use of Cash and cash

equivalents to return swap collateral to our derivative counterparties, as the fair market value of derivative instruments

covered by counterparty collateral arrangements at December 31, 2005 decreased as compared to December 31, 2004. See

""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative

Counterparty Credit Risk'' for further discussion of these arrangements.

37 Freddie Mac
Table 20 provides additional detail regarding the fair value of securities in the Cash and investments portfolio.

Table 20 Ì Fair Value of Securities in the Cash and Investments Portfolio(1)

December 31,

2005 2004 2003

(in millions)

Available-for-sale securities:

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,578 $21,733 $16,596

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 4,924

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,823 8,097 9,494

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,764 Ì 150

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 64

Total available-for-sale non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,165 29,830 31,228

Trading securities:

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 17,266

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 15,052

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 490

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 9

Total trading mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 32,817

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 52

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies ÏÏÏÏÏ Ì Ì 479

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 341

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 437

Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 5

Total trading non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,314

Total mortgage-related and non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $42,165 $29,830 $65,359

(1) The reduction of trading securities within the Cash and investments portfolio in 2004 was attributable to the liquidation in the fourth quarter of 2004 of

securities purchased through our SS&TG business unit and external Money Manager program.

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, 2005 and 2004, respectively.

38 Freddie Mac
Derivative Assets and Liabilities, at Fair Value

Table 21 summarizes the notional or contractual amounts and related fair value of our total derivative portfolio by

product type.

Table 21 Ì Total Derivative Portfolio

December 31,

2005 2004

Notional or Notional or

Contractual Contractual

Amount(1) Fair Value(2) Amount(1) Fair Value(2)

(in millions)

Interest-rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $181,562 $ (991) $ 95,043 $(2,879)

Receive-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159,212 756 83,602 2,394

Basis (Öoating to Öoating)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234 Ì 94 1

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 341,008 (235) 178,739 (484)

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146,615 3,453 189,945 4,988

Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,675 1,200 25,175 267

Other option-based derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,814 (7) 9,084 (3)

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 193,104 4,646 224,204 5,252

Futures(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,252 19 129,110 (33)

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,850 2,124 56,850 10,303

Interest-rate caps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45 Ì 9,897 5

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 658,259 6,554 598,800 15,043

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,961 (44) 32,952 (9)

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,414 (1) 10,926 (2)

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 738 (2) 408 (1)

Prepayment management agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 113,692 Ì

Total derivative portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $683,372 $6,507 $756,778 $15,031

(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 on 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, and is reported in the Derivative assets, at fair value and Derivative liabilities, at fair

value captions. The fair values for futures are directly derived from quoted market prices. Fair values of other derivatives are derived primarily from

valuation models using market data inputs.

(3) Primarily represents written options, including guarantees of stated Ñnal maturity of issued Structured Securities and written call options on PCs we

issued (see ""NOTE 4: FINANCIAL GUARANTEES'' to our consolidated Ñnancial statements for more information).

(4) Includes Treasury futures notional amounts of $Ì million and $2,001 million at December 31, 2005 and 2004, respectively.

The carrying value of our derivative assets and liabilities on our consolidated balance sheets is equal to their fair value,

which is aÅected by changes in market conditions such as the level and expected volatility of interest rates. The composition

of our derivative portfolio will change from period to period as a result of derivative purchases, terminations prior to

contractual maturity and expiration of the derivatives at their contractual maturity. We record changes in fair values of our

derivatives in current income or, to the extent our accounting hedge relationships are eÅective, we may defer those changes

in AOCI or oÅset them by basis adjustments to the related hedged item. As a result, the increases or decreases in fair value

by derivative categories will not correspond directly to Derivative gains (losses) or Hedge accounting gains (losses) on our

consolidated statements of income.

The fair value of the total derivative portfolio declined in 2005 due to a decline in the fair value of foreign-currency

swaps used primarily to hedge Euro-denominated debt as the U.S. dollar strengthened relative to the Euro during the year.

The notional balance of our total derivative portfolio declined by $73.4 billion during 2005 as a result of the termination of

our prepayment management agreement at December 31, 2005 and a change in the composition of our derivative portfolio.

The composition of our derivative portfolio changed with an increase in the notional balance of interest-rate swaps, oÅset

by decreases in the notional balance of call swaptions, futures and foreign-currency swaps. Several factors contributed to this

change in derivative composition. The asset mix in the Retained portfolio has moved toward a greater proportion of nonagency, variable-rate mortgage-related securities, which generally require less interest-rate protection than Ñxed-rate

products. Also, the gradual increase in market interest rates and the Öattening of the yield curve in 2005 has reduced the

interest-rate risk of our existing Ñxed-rate investments, thereby reducing our need for call swaptions to manage the related

risk. In addition, during 2005 and 2004, we sought to oÅset the prepayment risk in the Retained portfolio by increasing the

amount of our callable debt outstanding.

The notional balance of our interest-rate swaps increased in the aggregate during 2005. Due to the Öattening of the yield

curve and generally higher interest rates in 2005, we entered into pay-Ñxed swaps with relatively short maturities to oÅset

our yield curve exposure. The notional balance of receive-Ñxed swaps increased primarily as a result of economic hedging

39 Freddie Mac
activities related to our callable debt securities outstanding. Callable debt gives us the option to redeem the debt security on

one or more speciÑed call dates or at anytime on or after a speciÑed call date. We employ receive-Ñxed swaps to protect

against a decline in interest rates until the speciÑed call date and in between speciÑed call dates. As a result of changes in

the composition of our debt securities issued, we also reduced the notional balance of our call swaptions during 2005. The

notional balance of our futures declined in 2005 primarily because we reduced our position in Eurodollar future contracts

held for risk-management purposes in response to movements in short-term rates. The notional balance of our foreigncurrency swaps declined due to maturities of such swaps throughout 2005 that were not replaced by new contracts.

Table 22 summarizes the changes in derivative fair values.

Table 22 Ì Changes in Derivative Fair Values

December 31,

2005 2004

(in millions)

Beginning balance, at January 1 Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,031 $15,823

Net change in:

FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 (214)

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (35) 221

Credit derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 (7)

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (1)

Other derivatives:(1)

Changes in fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,486) (627)

Fair value of new contracts entered into during the period(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,522 1,733

Contracts realized or otherwise settled during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,577) (1,897)

Ending balance, at December 31 Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,507 $15,031

(1) Includes fair value changes for over-the-counter, or OTC, interest-rate swaps, option-based derivatives, foreign-currency swaps and interest-rate caps.

(2) Consists primarily of cash premiums paid or received on options and the initial value of interest-rate swaps after we have exercised related swaptions.

Table 23 shows the fair value for each derivative type and the maturity proÑle of our derivative positions. The fair value

of a longer-term derivative generally will vary more over time than a comparable derivative with a shorter term. A positive

fair value in Table 23 for each derivative type is the estimated amount, prior to netting by counterparty, that we would be

entitled to receive if we terminated the derivatives of that type. A negative fair value for a derivative type is the estimated

amount, prior to netting by counterparty, that we would owe if we terminated the derivatives of that type. See Table 35

under ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for additional information regarding

derivative counterparty credit exposure. Table 23 also provides the weighted-average Ñxed rate of our pay-Ñxed and receiveÑxed swaps.

40 Freddie Mac
Table 23 Ì Derivative Fair Values and Maturities

December 31, 2005

Fair Value(1)

Greater than

Total Fair Less than 1 to 3 3 and up to In Excess

Value 1 Year Years 5 Years of 5 Years

(dollars in millions)

Interest-rate swaps:

Pay-Ñxed:

SwapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 882 $ 23 $ 551 $ 376 $ (68)

Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.02% 4.25% 4.56% 4.94%

Forward-starting swaps(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,873) Ì Ì Ì (1,873)

Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 6.05%

Total pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (991) 23 551 376 (1,941)

Receive-Ñxed:

SwapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 756 (147) (344) 395 852

Weighted-average Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.95% 4.22% 4.69% 5.07%

Total receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 756 (147) (344) 395 852

Total interest-rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (235) (124) 207 771 (1,089)

Option-based:

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,453 86 877 406 2,084

Put swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,200 7 Ì 124 1,069

Other option-based derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) Ì Ì Ì (7)

Total option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,646 93 877 530 3,146

FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 19 Ì Ì Ì

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,124 297 144 1,178 505

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) (44) Ì Ì Ì

Swap guarantee derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) Ì Ì Ì (2)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,508 $ 241 $1,228 $2,479 $ 2,560

Credit derivative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,507

(1) Fair value is categorized based on the years from December 31, 2005 until the contractual maturity of the derivative.

(2) Represents interest-rate swap agreements scheduled to begin on a future date.

Guarantee Asset

Table 24 summarizes the changes in our Guarantee asset balance.

Table 24 Ì Changes in Guarantee Asset

December 31,

2005 2004

(in millions)

Beginning balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,516 $3,686

Additions, net of repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,631 1,965

Gains (losses) on Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,064) (1,135)

Ending balance, at December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,083 $4,516

(1) 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 2005 and 2004, the primary 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 2004 primarily because net

repurchases of PCs and Structured Securities into the Retained portfolio increased by approximately 28 percent in 2005 as

compared to 2004 (based on unpaid principal balances).

41 Freddie Mac
Total Debt Securities, Net

Table 25 reconciles the par value of our debt securities to the amounts shown on our consolidated balance sheets.

Table 25 Ì Reconciliation of the Par Value of Total Debt Securities to the Consolidated Balance Sheets

December 31,

2005 2004

(in millions)

Total debt securities:

Par value(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $780,382 $749,219

Unamortized balance of discounts and premiums(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (39,338) (33,899)

Foreign-currency-related and hedging-related basis adjustments(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,748 16,377

Total debt securities, net per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $748,792 $731,697

(1) Includes securities sold under agreements to repurchase and Federal funds purchased and swap collateral obligations.

(2) Primarily represents unamortized discounts on zero-coupon debt securities. Also, includes accrued interest payable on swap collateral obligations.

(3) Primarily represents the mark-to-market of foreign-currency debt that is in hedge accounting relationships. Balance will Öuctuate due to a number of

factors, primarily the U.S. dollar to Euro exchange rate.

Total debt securities, net increased by approximately $17.1 billion during 2005 while the par value of outstanding debt

securities increased by $31.2 billion as a result of our net issuance of Medium-term Notes, partially oÅset by reductions in

swap collateral obligations. The increase in par value was oÅset by increases in the unamortized balance of net discounts,

and a decline in foreign-currency-related and hedging-related basis adjustments. During 2005, the par value of our callable

Medium-term Notes increased by $26.3 billion, resulting from issuances of $88.8 billion oÅset by calls, maturities and

repurchases. In 2005, we issued more callable Ñxed-rate debt as part of our eÅort to reduce the liquidity risk of short-term

debt at a time when relative funding costs across our credit curve were more attractive. Our foreign-currency-related and

hedging-related basis adjustments declined during 2005 primarily due to Öuctuations in foreign-currency exchange rates. See

""LIQUIDITY AND CAPITAL RESOURCES'' for further discussion of our debt management activities.

Table 26 summarizes our Senior debt, due within one year.

Table 26 Ì Senior Debt, Due Within One Year

2005

Average Outstanding

December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4) Month End

(dollars in millions)

Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $181,468 4.00% $181,878 3.11% $194,578

Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,032 4.17 850 3.35 2,032

Securities sold under agreements to repurchase and Federal funds

purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 450 4.26 267 3.08 1,000

Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,768 4.30 10,374 3.14 13,533

Hedging-related basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) N/A

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 192,713 4.02

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,819 3.42

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $288,532 3.82

2004

Average Outstanding

December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4) Month End

(dollars in millions)

Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $180,198 2.04% $184,834 1.40% $212,715

Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 2.51 4,289 1.31 5,320

Securities sold under agreements to repurchase and Federal funds

purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 801 1.37 3,046

Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,279 2.24 13,549 1.36 16,279

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196,639 2.05

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,664 3.33

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $282,303 2.44

42 Freddie Mac
2003

Average Outstanding

December 31, During the Year Maximum

Weighted Weighted Balance, Net

Average Average Outstanding at Any

Balance, Net(1) EÅective Rate(2) Balance, Net(3) EÅective Rate(4) Month End

(dollars in millions)

Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $188,309 1.12% $207,374 1.21% $264,370

Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,300 1.18 1,243 1.32 5,300

Securities sold under agreements to repurchase and Federal funds

purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,611 0.96 2,283 0.94 8,296

Swap collateral obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,082 1.02 11,694 1.13 16,082

Securities sold, not yet purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 733 N/A

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,035 1.11

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,227 3.61

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $295,262 1.81

(1) Represents par value, net of associated discounts or premiums. Swap collateral obligations include the related accrued interest payable.

(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) Includes unamortized discounts or premiums and issuance costs. Issuance costs are reported in the Other assets caption on our consolidated balance sheets.

(4) 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.

Guarantee Obligation

Table 27 summarizes the changes in the Guarantee obligation balance.

Table 27 Ì Changes in the Guarantee Obligation

December 31,

2005 2004

(in millions)

Beginning balance, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,065 $2,904

Transfer-out to the loan loss reserve(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) (13)

Additions, net of repurchases:

Fair value of newly-issued guarantee obligations(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,629 1,174

Deferred gains on newly-executed guarantees(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 777 732

Amortization income related to:

Credit and buy-down fees received(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (197) (128)

Initial fair value of contractual guarantee fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (723) (604)

Income on Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (920) (732)

Ending balance, at December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065

Components of the Guarantee obligation, at period end:

Unamortized balance that is attributable to credit and buy-down fees received in FIN 45 transactions(4) ÏÏÏÏÏÏÏÏÏÏÏÏ $1,167 $ 940

Unamortized balance that is attributable to the other components of the Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,374 3,125

Ending Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065

(1) Represents portions of the Guarantee obligation 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.

(2) Includes the fair value of the Guarantee obligation that was recognized in connection with transfers of PCs and Structured Securities that qualiÑed as

sales, as well as the fair value of the Guarantee obligation 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.

(3) Represents the excess of recognized consideration received on guarantee transactions that are accounted for pursuant to the requirements of FIN 45

over the recognized fair value of the corresponding Guarantee obligation. Consideration received includes the contractual right to receive guarantee

fees, various credit enhancements for which we are the named beneÑciary and upfront cash payments that relate to credit and buy-down fees.

(4) Relates to upfront cash payments in the form of credit fees and buy-down payments that are received from counterparties to guarantee transactions that

are accounted for pursuant to FIN 45 (e.g., Guarantor Swaps).

In 2005, the Guarantee obligation increased due to business volume, the application of a new approach for estimating

the initial fair value of the Guarantee obligation and generally increasing mortgage interest rates during the year resulting in

lower liquidation rates on outstanding PCs and Structured Securities and lower rates of amortization. In addition, in 2004,

the Guarantee obligation increased due to business volume. See ""NOTE 2: TRANSFERS OF SECURITIZED

INTERESTS IN MORTGAGE-RELATED ASSETS'' for a discussion of our approach for estimating the initial fair value

of the Guarantee obligation.

Total Stockholders' Equity

The balance of Total stockholders' equity as presented on our consolidated balance sheets declined in 2005 primarily as

a result of an increase in net unrealized losses on available-for-sale securities, which are a component of the AOCI balance,

partially oÅset by an increase in Retained earnings. The driver of the increase in Retained earnings was net income earned

in 2005, partially oÅset by preferred and common stock dividends declared during 2005. Common stock dividends were

higher in 2005 due to increases in quarterly dividends declared by our board of directors in March and December of 2005.

43 Freddie Mac
The balance of AOCI at December 31, 2005 was a loss of approximately $8.8 billion, net of tax, compared to a loss of

$3.6 billion, net of tax, at December 31, 2004. This decline in the AOCI balance was primarily the result of changes in the

mark-to-fair value of our available-for-sale securities. Our available-for-sale securities are primarily funded with debt

securities which are recorded at amortized cost. As interest rates rose during 2005, the balance of AOCI related to availablefor-sale securities shifted to a net unrealized loss position from a net unrealized gain position at December 31, 2004. The

balance of AOCI associated with our available-for-sale securities was a loss of approximately $2.5 billion, net of tax, at

December 31, 2005 compared to a gain of $4.3 billion, net of tax, at December 31, 2004. The decline in the AOCI balance

associated with our available-for-sale securities was partially oÅset by the recognition of deferred losses in AOCI related to

derivatives in cash Öow hedge accounting relationships. The balance of net deferred losses in AOCI related to derivatives in

cash Öow hedge relationships was a loss of $6.3 billion, net of tax, at December 31, 2005 compared to a loss of $7.9 billion,

net of tax, at December 31, 2004.

At December 31, 2005, $668 million notional amount of derivative contracts was designated in cash Öow hedge

relationships, consisting of $534 million notional amount of foreign-currency swaps and $134 million notional amount of

commitments. For derivatives that receive cash Öow hedge accounting treatment, 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 the derivative generally oÅsets, on a cumulative basis, the cumulative

change in the present value of the hedged cash Öows.

At December 31, 2005, the net cumulative change in the fair value of all derivatives designated in cash Öow hedge

relationships for which the forecasted transactions had not yet aÅected earnings since SFAS 133 was implemented on

January 1, 2001 (net of amounts previously reclassiÑed to earnings through December 31, 2005) or that were still open was a

loss of approximately $6.3 billion on an after-tax basis. This amount related almost entirely to net deferred losses on closed

cash Öow hedge relationships, which involve derivatives that have been terminated or are no longer designated in 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. 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 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.

Of the $6.3 billion net unrealized loss included in AOCI, net of taxes, with respect to cash Öow hedge relationships at

December 31, 2005, approximately $5.9 billion relates to hedges associated with the forecasted issuances of non-callable

debt securities with maturities or interest payment frequencies of approximately one month to one year. Such debt issuances

are forecasted over the next 28 years; however, over 90 percent of the deferred losses relates to such issuances over the next

10 years. Over the next 10 years, the forecasted debt issuances associated with these hedges range from approximately

$24 billion to $105 billion in any one quarter, with an average of $74 billion per quarter.

Table 28 presents the scheduled amortization of the net deferred losses in AOCI at December 31, 2005, related to

closed cash Öow hedges based on a number of hypothetical assumptions that may diÅer from our expectations of future

events or from actual future events. It is likely that actual amortization in any given future period will diÅer from the

scheduled amortization presented in Table 28, 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 the related debt and that no other factors aÅecting debt

issuance probabilities will change. In addition, for forward purchase commitments in closed cash Öow hedge relationships,

the scheduled amortization assumes no changes in prepayment activities or other factors aÅecting the timing of

reclassiÑcations.

44 Freddie Mac
Table 28 Ì Scheduled Amortization of Net Deferred Losses in AOCI to Income Related to Closed Cash Flow Hedge

Relationships

December 31, 2005

Amount Amount

Period of Scheduled Amortization to Income (Pre-tax) (After-tax)

(in millions)

2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,969) $(1,280)

2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,462) (950)

2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,329) (864)

2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,105) (718)

2010ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (912) (593)

2011 to 2015ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,156) (1,401)

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (746) (485)

Net deferred losses in AOCI related to closed cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,679) (6,291)

Net deferred gains in AOCI related to open cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 4

Total AOCI related to cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(9,672) $(6,287)

CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS

Our consolidated fair value balance sheets include the estimated fair values of Ñnancial instruments recorded in our

consolidated balance sheets prepared in accordance with GAAP, as well as oÅ-balance sheet Ñnancial instruments that

represent our assets or liabilities that are not recorded in our GAAP consolidated balance sheets. These oÅ-balance sheet

items predominantly consist of: (a) the unrecognized Guarantee asset and Guarantee obligation associated with our PCs

issued through our Guarantor Swap program prior to the implementation of FIN 45, (b) commitments to purchase

multifamily and single-family mortgage loans that will be classiÑed as held-for-investment in our GAAP consolidated

Ñnancial statements and (c) certain credit enhancements on manufactured housing asset-backed securities. See ""OFFBALANCE SHEET ARRANGEMENTS'' and ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES'' as well

as ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 16: FAIR VALUE

DISCLOSURES'' to our consolidated Ñnancial statements for more information on fair values.

In conjunction with the preparation of our consolidated fair value balance sheets, we use 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 and are attributable to changes in a number of key components:

Core spread income

Core spread income on the Retained portfolio is a fair value estimate of the net current period accrual of income from

the spread between mortgage-related investments and debt, calculated on an option-adjusted basis. An option-adjusted

spread, or OAS, is an estimate of the yield spread between a given security and a benchmark (LIBOR, agency or Treasury)

yield curve, after consideration of variability in the security's cash Öows across diÅerent potential future interest rate

scenarios resulting from any options embedded in the security, such as prepayment options.

Changes in mortgage-to-debt OAS

The fair value of our net assets can be signiÑcantly aÅected from period to period by changes in the net OAS between

the mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of

the net unrealized increase or decrease in fair value of net assets arising from net Öuctuations in OAS during that period

between our mortgage asset holdings and our outstanding debt securities. We do not attempt to hedge or actively manage the

impact of changes in mortgage-to-debt OAS because we generally hold a substantial portion of our mortgage assets for the

long term and we do not believe that periodic increases or decreases in the fair value of net assets arising from Öuctuations

in OAS will signiÑcantly aÅect the long-term value of the Retained portfolio. Our estimate of the eÅect of changes in OAS

excludes the impact of other market risk factors, primarily duration and convexity risk, yield curve risk, volatility risk and

basis risk, the majority of which we actively manage, or economically hedge, to keep interest-rate risk exposure within

prescribed limits. The estimated impacts of these other market risk factors are subsumed within the ""Return on risk

positions'' component discussed below.

Return on risk positions

Return on risk positions represents the estimated net increase or decrease in the fair value of net assets resulting from

net exposures related to the market risks we actively manage. The types of market risks to which we are exposed as a result

of our Retained portfolio activities include duration and convexity risks, yield curve risk, volatility risk and basis risk. We

45 Freddie Mac
actively manage, or hedge, the majority of these risks to keep interest-rate risk exposures 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 a limited net exposure to these risks, which will result in a net increase

or decrease in fair value for a given period. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''

for more information.

Core guarantee fees, net

Core guarantee fees, net represents the annual income of the credit guarantee portfolio, based on current portfolio

characteristics and market conditions. This estimate considers both contractual guarantee fees collected over the life of the

credit guarantee portfolio and credit-related delivery fees collected up-front when pools are formed, and associated costs and

obligations which include default and capital costs.

Change in the fair value of the guarantee portfolio

Change in the fair value of the 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. In 2005, we changed our method for estimating the fair values of the Guarantee asset

and Guarantee obligation. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGERELATED ASSETS'' to our consolidated Ñnancial statements for additional information.

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 our expectation 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). However, 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 substantially all Ñnancial assets and liabilities, rather than an approach that

combines historical cost and fair value measurements, as is the case with our GAAP-based consolidated Ñnancial

statements. We use estimates of fair value on a routine basis to make decisions about our business activities. In addition, we

use fair value derived performance measures to establish corporate objectives and as a factor in determining management

compensation. Our consolidated fair value balance sheets are an important component of our risk management processes,

as we use estimates of the changes in fair value to calculate our PMVS and duration gap measures.

Discussion of the estimated impact of mortgage-to-debt OAS on fair value results

We believe disclosing the impact of changes in mortgage-to-debt OAS on the fair value of net assets is helpful to

understanding our current period fair value results in the context of our long-term fair value return expectation. Our longterm expectation is to generate returns, before capital transactions, over time on the average fair value of net assets

attributable to common stockholders in the low- to mid-teens. In discussing this long-term expectation, we qualify it by

noting that period-to-period returns may Öuctuate substantially due to market conditions. These market conditions include

changes in interest rates and other market factors that aÅect certain components of our fair value changes, including those

which we do not attempt to hedge or actively manage Ì speciÑcally, the change in mortgage-to-debt OAS with respect to

our Retained portfolio and the change in the fair value of the single-family guarantee portfolio.

Our estimate of the periodic increases or decreases in the fair value of net assets associated with Öuctuations in optionadjusted spreads provides insight into a component of our fair value results that we do not believe will signiÑcantly aÅect the

46 Freddie Mac
long-term fair value of the Retained portfolio. This belief is based on our expectation that diÅerences between the

prepayments forecasted by our models and the actual prepayments we will experience are not likely to be signiÑcant.

During the year ended December 31, 2005, the fair value of net assets attributable to common stockholders, before

capital transactions, increased by $1.0 billion. We estimate that this $1.0 billion is net of a decrease of approximately

$1.3 billion due to the net widening of mortgage-to-debt OAS.

How we estimate the impact of mortgage-to-debt OAS on fair value results

The method we have chosen to estimate the OAS impact is to fully revalue the fair value of identiÑed Ñnancial

instruments for a given period using the OAS level from the end of the previous period and subtract the revalued amount

from the estimated fair value of those instruments. We make this calculation as of the end of each month and sum these

monthly results into quarterly and annual estimates. To achieve consistency month-to-month, we use the smaller unpaid

principal balance for a given instrument between months so that we are measuring the OAS impact on constant positions,

with newly acquired positions excluded entirely during the month of acquisition.

For certain Ñnancial instruments in the Retained portfolio that aÅect our total change in fair value of net assets, we did

not estimate the impact of changes in OAS on fair value. We did not estimate the impact of changes in OAS for singlefamily and multifamily whole loans because we do not have a reliable methodology for estimating OAS impacts on these

loans at this time. We did not estimate the impact of changes in OAS for certain other instruments, including mortgage

revenue bonds, other securities and LIBOR-based derivatives, because an OAS measured in relation to LIBOR is not

relevant for these instruments. The Retained portfolio instruments for which we did not estimate an impact of the changes

in OAS represent approximately 17 percent of our total Retained portfolio. The funding instruments (including preferred

stock) for which we did not estimate an impact of the changes in OAS represent approximately 9 percent of our total debt

and preferred stock securities. The majority of this 9 percent was short-term debt instruments with maturities less than

thirty days.

The impact of changes in OAS on fair value should be understood as an estimate rather than a precise measurement. To

estimate the impact of OAS, we use models that involve the forecast of interest rates, prepayment behavior and other inputs.

We also make assumptions about a variety of factors, including macroeconomic and security-speciÑc data, interest-rate

paths, cash Öows and prepayment rates. We use these models and assumptions in running our business, and we rely on many

of the models in producing our Ñnancial statements and measuring, managing and reporting interest-rate and other market

risks. The use of diÅerent estimation methods or the application of diÅerent assumptions could result in a materially

diÅerent estimate.

Understanding our estimate of the impact of mortgage-to-debt OAS on fair value results

A number of important qualiÑcations apply to our disclosed estimates. The estimated impact of the change in optionadjusted spreads on the fair value of our net assets in any given period does not depend on other components of the change

in fair value. Although the net fair value of our Ñnancial instruments will generally move toward their par values as the

instruments approach maturity, investors should not expect that the eÅect of past changes in OAS will necessarily reverse

through future changes in OAS. To the extent that actual prepayment or interest rate distributions diÅer from the forecasts

contemplated in our models, changes in values reÖected in mortgage-to-debt OAS may not be recovered in fair value

returns at a later date.

When the OAS on a given asset widens, the fair value of that asset will typically decline, all other things being equal.

However, we believe such OAS widening has the eÅect of increasing the likelihood that, in future periods, we will recognize

income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens Ì current

period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on the asset

is more likely to be earned at a reduced spread. Although a widening of OAS is generally accompanied by lower current

period fair values, it can also provide us with greater opportunity to purchase new assets for our Retained portfolio at the

wider mortgage-to-debt OAS. (Again, the reverse can be true when OAS tightens.)

For these reasons, our estimate of the impact of the change in OAS provides information regarding one component of

the change in fair value for the particular period being evaluated, but results for a single period should not be used to

extrapolate long-term fair value returns. We believe the potential fair value return of our business over the long term

depends primarily on our ability to add new assets at attractive mortgage-to-debt OAS and to eÅectively manage over time

the risks associated with these assets, as well as those of our existing portfolio to ensure that we realize anticipated returns

on our business. In other words, to capture the fair value returns we expect, we have to apply accurate estimates of future

47 Freddie Mac
prepayment rates and other performance characteristics at the time we purchase assets, and then manage successfully the

range of market risks associated with a debt-funded mortgage portfolio over the life of these assets.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our business activities require that we maintain adequate liquidity to make payments upon the maturity or repurchase

of our debt securities, purchase mortgage loans, mortgage-related securities and other investments, make payments of

principal and interest on our debt securities and on our guaranteed PCs and Structured Securities, make net payments on

derivative instruments, fund our general operations and pay dividends on our preferred and common stock.

We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:

‚ receipts of principal and interest payments on securities we hold or mortgage loans we have securitized and sold;

‚ sales of securities we hold;

‚ 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 position on a daily basis, netting uses of cash with sources of cash. We manage the net cash

position over a rolling forecasted 90-day period, with the goal of providing the amount of debt funding needed to cover

expected net cash outÖows without adversely aÅecting our overall funding levels. We maintain alternative sources of liquidity

to allow normal operations for 90 days without relying upon issuance of unsecured debt and comply with industry practices

of sound liquidity management. We conduct our daily liquidity management activities in accordance with our October 2000

Liquidity Management and Contingency Planning commitment, incorporated into our agreement with OFHEO in

September 2005. See ""RISK MANAGEMENT AND DISCLOSURE COMMITMENTS'' for further information.

The Federal Reserve Board has revised its payments system risk policy, eÅective beginning in July 2006, to restrict or

eliminate daylight overdrafts by GSEs in connection with their use of the Fedwire system. The revised policy also includes a

requirement that the GSEs fully fund their accounts in the system to the extent necessary to cover payments on their debt

and mortgage-related securities each day, before the Federal Reserve Banks, acting as Ñscal agents for the GSEs, will initiate

such payments. We are taking actions to fully fund our account as necessary and we believe that these revisions to the

Federal Reserve's policies will not have a material adverse eÅect on our liquidity.

To fund our business activities, we depend substantially on the continuing willingness of investors to purchase our debt

securities. Any change in applicable legislative or regulatory exemptions, including those described in ""REGULATION

AND SUPERVISION'' 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 capital markets, our sources of liquidity have remained adequate to meet our needs and we anticipate that they will

continue to be so.

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.

Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk management

activities, our derivative portfolio can be either a net source 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.

We are required to pledge collateral to third parties in connection with secured Ñnancing and daily trade activities. In

accordance with contracts that we voluntarily entered into with certain derivative counterparties, we post collateral to those

counterparties for derivatives in a net loss position, after netting by counterparty, above agreed-upon posting thresholds. See

""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to our consolidated Ñnancial

statements for information about assets we pledge as collateral.

We are involved in various legal proceedings, including those discussed in ""NOTE 13: LEGAL CONTINGENCIES''

to our consolidated Ñnancial statements, which may result in a use of cash.

Debt Securities

We fund our operating cash needs and Ñnance our purchases of mortgage loans, mortgage-related securities and nonmortgage-related securities held in our Retained portfolio and Cash and investments portfolio primarily through the

issuance of short-term and long-term debt. Table 29 below summarizes the par value of the debt securities we issued (based

48 Freddie Mac
on settlement dates) during 2005 and 2004. We seek to maintain a variety of consistent, active funding programs that

promote high-quality coverage by market makers and reach a broad group of institutional and retail investors. By diversifying

our investor base and the types of debt securities we oÅer, we believe we enhance our ability to maintain continuous access

to the debt markets under a variety of conditions.

Table 29 Ì Debt Security Issuances by Product, at Par Value(1)

Year Ended December 31,

2005 2004

(in millions)

Short-term debt:

Reference Bills» securities and discount notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $826,253 $793,462

Medium-term Notes Ì Callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,745 145

Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 360 46

Total short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 828,358 793,653

Long-term debt:

Medium-term Notes Ì Callable(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87,047 144,431

Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,624 6,428

U.S. dollar Reference Notes» securities Ì Non-callable(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,146 40,000

4Reference Notes» securities Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 8,680

Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168,817 199,539

Total debt securities issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $997,175 $993,192

(1) Excludes securities sold under agreements to repurchase and Federal funds purchased, swap collateral obligations and securities sold, not yet

purchased.

(2) Includes $Ì million and $717 million of Medium-term Notes issued for the years ended December 31, 2005 and 2004, respectively, which were

accounted for as debt exchanges.

(3) Includes $3,396 million and $Ì million of Reference Notes» securities issued for the years ended December 31, 2005 and 2004, respectively, which

were accounted for as debt exchanges.

Short-Term Debt. We fund our operating cash needs primarily by issuing 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» securities program consists of large issues of short-term debt that we

auction to dealers on a regular schedule. 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. We issue a variety of Ñxed- and variable-rate Medium-term Notes, including callable and

non-callable Ñxed-rate securities, zero coupon securities and variable-rate securities, 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. Mediumterm Notes typically contain call provisions, eÅective as early as three months or as late as 10 years after the securities

are issued.

Reference Notes» Securities. Through our Reference Notes» securities program, we sell large issues of long-term

debt that provide investors worldwide with a high-quality, liquid investment vehicle. Reference Notes» securities are

regularly issued, non-callable Ñxed-rate securities, which we currently issue with original maturities ranging from two

through ten years. We primarily issue securities denominated in U.S. dollars. We have also issued 4Reference Notes»

securities denominated in Euros but did not issue any such securities in 2005. We hedge our exposure to changes in

foreign-currency exchange rates by entering into swap transactions that 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. We did not issue any Freddie SUBS» during 2005, 2004 or 2003. In accordance with our risk

management and disclosure commitments with OFHEO (described in ""RISK MANAGEMENT AND DISCLOSURE

COMMITMENTS''), we issued Freddie SUBS» with a principal amount of approximately $1.25 billion in June 2006. Our

ability to issue additional subordinated debt may be limited until we return to regular Ñnancial reporting. See ""RISK

MANAGEMENT AND DISCLOSURE COMMITMENTS'' and ""NOTE 10: REGULATORY CAPITAL'' to our

consolidated Ñnancial statements for additional information.

Debt Repurchase Activities. In order to manage our mix of assets and liabilities, we regularly conduct repurchases of

outstanding debt securities. Our repurchase activities support the liquidity and predictability of the market for our long-term

49 Freddie Mac
debt securities. When our debt securities become seasoned or European call options on our debt securities expire, they may

become less liquid, which could cause their price to decline. By periodically repurchasing debt securities, we help preserve

the liquidity of our debt securities and improve their price performance, which helps to reduce our funding costs over the

long-term. Our repurchase activities also help us manage the funding mismatch, or duration gap, created by declines in

interest rates. When interest rates decline, the expected lives of the mortgage-related securities held in our Retained portfolio

decrease, reducing the need for long-term debt. We use a number of diÅerent means to shorten the eÅective weighted

average lives of our outstanding debt securities and thereby manage the duration gap, including retiring long-term debt

through repurchases or calls; issuing additional short-term debt; or using derivative instruments, such as entering into

receive-Ñxed interest-rate swaps or terminating or assigning pay-Ñxed interest-rate swaps. 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.

Table 30 provides the par value of debt securities we repurchased, called and exchanged (based on settlement dates)

during 2005 and 2004.

Table 30 Ì Debt Security Repurchases, Calls and Exchanges

Year Ended

December 31,

2005 2004

(in millions)

Repurchases of outstanding U.S. dollar Reference Notes» securities and 4Reference Notes» securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 9,007

Repurchases of outstanding Medium-term NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,663 5,530

Calls of callable Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,236 119,987

Exchanges of U.S. dollar Reference Notes» securities and Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,043 717

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 31 indicates our credit ratings at June 1, 2006.

Table 31 Ì Freddie Mac Credit Ratings

Rating Agency

Standard & Poor's Moody's Fitch

Senior long-term debt(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AAA Aaa AAA

Short-term debt(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1° Prime-1 F-1°

Subordinated debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AA¿ Aa2 AA¿Watch Negative

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AA¿ Aa3 AA¿Watch Negative

(1) Includes Medium-term Notes, U.S. dollar Reference Notes» securities and 4Reference Notes» securities.

(2) Includes Reference Bills» securities and discount notes.

In addition to the ratings described in Table 31, Standard & Poor's, or S&P, provides a ""Risk-To-The-Government''

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 June 1, 2006. 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 June 1, 2006.

Equity Securities

During 2005 and 2004, we did not issue, redeem or repurchase any equity securities, other than reissuances of previously

issued treasury stock to employees and non-employee directors under our stock compensation plans. With the release of our

2005 Ñnancial results in May, we have moved forward with the repurchase of common stock and we expect to issue the

authorized preferred stock depending on market conditions and other factors. See ""Capital Resources Ì Capital Transactions'' below for further information.

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, 2005, the investments in this portfolio consisted of liquid

non-mortgage-related securities that we could sell or Ñnance to provide us with an additional source of liquidity to fund our

business operations. We also use the portfolio to help manage recurring cash Öows and meet our other cash management

needs. In addition, we use the portfolio to hold capital on a temporary basis until we can deploy it into Retained portfolio

investments or credit guarantee opportunities. We may also sell or Ñnance the securities in this portfolio to maintain capital

reserves to meet mortgage funding needs, provide diverse sources of liquidity, or 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 asset-backed securities

and other marketable assets that can be readily converted to cash. For additional information on our Cash and investments

50 Freddie Mac
portfolio, see ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Cash and Investments.'' The non-mortgagerelated investments in this portfolio may expose us to institutional credit risk and the risk that the investments could 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.

Contractual Obligations

Table 32 provides 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 32 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 debt securities and other liabilities reported on our consolidated balance

sheets and our operating leases at December 31, 2005. 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 this table, purchase obligations are included

through the termination date speciÑed in the respective agreements, even if the contract is renewable. Many of our 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, this table includes such obligations without regard to such termination

clauses (unless we have provided the counterparty with actual notice of our intention to terminate the agreement).

Table 32 excludes our Guarantee obligation, which represents our obligation 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. See ""NOTE 1: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated financial statements for additional information about our

Guarantee obligation.

We maintain a tax-qualiÑed, funded deÑned beneÑt pension plan, or Pension Plan, covering substantially all of our

employees. We generally contribute to our 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. See ""NOTE 15:

EMPLOYEE BENEFITS'' to our consolidated Ñnancial statements for additional information about contributions to the

Pension Plan.

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 32. See ""Table 23 Ì Derivative Fair Values and

Maturities,'' which describes the fair value for each derivative type and the maturity proÑle of the positions.

Dividend payments on preferred stock we issue are not reÖected on Table 32, since all classes of preferred stock are noncumulative. See ""NOTE 9: STOCKHOLDERS' EQUITY'' to our consolidated Ñnancial statements for additional

information. Dividend payments on cumulative preferred stock issued by our two consolidated REIT subsidiaries are not

reÖected on Table 32 since the timing of these payments is dependent upon declaration by the boards of the REITs. See

""NOTE 18: MINORITY INTERESTS'' to our consolidated Ñnancial statements for additional information.

On April 20, 2006, we reached an agreement in principle to settle the securities class action lawsuits and the shareholder

derivative lawsuits related to our restatement. The settlement of these actions includes a cash payment of $410 million,

including the application of expected net insurance proceeds, and is not included in Table 32 since this was not a contractual

obligation at December 31, 2005. See ""NOTE 13: LEGAL CONTINGENCIES'' for additional information.

51 Freddie Mac
Table 32 Ì SpeciÑed Contractual Obligations by Year (at December 31, 2005)

Total 2006 2007 2008 2009 2010 Thereafter

(in millions)

Long-term debt securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $585,804 $ 95,596 $106,696 $72,125 $47,348 $52,249 $211,790

Short-term debt securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,578 194,578 ÌÌÌÌ Ì

Other liabilities reÖected on our consolidated balance sheets:

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,607 10,607 ÌÌÌÌ Ì

Accrued interest payable(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,611 7,611 ÌÌÌÌ Ì Other contractual liabilities(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,931 2,179 1,006 425 126 63 132

Purchase obligations:

Purchase commitments(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,095 13,095 ÌÌÌÌ Ì Other purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 209 91 47 20 14 27

Operating lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101 17 14 11 10 10 39

Total speciÑed contractual obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $816,135 $323,892 $107,807 $72,608 $47,504 $52,336 $211,988

(1) Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our debt securities, see

""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to our consolidated Ñnancial statements.

(2) 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 of all derivatives, netted by counterparty.

(3) Other contractual liabilities primarily represent future cash payments due under our contractual obligations to make delayed equity contributions to

low-income housing tax credit partnerships that are unconditional and legally binding.

(4) Accrued obligations related to our deÑned beneÑt plans, deÑned contribution plans and executive deferred compensation plan are included in the Total

and 2006 columns. However, the timing of payments due under these obligations is uncertain. See ""NOTE 15: EMPLOYEE BENEFITS'' to our

consolidated Ñnancial statements for additional information.

(5) 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.

Capital Resources

Our objective in managing capital is to preserve our safety and soundness, while maintaining suÇcient capital to take

advantage of new business opportunities and support our mission at attractive long-term returns.

Capital Transactions

During 2005 and 2004, we added approximately $1.0 billion and $2.0 billion, respectively, to Core capital primarily from

Net income of $2.1 billion and $2.9 billion, respectively, oÅset by the payment of common and preferred stock dividends

totalling $1.3 billion and $1.0 billion, respectively. See ""NOTE 10: REGULATORY CAPITAL'' to our consolidated

Ñnancial statements for additional information.

Our board of directors approved a dividend per common share of $0.47 for the fourth quarter of 2005, an increase of

34 percent over the previous quarterly dividends in 2005. The dividend per common share was $0.35 for the Ñrst three

quarters in 2005, an increase of 17 percent over the $0.30 per common share quarterly dividend paid each quarter

during 2004. We paid a quarterly dividend per common share of $0.26 in 2003. Our board of directors will determine the

amount of dividends, if any, declared and paid in any quarter after considering our capital position and earnings and growth

prospects, among other factors.

In addition, as described in ""MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES,'' on October 5, 2005, our board of

directors authorized us to repurchase up to $2.0 billion of outstanding shares of common stock and issue up to $2.0 billion of

non-cumulative, perpetual preferred stock. With the release of our 2005 Ñnancial results in May, we moved forward with

the repurchase of common stock and we expect to issue the authorized preferred stock depending on market conditions and

other factors.

Subject to being consistently well capitalized relative to our regulatory requirements and risks and having suÇcient

capital to support our business and mission, we will consider returning excess capital to our stockholders in future periods.

The amount of capital available to distribute to our stockholders is aÅected primarily by our capital position and earnings

and growth prospects, among other factors. In addition, as long as OFHEO's capital monitoring framework remains in

place, certain capital transactions, including the repurchase of any shares of common stock, require prior written OFHEO

approval.

For a summary of our preferred stock outstanding at December 31, 2005 and information on redemption dates for our

preferred stock issuances, see ""NOTE 9: STOCKHOLDERS' EQUITY'' to our consolidated Ñnancial statements.

We periodically reissue treasury stock to employees and non-employee directors as part of our stock-based compensation plans. See ""NOTE 11: STOCK-BASED COMPENSATION'' to our consolidated Ñnancial statements for a

description of these plans.

52 Freddie Mac
Capital Adequacy

We regularly assess the adequacy of our capital to ensure that we hold capital suÇcient to comply with our minimum,

critical and risk-based regulatory capital requirements.

We evaluate ongoing compliance with minimum and critical capital requirements under changing market conditions

through regular assessments of the impact of these conditions on the level of our minimum capital surplus. We measure the

eÅects of changes in key market 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 market scenarios. We monitor the level and variability of our capital surplus relative to the

30 percent mandatory target surplus established under the capital monitoring framework mandated by OFHEO. We believe

that our actual surplus would exceed the mandatory target surplus across a wide range of market scenarios. We also

evaluate ongoing compliance with the risk-based capital requirement through regular intra-quarter analysis of the sensitivity

of our risk-based capital surpluses to changes in interest rates and house prices, among other factors.

At December 31, 2005, we exceeded each of our capital requirements, including the 30 percent mandatory target

surplus. See ""NOTE 10: REGULATORY CAPITAL'' to our consolidated Ñnancial statements for further information

regarding our regulatory capital requirements and OFHEO's capital monitoring framework.

RISK MANAGEMENT

Our business is exposed to operational risks, interest-rate and other market risks, and credit risks. We are also exposed

to other risks, such as those described in ""RISK FACTORS,'' including reputation risk and risks related to implementing

our business strategies. We manage risk through a framework that recognizes primary risk ownership and management by

our business units, oversight by our executive management committees and divisions responsible for independent risk

oversight functions, and oversight by our board of directors and its committees.

Executive management committees and other internal advisory groups monitor performance against our risk management strategies and established risk limits; identify and assess potential issues; and provide oversight regarding changes in

business processes and activities. Within the business units, risk management personnel identify, monitor and report risks.

Independent oversight of risk management is provided by our Enterprise Risk Oversight, Corporate Compliance and Internal

Audit divisions, in addition to the oversight provided by the board of directors and its committees. Together, these groups

assess the adequacy and eÅectiveness of the risk management functions across the company.

While we believe that both our day-to-day and long-term management of interest-rate and other market risks and credit

risks is satisfactory, weaknesses exist in our overall risk governance framework. We are focused on strengthening our

capacity in four important areas: risk governance, risk identiÑcation, risk measurement and assessment, and related

education and communication. Our risk management framework is being reviewed under a new leadership team in our

Enterprise Risk Oversight division to address these issues and to establish clear lines of authority, clarify roles and

responsibilities, and to improve the overall eÅectiveness of the risk oversight function. We recently created an executive

management enterprise risk committee to provide an enterprise-wide view of risk. Our board of directors also assigned

primary responsibility for oversight of enterprise risk management to the newly re-chartered Governance, Nominating and

Risk Oversight Committee of the board of directors.

Operational Risks

Operational risks are inherent in all of our business activities and can become apparent in various ways, including

accounting or operational errors, business interruptions, fraud, failures of the technology used to support our business

activities, and other operational challenges from failed or inadequate internal controls. We face a number of signiÑcant

operational risks, including material weaknesses and other signiÑcant deÑciencies in our internal control over Ñnancial

reporting. These operational risks may expose us to Ñnancial loss, may delay or interfere with our ability to return to and

sustain timely Ñnancial reporting, or may result in other adverse consequences.

We endeavor to mitigate our operational risks related to properly executing and recording transactions through

comprehensive processes that include approval authorities, data quality standards and control procedures within business

processes. A cross-divisional committee oversees new products and transaction types.

Our business processes are highly dependent on our use of technology and business and Ñnancial models. As described

below, we are making signiÑcant investments to build new Ñnancial reporting and operational systems and to move to more

eÅective and eÇcient business processing systems. See ""Internal Control Over Financial Reporting'' for more information

concerning internal control deÑciencies related to our systems. In recent years, we have strengthened our processes to

validate model assumptions, code, theory, and the system applications that utilize our models. We are currently improving

our model oversight processes and enhancing our staÇng both within the business areas and in our risk oversight functions.

53 Freddie Mac
We currently outsource certain key functions to external parties, including processing functions for trade capture,

market risk management analytics, asset valuation, and mortgage loan underwriting. We mitigate the risk from outsourcing

by engaging in active vendor management, including establishing detailed vendor requirements, reviewing business

continuity plans, monitoring quality assurance processes and engaging third party reviews of our vendors. In addition, we use

a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, we provide

originators with a series of mortgage underwriting guidelines and they represent and warrant to us that the mortgages sold to

us meet these guidelines. See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì

Underwriting Requirements and Quality Control Standards'' and ""Institutional Credit Risk Ì Mortgage Seller/Servicers''

for information about how we mitigate the risks associated with delegated underwriting.

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 is desirable and are challenged to deliver integrated production systems. Certain of these end-user computing

systems increase the risk of errors in some of our core operational processes and increase our reliance on monitoring

controls, which is an area where we have a material weakness in our internal control over Ñnancial reporting. They may also

limit our capacity for change. In the near term, we are mitigating this risk by improving our documentation and controls

over these systems and placing key end-user systems under the same technology controls as our production applications. We

also face challenges in the areas of system security, change management and information technology application and general

controls. See ""Internal Control over Financial Reporting'' for more information concerning internal control issues related to

our systems, both Ñnancial and non-Ñnancial reporting.

We are also exposed to the risk that our business processes could be adversely aÅected by inadequate staÇng, which

strains existing resources and increases the risk that an error or fraud will not be detected. This risk is of particular concern

for us because of high turnover rates, critical vacancies and recent changes in our senior management. We have Ñlled some

important vacancies such as General Counsel, General Auditor, Principal Accounting OÇcer, and Senior Vice President,

Enterprise Operational Risk. Our President and Chief Operating OÇcer has assumed the responsibilities of the Chief

Financial OÇcer while we conduct a search to Ñll that position. Recently, high employee turnover rates have contributed to

increased operational risk. While we have made progress in our eÅorts to build a strong management team by Ñlling several

senior positions, we need to continue to recruit additional qualiÑed people into leadership positions across the organization

in order to achieve our objectives in regard to remediation of our internal control deÑciencies.

In addition to the particular risks and challenges we are facing, we face ongoing risks that are similar to those of other

large Ñnancial institutions. For example, 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 business continuity plans and have established backup

facilities for critical business processes and systems away from, although in the same metropolitan area as, our main oÇces.

In 2005, we began an eÅort to establish out-of-region capabilities for clearing and treasury services. However, it is not clear

that these measures will be suÇcient to respond to the full range of catastrophic events that might occur.

Internal Control over Financial Reporting

Since the revision and restatement of our Ñnancial results for 2000 through 2002, we have had to face many challenging

and complex accounting and Ñnancial reporting issues, including ongoing controls remediation and systems re-engineering

and development. We fell behind in our periodic reporting for the years ended December 31, 2002, 2003, 2004 and 2005,

and we have not yet returned to quarterly reporting. Improving internal control over Ñnancial reporting and mitigating the

risks presented by material weaknesses and other control deÑciencies in our Ñnancial reporting processes continue to be top

corporate priorities. Many of the material weaknesses and other control deÑciencies identiÑed in prior years persisted

throughout 2005 and continue to present challenges for us in 2006. In addition, we determined that some previously

identiÑed deÑciencies were more serious than originally assessed. We also identiÑed additional control deÑciencies in 2005.

While we believe we have made progress in the remediation of certain material weaknesses and other control deÑciencies

that have been identiÑed, these will continue to pose signiÑcant risks to our Ñnancial reporting process until fully

remediated. For example, in the course of completing our Ñnancial reporting processes for 2005, we discovered a number of

internal control issues that resulted in adjustments to our interim 2005 Ñnancial results.

The material weaknesses that aÅected us throughout 2005 and at the end of the year included:

‚ Integration among our systems, business units and external service providers Ì Integration issues among our systems

and processes related to our operational and Ñnancial accounting systems, business units and external service

providers, which collectively increase the risk of error in our Ñnancial reporting due to: (a) the potential failure to

correctly pass information between systems and processes; (b) incompatibility of data between systems;

(c) incompatible systems; or (d) a lack of clarity in process ownership. To compensate for this weakness, we have

54 Freddie Mac
implemented compensating controls, including the performance of signiÑcant data validation and Ñnancial analytics,

which contributed to our delayed Ñnancial reporting timeline.

‚ Information technology general controls as they relate to change management Ì Our controls over managing

changes related to the introduction of program and data changes and our controls related to production data and

applications need improvement. Weaknesses in these controls include lack of consistent standards and inadequate

testing of changes prior to deployment.

‚ Information technology general controls as they relate to security administration, management and technology Ì Our

controls over information systems security administration and management functions need to improve in the

following areas: (a) development of and adherence to procedures and guidelines; (b) segregation of duties;

(c) logging and monitoring user access rights; and (d) periodic review of the appropriateness of access rights.

Weaknesses in these controls could allow unauthorized users to enter, delete or change data in these systems, as well

as increase the possibility that entries could be duplicated or omitted inadvertently.

‚ Monitoring controls within Ñnancial operations and reporting functions Ì Monitoring controls are those controls that

are designed to evaluate how other controls are working, such as the performance of Ñnancial analytics and the

completion of account reconciliations. Despite the progress made in the identiÑcation, documentation, and

enhancement of monitoring controls during 2005, there were several instances where these controls did not identify

issues that ultimately led to accounting adjustments.

‚ StaÇng adequacy Ì While we have made progress in our eÅorts to build a strong management team by Ñlling several

senior positions, we need to continue to recruit additional qualiÑed people into leadership positions across the

organization in order to achieve our objectives with regard to the remediation of weaknesses and deÑciencies within

our internal control infrastructure and our return to timely Ñnancial reporting. We have recently experienced high

employee turnover rates, which strain existing resources and contribute to increased operational risk. We are also

assessing our standards of performance and how we enforce those standards to create a more eÅective culture of

accountability.

‚ Management risk and control self-assessment process Ì Our process to identify deÑciencies in key Ñnancial reporting

controls, prior to testing, does not provide reliable information on our risk and control environment.

In addition to these material weaknesses, a number of signiÑcant deÑciencies in our internal control were apparent that,

although not determined to be material at this time, still present risks of error in our Ñnancial reporting. For example, we

place reliance on end-user computing solutions with both insuÇcient documentation and change controls. This control

deÑciency was considered a material weakness at December 31, 2004. We believe that our remediation eÅorts have reduced

the severity of this deÑciency, however, it continues to pose signiÑcant risk to our Ñnancial reporting processes and requires

us to allocate signiÑcant resources to continue progress toward full remediation and to provide that this deÑciency does not

become material again.

Other signiÑcant deÑciencies include areas that need improvement: the governance over our risk management processes,

where we need to strengthen the resources engaged in this oversight role and our ability to aggregate risks across our

organization; our new product implementation process; and the governance of and processes related to our valuation of our

guarantee-related assets and liabilities. We also need to strengthen our procedures for monitoring instances where we make

simplifying assumptions in the application of our accounting policies in our Ñnancial reporting, and we need to reduce our

reliance on such assumptions. The excessive use of such assumptions increases the risk that diÅerences, when compared to a

stricter application of our accounting policies, could become consequential over time and result in errors that are not

detected (e.g., if the underlying transaction volume increases). Furthermore, we are examining the cause of certain data

quality issues associated with information provided to us by seller/servicers related to mortgage loans underlying our PCs and

Structured Securities and the use of that data within our operational transaction systems and Ñnancial reporting systems.

As we continue the remediation activities noted below, we may identify additional material weaknesses, signiÑcant

deÑciencies or other operational issues in our internal controls or conclude that signiÑcant deÑciencies we have already

identiÑed should be regarded as material weaknesses, either individually or in the aggregate.

During 2005, we implemented an internal control testing and evaluation program designed to evaluate the signiÑcant

components of our internal control over Ñnancial reporting and to identify whether deÑciencies exist within our internal

control environment. Upon discovering the need for several adjustments to our 2005 interim Ñnancial results in the course of

our Ñnancial reporting processes for 2005, we began a more comprehensive review of our internal control environment. This

review includes an assessment of the design and eÅectiveness of our internal control environment, an initiative to improve

information technology general controls, and remedial actions needed to address any issues identiÑed in the course of these

reviews.

55 Freddie Mac
This review is expected to continue throughout 2006 and contemplates the implementation of several planned system

enhancements to our accounting, Ñnancial reporting and operational infrastructure later in the year. This review will enable

us to further evaluate the risk severity of our existing deÑciencies and may identify new material weaknesses or other

deÑciencies. We believe that this process will provide consistency in evaluations and veriÑcation of the appropriateness and

completeness of our remediation activities. After a control deÑciency is identiÑed, the responsible business area is required

to establish a remediation plan to address it. Upon achieving milestones in our remediation plans, we will test the results.

To provide for Ñnancial reporting at the end of 2006, we will conduct an assessment of the existing material weaknesses and

deÑciencies and remediation activities. We will regularly monitor and report on our remediation progress to senior

management, our board of directors, OFHEO and our internal and external auditors.

In order to devote the resources needed to complete the review eÅectively and return to timely reporting as soon as

possible, we have decided to delay our interim Ñnancial reporting for 2006. We have also decided to limit the number of

initiatives we plan to undertake in 2006 and defer lower priority systems initiatives until we have progressed further with our

internal controls. It is our objective to return to quarterly reporting with our release of full-year 2006 Ñnancial results. After

we resume regular quarterly reporting, we will begin the process of registering our common stock with the SEC.

Our review of the internal control environment and our ongoing control remediation activities are intended to provide a

basis for our reliance on our internal control over Ñnancial reporting. Our ability to rely on internal controls is essential to our

return to timely reporting, because it will alleviate the need to perform substantive procedures to compensate for our

material weaknesses and other control deÑciencies.

The material weaknesses and signiÑcant deÑciencies in our internal control over Ñnancial reporting adversely aÅect our

ability to record, process, summarize and report Ñnancial data in a timely manner. Based on the continued existence of

material weaknesses at December 31, 2005, our Chief Executive OÇcer and President and Chief Operating OÇcer have

concluded that our internal control over Ñnancial reporting was not eÅective at December 31, 2005. In order to compensate

for the material weaknesses and other deÑciencies in our internal controls, we continue to perform extensive veriÑcation and

validation procedures to provide reasonable assurance that our consolidated Ñnancial statements are prepared in accordance

with GAAP. Therefore, in view of the alternative procedures we performed, we believe that these weaknesses do not prevent

us from preparing and issuing our consolidated Ñnancial statements in accordance with GAAP.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the

information required to be disclosed by a company in its Ñnancial reports is accumulated and communicated to its senior

management team as appropriate to allow timely decisions regarding required disclosure. Full evaluation of our disclosure

controls and procedures has been delayed pending our completion of the design and implementation of these controls and

procedures and the testing program for evaluating their eÅectiveness.

Interest-Rate Risk and Other Market Risks

Our interest-rate risk management objective is to serve our housing mission by protecting shareholder value in all

interest-rate environments. Our disciplined approach to interest-rate risk management is essential to maintaining a strong

and durable capital base and uninterrupted access to debt and equity capital markets.

Sources of Interest-Rate Risk and Other Market Risks

Our Retained portfolio activities expose us to interest-rate risk and other market risks arising 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 mortgage-related 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 a prepayment penalty) or to hold the mortgage loan to its stated maturity.

Our credit guarantee activities also expose us to interest-rate risk because changes in interest rates can cause

Öuctuations in the fair value of our existing credit guarantee portfolio. We generally do not hedge these changes in fair value

except for interest-rate exposure related to net buy-ups and Öoat. Float, which arises from timing diÅerences between when

the borrower pays us and when we reduce the PC balance, can lead to signiÑcant interest expense if the interest rate paid to

a PC investor is higher than the reinvestment rate we earn on payments received from mortgage borrowers.

The types of interest-rate risk and other market risks to which we are exposed are described below.

Duration Risk and Convexity Risk. Duration is a measure of a Ñnancial instrument's price sensitivity to changes in

interest rates. Convexity is a measure of how much a Ñnancial instrument's duration changes as interest rates change. Our

convexity risk primarily results from prepayment risk. We actively manage duration risk and convexity risk through asset

selection and structuring (that is, by identifying or structuring mortgage-related securities with attractive prepayment and

56 Freddie Mac
other characteristics), by issuing a broad range of both callable and non-callable debt instruments and by using interest-rate

derivatives. Managing the impact of duration risk and convexity risk is the principal focus of our daily market risk

management activities. These risks are encompassed in our PMVS and duration gap risk measures, discussed in greater

detail below. We use prepayment models to determine the estimated duration and convexity of mortgage assets for our

PMVS and duration gap measures. Expected results can be aÅected by diÅerences between prepayments forecasted by the

models and actual prepayments.

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 shareholder value. Because 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, 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 PMVS-Yield 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 shareholder value. 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. Since mortgage assets

generally include the borrower's option to prepay a loan without penalty, changes in implied volatility aÅect the value of

mortgage assets. We manage volatility risk through asset selection and by maintaining a consistently high percentage of

option-embedded liabilities 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 that is acceptable to us.

Basis Risk. Basis risk is the risk that interest rates in diÅerent market sectors will not move in tandem and will

adversely aÅect shareholder value. This risk arises principally because we generally hedge mortgage-related investments with

debt securities. We do not actively manage the basis risk arising from funding Retained portfolio investments with our debt

securities, also referred to as mortgage-to-debt option-adjusted spread risk. See ""CONSOLIDATED FAIR VALUE

BALANCE SHEETS ANALYSIS Ì Key Components of Changes in Fair Value of Net Assets Ì Changes in mortgageto-debt OAS '' for additional information.

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 shareholder value. We are exposed to foreign currency risk because we

have debt denominated in currencies other than the U.S. dollar, our functional currency. We mitigate foreign-currency risk

by entering into swap transactions that eÅectively convert foreign-denominated obligations into U.S. dollar denominated

obligations.

Portfolio Market Value Sensitivity and Measurement of Interest-Rate Risk

We employ a risk management strategy that seeks to substantially match the duration characteristics of our assets and

liabilities. To accomplish this, we employ an integrated strategy encompassing asset selection and structuring and asset and

liability management.

The prepayment option held by mortgage borrowers drives the market value proÑle of our mortgage assets such that the

combined market value of our mortgage assets and non-callable debt will decline if interest rates move signiÑcantly in either

direction. We mitigate much of our exposure to changes in interest rates by funding a signiÑcant portion of our mortgage

portfolio with callable debt. When interest rates change, our option to redeem this debt oÅsets a large portion of the fair

value change driven by the mortgage prepayment option. Currently, approximately 60 percent of our Ñxed-rate mortgage

assets are funded and economically hedged with callable debt. However, because the mortgage prepayment option is not fully

hedged by callable debt, the combined market value of our mortgage assets and debt will be aÅected by changes in interest

rates.

To further reduce our exposure to changes in interest rates, we hedge a signiÑcant portion of the remaining prepayment

risk with option-based derivatives. These derivatives primarily consist of call swaptions, which tend to increase in value as

interest rates decline, and put swaptions, which tend to increase in value as interest rates increase. With the addition of

these option-based derivatives, the market value of stockholders' equity becomes relatively stable over a wide range of

interest rates because a greater portion of our prepayment risk has been hedged. The market value of stockholders' equity is

further stabilized by our ongoing portfolio rebalancing primarily involving interest-rate swaps. Generally, receive-Ñxed swaps

increase in value as interest rates decline and pay-Ñxed swaps increase in value as interest rates increase. Although some

unhedged exposure to changes in interest rates remains, these exposures are generally well understood, subject to established

limits, monitored and controlled through our disciplined risk management process.

We measure our exposure to key interest-rate risks every day against both internal management limits and limits set by

our board of directors. Throughout 2005, our interest-rate risk remained low and well below management and board limits.

57 Freddie Mac
PMVS and Duration Gap. Our primary interest-rate risk measures are 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). 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.

Our PMVS and duration gap estimates are determined using models that involve our best judgment of interest-rate and

prepayment assumptions. 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 as precise measurements.

While PMVS and duration gap estimate the exposure of the fair value of net assets attributable to common stockholders

(measured as fair value of total net assets less the fair value of preferred stock) 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, mortgageto-debt option-adjusted spreads and foreign-currency risk. The impact of these other market risks can be signiÑcant. See

""Sources of Interest-Rate Risk and Other Market Risks'' and ""CONSOLIDATED FAIR VALUE BALANCE SHEETS

ANALYSIS Ì Key Components of Changes in Fair Value of Net Assets Ì Changes in mortgage-to-debt OAS '' for

further information.

‚ 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, 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.

‚ 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 two-year and ten-year points are interpolated.

‚ 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. 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, we believe duration gap is

most useful when used in conjunction with PMVS.

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 and 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 guarantee-related items, including net

buy-ups and expected gains or losses due to net interest from Öoat. 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:

‚ Credit guarantee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups and Öoat),

the sensitivity of the fair value of the credit guarantee 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 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 credit guarantee 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.

PMVS Results. Table 33 provides estimated point-in-time PMVS-L and PMVS-YC results at December 31, 2005

and 2004. Table 33 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 33, the PMVS-L results based on a 100 basis point shift

58 Freddie Mac
in the LIBOR curve are disproportionately higher than the PMVS-L results based on a 50 basis point shift in the LIBOR

curve.

Table 33 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve

Potential Pre-Tax Loss in

Portfolio Market Value Sensitivity Portfolio Market Value (in millions)

PMVS-YC PMVS-L PMVS-YC PMVS-L

25 bp 50 bp 100 bp 25 bp 50 bp 100 bp

At:

December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% 1% 3% $ 26 $236 $ 798

December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% 3% 8% $ 25 $725 $2,083

Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a wide range of interestrate 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 34 shows that the low PMVS-L risk levels for the periods presented would generally have been higher if we had

not used derivatives to manage our interest-rate risk exposure.

Table 34 Ì Derivative Impact on PMVS

Before After EÅect of

Derivatives Derivatives Derivatives

At December 31, 2005

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% 1% (1)%

PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% Ì% Ì%

At December 31, 2004

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7% 3% (4)%

PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1% Ì% (1)%

Duration Gap Results. Our estimated average duration gap for the months of December 2005 and 2004 was zero

months and negative one month, respectively.

The disclosure in our Monthly Volume Summary reports, which are available on our website at www.FreddieMac.com,

reÖects the average of the daily PMVS-L, PMVS-YC and Duration Gap estimates for a given reporting period (a month,

quarter or year).

Use of Derivatives and Interest-Rate Risk Management

Use of Derivatives. We use derivatives primarily to:

‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;

‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate

characteristics of our mortgage assets; and

‚ hedge foreign-currency exposure (discussed above in ""Sources of Interest-Rate Risk and Other Market Risks Ì

Foreign-Currency Risk.'')

Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase mortgage

investments on an opportunistic basis for a future settlement, typically ranging 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 economically hedge the interest-rate risk exposure from the time we commit to purchase a

mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic

equivalent of various debt funding structures. For example, the combination of a series of short-term debt issuances over a

deÑned longer-term period and a pay-Ñxed swap with the same maturity as the last issuance is the substantive economic

equivalent of a long-term Ñxed-rate 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. These derivatives strategies increase our funding Öexibility and allow us to

better match asset and liability cash Öows, often reducing the overall funding costs.

Adjust Funding Mix. We generally use interest-rate swaps to mitigate contractual funding mismatches between our

assets and liabilities. We also use swaptions and other option-based derivatives to adjust the contractual funding of our debt

in response to changes in the expected lives of mortgage-related assets in the Retained portfolio. As market conditions

dictate, we take rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining

interest-rate environment, we typically enter into receive-Ñxed swaps or purchase Treasury-based derivatives to shorten the

duration of our funding to oÅset the declining duration of our mortgage assets. In a rising interest-rate environment, we

typically enter into pay-Ñxed swaps or sell Treasury-based derivatives in order to lengthen the duration of our funding to

oÅset the increasing duration of our mortgage assets.

59 Freddie Mac
Types of Derivatives. The derivatives we use are common in the Ñnancial markets. We principally use the following

types of derivatives:

‚ 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 the following:

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.

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 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. 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.

Prepayment Management Agreement. Beginning in 2002, we required that certain mortgage pools delivered to us

between 2001 and 2003, which we considered to pose an 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 was within deÑned ranges. EÅective December 31, 2005, we agreed

to an early termination of this prepayment management agreement.

Credit Derivatives. See ""Credit Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for

more information.

Derivative-Related Risks

Our use of derivatives exposes us to derivative market liquidity risk and counterparty credit risk.

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. To help maintain continuous access

to derivative markets, we use a variety of products and transact with many diÅerent derivative counterparties. In addition to

OTC derivatives, we also use exchange-traded derivatives, asset securitization activities, callable debt and short-term debt to

rebalance our portfolio.

We limit our duration and convexity exposure to each counterparty. At December 31, 2005, the largest single

uncollateralized exposure of our 25 approved OTC counterparties listed in ""Table 35 Ì Derivative Counterparty Credit

Exposure'' was related to a AAA-rated counterparty, constituting $93 million, or 49 percent, of the total uncollateralized

exposure of our OTC interest-rate swaps, option-based derivatives and foreign-currency swaps.

Derivative Counterparty Credit Risk. Counterparty credit risk arises from the possibility that the derivative

counterparty will not be able to meet its contractual obligations. 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., it is 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 using several tools, 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;

60 Freddie Mac
‚ 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 our internal standards. We assign internal ratings, credit, capital and trading limits to each counterparty

based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional

reviews when market conditions dictate or events aÅecting an individual counterparty occur.

Derivative Counterparties. Our use of OTC interest-rate swaps, option-based derivatives and foreign-currency swaps is

subject to 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. See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to our consolidated Ñnancial

statements for additional information.

61 Freddie Mac
Table 35 summarizes our exposure to counterparty credit risk in our derivatives, which represents the net positive fair

value of derivative contracts and related accrued interest after netting by counterparty as applicable (i.e., net amounts due to

us under derivative contracts). This table is useful in understanding the credit risk related to our derivative portfolio.

Table 35 Ì Derivative Counterparty Credit Exposure

December 31, 2005

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

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 3,102 $ 93 $ 93 2.7 Mutually agreed upon

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 148,135 619 16 4.3 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 156,058 2,499 73 5.8 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 227,842 5,297 2 5.8 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 24,879 364 5 4.0 $1 million or less

A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 210 3 1 6.0 $1 million or less

Subtotal(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 560,226 8,875 190 5.3

Other derivatives(6) ÏÏÏÏÏÏÏÏÏÏ 98,033 Ì Ì

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,961 35 35

Credit derivative ÏÏÏÏÏÏÏÏÏÏÏÏ 2,414 Ì Ì

Swap guarantee derivativesÏÏÏÏ 738 Ì Ì

Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ $683,372 $8,910 $225

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

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 210 11 2 7.0 $1 million or less

Subtotal(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 459,978 17,186 601 5.0

Other derivatives(6) ÏÏÏÏÏÏÏÏÏÏ 138,822 Ì Ì

Prepayment management

agreementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113,692 Ì Ì

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,952 40 40

Credit derivativesÏÏÏÏÏÏÏÏÏÏÏÏ 10,926 Ì Ì

Swap guarantee derivativesÏÏÏÏ 408 Ì Ì

Total derivatives ÏÏÏÏÏÏÏÏÏÏÏÏ $756,778 $17,226 $641

(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 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) Consists of OTC derivative agreements for interest-rate swaps, option-based derivatives, excluding written options, foreign-currency swaps and

purchased interest-rate caps. 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.

(6) Consists primarily of exchange-traded contracts.

Over time, our exposure to individual counterparties for OTC interest-rate swaps, option-based derivatives and foreigncurrency 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 these derivatives, after applying netting agreements and collateral, decreased to $190 million

at December 31, 2005 from $601 million at December 31, 2004. This decrease was due to a signiÑcant decrease in

uncollateralized exposure to AAA-rated counterparties, which typically are not required to post collateral given their low

risk proÑle.

At December 31, 2005, the uncollateralized exposure to non-AAA-rated counterparties was due to uncollateralized

exposure below the applicable counterparty posting threshold as well as market movements during the time period between

when a derivative was marked to fair value and the date we received the related collateral.

As indicated in Table 35, approximately 98 percent of our counterparty credit exposure for OTC interest-rate swaps,

option-based derivatives and foreign-currency swaps was collateralized at December 31, 2005. In the event that all of our

62 Freddie Mac
counterparties for these derivatives were to have defaulted simultaneously on December 31, 2005, our maximum loss for

accounting purposes would have been approximately $190 million. Our economic loss, as measured by our potential

additional uncollateralized exposure, may be higher than the uncollateralized exposure of our derivatives if we were not able

to replace the defaulted derivatives in a timely fashion. 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 by performing daily market stress tests. These tests evaluate the potential additional uncollateralized exposure we would have to each of these derivative counterparties assuming changes in the level and implied volatility

of interest rates and changes in foreign-currency exchange rates over a brief time period.

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 credit risk

management policies and collateral requirements.

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. However, 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. As indicated in Table 35, the exposure to

OTC commitments counterparties of $35 million and $40 million at December 31, 2005 and 2004, respectively, was

uncollateralized.

Credit Risks

Our credit guarantee portfolio is 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 or security we

own or guarantee. 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. See ""Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs

and Structured Securities Issued Based on Unpaid Principal Balances'' for more information on the composition of our

Total mortgage portfolio.

Mortgage Credit Risk

Mortgage Credit Risk Management Strategies. Mortgage credit risk is primarily inÖuenced by the credit proÑle of

the borrower on the mortgage, the features of the mortgage itself, the type of property securing the mortgage and by the

general economy, especially the movement of house prices. To manage our mortgage credit risk, we focus on three key

areas: underwriting requirements and quality control standards; portfolio diversiÑcation; and portfolio management activities,

including loss mitigation, and the use of credit enhancements and credit risk transfers. While we have historically focused on

obtaining credit enhancements at the time of mortgage purchase, we are continuing to expand our capabilities in this area

to allow more active and ongoing credit portfolio rebalancing and risk transfers.

Underwriting Requirements and Quality Control Standards. All mortgages that we purchase or guarantee have an

inherent risk of default. We seek to manage the underlying risk in a given mortgage we securitize or purchase for our

Retained portfolio by adequately pricing for the risk we assume using our underwriting and quality control processes. We use

a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, we provide

originators with a series of mortgage underwriting guidelines 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/servicer to repurchase that mortgage or make us

whole in the event of a default. We provide originators with written standards and/or automated underwriting software tools,

such as Loan Prospector» and other quantitative credit risk management tools that are designed to evaluate single-family

mortgages and monitor the related mortgage credit risk for loans we may purchase. Loan Prospector» generates a credit

risk classiÑcation by evaluating information on signiÑcant indicators of mortgage default risk, such as loan-to-value ratios,

credit scores and other mortgage and borrower characteristics. These statistically-based risk assessment tools increase our

ability to distinguish among single-family loans based on their expected risk, return and importance to our mission. We may

allow seller/servicers to underwrite mortgages for sale to us using other automated underwriting systems and agreed-upon

underwriting standards that diÅer from our normal standards.

The percentage of our single-family mortgage purchase volume evaluated using Loan Prospector» prior to purchase has

declined over the last three years. 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 loans we review

in quality control.

63 Freddie Mac
We have been expanding the share of mortgages we purchase that were underwritten and originated using alternative

automated underwriting systems, which could increase our credit risk. We regularly monitor the performance of mortgages

purchased using these systems and if they underperform mortgages originated using Loan Prospector we may seek

additional compensation for guaranteeing such mortgages in the future.

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

rely on third-party appraisals and environmental and engineering reports.

Credit Enhancements. Our charter requires that single-family mortgages with loan-to-value ratios above 80 percent at

the time of purchase must be covered by one or more of the following: (a) primary mortgage insurance; (b) a seller's

agreement to repurchase or replace any mortgage in default (for such period and under such circumstances as we may

require); or (c) retention by the seller of at least a ten percent participation interest in the mortgages. 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 enhancements. 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. At December 31, 2005 and 2004, credit-enhanced single-family

mortgages and mortgage-related securities represented approximately 17 percent and 19 percent of the $1,395 billion and

$1,267 billion, respectively, unpaid principal balance of the Total mortgage portfolio, excluding non-Freddie Mac mortgagerelated securities and that portion of issued Structured Securities that is backed by Ginnie Mae CertiÑcates. We exclude

non-Freddie Mac mortgage-related securities because they expose us primarily to institutional credit risk. We exclude that

portion of Structured Securities backed by Ginnie Mae CertiÑcates because the incremental credit risk to which we are

exposed is considered de minimis. See ""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Table 17 Ì Characteristics of Mortgage Loans and Mortgage-Related Securities in the Retained Portfolio'' for additional information about

our non-Freddie Mac mortgage-related securities. 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, the risk proÑle of our portfolio and the future availability of eÅective credit enhancements at prices that permit

an attractive return. While the use of credit enhancements reduces our exposure to mortgage credit risk, it increases our

exposure to institutional credit risk.

Primary mortgage insurance is the most prevalent type of credit enhancement protecting our Total mortgage portfolio

and is typically provided on a loan-level basis for certain single-family mortgages. Primary mortgage insurance transfers

varying portions of the credit risk associated with a mortgage to a third-party insurer. The amount of insurance we obtain on

any mortgage depends on our requirements, which depend on 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. 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 indemniÑcation agreements (under which

we may require a lender to reimburse us for credit losses realized on mortgages), government guarantees, collateral

(including cash or high-quality marketable securities) pledged by a lender and subordinated security structures.

For multifamily mortgages, we occasionally use credit enhancements to mitigate risk. The types of credit enhancements

used for multifamily mortgage loans include recourse, third-party guarantees or letters of credit, cash escrows, subordinated

participations in mortgage loans or structured pools, and cross-default and cross-collateralization provisions. Cross-default

and cross-collateralization provisions typically work in tandem. 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. In cases where the borrower agrees to cross-collateralization, 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 its speciÑed aÇliates relating to other multifamily mortgage loans we own. For information about our maximum coverage

in regards to these credit enhancements, see ""NOTE 4: FINANCIAL GUARANTEES'' to our consolidated Ñnancial

statements. We also receive similar credit enhancements for multifamily PC Guarantor Swaps; for tax-exempt multifamily

64 Freddie Mac
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 the 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.

Portfolio DiversiÑcation. A key characteristic of our credit risk portfolio is 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. As part of our risk

management practices, we have adopted a set of limits on our purchases and holdings of certain types of loans that are

deemed to have higher risks, including interest-only loans, Option ARMs, loans with high loan-to-value ratios, and

mortgages originated with limited or no underwriting documentation.

Table 36 provides the distribution of our Total mortgage portfolio.

Table 36 Ì Total Mortgage Portfolio Distribution(1)(2)

December 31,

2005 2004

(dollars in millions)

Balances related to:

Guaranteed PCs and Structured Securities:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,294,521 $1,173,847

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,503 15,546

Structured Securities backed by non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,500 19,575

Mortgage loans in the Retained Portfolio:

Single-Family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,396 23,389

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,085 37,971

Total Unpaid Principal Balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,397,005 $1,270,328

Product Distribution

Single-family

30-year Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59% 56%

15-year Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 28

ARMS/Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 8

Option ARMS(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì

Interest only(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Ì

Balloon/Resets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 3

Other(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1

Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 96

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 4

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100%

(1) Based on unpaid principal balances.

(2) Excludes non-Freddie Mac mortgage-related securities other than those that underlie Structured Securities.

(3) Represents loans that may expose the borrower to future increases in the loan obligation in excess of increases that result solely from contractual

interest-rate adjustments. Includes mortgage loans we purchased that underlie the guaranteed portion of whole-loan REMICs and that portion of

alternative collateral deals that are backed by negative amortization loans.

(4) Represents loans where the borrower pays only interest for a period of time before the loan begins to amortize.

(5) Represents alternative collateral deals that include Structured Securities backed by non-agency securities, which were backed by FHA/VA and

subprime mortgage loans primarily, and Structured Securities backed by Ginnie Mae securities.

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 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 2005, 2004 and 2003, this trend was reversed with ARMs exhibiting lower

default rates than Ñxed-rate mortgages.

During 2005 and 2004, there was a rapid proliferation of alternative product types designed to address a variety of

borrower needs, including issues of aÅordability and lack of income documentation. While each of these products has been

on the market for some time, their prevalence increased in 2005 and 2004. We expect each of these products to default more

often than traditional products and we consider this when determining our guarantee fee. Our purchases of interest-only

and Option ARM mortgage products increased in 2005, representing approximately 11 percent of our Total mortgage

portfolio purchases as compared to 2 percent in 2004, and we expect this trend to continue in 2006. Despite this recent

65 Freddie Mac
increase in purchases, these products represent a small percentage of the unpaid principal balance of our Total mortgage

portfolio. At December 31, 2005 and 2004, interest-only and option ARMs collectively represented approximately 3 percent

and less than 1 percent, respectively, of the unpaid principal balance of the Total mortgage portfolio. We will continue to

monitor the growth of these products in our portfolio and, if appropriate, may seek credit enhancements to further manage

the incremental risk.

We also hold securities issued by third parties where the underlying collateral may include interest-only and Option

ARM mortgage products. We generally mitigate credit risk inherent in these securities through a guarantee from the third

party issuer or the underlying structure of the security. For additional information about the credit quality and credit risk

management of non-Freddie Mac securities we hold see ""Institutional Credit Risk Ì Non-Freddie Mac Mortgage-Related

Securities'' and ""MD&A Ì CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Retained Portfolio.''

The subprime segment of the mortgage market primarily serves borrowers with lower quality credit payment histories.

Our participation in this market helps reduce barriers to homeownership for these borrowers by increasing the availability of

mortgage credit and reducing the costs of homeownership. We participate in the subprime market segment primarily 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. Second, we guarantee securities backed by subprime mortgages, which comprise a portion of the ""alternative

collateral deals'' we purchase. These securities have previously been credit enhanced and at the time of our purchase most

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 credit risks of the securities without regard to the beneÑts of our guarantee. At December 31,

2005 and 2004, we guaranteed $2.3 billion and $4.5 billion of securities backed by subprime mortgages which constituted

less than one percent of our Total mortgage portfolio, respectively. In addition to the non-Freddie Mac mortgage-related

securities discussed above, we make investments through our Retained portfolio in some of the Structured Securities we

issue with underlying collateral that is subprime.

The distribution of the single-family loans underlying our Total mortgage portfolio by original and estimated current

loan-to-value ratio, credit scores, loan purpose, property type and occupancy type is shown in Table 37.

66 Freddie Mac
Table 37 Ì Characteristics of Single-Family Total Mortgage Portfolio(1)

Purchases During

the Year Ended Ending Balance

December 31, December 31,

Original Loan-to-Value, or LTV, Ratio Range(2) 2005 2004 2003 2005 2004 2003

Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21% 23% 29% 25% 26% 26%

Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 16 19 17 17 17

Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 46 40 44 42 41

Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 8 7 8 9 9

Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 6 4 5 5 6

Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 1 1 1 1 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100% 100%

Weighted average original loan-to-value ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71% 71% 68% 70% 70% 70%

Estimated Current LTV Ratio Range(3)

Less than 60% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57% 53% 44%

Above 60% to 70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 19 20

Above 70% to 80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 18 23

Above 80% to 90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 7 9

Above 90% to 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 2 3

Above 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Weighted average estimated current LTV ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55% 57% 61%

Credit Score(4)

740 and aboveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44% 41% 49% 45% 44% 44%

700 to 739 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 24 23 23 23 23

660 to 699 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 20 17 18 18 17

620 to 659 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 11 8 9 9 9

Less than 620 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 4 3 4 4 4

Not Available ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 1 2 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100% 100%

Weighted average credit score ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 722 719 729 725 723 723

Loan Purpose

Purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44% 40% 19% 32% 28% 25%

Cash-out reÑnance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 27 26 29 27 26

Other reÑnanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 33 55 39 45 49

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100% 100%

Property Type

1 unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97% 97% 98% 97% 97% 97%

2-4 units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3 2 3 3 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100% 100%

Occupancy Type

Primary residenceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91% 92% 95% 93% 94% 94%

Second/vacation home ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 4 3 4 3 3

Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 4 2 3 3 3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100% 100%

(1) Purchases and ending balances are based on the unpaid principal balance of the single-family mortgage portfolio (excluding non-Freddie Mac

mortgage-related securities, alternative collateral deals that are not backed by prime mortgage loans and that portion of Structured Securities that is

backed by Ginnie Mae CertiÑcates). Such purchases totaled $396 billion, $360 billion and $701 billion at December 31, 2005, 2004 and 2003,

respectively. Such ending balances totaled $1,333 billion, $1,203 billion and $1,151 billion at December 31, 2005, 2004 and 2003, 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. Estimated current LTV excludes alternative collateral deals and Option ARMs. Estimated current LTV ratio range is not applicable to

purchases made during the year.

(4) Credit score data are as of mortgage loan origination.

Loan-to-Value Ratios. Our principal safeguard against credit losses for mortgage loans in our single-family, noncredit-enhanced portfolio is provided by the borrowers' equity in the underlying properties. Mortgage loans with higher loanto-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. House prices have risen

signiÑcantly over the last 10 years, and have grown very dramatically over the last four years. This house price appreciation

67 Freddie Mac
has increased the values of properties underlying the mortgages in our portfolio. We monitor regional geographic markets

for changes in these trends, particularly with respect to new loans originated in regional markets that have had signiÑcant

house price appreciation, and may seek to reinsure a portion of this risk should we determine that the possibility of such

changes 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, increases in house prices generally 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 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, 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 725 at December 31, 2005 and 723 at both December 31, 2004 and 2003, indicating borrowers with strong

credit quality.

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 borrower

obtains 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. Given similar loan characteristics (e.g., loan-to-value ratios), purchase transactions have the lowest

likelihood of default followed by no-cash out reÑnances and then cash out reÑnances. As a practical matter, however, no-cash

out reÑnances tend to have lower loan-to-value ratios and borrowers with higher credit scores than purchase transactions

and as such, have better overall performance than purchase transactions.

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 multiple-unit properties.

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.

Geographic Concentration. Since our business involves purchasing mortgages from every geographic region in the

U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation generally mitigates credit risks arising

from changing local 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 by

geographic region. Our Total mortgage portfolio's geographic distribution was relatively stable from 2003 to 2005, and

remains broadly diversiÑed across these regions.

Loss Mitigation Activities. Within our Total mortgage 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 38 summarizes our non-performing assets. The increase in our non-performing assets

from 2001 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. The increase in our troubled debt restructurings from 2004 to 2005 was

primarily related to multifamily loans impacted by Hurricane Katrina. At December 31, 2005, troubled debt restructurings

as shown in Table 38 included multifamily loans aÅected by Hurricane Katrina with unpaid principal balances totaling

approximately $210 million.

68 Freddie Mac
Table 38 Ì Non-Performing Assets

December 31,

2005 2004 2003 2002 2001

(in millions)

Troubled debt restructurings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,605 $2,297 $ 2,370 $2,164 $1,617

Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,438 6,318 7,470 6,830 5,070

Non-accrual loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 27 21 47 44

Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,044 8,642 9,861 9,041 6,731

REO, net(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 629 741 795 594 447

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,673 $9,383 $10,656 $9,635 $7,178

(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the modiÑed terms.

Troubled debt restructurings 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 $1,449 million, $2,234 million, $2,793 million, $2,290 million and $1,052 million at December 31, 2005, 2004, 2003, 2002 and 2001,

respectively. For more information about delinquency rates, see ""NOTE 6: LOAN LOSS RESERVES Ì Table 6.3 Ì Delinquency Performance'' to

the consolidated Ñnancial statements.

(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. No single-family mortgage loans are classiÑed as non-accrual.

(4) For the year ended December 31, 2005, $481 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 $140 million for the year ended December 31, 2005.

(5) For more information about REO balances, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 7: REAL

ESTATE OWNED'' to the consolidated Ñnancial 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. Other single-family loss mitigation activities include providing our single-family servicers with default

management tools designed to help them manage non-performing loans more eÅectively. 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. Repayment plans, the most common type of

foreclosure alternative, mitigate our credit losses because they assist borrowers in returning to compliance with 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. 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. The total number of loans with foreclosure

alternatives was approximately 60,000, 48,300 and 46,900 for the years ended December 31, 2005, 2004 and 2003,

respectively. The increase in foreclosure alternatives in 2005 was primarily driven by forbearance agreements related to

single-family loans aÅected by Hurricane Katrina. 

We require multifamily servicers to closely manage mortgage loans they have sold us in order to mitigate potential

losses. Generally, on an annual basis, for loans over $1 million, servicers must submit an assessment of the mortgaged

property to us based on the servicer's analysis of Ñnancial and other information about the property and, except for certain

higher performing loans, an inspection of the property. We 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

may oÅer a 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. 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 based on credit risk factors such as the mortgage product type, loan purpose, loan-to-value

ratio, and other loan or borrower 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 credit-related expenses and to help us manage purchase quality, thereby improving our overall

returns.

In some cases, we provide Ñnancial incentives in the form of lump sum payments to selected seller/servicers if they

deliver a speciÑed volume or percentage of mortgage loans meeting speciÑed credit risk standards over a deÑned period of

69 Freddie Mac
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. 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 agreements are accounted for as credit derivatives rather than Ñnancial guarantees, in part, because

we may make payments to the seller/servicer under these agreements (depending upon actual default experience over the

lives of the mortgages). The total notional amount of mortgage loans subject to these agreements was approximately

$2.4 billion and $10.9 billion at December 31, 2005 and 2004, respectively. These risk-sharing agreements are derivatives

classiÑed as no hedge designation, 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 Derivative assets, at fair value and

Derivative liabilities, at fair value on the consolidated balance sheets, with net amounts of $(1) million and $(2) million at

December 31, 2005 and 2004, 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 the Ñnancial incentive and

credit derivative agreements may result in us making payments to the seller/servicer.

Credit Performance. Credit losses are a useful indicator of credit risk management activities; however, 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 39 presents delinquency information for the single-family loans underlying our Total mortgage

portfolio.

Table 39 Ì Single-Family Ì Delinquency Rates Ì By Region(1)(2)(3)

December 31,

2005 2004 2003

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.22% 0.24% 0.28%

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.38 0.31 0.32

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30 0.27 0.27

SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.64 0.26 0.28

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.11 0.15 0.19

Total non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30 0.24 0.27

Total credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.46 2.75 2.96

Total credit-enhanced and non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.69% 0.73% 0.86%

(1) Based on mortgage loans in the Retained portfolio and Total Guaranteed PCs and Structured Securities Issued, excluding 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. Excludes delinquencies in alternative collateral deals.

(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,

VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,

CO, KS, LA, MO, NE, NM, OK, TX, WY). Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast.

While overall single-family delinquencies have declined over the past three years as a result of generally strong

economic conditions and continued house price appreciation in the United States, non-credit enhanced delinquencies

increased in 2005, with some regional variation, primarily due to Hurricane Katrina. See ""Table 6.3 Ì Delinquency

Performance'' in ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for detailed delinquency

performance information.

Our multifamily delinquency rate remained very low at zero percent, 0.06 percent and 0.05 percent at the end of 2005,

2004 and 2003, respectively. Hurricane Katrina has not aÅected our reported multifamily delinquency rate because the

contractual terms of certain aÅected mortgage loans, with unpaid principal balances totaling $210 million at December 31,

2005, were modiÑed. Multifamily delinquencies may include 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.

70 Freddie Mac
Table 40 Ì Single-Family Mortgages By Year of Origination Ì Percentage of Mortgage Portfolio and Non-CreditEnhanced Delinquency Rates

December 31,

2005 2004 2003

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-1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3% 0.75% 4% 0.67% 7% 0.69%

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 0.56 3 0.49 4 0.45

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 0.89 2 0.78 3 0.73

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2.09 1 1.94 1 1.78

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 0.75 6 0.59 10 0.48

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 0.38 16 0.26 24 0.18

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 0.17 44 0.06 51 0.01

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 0.21 24 0.03 Ì Ì

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 0.08 Ì Ì Ì Ì

At December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 0.30% 100% 0.24% 100% 0.27%

(1) Based on unpaid principal balances of 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).

(2) Based on mortgages 90 days or more delinquent or in foreclosure.

Our single-family portfolio was aÅected by heavy reÑnance volumes in recent years. At December 31, 2005, 79 percent

of our single-family mortgage portfolio consisted of mortgage loans originated in 2005, 2004 or 2003. Mortgage loans

originated in 2002 and earlier, which represent approximately 21 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, the weaker credit quality of these loans. For example, mortgage loans originated in 2000 were

generally for purchase transactions, which typically involve more risk because they tend to have relatively higher loan-tovalue ratios and borrowers with lower credit scores, resulting in weaker credit quality, than loans originated in 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 less than one percent of the single-family Total mortgage portfolio.

71 Freddie Mac
Credit Loss Performance. Table 41 provides detail on our credit loss performance, including REO activity, charge-oÅs

and credit losses. The decrease in REO operations income of $43 million in 2005 compared to 2004 was primarily

attributable to a reduction in recoveries.

Table 41 Ì Credit Loss Performance

Year Ended December 31,

2005 2004 2003

(dollars in millions)

REO

REO balances:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 611 $ 740 $ 758

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 1 37

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 629 $ 741 $ 795

REO activity (number of properties):(1)

Beginning property inventory, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,604 9,170 7,222

Properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,861 18,489 17,750

Properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,395) (18,055) (15,802)

Ending property inventory, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,070 9,604 9,170

Average holding period (in days)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186 177 174

REO operations income (expense):

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (40) $ (1) $ (4)

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4 (3)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (40) $ 3 $ (7)

CHARGE-OFFS

Single-family:

Foreclosure alternatives, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (44) $ (47) $ (40)

Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 21 17

Foreclosure alternatives, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21) (26) (23)

REO acquisitions, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (242) (253) (176)

Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 139 127

REO acquisitions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (80) (114) (49)

Single-family totals:

Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (286) (300) (216)

Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 160 144

Single-family charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (101) (140) (72)

Multifamily:

Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) Ì (8)

Recoveries(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1

Multifamily charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) Ì (7)

Total Charge-oÅs:

Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (294) (300) (224)

Recoveries:

Related to primary mortgage insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119 85 94

Not related to primary mortgage insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 75 51

Total recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 160 145

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (109) $ (140) $ (79)

CREDIT GAINS (LOSSES)(4)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (141) $ (141) $ (76)

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) 4 (10)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (149) $ (137) $ (86)

In basis points:(5)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) (1.1) (0.7)

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (0.1)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) (1.1) (0.8)

(1) Includes single-family and multifamily REO properties.

(2) Represents weighted average holding period for single-family and multifamily properties based on number of REO properties disposed.

(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 mortgage insurers, servicers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements

are limited in some instances to amounts less than the full amount of the loss.

(4) Equal to REO operations income (expense) plus Charge-oÅs, net.

(5) 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.

72 Freddie Mac
Table 42 and Table 43 provide detail by region for two credit performance statistics, REO activity and charge-oÅs.

Regional REO acquisition and charge-oÅ trends generally follow a pattern that is similar to, but lags, that of regional

delinquency trends.

Table 42 Ì REO Activity By Region(1)

Year Ended December 31,

2005 2004 2003

(number of properties)

REO Inventory

Beginning property inventory, at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,604 9,170 7,222

Properties acquired by region:

NortheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,306 1,500 1,600

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,504 5,499 5,378

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,790 5,787 4,643

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,412 3,926 3,503

WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 849 1,777 2,626

Total properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,861 18,489 17,750

Properties disposed by region:

NortheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,384) (1,562) (1,674)

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,221) (5,596) (4,476)

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,715) (5,111) (3,908)

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,820) (3,605) (3,018)

WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,255) (2,181) (2,726)

Total properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,395) (18,055) (15,802)

Ending property inventory, at December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,070 9,604 9,170

(1) See ""Table 39 Ì Single-Family Ì Delinquency Rates-By Region'' for a description of these regions.

Table 43 Ì Single-Family Charge-oÅs and Recoveries By Region(1)(2)

Year Ended December 31,

2005 2004 2003

Charge-oÅs, Charge-oÅs, Charge-oÅs, Charge-oÅs, Charge-oÅs, Charge-oÅs,

gross Recoveries net gross Recoveries net gross Recoveries net

(in millions)

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 21 $ (10) $ 11 $ 24 $ (10) $ 14 $ 21 $ (10) $11

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 (54) 22 84 (49) 35 62 (44) 18

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 102 (66) 36 92 (49) 43 54 (35) 19

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 (44) 24 66 (35) 31 43 (32) 11

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 (11) 8 34 (17) 17 36 (23) 13

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $286 $(185) $101 $300 $(160) $140 $216 $(144) $72

(1) See ""Table 39 Ì Single-Family Ì Delinquency Rates-By Region'' 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 mortgage insurers, servicers, or other third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements

are limited in some instances to amounts less than the full amount of the loss.

73 Freddie Mac
Table 44 summarizes our loan loss reserves activity.

Table 44 Ì Loan Loss Reserves Activity

Year Ended December 31,

2005 2004 2003 2002 2001

(dollars in millions)

Total loan loss reserves(1):

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 264 $ 299 $ 265 $ 224 $ 229

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 251 143 (5) 122 33

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (294) (300) (224) (171) (129)

Recoveries(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 160 145 99 101

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (109) (140) (79) (72) (28)

Adjustment for change in accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 110 Ì Ì

Transfers-out during the period(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (11) (20) (11) (9) (10)

Other transfers, net, during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 (18) 19 Ì Ì

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 414 $ 264 $ 299 $ 265 $ 224

Charge-oÅs, net to Total mortgage portfolio(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.8bp 1.1bp 0.7bp 0.7bp 0.3bp

Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.8 1.9 3.8 3.7 8.0

(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) 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 mortgage insurers, servicers or third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements are

limited in some instances to amounts less than the full amount of the loss.

(3) On January 1, 2003, $110 million of recognized Guarantee obligation 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 portion of the Guarantee obligation recognized upon the sale of PCs or Structured Securities that correspond to incurred credit losses

reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition of a Guarantee obligation. In addition, the amount

includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004, respectively, related to prior period

adjustments for which the related income was recorded in Other income.

(6) 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 in the Retained portfolio 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 the 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.

As shown in ""Table 44 Ì Loan Loss Reserves Activity,'' total loan loss reserves increased in 2005. The increase in loan

loss reserves in 2005 is primarily related to our estimate of our incurred losses as a result of Hurricane Katrina. The 2005

provision also includes additions related to the single-family portfolio as we anticipate an increase in the severity of losses

on a per-property basis driven, in part, by the expectation of low or slower home price appreciation in certain areas and

increased incurred losses as delinquencies occur for loans that are experiencing higher default rates based on their year of

origination.

Credit Risk Sensitivity. Our credit risk 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 immediate Ñve percent decline in

house prices nationwide, followed by a return to more normal growth in house prices based on historical experience. We use

an internally developed Monte Carlo simulation-based model to generate our credit risk sensitivity analyses. The Monte

Carlo model uses a simulation program to generate numerous potential interest-rate paths that, in conjunction with a

prepayment model, are used to estimate mortgage cash Öows along each path. 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.

74 Freddie Mac
The credit risk sensitivity results at December 31, 2005 and 2004 are shown in Table 45. Credit risk sensitivity results at

the end of each quarter in 2005 and the fourth quarter of 2004 are presented in ""RISK MANAGEMENT AND

DISCLOSURE COMMITMENTS.''

Table 45 Ì Credit Risk Sensitivity Ì Estimated Increase in Net Present Value, or NPV, of 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, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $873 6.5bps $564 4.2bps

December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $794 6.5bps $463 3.8bps

(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 single-family 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 non-Freddie Mac

mortgage-related securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.

Institutional Credit Risk

Our primary institutional credit risk exposure, other than counterparty credit risk exposure relating to derivatives, arises

from agreements with the following entities: mortgage loan insurers; mortgage seller/servicers; issuers, guarantors or third

party providers of credit enhancements on non-Freddie Mac mortgage-related securities held in our Retained portfolio;

mortgage investors and originators; and issuers, guarantors and insurers of investments held in our Cash and investments

portfolio. See ""Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit

Risk'' for information concerning counterparty credit risk exposure relating to derivatives.

Mortgage Loan Insurers. We bear institutional credit risk relating to the potential insolvency or non-performance of

mortgage insurers that insure mortgages we purchase or guarantee. 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 and 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 we purchased during 2005 were rated ""AA'' or better by S&P. At

December 31, 2005, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance Corporation)

that each provided more than seven 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.

Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of or nonperformance by our mortgage seller/servicers, including performance of their repurchase obligations arising from the

representations and warranties made to us for loans they underwrote and sold to us. The servicing fee charged by mortgage

servicers varies by mortgage product. We generally 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,

on an exception basis, we allow a lower or no minimum servicing amount. The credit risk associated with servicing fees

relates 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.

In order to manage the credit risk associated with our mortgage seller/servicers, we require them to meet minimum

Ñnancial capacity standards, insurance and other eligibility requirements. We institute remedial actions against

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 seller/servicer. We conduct periodic operational reviews of our

single-family mortgage seller/servicers to help us better understand their control environment and its impact on the quality

of loans sold to us. We use this information to determine the terms of business we conduct with a particular seller/servicer.

We manage the credit risk associated with our multifamily seller/servicers by establishing 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.

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 servicers, issuers, guarantors, or third parties

75 Freddie Mac
providing credit enhancements become insolvent or do not perform. See ""Table 17 Ì Characteristics of Mortgage Loans

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 due to the high credit quality of Fannie Mae and Ginnie Mae. 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 credit rating agencies). At December 31, 2005, we held approximately $45 billion of agency

securities, representing approximately 3 percent of our Total mortgage portfolio.

Non-agency mortgage-related securities expose us to 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-related securities rely primarily

on subordinated tranches to provide credit loss protection and therefore expose us to 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 risks related to the bond insurer's ability to satisfy claims. At

December 31, 2005, substantially all of the bond insurers providing coverage for non-agency mortgage-related securities held

by us were rated AAA or equivalent by at least one nationally recognized credit rating agency. At December 31, 2005, we

held approximately $243 billion of non-agency mortgage-related securities. Of this amount, 97.8 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 creditworthiness of these entities, 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, we regularly evaluate our investments to determine if any

impairment in fair value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination

of both.

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. 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 potential insolvency or non-performance

of issuers or guarantors of investments held in our Cash and investments portfolio. Instruments in this portfolio are

investment grade at the time of purchase and primarily short-term in nature, thereby substantially 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.

76 Freddie Mac
OFF-BALANCE SHEET ARRANGEMENTS

OÅ-Balance Sheet Transactions

Financial instruments created through our business transactions may be recorded on our consolidated balance sheets at

their fair value or on a cost basis, or not recorded, as appropriate. 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 of oÅ-balance sheet

arrangements.

Guarantee of PCs and Structured Securities

As discussed in ""BUSINESS Ì Credit Guarantee Activities,'' we participate in the secondary mortgage market in part

by issuing PCs and Structured Securities to third party investors. 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, 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 information about our

guarantees, including 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.

Most of our credit guarantee activity occurs through the Guarantor Swap 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 Swap 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 swapbased 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.

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 is represented by non-Freddie Mac mortgagerelated securities. Our outstanding PCs and Structured Securities also include securities issued by third parties that we

guarantee. See ""NOTE 4: FINANCIAL GUARANTEES'' for more information about these guarantees. For information

about our purchase and securitization activity, see ""PORTFOLIO BALANCES AND ACTIVITIES.''

The accounting policies and fair value estimation methodologies we apply to our credit guarantee activities signiÑcantly

aÅect the volatility of our reported earnings through the initial recognition of the fair value of the Guarantee asset and

Guarantee obligation in connection with sales of PCs and Structured Securities, the recognition of subsequent gains or losses

from the change in fair value of the Guarantee asset and PC residuals generated from such sales and the repurchase and

sale of PCs into and out of our Retained portfolio. See ""CONSOLIDATED RESULTS OF OPERATIONS Ì NonInterest Income (Loss)'' 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 asset and Guarantee obligation. The accounting 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.

77 Freddie Mac
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 in accordance with FASB

Interpretation No. 46 (Revised December 2003), ""Consolidation of Variable Interest Entities'', or FIN 46(R). These

variable interest entities 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. A portion of these commitments are accounted for as derivatives, 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'' for further information. Certain nonderivative 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. These non-derivative commitments totaled

$178.8 billion and $182.9 billion at December 31, 2005 and 2004, respectively. Such commitments were not accounted for

as derivatives and were not recorded on our consolidated balance sheets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our Ñnancial

condition and results of operations 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 our consolidated Ñnancial statements.

The accounting policies discussed in this section are particularly critical to understanding our consolidated Ñnancial

statements. For additional information about these and other accounting policies, including recently issued accounting

pronouncements, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our 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 as the amount at which an asset or liability could be exchanged

between willing parties, other than in a forced or liquidation sale. We record many of our Ñnancial instruments at fair value

in our consolidated balance sheets, with changes in these fair values recognized as gains and losses in our consolidated

statements of income or deferred, net of tax, in AOCI. We also disclose fair value-based consolidated balance sheets, which

present our Ñnancial assets and liabilities at fair value (including instruments such as debt, which are presented at amortized

cost in our consolidated Ñnancial statements). Our consolidated fair value balance sheets satisfy our disclosure

requirements under SFAS No. 107, ""Disclosures about Fair Value 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 ANALYSIS'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements for

more information.

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 in fair value hedge accounting relationships, derivatives with

no hedge designation and the Guarantee asset), 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 asset. For certain other Ñnancial instruments that are

carried at fair value (such as securities and PC residuals classiÑed as available-for-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, including through

amortization, sale of securities from the available-for-sale category or impairment recognition. In addition, impairments of

mortgage loans classiÑed as held-for-sale are recognized in earnings through lower-of-cost-or-market valuation adjustments.

Finally, certain other amounts (such as the Guarantee obligation) 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

78 Freddie Mac
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.

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.

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 and are 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 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 99 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 mortgagerelated securities are obtained from internal models with few or no market inputs. The fair values for our non-mortgagerelated 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

inputs. Approximately 68 percent of the gross fair value of our derivatives portfolio relates to interest-rate and foreigncurrency 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 32 percent of our

derivatives portfolio is valued based on prices obtained from third parties or 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 the Guarantee asset, Guarantee

obligation and PC residuals. In 2005, our approach for valuing these items incorporated more third-party market-based

information in their valuations. Our valuation methodologies and the recent improvements are discussed in

""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements.

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

79 Freddie Mac
veriÑcation of Ñnancial instrument pricing with third-party 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 sales of Ñnancial assets or as 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. In this regard, we account for a transfer as a sale to the extent

we conclude that (i) assets that underlie the transferred PCs or Structured Securities are legally beyond our reach and the

reach of our creditors even in the event that we were to become Ñnancially insolvent, (ii) a third-party buyer can freely

pledge or exchange the PCs or Structured Securities that were transferred to it and (iii) we did not maintain eÅective

control over transferred PCs or Structured Securities through either (a) an arrangement that both entitles and obligates us

to repurchase or redeem transferred PCs or Structured Securities before their maturity or (b) the ability to 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 guarantee of 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.

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'', or FIN 45. 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, at the inception of an executed guarantee, we recognize 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.

With respect to all transfers of PCs and Structured Securities to third parties, the measurement of the Guarantee asset,

Guarantee obligation 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 MORTGAGERELATED ASSETS'' to our consolidated Ñnancial statements for further discussion of the approach we use to determine

the fair values of the Guarantee asset and Guarantee obligation.

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. EÅective at the

80 Freddie Mac
beginning of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward

purchase commitments and the majority of our new commitments to forward sell mortgage-related securities. On March 31,

2006, we voluntarily discontinued hedge accounting treatment for all derivatives, with the exception of certain commitments to forward sell mortgage-related securities and one foreign-currency hedge strategy, in an eÅort to simplify our

operations.

Our total derivative portfolio is an eÅective component of our interest-rate risk management activities. 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 hedged item or forecasted transaction aÅects earnings. 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 attributable to the hedged risk.

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. Throughout 2005, we have used a 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.

Derivatives designated as cash Öow hedges generally hedged 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 ""CONSOLIDATED RESULTS OF OPERATIONS Ì Derivative Overview'' and ""NOTE 12: DERIVATIVES'' to the consolidated

Ñnancial statements.

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, 2005 and 2004, the Reserve for losses on mortgage loans held-for-investment was

$119 million and $114 million, respectively. 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,

2005 and 2004, the Reserve for guarantee losses on Participation CertiÑcates was $295 million and $150 million, respectively.

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 are reÖected in earnings as a

component of the Provision for credit losses. Loan loss reserves decrease when charge-oÅs of such balances (net of

recoveries) occur or when we record realized losses.

The process for determining the level of loan loss reserves is subject to numerous estimates and assumptions that 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

81 Freddie Mac
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 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. 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.'' Deferred items, including premiums, discounts and

other basis adjustments, such as changes in commitment-period 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 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 due to changes in estimated lives 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 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.

Judgment is involved in making initial determinations about prepayment expectations and in changing those expectations

over time in response to changes in market conditions, such as interest rates and other macroeconomic factors. 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 when we have concluded that a decrease in the fair

value of a security is not temporary. For securities accounted for under EITF 99-20, an impairment loss is recognized 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. We review

securities not accounted for under EITF 99-20 for potential impairment whenever the security's fair value is less than its

amortized cost. This review considers a number of factors, including the severity of the decline in fair value, credit ratings

and the length of time the investment has been in an unrealized loss position. We recognize impairment when quantitative

and qualitative factors indicate that we may not recover the unrealized loss. One of the factors we consider is 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

82 Freddie Mac
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for

more information on interest income and impairment recognition on securities.

Accounting Changes and Recently Issued Accounting Pronouncements

See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial

statements for more information concerning our accounting policies, changes to those policies, and recently issued

accounting pronouncements that we have not yet adopted and that will likely aÅect our consolidated Ñnancial statements.

83 Freddie Mac
PORTFOLIO BALANCES AND ACTIVITIES

Total Mortgage Portfolio

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 guaranteed PCs and Structured Securities held by third

parties. Guaranteed PCs and Structured Securities held by third parties are considered outstanding and are not included on

our consolidated balance sheets.

Table 46 provides information about our Total mortgage portfolio at December 31, 2005 and 2004.

Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs and Structured Securities Issued Based on Unpaid

Principal Balances(1)

December 31,

2005 2004

% of Total % of Total

Mortgage Mortgage

Amounts Portfolio Amounts Portfolio

(dollars in (dollars in

millions) millions)

Outstanding Guaranteed PCs and Structured Securities(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 974,200 58% $ 852,270 56%

Retained portfolio:

PCs and Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,324 21 356,698 24

Non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 287,212 17 234,878 16

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,481 4 61,360 4

Total Retained portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 710,017 42 652,936 44

Total mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,684,217 100% $1,505,206 100%

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

(2) Represents Guaranteed PCs and Structured Securities held by third parties.

(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 and deferred balances. See ""Table 17 Ì Characteristics of Mortgage

Loans and Mortgage-Related Securities in the Retained Portfolio'' for a reconciliation of the Retained portfolio amounts shown in this table to the

amounts shown under such caption on our consolidated balance sheets.

See ""Table 49 Ì Guaranteed PCs and Structured Securities Issued and Outstanding'' for more information concerning

outstanding guaranteed PCs and Structured Securities. Also see ""Table 17 Ì Characteristics of Mortgage Loans and

Mortgage-Related Securities in the Retained Portfolio'' for more information concerning the non-Freddie Mac mortgagerelated securities in our Retained portfolio.

Table 47 presents the distribution of unsecuritized whole mortgage loans held in our Retained portfolio.

Table 47 Ì Mortgage Loans Held in the Retained Portfolio(1)

December 31,

2005 2004

(in millions)

Single-family:

Conventional

Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,532 $21,409

Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 903 990

Total conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,435 22,399

FHA/VA Ì Fixed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 255 344

Rural Housing Service, or RHS, and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 706 646

Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,396 23,389

Multifamily:

Conventional

Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,961 34,127

Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,121 3,841

Total conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,082 37,968

RHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,085 37,971

Total mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $61,481 $61,360

(1) Based on unpaid principal balances. Excludes mortgage loans traded, but not yet settled.

84 Freddie Mac
Table 48 summarizes purchases into our Total mortgage portfolio.

Table 48 Ì Total Mortgage Portfolio Purchase Detail(1)

Year Ended December 31,

2005 2004

% of % of

Purchase Purchase

Amounts Amounts Amounts Amounts

(dollars in millions)

New business purchases(2)

Single-family mortgage purchases

Conventional:

30-year Ñxed-rate(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $272,702 67% $220,867 59%

15-year Ñxed-rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,963 10 72,754 19

ARMs/Variable-Rate(4)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,677 9 50,187 14

Interest Only(4)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,516 7 818 Ì

Option ARMs(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,918 1 Ì Ì

Balloon/Resets(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,720 Ì 9,658 3

FHA/VA(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 319 Ì

RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 177 Ì 209 Ì

Total single-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 381,673 94 354,812 95

Multifamily:

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,172 3 12,712 3

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,172 3 12,712 3

Total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 392,845 97 367,524 98

Non-Freddie Mac mortgage-related securities purchased for Structured Securities:

Alternative collateral deals backed by:

Option ARMsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,331 3 5,653 2

Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 Ì 85 Ì

Other(10)(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,552 Ì

Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,368 3 7,290 2

Total single-family and multifamily mortgage purchases and total non-Freddie Mac mortgage-related securities purchased for

Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $407,213 100% $374,814 100%

Non-Freddie Mac Mortgage-Related Securities Purchased into the Retained Portfolio:

Agency Securities:

Fannie Mae:

Single-Family:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,854 $ 756

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,368 3,282

Total Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,222 4,038

Ginnie Mae:

Single-Family:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 Ì

Total Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 Ì

Total agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,286 4,038

Non-Agency Securities:

Single-family and other mortgage-related securities

Single-family:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,478 1,294

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,276 101,620

Total single-family and other mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150,754 102,914

CMBS:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,291 8,841

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,549 2,037

Total CMBS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,840 10,878

Mortgage Revenue Bonds:

Single-family:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,374 1,499

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Ì

Multifamily:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 418 414

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 31

Total mortgage revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,840 1,944

Total non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168,434 115,736

Total non-Freddie Mac mortgage-related securities purchased into the Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,720 119,774

Total new business purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $581,933 $494,588

Mortgage purchases with credit enhancementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17% 19%

Mortgage liquidations(12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $384,674 $401,029

Mortgage liquidations rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26% 28%

Freddie Mac securities repurchased into the Retained portfolio:

Single-family:

Fixed-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $106,682 $ 72,147

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,805 23,942

Multifamily:

Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 146

Total Freddie Mac securities repurchased into the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $136,487 $ 96,235

(1) Based on unpaid principal balances. Excludes mortgage loans and mortgage-related securities traded but not yet settled.

(2) 2004 data includes certain mortgage-related securities that have been transferred from the Investments caption to the Retained portfolio caption on

the consolidated balance sheets.

(3) Includes 20 year Ñxed-rate mortgages.

(4) Subsequent to the issuance of our Information Statement dated June 14, 2005, we reclassiÑed select captions to agree with current period

classiÑcations.

(5) Includes ARMs with 1-, 3-, 5-, 7- and 10-year initial Ñxed-rate periods.

(6) Represents loans where the borrower pays interest only for a period of time before the borrower begins making principal payments.

85 Freddie Mac
(7) Includes mortgage loans we purchased that underlie whole-loan REMICs. Excludes $83 million of mortgage loan purchases that collateralize the

unguaranteed portion of whole-loan REMICs.

(8) 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.

(9) Excludes FHA/VA loans that may be collateral for alternative collateral deals.

(10) Includes Structured Securities backed by non-agency securities, which were backed by a mixture of prime, FHA/VA and subprime mortgage loans.

(11) 2004 data represents $1,462 million of Ñxed-rate and $90 million of variable-rate non-Freddie Mac single-family mortgage-related securities.

(12) Excludes the eÅect of sales of non-Freddie Mac mortgage-related securities.

Guaranteed PCs and Structured Securities

Guaranteed PCs and Structured Securities Issued represent the unpaid principal balances of the mortgage-related

securities we issue or otherwise guarantee. Table 49 presents the distribution of underlying mortgage assets for total PCs and

Structured Securities issued and outstanding.

Table 49 Ì Guaranteed PCs and Structured Securities Issued and Outstanding

December 31,

2005 2004

Total Issued PCs Outstanding PCs Total Issued PCs Outstanding PCs

and Structured and Structured and Structured and Structured

Securities(1) Securities(2) Securities(1) Securities(2)

(in millions)

PCs and Structured Securities

Single-family:

Conventional:

30-year Ñxed-rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 810,897 $614,112 $ 689,945 $509,923

15-year Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 321,176 220,225 347,135 224,627

ARMs/Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131,294 88,898 102,273 59,234

Option ARMs(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,830 414 Ì Ì

Balloons/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,321 24,973 32,966 31,075

FHA/VA(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 849 823 1,350 1,340

RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 154 178 178

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,294,521 949,599 1,173,847 826,377

Multifamily:

Conventional:

Fixed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,149 9,902 10,787 10,526

Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,354 4,210 4,759 4,614

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,503 14,112 15,546 15,140

Structured Securities backed by Non-Freddie Mac mortgage-related

securities:

Ginnie Mae CertiÑcates(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,021 1,900 3,015 2,628

Other(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,479 8,589 16,560 8,125

Total Structured SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,500 10,489 19,575 10,753

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,335,524 $974,200 $1,208,968 $852,270

(1) Based on unpaid principal balances. Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2) Represents PCs and Structured Securities held by third parties.

(3) Includes 20-year Ñxed-rate mortgages.

(4) Excludes $82 million of Structured Securities issued by non-consolidated, special-purpose entities established by us that are not guaranteed by us.

(5) Excludes FHA and VA loans that may be collateral for alternative collateral deals.

(6) Ginnie Mae CertiÑcates which underlie the Structured Securities are backed by FHA/VA loans.

(7) Alternative collateral deals include Structured Securities backed by non-agency securities, which are backed by a mixture of prime, FHA/VA and

subprime mortgage loans. Outstanding alternative collateral deals include $1,520 million and $1,587 million of Ñxed-rate, $3,472 million and

$1,165 million of ARMs/variable-rate, $3,566 million and $5,286 million of FHA/VA, $12 million and $17 million of the Rural Housing Service and

other federally guaranteed loans and $19 million and $70 million of second mortgages, which are mortgage loans that are subordinate to a superior

mortgage lien on the property, at December 31, 2005 and 2004, respectively.

86 Freddie Mac
Table 50 provides further detail regarding both issued and outstanding Guaranteed PCs and Structured Securities.

Table 50 Ì Single-Class and Multi-Class PCs and Other Structured Securities Based on Unpaid Principal Balances(1)

PCs and Structured

PCs and Structured Securities Outstanding Total Guaranteed

Securities in (held by PCs and Structured

December 31, 2005 Retained Portfolio third parties) Securities Issued

(in millions)

PCs and Structured Securities:

Single-class(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $202,970 $529,901 $ 732,871

Multi-class(3)(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 158,354 437,668 596,022

Other(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6,631 6,631

Total PCs and Structured Securities(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $361,324 $974,200 $1,335,524

December 31, 2004

PCs and Structured Securities:(8)

Single-class(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $219,154 $454,973 $ 674,127

Multi-class(3)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,544 390,516 528,060

Other(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6,781 6,781

Total PCs and Structured Securities(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $356,698 $852,270 $1,208,968

(1) Excludes Freddie Mac mortgage-related securities traded, but not yet settled.

(2) Includes PCs not backing Structured Securities and single-class Structured Securities backed by PCs and Ginnie Mae CertiÑcates.

(3) Includes that portion of multi-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.

(4) Excludes $82 million of Structured Securities issued by non-consolidated, special-purpose entities established by us that are not guaranteed

by us.

(5) Principal-only strips backed by Freddie Mac mortgage-related Securities held in the Retained portfolio are classiÑed as multi-class for the

purpose of this table.

(6) See ""NOTE 4: FINANCIAL GUARANTEES,'' for a discussion of our guarantees of principal and interest related to these securities.

(7) PCs and Structured Securities Issued exclude $961,777 million and $723,429 million at December 31, 2005 and 2004, 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 (including excess interest-only strips) totaled $132,883 million and $105,703 million at

December 31, 2005 and 2004, respectively, and 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 $1,495,501 million and

$1,097,336 million at December 31, 2005 and 2004, respectively, where the holder has the option to exchange the security tranches for

other pre-deÑned security tranches.

(8) Subsequent to our Information Statement dated June 14, 2005, we reclassiÑed PCs and Structured Securities in the Retained portfolio from

Single-class to Multi-class and Total Guaranteed PCs and Structured Securities Issued from Single-class and Other to Multi-class to

conform to the current period classiÑcations.

87 Freddie Mac
Table 51 provides settlement detail for the mortgage-related securities that we issued during the past two years.

Table 51 Ì Security Settlement Detail for Total Guaranteed PCs and Structured Securities Issued(1)

Year Ended

December 31,

2005 2004

(in millions)

Total Guaranteed PCs and Structured Securities Issuance Detail:

Single-family:

Conventional:(2)

30-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $272,910 $220,137

15-year Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,037 72,358

ARMs/Variable-Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,666 50,226

Interest Only ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,487 818

Option ARMs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,918 Ì

Balloon/ResetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,817 9,737

FHA/VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 319

RHS and other federally guaranteed loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 48

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 381,845 353,643

Multifamily:

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,654 4,175

Total multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,654 4,175

Non-Freddie Mac mortgage-related securities purchased for Structured Securities:

Alternative collateral deals backed by:

Option ARMs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,331 5,653

Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 85

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,552

Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,368 7,290

Total Guaranteed PCs and Structured Securities Issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $397,867 $365,108

(1) Based on unpaid principal balances. Excludes Freddie Mac mortgage-related securities traded, but not yet settled.

(2) The single-family product detail in this table does not agree to similar detail in ""Table 48 Ì Total Mortgage Portfolio Purchase Detail'' due to timing

diÅerences associated with mortgage loan purchases into the Retained portfolio and sales from the Retained portfolio. SpeciÑcally, we report mortgage

loans in Table 48 when we purchase them into the Retained portfolio whereas we report mortgage loans in Table 51 when we sell them from the

Retained portfolio to create PCs and Structured Securities.

Our new business purchases consist of mortgage loans and non-Freddie Mac mortgage-related securities that are

purchased for our Retained portfolio and serve as collateral for our issued PCs and Structured Securities. We generate a

signiÑcant portion of our mortgage purchase volume through several key mortgage lenders that have entered into unique

business arrangements with us. See ""BUSINESS Ì Credit Guarantee Activities'' for information about these relationships

and consequent risks. During 2005 and 2004, we increased purchases of adjustable-rate (i.e., ARMs/Variable-Rate and

Option ARMs) and interest-only mortgage products and non-Freddie Mac mortgage-related securities because these

products generally oÅered more attractive option-adjusted spreads than Ñxed-rate products.

88 Freddie Mac
QUARTERLY SELECTED FINANCIAL DATA

In our opinion, Ñnancial data for each quarter and full-year 2005 and 2004 reÖects all adjustments, consisting of normal

recurring adjustments, necessary for fair presentation of the results of operations for such periods. See ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Estimates'' and ""Ì Changes in Accounting Principles'' for more information concerning some of these adjustments.

2005

1Q 2Q 3Q 4Q Full-Year

(in millions, except share-related amounts)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,501 $1,269 $1,363 $1,237 $ 5,370

Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (292) (278) 423 346 199

Non-interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (940) (583) (729) (761) (3,013)

Income tax beneÑt (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 (68) (177) (138) (367)

Net income before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 285 340 880 684 2,189

Cumulative eÅect of change in accounting principle, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (59) Ì Ì Ì (59)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 226 $ 340 $ 880 $ 684 $ 2,130

Earnings per common share before cumulative eÅect of change in accounting principle:

Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.34 $ 0.41 $ 1.19 $ 0.90 $ 2.84

Diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.33 $ 0.41 $ 1.19 $ 0.90 $ 2.83

Earnings per common share after cumulative eÅect of change in accounting principle:

Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.25 $ 0.41 $ 1.19 $ 0.90 $ 2.76

Diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.25 $ 0.41 $ 1.19 $ 0.90 $ 2.75

2004

1Q 2Q 3Q 4Q Full-Year

(in millions, except share-related amounts)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,126 $2,625 $ 2,321 $2,065 $ 9,137

Non-interest income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26) 1,532 (3,691) (854) (3,039)

Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (503) (548) (603) (717) (2,371)

Income tax (expense) beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (285) (855) 467 (117) (790)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,312 $2,754 $(1,506) $ 377 $ 2,937

Earnings (loss) per common share:

Basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.83 $ 3.92 $ (2.26) $ 0.47 $ 3.96

Diluted(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.82 $ 3.91 $ (2.26) $ 0.47 $ 3.94

(1) Earnings (loss) per share is computed independently for each of the quarters presented. Due to the use of weighted-average common shares

outstanding when calculating earnings (loss) per share, the sum of the four quarters may not equal the full-year amount. Earnings (loss) per share

amounts may not recalculate using the amounts in this table due to rounding.

89 Freddie Mac
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS

In October 2000, we announced our voluntary adoption of a series of commitments designed to enhance market discipline,

liquidity and capital. In September 2005, we entered into a written agreement with OFHEO that updated these

commitments and set forth a process for implementing them. The letters between the company and OFHEO dated

September 1, 2005 constituting the written agreement are available on the Investor Relations page of our website at

www.freddiemac.com/investors/reports.html#commit. As noted in these letters, disclosures may be affected by situations

where current financial statements are not available. Our commitments at December 31, 2005 follow:

Description Status

1. Periodic Issuance of Subordinated Debt:

‚ We will issue Freddie SUBS» for public secondary ‚ We did not issue any Freddie SUBS» during 2005, 2004 market trading that are rated by no less than two or 2003. We issued approximately $1.25 billion of nationally recognized statistical rating organizations. Freddie SUBS» in June 2006. Our ability to issue

‚ Freddie SUBS» will be issued in an amount such additional subordinated debt may be limited until we

that the sum of Total capital (core capital plus return to regular Ñnancial reporting. During 2001 and

general allowance for losses) and the outstanding 2002, we completed a total of four oÅerings of Freddie

balance of ""Qualifying subordinated debt'' will equal SUBS» that provided approximately $5.5 billion in net

or exceed the sum of 0.45 percent of outstanding PCs proceeds.

and Structured Securities we guaranteed and ‚ At December 31, 2005, we had $5.5 billion in qualifying 4 percent of total on-balance sheet assets. Each Freddie SUBS» outstanding and Total capital, for the quarter we will submit to OFHEO calculations of the purpose of this calculation, in the amount of quantity of qualifying Freddie SUBS» and Total $36.4 billion, resulting in a surplus of $5.2 billion. capital as part of our quarterly capital report. ‚ We have submitted our semi-annual subordinated debt ‚ Every six months, beginning January 1, 2006, we will management plan to OFHEO. submit to OFHEO a subordinated debt management ‚ We expect to issue additional subordinated debt in a plan that includes any issuance plans for the six

months following the date of the plan. principal amount in excess of $1 billion from time to

time during the remainder of 2006, subject to market

conditions and other factors.

2. Liquidity Management and Contingency Planning:

‚ We will maintain a contingency plan providing for at ‚ We have in place a liquidity contingency plan, upon

least three months' liquidity without relying upon the which we report to OFHEO on a monthly basis. During

issuance of unsecured debt. We will also periodically the second quarter of 2006, we also began our periodic

test the contingency plan in consultation with testing.

OFHEO.

3. Interest-Rate Risk Disclosures:

‚ We will provide public disclosure of our duration gap, ‚ For the twelve months ended December 31, 2005, our

PMVS-L and PMVS-YC interest-rate risk sensitivity duration gap averaged zero months, PMVS-L averaged

results on a monthly basis. See ""RISK one percent and PMVS-YC averaged zero percent. Our

MANAGEMENT Ì Interest-Rate Risk and Other 2005 monthly average duration gap, PMVS results and

Market Risks Ì Portfolio Market Value Sensitivity and related disclosures are provided in our Monthly Volume

Measurement of Interest-Rate Risk'' for a description of Summary which is available on our website,

these metrics. www.FreddieMac.com/investors/volsum.

90 Freddie Mac
Description Status

4. Credit Risk Disclosures:

‚ We will make quarterly assessments of the impact on ‚ Our quarterly credit risk sensitivity estimates are as

expected credit losses from an immediate 5 percent follows:

decline in single-family home prices for the entire

U.S. We will disclose the impact in present value

terms and measure our losses both before and after

receipt of private mortgage insurance claims and

other credit enhancements.

(1) Assumes that none of the credit enhancements currently covering our mortgage loans

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 Ginnie Mae CertiÑcates.

(4) Calculated as the ratio of net present value of increase in credit losses to the singlefamily Total mortgage portfolio, deÑned above.

(5) Beginning with period ended March 31, 2005, results included in this table are based

on the model enhancements implemented on January 1, 2005. Results from March 31,

2005 using the previous model were $756 million or 6.2 bps before receipt of credit

enhancements and $447 million or 3.6 bps after receipt of credit enhancements.

5. Public Disclosure of Risk Rating:

‚ We will seek to obtain a rating, that will be ‚ At June 1, 2006, our ""risk-to-the-government'' rating

continuously monitored by at least one nationally from Standard & Poor's, or S&P, was ""AA¿'' and

recognized statistical rating organization, assessing Moody's Bank Financial Strength Rating for us was

""risk-to-the-government'' or independent Ñnancial ""A¿''.

strength.

Before Receipt After Receipt

of Credit of Credit

Enhancements(1) Enhancements(2)

Net Present NPV Net Present NPV

Value, or NPV(3) Ratio(4) Value, or NPV(3) Ratio(4)

(dollars in (dollars in

millions) millions)

As of:

12/31/05 $873 6.5 bps $564 4.2 bps

09/30/05 844 6.6 516 4.0

06/30/05 787 6.3 471 3.7

03/31/05(5) 814 6.6 505 4.1

12/31/04 794 6.5 463 3.8

91 Freddie Mac
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

92 Freddie Mac
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, 2005 and 2004,

and the results of their operations and their cash Öows for each of the three years in the period ended December 31, 2005, 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, 2005 and 2004. 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 changed

its method of accounting for interest expense related to callable debt instruments as of January 1, 2005, and its method for

determining gains and losses on sales of certain guaranteed securities as of October 1, 2005.

McLean, Virginia

June 28, 2006

93 Freddie Mac
FREDDIE MAC

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

2005 2004 2003

(dollars in millions, except sharerelated amounts)

Interest income

Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,037 $ 4,007 $ 4,251

Mortgage-related securities in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,684 28,460 29,051

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,606 3,136 3,796

Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,327 35,603 37,098

Interest expense

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,102) (2,908) (2,785)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23,246) (22,950) (22,083)

Total interest expense on debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29,348) (25,858) (24,868)

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (551) (708) (1,641)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29,899) (26,566) (26,509)

Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,058) 100 (1,091)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,370 9,137 9,498

Non-interest income (loss)

Management and guarantee income (includes interest on Guarantee asset of $371, $257 and $244) ÏÏ 1,450 1,382 1,653

Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,064) (1,135) (1,461)

Income on Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 920 732 925

Derivative gains (losses)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,357) (4,475) 39

Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 743 644

Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (127) (348) (1,114)

Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 206 (327) (1,775)

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 159 352

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 230 493

Non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 199 (3,039) (244)

Non-interest expense

Salaries and employee beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (805) (758) (624)

Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (386) (588) (311)

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (58) (60) (52)

Other administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (286) (144) (194)

Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,535) (1,550) (1,181)

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (251) (143) 5

REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40) 3 (7)

Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (320) (281) (200)

Minority interests in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (96) (129) (157)

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) (271) (696)

Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,013) (2,371) (2,236)

Income before income tax expense and cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏ 2,556 3,727 7,018

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (367) (790) (2,202)

Net income before cumulative eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,189 2,937 4,816

Cumulative eÅect of change in accounting principle, net of taxes of $32ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (59) Ì Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,130 $ 2,937 $ 4,816

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (223) (210) (216)

Net income available to common stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,907 $ 2,727 $ 4,600

Basic earnings per common share:

Earnings before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.84 $ 3.96 $ 6.69

Cumulative eÅect of change in accounting principle, net of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (0.09) $ Ì $ Ì

Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.76 $ 3.96 $ 6.69

Diluted earnings per common share:

Earnings before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.83 $ 3.94 $ 6.68

Cumulative eÅect of change in accounting principle, net of taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (0.08) $ Ì $ Ì

Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.75 $ 3.94 $ 6.68

Weighted average common shares outstanding (in thousands)

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 691,582 689,282 687,094

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 693,511 691,521 688,675

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.52 $ 1.20 $ 1.04

The accompanying notes are an integral part of these Ñnancial statements.

94 Freddie Mac
FREDDIE MAC

CONSOLIDATED BALANCE SHEETS

December 31,

2005 2004

(in millions, except

share-related amounts)

Assets

Retained portfolio

Mortgage loans:

Held-for-investment, at amortized costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 60,009 $ 58,852

Reserve for losses on mortgage loans held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (119) (114)

Held-for-sale, at lower-of-cost-or-market ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,538 2,582

Mortgage loans, net of reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,428 61,320

Mortgage-related securities:

Available-for-sale, at fair value (includes $168 and $194, respectively, pledged as collateral that may be repledged)ÏÏÏÏÏÏ 638,465 590,461

Trading, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,894 11,842

Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 597 845

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 647,956 603,148

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 709,384 664,468

Cash and investments

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,468 35,253

Investments:

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,165 29,830

Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,159 32,197

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,792 97,280

Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,373 7,286

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,097 15,257

Guarantee asset, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,083 4,516

Real estate owned, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 629 741

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,864 5,736

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $806,222 $795,284

Liabilities and stockholders' equity

Debt securities, net

Senior debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $288,532 $282,303

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454,627 443,772

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,633 5,622

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 748,792 731,697

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,607 13,654

Accrued interest payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,611 7,329

Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,541 4,065

Derivative liabilities, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 590 226

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 295 150

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,646 5,238

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 778,082 762,359

Commitments and contingencies (Notes 1, 3, 4, 13 and 14)

Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 949 1,509

Stockholders' equity

Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,609 4,609

Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and 692,717,422 shares and

690,606,185 shares outstanding, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 152

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 924 873

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,559 30,728

Accumulated other comprehensive income (loss) (AOCI), net of taxes, related to:

Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,485) 4,339

Cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,287) (7,924)

Minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (8)

Total accumulated other comprehensive income (loss), net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,773) (3,593)

Treasury stock, at cost, 33,164,858 shares and 35,276,095 shares, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,280) (1,353)

Total stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,191 31,416

Total liabilities and stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $806,222 $795,284

The accompanying notes are an integral part of these Ñnancial statements.

95 Freddie Mac
FREDDIE MAC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Year Ended December 31,

2005 2004 2003

Shares Amount Shares Amount Shares Amount

(in millions)

Preferred stock, at redemption value

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 $ 4,609 92 $ 4,609 92 $ 4,609

Preferred stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 4,609 92 4,609 92 4,609

Common stock, par value

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Common stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Additional paid-in capital

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 873 814 744

Stock-based compensation, before tax eÅect of $24, $20 and $23, respectively 67 56 64

Income tax beneÑt from employee stock option exercises ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 20 16

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13) (17) (10)

REIT preferred stock purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9) Ì Ì

Additional paid-in capital, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 924 873 814

Retained earnings

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,728 28,837 24,955

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,130 2,937 4,816

Preferred stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (223) (210) (216)

Common stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,076) (836) (718)

Retained earnings, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,559 30,728 28,837

AOCI, net of taxes

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,593) (1,498) 2,340

Changes in unrealized gains (losses) related to available-for-sale securities, net

of reclassiÑcation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,824) (2,010) (5,868)

Changes in unrealized gains (losses) related to cash Öow hedge relationships,

net of reclassiÑcation adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,637 (87) 2,040

Change in minimum pension liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 2 (10)

AOCI, net of taxes, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,773) (3,593) (1,498)

Treasury stock, at cost

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 (1,353) 37 (1,427) 39 (1,470)

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) 73 (2) 74 (2) 43

Treasury stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 (1,280) 35 (1,353) 37 (1,427)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,191 $31,416 $31,487

Comprehensive income (loss)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,130 $ 2,937 $ 4,816

Changes in AOCI, net of taxes, net of reclassiÑcation adjustments ÏÏÏÏÏÏÏÏÏÏÏ (5,180) (2,095) (3,838)

Total comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,050) $ 842 $ 978

The accompanying notes are an integral part of these Ñnancial statements.

96 Freddie Mac
FREDDIE MAC

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2005 2004 2003

(in millions)

Cash Öows from operating activities

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,130 $ 2,937 $ 4,816

Adjustments to reconcile net income to net cash provided by operating activities:

Cumulative eÅect of change in accounting principle, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 Ì Ì

Hedge accounting gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22) (743) (644)

Unrealized losses (gains) on derivatives not in hedge accounting relationships, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,014 2,758 (1,079)

Asset related amortization Ì premiums, discounts and hedging basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 791 1,302 968

Debt related amortization Ì premiums and discounts on certain debt securities and hedging basis

adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,129 5,748 5,027

Net discounts paid on retirements of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,207) (3,085) (3,326)

(Gains) losses on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (206) 327 1,775

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 143 (5)

Housing tax credit partnership losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320 281 200

Losses on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343 738 2,625

(Decrease) increase in deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,452) (346) 737

Purchases of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,763) (31,698) (82,074)

Sales of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,662 30,965 84,329

Repayments of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 118 162 390

Net proceeds of trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,598 38,672 8,935

Change in accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 661 1,870 3,902

Change in amounts due to Participation CertiÑcate investors, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,077) 529 (22,369)

Change in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 282 (235) 275

Change in income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607 773 (1,074)

Change in Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (567) (830) (1,362)

Change in Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,413 1,173 1,606

Change in Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 (170) (389)

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (66) 37 7

Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,139 51,308 3,270

Cash Öows from investing activities

Purchases of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (414,063) (276,573) (446,036)

Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94,961 85,583 143,513

Proceeds from maturities of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249,857 176,432 240,041

Purchases of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,980) (12,525) (15,567)

Repayments of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,051 11,511 15,283

Proceeds from sales of REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,380 1,552 1,327

Net decrease (increase) in securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏ 17,038 (11,615) 2,461

Repurchase of REIT preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (142) Ì Ì

Derivative premiums and terminations, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 932 (193) 3,333

Investments in housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (127) (69) (32)

Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (51,093) (25,897) (55,677)

Cash Öows from Ñnancing activities

Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 857,361 826,020 900,073

Repayments of short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (862,176) (841,638) (881,860)

Proceeds from issuance of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,504 187,779 258,267

Repayments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (125,959) (183,541) (210,121)

Repayments of minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (436) (405) (376)

Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 57 33

Payment of cash dividends on preferred stock and common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,299) (1,046) (934)

Repayments of housing tax credit partnerships notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (940) (498) (349)

Increase (decrease) in cash overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 (28) 24

Net cash provided by (used for) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,169 (13,300) 64,757

Net (decrease) increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (24,785) 12,111 12,350

Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,253 23,142 10,792

Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,468 $ 35,253 $ 23,142

Supplemental cash Öow information

Cash (received) paid for:

InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26,797 $ 23,902 $ 25,918

Derivative interest carry, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (590) 325 578

Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,212 363 2,538

Loans in acceleration held in the retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,372 1,716 2,003

Non-cash investing and Ñnancing activities:

Securitized and retained available-for-sale securities of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175 272 1,681

Transfers from mortgage loans to REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,312 1,546 1,570

Investments in housing tax credit partnerships Ñnanced by notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,095 1,184 702

Transfers from held-for-sale mortgages to held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 291 198 179

The accompanying notes are an integral part of these Ñnancial statements.

97 Freddie Mac
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are a stockholder-owned, government-sponsored enterprise, or GSE, established by Congress in 1970 to provide a

continuous Öow of funds for residential mortgages. Our obligations are ours alone and are not insured or guaranteed by the

U.S., or any other agency or instrumentality of the U.S. We play a fundamental role in the American housing Ñnance

system, linking the domestic mortgage market and the global capital markets. Our participation in the secondary mortgage

market includes providing our credit guarantee for residential mortgages originated by mortgage lenders and investing in

mortgage loans and mortgage-related securities that we hold in our Retained portfolio. Through our credit guarantee

activities, we securitize mortgage loans by issuing Mortgage Participation CertiÑcates, or PCs, to third-party investors. We

also resecuritize mortgage-related securities that are issued by us or the Government National Mortgage Association, or

Ginnie Mae, as well as non-agency entities. Resecuritized mortgage-related securities are referred to as Structured

Securities. We also guarantee multifamily mortgage loans that support housing revenue bonds issued by third parties and we

guarantee other mortgage loans held by third parties. Securitized mortgage-related assets that back PCs and Structured

Securities that are held by third parties are not reÖected as our assets. In return for providing our guarantee on issued PCs

and Structured Securities, we may earn a management and guarantee fee that is paid to us over the life of the related PCs

and Structured Securities. Our obligation to guarantee the payment of principal and interest on issued PCs and Structured

Securities usually results in the recognition of a Guarantee asset and Guarantee obligation.

Our Ñnancial reporting and accounting policies conform to U.S. generally accepted accounting principles, or GAAP.

Certain amounts in prior periods have been reclassiÑed to conform to the current presentation.

Estimates

The preparation of Ñnancial statements requires us 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.

Our estimates and judgments include the following: the estimation of fair value for Ñnancial instruments (See

""NOTE 16: FAIR VALUE DISCLOSURES'' for a discussion of our fair value estimates); determining the expected future

cash Öows (including the timing and amounts of prepayments) of mortgage-related assets in the Retained portfolio for the

purpose of amortizing deferred amounts and assessing when securities are other-than-temporarily impaired; assessing the

reserves for credit losses on mortgage loans and guarantee losses on PCs; assessing our legal and tax contingencies;

estimating the expected timing and amounts of future issuances of non-callable debt; and determining other matters that

aÅect the reported amounts and disclosure of contingencies in the Ñnancial statements.

Net income for 2005 was reduced by approximately $206 million (after tax), or $0.30 per diluted common share,

related to the implementation of enhancements to our approach for certain valuations, the estimation of reserves for

uncollectible interest and models used to estimate prepayment behavior of mortgage assets that were recorded as changes in

accounting estimates.

EÅective January 1, 2005, we implemented several enhancements to the valuation approach that we use to estimate the

fair value of our guarantee-related assets and liabilities. With respect to our guarantee-related assets, these enhancements

include the use of third-party quotes on assets that have similar characteristics. We have also worked with third parties to

create and value hypothetical credit structures based on the collateral underlying our PCs, and used those values in

determining the fair values of our guarantee-related liabilities. The change in valuation approach for our guarantee-related

assets and liabilities primarily aÅected our Guarantee asset and Participation CertiÑcate residuals, which are both carried at

fair value, and reduced Net income by approximately $68 million (after-tax). This valuation change also aÅected the

amortization of deferred credit fees resulting in a $17 million reduction in Net income. Additional information about the

valuation methods used for our guarantee-related assets and liabilities is discussed in ""NOTE 2: TRANSFERS OF

SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.''

We also changed our estimate of reserves for uncollectible interest on single-family mortgage loans we hold that are

greater than 90 days delinquent. Our new estimation approach establishes reserves for all accrued but uncollected interest on

all single-family loans that are greater than 90 days delinquent. Prior to this change, we accrued interest on all single-family

loans and established reserves for all accrued interest we deemed uncollectible using internal statistically based models. This

change resulted in a $77 million (after-tax) reduction in Net income for 2005.

Also, eÅective January 1, 2005, we implemented reÑnements to our prepayment model that is used to evaluate

prepayment behavior for assets in our Retained portfolio. As a result, prepayment speeds used in our amortization model

98 Freddie Mac
generally increased, reÖecting better estimates of the eÅects of recent market conditions on expected prepayments. This

change resulted in a $44 million (after-tax) reduction in Net income for 2005.

Net income for 2004 was decreased by approximately $56 million (after tax), or $0.08 per diluted common share, as the

result of a change in estimate related to enhancements to certain assumptions and calculations in the amortization process

for deferred fees recorded as basis adjustments on assets in our Retained portfolio.

Net income for 2003 was increased by approximately $92 million (after tax), or $0.13 per diluted common share, as a

result of changes in accounting estimates related to: (a) the amortization of certain deferred fees recorded as basis

adjustments on assets in our Retained portfolio, which increased net income by $20 million, and (b) improvements to our

approach for estimating the expected weighted-average lives of mortgages with related deferred fees, including credit fees

and buy-down fees, which increased net income by $72 million.

Table 1.1 shows the pre-tax impact of the changes in estimates on our consolidated statement of income:

Table 1.1 Ì Summary of Change in Estimates (Pre-Tax)

Year ended December 31,

2005 2004 2003

(in millions)

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(166) $(86) $ 31

Non-interest income (loss)

Management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) Ì 110

Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (27) Ì Ì

Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (78) Ì Ì

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (27) Ì Ì

Total non-interest income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (149) Ì 110

Total pre-tax impact of changes in estimatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(315) $(86) $141

Changes in Accounting Principles

EÅective January 1, 2005, we changed our method of accounting for interest expense related to callable debt

instruments to recognize interest expense using an eÅective interest method over the contractual life of the debt. For periods

prior to 2005, we amortized premiums, discounts, deferred issuance costs and other basis adjustments in interest expense

using an eÅective interest method over the estimated life of the debt. We implemented this change in accounting method to

facilitate improved Ñnancial reporting, particularly to promote the comparability of our Ñnancial reporting with that of our

primary competitor. The change in accounting method also reduces the operational complexity associated with determining

the estimated life of callable debt. The cumulative eÅect of this change was a $59 million (after-tax) reduction in net

income for 2005.

Table 1.2 summarizes the pro forma net income and related basic and diluted earnings per common share, had the

amortization of premiums, discounts, deferred issuance costs and other basis adjustments related to callable debt based on

the contractual maturity been in eÅect for the years ended December 31, 2004 and 2003.

Table 1.2 Ì Pro Forma Information Ì Change in Accounting for Interest Expense Related to Callable Debt

Year Ended December 31,

2004 2003

(in millions, except sharerelated amounts)

As reported:

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,937 $4,816

Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96 $ 6.69

Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.94 $ 6.68

Pro forma:

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,910 $4,746

Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.92 $ 6.59

Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.90 $ 6.58

Beginning October 1, 2005, we changed our method for determining gains and losses upon the re-sale of PCs and

Structured Securities related to deferred items recognized in connection with our guarantee of those securities. This change

in accounting principle was facilitated by system changes that now allow us to apply and track these deferred items relative

to the speciÑc portions of the purchased PCs and Structured Securities, thus improving our Ñnancial reporting. Due to the

unavailability of certain historical data, we did not have the ability to calculate the cumulative eÅect of the change nor were

we able to determine the pro forma eÅects of applying the new method retroactively. See ""NOTE 2: TRANSFERS OF

SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' for additional information.

99 Freddie Mac
Consolidation and Equity Method of Accounting

The consolidated Ñnancial statements include our accounts and those of our subsidiaries. All material intercompany

transactions have been eliminated in consolidation. For each entity with which we are involved, we determine whether the

entity should be considered our subsidiary and included in our consolidated Ñnancial statements. We consolidate (a) all

Variable Interest Entities, or VIEs, in which we are the primary beneÑciary and (b) entities that are not VIEs in which we

hold more than 50 percent of the voting rights and have the ability to exercise control over the entity.

For each entity in which we are involved, we determine if the entity is a VIE. A VIE 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. We consolidate entities that are VIEs when we are the primary beneÑciary. We are considered the primary

beneÑciary and must consolidate a VIE when we absorb a majority of expected losses or expected residual returns, or both.

In addition to the VIEs that are consolidated, we have signiÑcant variable interest in certain other VIEs that are not

consolidated because we are not the primary beneÑciary. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' for more

information.

We consolidate entities that are not VIEs when we hold more than 50 percent of the voting rights and have the ability to

exercise control over the entity. Accordingly, we consolidate our two majority-owned Real Estate Investment Trusts, or

REITs, Home Ownership Funding Corporation and Home Ownership Funding Corporation II. The equity and net earnings

attributable to the minority shareholder interests in our 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.

We use the equity method of accounting for VIEs when we are not the primary beneÑciary and for entities that are not

VIEs over which we have the ability to exercise signiÑcant inÖuence, but not control. Under the equity method of

accounting, we report our recorded investment as part of Other assets on the consolidated balance sheets and recognize our

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.

We regularly invest as a limited partner in qualiÑed low-income housing tax credit, or LIHTC, partnerships that are

eligible for federal tax credits. Most of these are VIEs. We are the primary beneÑciary and consolidate certain of these

partnerships as described further in ""NOTE 3: VARIABLE INTEREST ENTITIES.'' Our recorded investment in those

partnerships that are not consolidated is accounted for under the equity method and is reported as part of Other assets on

the consolidated balance sheets. Our share of partnership income or loss is reported in the consolidated statements of

income as Non-interest expense Ì Housing tax credit partnerships. Our 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 our cost basis in qualiÑed LIHTC partnerships diÅers from the book basis reÖected at the partnership

level, the diÅerence is amortized over the life of the tax credits and included in our share of earnings (losses) from housing

tax credit partnerships. We periodically review these investments for impairment and adjust them to fair value when a

decline in market value below the recorded investment is deemed to be other than temporary. Impairment losses are

included in our consolidated statements of income as part of Non-interest expense Ì Housing tax credit partnerships.

Cash and Cash Equivalents and Statements of Cash Flows

Highly liquid investment securities that have an original maturity of three months or less and are used for cash

management purposes are accounted for as cash equivalents. Cash collateral we obtained from counterparties to derivative

contracts where we are in a net unrealized gain position is recorded as Cash and cash equivalents. The vast majority of the

cash and cash equivalents balance is interest-bearing in nature.

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 the derivatives are

designated as a hedge of another item. Cash Öows from commitments accounted for as derivatives that result in the

acquisition or sale of mortgage securities or mortgage loans are classiÑed in either: (a) operating activities for trading

securities or mortgage loans classiÑed as held-for-sale, or (b) investing activities for available-for-sale securities or mortgage

loans classiÑed as held-for-investment. Cash Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in

operating activities until the loans have been securitized and retained as available-for-sale PCs, at which time the cash Öows

are classiÑed as investing activities. Cash Öows related to guarantee fees, including buy-up and buy-down payments, 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-up and buy-down payments are discussed further below in ""Swap-Based Issuances of

PCs and Structured Securities.'' There were less than $1 million, $428 million and $322 million of non-cash net transfers to

100 Freddie Mac
the available-for-sale classiÑcation from the trading classiÑcation related to resecuritization transactions during 2005, 2004

and 2003, respectively.

Transfers of PCs and Structured Securities that Qualify as Sales

Upon completion of a transfer of a Ñnancial asset that qualiÑes as a sale under SFAS No. 140, ""Accounting for

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' (""SFAS 140''), we de-recognize all assets

sold and recognize all assets obtained and liabilities incurred. In this regard, we recognize the fair value of our obligation to

guarantee the payment of principal and interest of PCs and Structured Securities transferred in sale transactions. The

portion of such obligation that relates to our non-contingent obligation to stand ready to perform under our guarantee is

recognized as a Guarantee obligation, while the portion of the obligation that relates to estimated incurred losses on

securitized assets is recognized for consolidated balance sheet purposes as Reserve for guarantee losses on Participation

CertiÑcates. The resulting gain (loss) on sale of transferred PCs and Structured Securities is reÖected in our consolidated

statements of income as a component of Gains (losses) on investment activity.

In recording a sales transaction, we also continue to carry on our consolidated balance sheets any retained interests in

securitized Ñnancial assets. Such retained interests include our right to receive management and guarantee fees on PCs or

Structured Securities, which is classiÑed on our consolidated balance sheets as a Guarantee asset. The carrying amount of

all such retained interests is 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. Other retained interests include

PCs or Structured Securities that are not transferred to third parties upon the completion of a securitization or

resecuritization transaction.

Swap-Based Issuances of PCs and Structured Securities

In addition to issuing PCs and Structured Securities through cash-based sales transactions, we issue such securities

through various swap-based exchanges. In the case of PC-based swaps, we issue such securities to third parties through

Guarantor and MultiLender Swap transactions. Guarantor Swaps represent transactions in which Ñnancial institutions

transfer mortgage loans to us in exchange for PCs we issue that are backed by such mortgage loans. MultiLender Swaps are

similar to Guarantor Swaps, except that formed pools include loans that are contributed by more than one other party or by

us. In Guarantor and MultiLender Swaps, as in sales transactions, in return for providing our guarantee, we earn a

guarantee fee that is paid to us over the life of an issued PC. It is also common for buy-up or buy-down payments to be

exchanged between our counterparties and us upon the issuance of a PC. Buy-Ups are upfront payments made by us that

increase the guarantee fee we will receive over the life of the PC. Buy-Downs are upfront payments that are made to us that

decrease (i.e., partially prepay) the guarantee fee we will receive over the life of the PC. We also may receive upfront,

cash-based payments as additional compensation for our guarantee of mortgage loans, referred to as Credit Fees, and as

additional consideration received on such exchanges, we may receive various types of seller-provided credit enhancements

related to the underlying mortgage loans. We also issue and transfer Structured Securities to third parties in exchange for

PCs and non-Freddie Mac mortgage-related securities.

We recognize the fair value of our contractual right to receive guarantee fees as a Guarantee asset at the inception of an

executed guarantee. Additionally, we recognize a Guarantee obligation at the greater of (a) fair value or (b) the contingent

liability amount required by SFAS No. 5, ""Accounting For Contingencies,'' or SFAS 5, to be recognized at inception of an

executed guarantee. Similar to transfers of PCs and Structured Securities that qualify as sales, that portion of our estimated

guarantee liability that relates to our non-contingent obligation to stand ready to perform under a PC guarantee is

recognized as Guarantee obligation, while that portion of such estimated guarantee liability that relates to our contingent

obligation to make payments under our guarantee is recognized for consolidated balance sheet purposes as Reserve for

guarantee losses on Participation CertiÑcates. Further, credit enhancements received in connection with Guarantor Swaps

and other similar exchange transactions of PCs are measured at fair value and recognized as follows: (a) pool insurance is

recognized as an Other asset; (b) recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap

transactions are recognized as Other assets; and (c) primary mortgage insurance is recognized at inception as a component

of the recognized Guarantee obligation.

Because Guarantee asset, Guarantee obligation 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 our consolidated

balance sheet as a component of Guarantee obligation and are hereinafter referred to as ""Deferred Guarantee Income''.

Net negative diÅerences between Guarantee asset, Guarantee obligation and credit enhancement-related assets that are

recognized at the inception of executed Ñnancial guarantees are expensed immediately to earnings as a component of Noninterest expense Ì Other expenses. Additionally, cash payments that are made or received in connection with Buy-Ups

101 Freddie Mac
and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee Income. Likewise, Credit Fees that we

receive at inception are also recognized as adjustments of recognized Deferred Guarantee Income.

With regard to PCs that we issue through our MultiLender Swap Program, we account for a portion of such transactions

in the same manner as transfers described above that are accounted for as sales. The remaining portion of such PC issuances

are accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Swap program.

Concerning Structured Securities that we issue to third parties in exchange for PCs and non- Freddie Mac mortgagerelated securities, we do not recognize any incremental Guarantee asset or Guarantee obligation on such transactions.

Rather, we defer and amortize into income on a straight-line basis that portion of the transaction fee that we receive on such

transactions that relates to the estimated fair value of our future administrative responsibilities for issued Structured

Securities. In cases where we retain portions of Structured Securities issued in such transactions, a portion of the received

transaction fee is deferred as a carrying value adjustment of retained Structured Securities. The balance of transaction fees

received, which relates to compensation earned in connection with structuring-related services rendered by us to third

parties, is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.

Purchases of PCs or Structured Securities

The purchase of a PC or Structured Security prompts the extinguishment of the corresponding, recognized Guarantee

obligation. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the related

unamortized balance of Deferred Guarantee Income.

We de-recognize an extinguished Guarantee obligation against earnings as a component of Gains (losses) on

investment activity. Correspondingly, the recognized Guarantee asset is reclassiÑed on our consolidated balance sheets as a

component of Participation CertiÑcate residuals, at fair value, or PC Residuals.

The unamortized balance of Deferred Guarantee Income is 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 No. 91, ""Accounting for Nonrefundable Fees and Costs Associated with

Originating or Acquiring Loans and Initial Direct Costs of Leases,'' or SFAS 91, using the eÅective interest method.

Subsequent Measurement of Recognized Guarantee-Related Assets and Liabilities

Deferred Guarantee Income

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.

Recognized Guarantee Asset

We generally account for a Guarantee asset like a debt instrument classiÑed as trading under SFAS 115. As such, all

changes in the fair value of recognized Guarantee asset are reÖected in earnings as a component of Gains (losses) on

Guarantee asset. 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.

Recognized Guarantee Obligation

We subsequently amortize the recognized Guarantee obligation into earnings in proportion to the rate of the unpaid

principal balance decline of securitized mortgage loans. Periodic amortization of a recognized Guarantee obligation is

reÖected in earnings as a component of Income on Guarantee obligation. The subsequent measurement of our contingent

obligation to make guarantee payments is further discussed below in ""Reserves for Losses on Mortgage Loans Held-forInvestment and Losses on PCs''.

Recognized Credit Enhancements

Credit enhancements that are separately recognized as Other assets are amortized into earnings as Non-interest

expense. Such assets are 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, whichever is shorter. Recurring insurance premiums are

recorded at the amount paid and amortized over their contractual life and, if provided quarterly, then the amortization period

is three months.

PC Residuals

PC residuals relate to certain PCs or Structured Securities held by us as investments and represent the fair value of the

expected future cash Öows associated with the guarantee contracts (including cash Öows related to Management and

guarantee fees and our Guarantee obligation) that are inherent within such securities.

102 Freddie Mac
We recognize a PC residual in connection with PCs or Structured Securities held by us that (a) were previously

transferred to third parties as part of transactions that were accounted for either as sales or in a manner described above for

Guarantor Swap transactions (such that a Guarantee asset and Guarantee obligation was previously established for held

PCs or Structured Securities), (b) were formed from mortgage loans purchased through our Cash Window (""Cash Window

Purchases'') and that were never transferred to third parties, (c) were purchased by us from third parties in contemplation

of the related issuance of such PCs through the Guarantor Swap 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 or as part of a

guarantee transaction that was accounted for like Guarantor Swaps as described above.

Like a recognized Guarantee asset, 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 were transferred to

third parties and for which a Guarantee asset and Guarantee obligation was recognized are accounted for like debt securities

that are classiÑed as trading. 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 accounted for like debt securities that are classiÑed as availablefor-sale.

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-forsale are reÖected as a component of Accumulated other comprehensive income (loss), net of taxes, or AOCI, a component

of Stockholders' equity. All cash received over the life of the underlying loans with respect to the Guarantee asset

component of the PC residuals is reÖected in earnings as a component of Net interest income.

Due to Participation CertiÑcate Investors

Timing diÅerences between our 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 thirdparty investors result in the liability Due to Participation CertiÑcate investors. In those cases, the PC balance is not reduced

for payments of principal received from seller/servicers in a given month until the Ñrst day of the next month and we do not

release the cash received (principal and interest) to the PC investor until the Ñfteenth day of that next month. We generally

invest the principal and interest amounts we receive in short-term investments from the time the cash is received until the

time we pay the PC investor. Interest income resulting from investment of principal and interest payments from

seller/servicers is reported in interest income.

For unscheduled principal prepayments, these timing diÅerences result in an expense accrual upon prepayment of the

underlying mortgage. This is because the related PCs continue to bear interest due 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 period. The expense recognized upon prepayment is reported in

Interest expense Ì Due to Participation CertiÑcate investors. We report PC coupon interest amounts relating to our

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 us 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 us that relate to our investment in PCs are reported as

a reduction to our investment in PCs on the consolidated balance sheets.

Mortgage Loans

Mortgage loans that we may sell are classiÑed as held-for-sale. If we decide to retain a loan, the loan is transferred to the

held-for-investment portfolio. Loans transferred to the held-for-investment portfolio are transferred at lower of cost or

market. Lower-of-cost-or-market valuation adjustments relating to these loans are treated as basis adjustments and are

subsequently amortized into interest income over the period held. We recognize interest on mortgage loans on an accrual

basis, except when we believe the collection of principal or interest is doubtful.

Held-for-sale mortgages are reported at lower-of-cost-or-market, on a portfolio basis, with losses reported in Gains

(losses) on investment activity. Premiums and discounts on loans classiÑed as held-for-sale are not amortized during the

period that such loans are classiÑed as held-for-sale. For a description of how we determine the fair value of our held-for-sale

mortgage loans, see ""NOTE 16: FAIR VALUE DISCLOSURES.''

Mortgage loans that we have the ability and intent to hold for the foreseeable future or to maturity are classiÑed as heldfor-investment. These mortgage loans are reported at their outstanding principal balances, net of deferred fees (including

premiums and discounts). These deferred items are amortized into interest income over the estimated lives of the

mortgages using the eÅective interest method. We use actual prepayment experience and estimates of future prepayments to

103 Freddie Mac
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.

Reserves for Losses on Mortgage Loans Held-for-Investment and Losses on PCs

We maintain a Reserve for losses on mortgage loans held-for-investment to provide for credit losses inherent in that

portfolio. We also maintain a Reserve for guarantee losses on Participation CertiÑcates or Structured Securities held by third

parties. 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 for credit losses. Decreases in loan loss reserves are reÖected through either (a) charging-oÅ

such balances (net of recoveries) when realized losses are recorded or (b) a reduction in the Provision for credit losses.

Loan loss reserves are also recorded upon the sale of PCs and Structured Securities for which losses were incurred on

the underlying mortgage loans while we held such securities. We recognize incurred losses 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; (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 Ì We estimate credit losses on homogeneous pools of single-family loans using statistically-based models that evaluate a variety of factors. 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 impaired single-family loans at the balance sheet date, we determine the point within

the range of probable losses that represents the best estimate of losses. The factors used to estimate losses include the year

of loan origination, geographic location, actual and estimated amounts for loss severity trends for similar loans, default

experience, proceeds from credit enhancements, pre-foreclosure real estate taxes and insurance, and estimated costs should

the underlying property ultimately be foreclosed upon and sold.

We frequently validate and update the models and factors to capture changes in actual loss experience, as well as

changes in underwriting practices and in our loss mitigation strategies. We also consider 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, the 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, while adverse trends in

these factors produce a reserve requirement toward the higher end of the range. We then adjust the level of loan loss

reserves to the level required based on our best assessment of these factors.

Multifamily loan portfolio Ì We estimate credit losses on the multifamily loan portfolio based on all available

evidence, including adequacy of third-party credit enhancements, evaluation of the repayment prospects, and fair value of

collateral underlying the individual loans. The review of the repayment prospects and value of collateral underlying

individual loans is based on property-speciÑc and market-level risk characteristics including apartment vacancy rates,

apartment rental rates, and property sales information. 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 our impaired loan population (""troubled debt restructurings''), (b) serious

delinquencies and (c) nonaccrual loans. Serious delinquencies are those single-family loans that are 90 days or more past

due or in foreclosure, and multifamily loans that are more than 60 days but less than 90 days past due. This category also

includes multifamily loans that are 90 days or more past due but where principal and interest are being paid to us 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 90 days or more 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 delinquent, interest income is accrued; however, we establish reserves for all accrued but uncollected

interest on all single-family loans we hold that are greater than 90 days delinquent. Prior to 2005, we established a reserve for

104 Freddie Mac
all single-family accrued interest we deemed uncollectible using internal statistically based models, which estimated accrued

but uncollectible interest. We report 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 troubled debt restructurings.

Multifamily impaired loans are deÑned as performing and non-performing troubled debt restructurings, 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.

We have the option to purchase mortgage loans out of PC pools under certain circumstances, such as to resolve an

existing or impending delinquency or default. Our general practice is to purchase the mortgage loans out of pools after the

loans are 120 days delinquent. These loans are recorded on our consolidated balance sheets at fair value.

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 and the loans are subsequently accounted for as troubled debt restructurings. For mortgages that are foreclosed

upon and thus transferred to Real estate owned, net, or REO, or are 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. For

transfers to REO, 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 of the mortgage (including accrued

interest). REO gains and losses subsequent to foreclosure are included in REO operations income (expense).

Investments in Securities

Investments in securities consist primarily of mortgage-related securities. We classify securities as ""available-for-sale''

or ""trading.'' We currently do not classify any securities as ""held-to-maturity'' although we 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 we determine the fair value of securities.

We record forward purchases and sales of securities that are speciÑcally exempt from the requirements of ""Accounting

for Derivative Instruments and Hedging Activities,'' or 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 the contractual

settlement date with a corresponding commitment recorded on the trade date.

We often retain Structured Securities created through resecuritizations of mortgage-related securities held by us. The

new Structured Securities we acquire in these transactions are classiÑed as available-for-sale or trading based upon the

predominant classiÑcation of the mortgage-related security collateral we contributed.

For most of our investments in securities, interest income is recognized using the retrospective eÅective interest method.

Deferred items, including premiums, discounts and other basis adjustments, are amortized into interest income over the

estimated lives of the securities. We use actual prepayment experience and estimates of future prepayments to determine the

constant yield needed to apply the eÅective interest method. We recalculate 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 securities investments, interest income is recognized using the prospective eÅective interest method. We

speciÑcally apply this accounting to beneÑcial interests in securitized Ñnancial assets that (a) 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

strips) or (b) are not of high credit quality at the acquisition date. We recognize as interest income (over the life of these

securities) the excess of all estimated cash Öows attributable to these interests over their principal amount using the

eÅective yield method. We update our estimates of expected cash Öows periodically and recognize changes in calculated

eÅective yield on a prospective basis.

We periodically review securities for potential impairment. We consider a number of factors, including whether the fair

value of a security is less than its amortized cost, the severity of the decline in fair value, credit ratings and the length of time

the investment has been in an unrealized loss position. We also recognize impairment when qualitative factors indicate that

105 Freddie Mac
we may not recover the unrealized loss. When evaluating these factors, we consider our intent and ability to hold the

investment until a point in time at which recovery of the unrealized loss 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. Based on the new cost basis, the adjusted deferred amounts

related to the impaired security are amortized over the security's remaining life in a prospective manner consistent with the

amount and timing of the future estimated cash Öows. The security cost basis is not changed for subsequent recoveries in

fair value. For certain securities meeting the criteria of (a) and (b) in the preceding paragraph, other-than-temporary

impairment is 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. We use the speciÑc identiÑcation method for determining the cost of a

security in computing the gain or loss.

Repurchase and Resale Agreements

We enter into repurchase and resale agreements primarily as an investor or to Ñnance our security positions. Such

transactions are accounted for as purchases and sales when the transferor relinquishes control over transferred securities and

as secured Ñnancings when the transferor does not relinquish control. Our policy is to take possession of securities purchased

under agreements to resell and reverse dollar roll transactions.

Debt Securities Issued

Debt securities that we issue 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 contractual life of the related indebtedness. The balance of deferred items remaining when debt is extinguished

prior to its contractual maturity is reÖected in earnings in the period of extinguishment as a component of Gains (losses) on

debt retirement. Prior to 2005, for callable debt, deferred items were amortized over the period during which the related

indebtedness was expected to be outstanding and changes in the expected life were 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. Amortization of premiums, discounts and issuance costs begins at the time of debt issuance.

Premiums, discounts and hedging-related basis adjustments are reported as a component of Debt securities, net. 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 translation gains or losses are reported in Noninterest income (loss) Ì Other income.

Contemporaneous transfers of cash between us 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 any 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.

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 or 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 unrealized gain position are reported as Derivative assets, at fair value. Similarly,

derivatives in a net unrealized loss position are reported as Derivative liabilities, at fair value.

Currently, the majority of our 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, fair value gains and losses are

reported as Gains (losses) on investment activity in the consolidated statements of income.

Subject to certain qualifying conditions, we may designate a derivative as either a hedge of the cash Öows of a variablerate instrument or forecasted transaction, referred to as a cash Öow hedge; a hedge of the fair value of a Ñxed-rate

106 Freddie Mac
instrument, referred to as a fair value hedge; or a foreign-currency fair value or cash Öow hedge, referred to as a foreigncurrency hedge. In order to be designated as an accounting hedge, the derivative must 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, we report changes in the fair value of these instruments in AOCI to the

extent the hedge is eÅective. The remaining ineÅective portion is reported as Hedge accounting gains (losses). In general,

we recognize the associated amounts reported in AOCI as Net interest income during the period or periods in which the

hedged item 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 basis adjustments to the assets held which are

amortized in earnings as interest income using the eÅective interest method and, for assets sold, as Gains (losses) on

investment activity.

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 we expect 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, we report 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.

Any diÅerence between these two amounts results in ineÅectiveness recognized in the income statement. 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 interest method. If a derivative no longer qualiÑes as a cash Öow or fair value hedge, we discontinue hedge

accounting prospectively. We continue to carry the derivative on the consolidated balance sheets at fair value and record

further fair value gains and losses as Derivative gains (losses) in our consolidated statements of income 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.

Real Estate Owned

REO is carried at the lower of cost or market, net of estimated disposition costs. Amounts we expect 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 market adjustment to the basis of the properties. Any gains and losses on REO

dispositions are included in REO operations income (expense).

Income Taxes

We use the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, ""Accounting for

Income Taxes.'' Under this 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 our management. Reserves are recorded for income tax contingencies 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 as

well as the tax eÅects of the cumulative eÅect of changes in accounting principles.

107 Freddie Mac
Stock-Based Compensation

We record compensation expense equal to the estimated fair value of the stock-based compensation on the grant date,

which is generally the eÅective date of the grant, amortized on a straight-line basis over the vesting period. The vesting

period is generally three to Ñve years for options, restricted stock and restricted stock units and three months for the

Employee Stock Purchase Plan, or ESPP. The recorded compensation expense is oÅset by an adjustment to Additional paidin capital in our consolidated balance sheets.

The fair value of options to purchase shares of our 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 an estimate of the

expected life of the option, the market value of the underlying stock, expected volatility, expected dividend yield, and the

risk-free interest rate for the expected life of the option. The fair value of restricted stock and restricted stock unit awards is

based on the fair value of our common stock on the grant date.

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). We generally expect to settle our stock-based compensation awards in shares. In limited cases an award may

be cash-settled upon a contingent event such as involuntary termination. These awards are accounted for as an equity award

until the contingency becomes probable of occurring, then the award is reclassiÑed from equity to liability. Such liabilities

are initially measured at intrinsic value with changes in intrinsic value recognized as an adjustment to Salaries and

employee beneÑts.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), ""Share-Based Payment,'' or SFAS 123(R).

SFAS 123(R) requires companies to measure and record compensation expense for share-based payments based on the

instruments' fair value reduced by expected forfeitures. The adoption of the revision to this statement did not have a material

impact on our Ñnancial position or results of operations.

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 net issuance of additional common shares pursuant to certain of our stockbased compensation plans that could potentially dilute earnings per common share.

Comprehensive Income

Comprehensive income 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 stockholders. We deÑne comprehensive income as consisting 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

We have one business segment for Ñnancial reporting purposes under SFAS No. 131, ""Disclosures About Segments of

an Enterprise and Related Information,'' or SFAS 131, for all periods presented in the consolidated Ñnancial statements.

Recently Issued Accounting Standards, Not Yet Adopted

Accounting for Certain Hybrid Instruments Ì In February 2006, the FASB issued SFAS No. 155, ""Accounting for

Certain Hybrid Financial Instruments,'' or SFAS 155. This statement amends SFAS No. 133, ""Accounting for Derivative

Instruments and Hedging Activities,'' or SFAS 133, and SFAS No. 140. The objective of this statement is to simplify the

accounting for certain hybrid Ñnancial instruments, permitting fair value measurement for any hybrid Ñnancial instrument

with an embedded derivative that otherwise would require bifurcation. In addition, this statement establishes a requirement

to evaluate interests in securitized Ñnancial assets to identify instruments that are freestanding derivatives or that are hybrid

Ñnancial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 is eÅective for all Ñnancial

instruments acquired or issued after the beginning of an entity's Ñrst Ñscal year that begins after September 15, 2006. Since

SFAS 155 is to be adopted prospectively, it will not result in a cumulative eÅect of a change in accounting principle. We are

presently assessing which instruments will be aÅected and how other potential accounting standards may interact with

SFAS 155. With respect to mortgage-related security purchases beginning in 2007, this standard could require us to account

for these securities, or a portion of these securities, by recognizing changes in fair values in current earnings.

Determining Variability in Applying FASB Interpretation No. 46(R) Ì In April 2006, the FASB issued FASB StaÅ

Position No. FSP FIN 46(R)-6, ""Determining the Variability to Be Considered in Applying FASB Interpretation

108 Freddie Mac
No. 46(R),'' or FSP FIN 46(R)-6. FSP FIN 46(R)-6 addresses how a reporting enterprise should determine the

variability to be considered in applying FASB Interpretation No. 46 (revised December 2003) ""Consolidation of Variable

Interest Entities,'' or FIN 46(R). It requires the variability to be considered to be based on the design of the entity. This

statement is eÅective for us beginning July 1, 2006. We do not expect the adoption of FSP FIN 46(R)-6 to be material to

our Ñnancial condition or results of operations.

NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS

Securitization Transactions Executed By Us

As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' we issue two types of

mortgage-related securities: PCs and Structured Securities.

Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities as of December 31, 2005

and 2004.

Table 2.1 Ì Guaranteed PCs and Structured Securities Issued Based on Unpaid Principal Balances(1)(2)

December 31,

2005 2004

(in millions)

Guaranteed PCs and Structured Securities Issued:

Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 974,200 $ 852,270

Held in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,324 356,698

Total Guaranteed PCs and Structured Securities issued(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,335,524 $1,208,968

(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 subsequent pass-through of payments to PC

investors, 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) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' we guarantee certain mortgage-related securities issued by third parties.

(4) Guaranteed PCs and Structured Securities exclude $961,776 million and $723,429 million at December 31, 2005 and 2004, respectively, of Structured

Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured Securities do not increase our

credit-related exposure and consist of single-class and multiclass Structured Securities backed by PCs, REMICs and principal-only strips. The

notional balance of interest-only strips of $132,883 million and $105,703 million at December 31, 2005 and 2004, 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 where

the holder has the option to exchange the security tranches for other pre-deÑned security tranches. These tranches and classes collectively totaled

$1,495,501 million and $1,097,336 million at December 31, 2005 and 2004, respectively.

At December 31, 2005 and 2004, approximately 92 percent and 87 percent, respectively, of issued PCs and Structured

Securities (excluding securities we issued that are backed by Ginnie Mae CertiÑcates or non-agency mortgage-related

securities and other securities issued by third-parties that we guaranteed) had a corresponding Guarantee asset, Guarantee

obligation or PC residual recognized on our consolidated balance sheets. The percentage of these PCs and Structured

Securities that had a corresponding Guarantee asset, Guarantee obligation or PC residual due to the adoption of FIN 45

accounting on January 1, 2003 was 50 percent and 40 percent, at December 31, 2005 and 2004, respectively. At

December 31, 2005 and 2004, 93 percent and 89 percent, respectively, of PCs and Structured Securities held by third parties

had a related Guarantee asset and Guarantee obligation established.

Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales

We recognized net pre-tax gains of approximately $364 million, $356 million and $711 million for the years ended

December 31, 2005, 2004 and 2003, respectively, on transfers of PCs and Structured Securities that were accounted for as

sales under SFAS 125/140.

In connection with the derivation of such gains (losses) upon sale prior to October 1, 2005, we had consistently applied

a methodology for determining the order in which to record extinguishments of unamortized deferred guarantee income,

buy-down fees and credit fees as adjustments to the carrying value of the repurchased securities. Beginning October 1, 2005,

we changed our method for determining gains (losses) upon the re-sale of PCs and Structured Securities related to

unamortized deferred guarantee income, buy-down fees and credit fees. Our methodology is now to apply a speciÑc

identiÑcation method of associating the extinguished deferred guarantee income, buy-down fees and credit fees to the

speciÑc portions of purchased PCs and Structured Securities and to relieve those carrying value adjustments through the

gains (losses) when the speciÑc portion of the PC or Structured Security is re-sold. This change in accounting principle was

facilitated by system changes that now allow us to apply and track the extinguished carrying value adjustments to the

speciÑc portions of the purchased PCs and Structured Securities.

109 Freddie Mac
Valuation of Recognized Guarantee Asset, Guarantee Obligation and PC Residuals

Recognized Guarantee asset

EÅective January 1, 2005, we enhanced our approach for estimating the fair value of the Guarantee asset to make

greater use of third-party market data. For approximately 70 percent of the Guarantee asset, the new valuation approach

involves obtaining dealer quotes on proxy securities with collateral similar to aggregated characteristics of our portfolio,

eÅectively equating the Guarantee asset with current, or ""spot,'' market values for excess servicing interest-only, or IO,

securities, which trade at a discount to trust IO security prices. We consider excess servicing securities to be comparable to

the Guarantee asset, in that they represent an IO-like income stream, have less liquidity than trust IO securities and do not

have matching principal-only securities. The remaining 30 percent of the Guarantee asset, which relates to underlying loan

products for which comparable market prices are not readily available, is valued using an expected cash Öow approach with

market input assumptions extracted from the dealer quotes provided on the more liquid products, reduced by an estimated

liquidity discount.

For periods prior to January 1, 2005, we calculated the Guarantee asset fair value using an expected cash Öow approach.

SpeciÑcally, Monte Carlo projections were used to forecast Guarantee asset-related future cash Öows. The forecasted cash

Öows were then discounted using factors that were derived from modeled forward interest rates for each scenario path, to

which we then applied a trailing average option-adjusted spread of up to 24 months that was based on trust IO security

prices.

Recognized Guarantee obligation

EÅective January 1, 2005, we enhanced our approach for estimating the fair value of the Guarantee obligation to make

greater use of third-party market data. We concluded that the structured credit market has evolved to the point where we

can now look to that market for fair value discovery. We have divided our Guarantee obligation portfolio into three primary

components: performing loans, non-performing loans and manufactured housing. For each component, we have developed a

speciÑc valuation approach for capturing its unique characteristics.

For performing loans, our enhanced approach uses the capital markets to obtain estimated subordination levels based on

rating agency models and dealer price quotes on proxy securities with collateral characteristics matched to our portfolio to

value the expected credit losses and the risk premium for unexpected losses related to our guarantee portfolio (which is

predominantly prime mortgages) to reduce our reliance on internal models. We segmented the portfolio into distinct loan

cohorts to diÅerentiate between product types, coupon rate, seasoning, and interests retained by us versus those held by

third parties. We use our models to adjust the dealer quotes as appropriate, including an adjustment to remove the price

eÅects of interest rate risks not relevant to the credit loss estimation from the quoted dealer prices.

Since typical structured securitizations of single-family collateral only include performing loans, we developed a

separate method for estimating the fair value of the Guarantee obligation for non-performing loans. For loans that are

extremely delinquent and have been purchased out of pools, we obtained dealer indications that reÖect their non-performing

status. To value delinquent loans remaining in PCs, we start with the market driven performing loan and non-performing

whole loan values and use empirically observed delinquency transition rates to interpolate the appropriate values in each

phase of delinquency (i.e., 30 days, 60 days, 90 days).

We evaluated market sources to determine the appropriate credit costs associated with the Guarantee obligation for the

manufactured housing portfolio, which we estimated for purposes of our valuation approach to be approximately two percent

of our total guarantee portfolio, but approximately 20 percent of the fair value of the Guarantee obligation, and determined

that there is limited price discovery in the market. As a result, we used our judgment to develop an alternative approach for

estimating the incremental credit costs associated with the manufactured housing portfolio. SpeciÑcally, we calculated the

ratio of realized credit losses for performing loans and manufactured housing loans to determine a loss history ratio. We

then applied the loss history ratio to market implied performing loan Guarantee obligation fair value estimates to calculate

the implied credit costs for the manufactured housing portfolio. This approach grounds the Guarantee obligation related to

manufactured housing in performing loan market prices, while adjusting for the loss history reÖected in empirical data. We

undertook a similar process for estimating the fair value of seriously delinquent manufactured housing loans. We then

benchmarked our performing loan Guarantee obligation fair value estimate by obtaining a range of price indications that

corroborated the reasonableness of our estimate through discussions with leading market participants, including third-party

dealers and mortgage insurance companies. The changes to the credit components of the Guarantee obligation necessitated

a change to the approach used to estimate the costs associated with administering the collection and distribution of

payments on the mortgage loans underlying a PC. Finally, we use our models to estimate the present value of net cash Öows

related to security program cycles. This estimate is included in the Guarantee obligation valuation.

110 Freddie Mac
For periods prior to January 1, 2005, the Guarantee obligation fair value was calculated using internal models to

estimate future cash Öows using a Monte Carlo simulation. The components of estimated cash Öows associated with the

Guarantee obligation included estimates of expected future credit losses using statistically based models that were

benchmarked periodically to the non-conforming loan, or jumbo, securitization market. For all periods our estimates

included costs to administer the collection and distribution of payments on the mortgage loans underlying a PC and

considered net cash Öows due to security program cycles.

Recognized PC residuals

The fair value of recognized PC residuals is determined in a manner that is consistent with the approach described

above for the recognized Guarantee asset and Guarantee obligation.

Key assumptions used in the valuation of the Guarantee asset

Table 2.2 summarizes the key assumptions associated with the fair value measurements of the recognized Guarantee

asset. The assumptions included in this table for 2004 and 2003 relate to those used in our internal models to measure the

fair value of the Guarantee asset for single-family loans at the time of securitization and the subsequent fair value

measurements, which occurred throughout each year. For 2005, the fair values at the time of securitization and the

subsequent fair value measurements were estimated using third party information. The assumptions included in this table for

2005 are those implied by our fair value estimates, with the Internal Rates of Return, or IRRs, adjusted where necessary to

align our internal models with estimated fair values determined using third party information. Prepayment rates are

presented as implied by our internal models and have not been similarly adjusted.

Table 2.2 Ì Key Assumptions Utilized in Fair Value Measurements of the Guarantee Asset

2005 2004 2003

Valuation Assumptions for the Guarantee Asset Range(3) Mean(4) Range(3) Mean(4) Range(3) Mean(4)

Internal rates of return(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.8% - 13.8% 8.7% (1.4)% - 13.6% 6.7% 4.5% - 15.1% 9.4%

Prepayment rates(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.6% - 59.8% 17.2% 6.9% - 58.6% 19.1% 8.0% - 62.9% 23.3%

(1) The IRRs reported above represent a duration-weighted average of the discount rates used to value the recognized Guarantee asset. In 2004 and 2003,

such rates were derived by determining a single rate that equated (a) the simple average of future cash Öows of the Guarantee asset for each Loan

Group with that of (b) the calculated fair value of the Guarantee asset for each Loan Group. In 2005, the IRRs represent a duration-weighted

average of the discount rates as adjusted to align with our estimated fair values. Negative IRRs can occur when suÇciently large negative optionadjusted spreads are applied to LIBOR. When we calibrate our modeled discounted cash Öows to the traded price of an IO security, a negative optionadjusted 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.

(2) 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.

(3) The lowest value in each presented range represents the Ñrst percentile IRRs and prepayment rates throughout 2005, 2004 and 2003. Likewise, the

highest value in each range represents the 99th percentile IRRs and prepayment rates throughout 2005, 2004 and 2003.

(4) Reported values represent the weighted average value of all IRRs and prepayment rates throughout the 2005, 2004 and 2003 periods.

Weighted average lives of the Guarantee asset during 2005, 2004 and 2003 ranged between 1.6 and 8.9 years, 1.2 and

8.7 years, and 1.0 and 8.5 years, respectively, while the average derived weighted average lives of the Guarantee asset for the

same periods were 5.1, 5.3 and 4.8 years, respectively. Such derived weighted average lives are reÖective of prepayment

speed assumptions cited in Table 2.2 above.

At December 31, 2005, the fair value of the recognized Guarantee asset was based upon a valuation approach that

incorporates market-based information. In order to report the hypothetical sensitivity of the carrying value of the Guarantee

asset to changes in key assumptions, we used internal models to approximate their reported carrying values. We then

measured the hypothetical impact of changes in key assumptions using our models to estimate the potential view of fair

value the market might have in response to those changes. In our models, the assumed Internal Rates of Return were

adjusted to calibrate our model results with the reported carrying value. The sensitivity analysis in Table 2.3 illustrates

hypothetical adverse changes in the fair value of the Guarantee asset for changes in key assumptions at December 31, 2005.

Table 2.3 Ì Sensitivity Analysis of the Guarantee Asset

December 31, 2005

GA(1)

(dollars in millions)

Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,938

Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.2%

Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (184)

Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (354)

Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.5%

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (212)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (404)

(1) At December 31, 2005, our Guarantee asset totaled $5,083 million on our consolidated balance sheet and of that amount, approximately $145 million

(or approximately 3 percent), relates to PCs backed by multifamily mortgage loans. The sensitivity analysis presented in Table 2.3 relates solely to the

Guarantee asset associated with PCs backed by single-family mortgage loans.

111 Freddie Mac
Valuation of Other Retained Interests

Other retained interests include securities that were issued by us as part of a resecuritization transaction for which sale

accounting was applied. The majority of these securities is classiÑed as available-for-sale. The fair value of Other retained

interests is generally based on independent price quotations obtained from third-party pricing services or dealer marks.

In order to report the hypothetical sensitivity of the carrying value of Other retained interests, we used internal models

calibrated to the fair values. The sensitivity analysis in Table 2.4 illustrates hypothetical adverse changes in the fair value of

Other retained interests for changes in key assumptions based on these models.

Table 2.4 Ì Sensitivity Analysis of Other Retained Interests

December 31, 2005

(dollars in millions)

Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $124,939

Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.4%

Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4,470)

Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (8,656)

Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.3%

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (85)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (164)

Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests

Table 2.5 below summarizes cash Öows on retained interests.

Table 2.5 Ì Details of Cash Flows

Year Ended December 31,

2005 2004 2003

(in millions)

Cash Öows from:

Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $86,326 $152,662 $347,874

Cash Öows received on the Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,270 $ 1,086 $ 891

Other Retained Interests principal and interest(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,611 $ 28,439 $ 35,975

Purchases of delinquent or foreclosed loans(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,373) $ (4,931) $ (5,822)

(1) Represents contractual guarantee-related cash Öows received by us in connection with the recognized Guarantee asset.

(2) Excludes cash Öows related to retained interests held in the portfolio of our Securities Sales and Trading Group, or SS&TG, business unit which ceased

operations in the fourth quarter of 2004. Such cash Öows were not material.

(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.

NOTE 3: VARIABLE INTEREST ENTITIES

We are a party to numerous entities that are considered to be variable interest entities, or VIEs. These VIEs include

low-income housing tax credit partnerships, certain Structured Securities transactions and a mortgage reinsurance company.

In addition, we buy 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. Our investments in these securities do not represent a signiÑcant variable interest in the

securitization trusts. Further, we invest in securitization entities that are qualifying special purpose entities which are not

subject to consolidation because of our inability to unilaterally liquidate or change the qualifying special purpose entity. See

""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Consolidation and Equity Method of

Accounting'' for further information regarding the consolidation practices of our VIEs.

Low-Income Housing Tax Credit Partnerships

We invest 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, we realize a return on our 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 2005. At December 31, 2005 and 2004, we did not guarantee any obligations of these partnerships and our exposure was

limited to the amount of our investments. At December 31, 2005 and 2004, we were the primary beneÑciary of investments

in six and Ñve low-income housing tax credit partnerships, respectively, and we consolidated these investments. The

investors in the obligations of the consolidated low-income housing tax credit partnerships have recourse only to the assets of

those VIEs and do not have recourse to us.

112 Freddie Mac
Asset-Backed Investment Trusts

We invest in a variety of mortgage and 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. These trusts act as vehicles to allow originators to securitize 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. 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. At December 31, 2005 and 2004, we were not the primary

beneÑciary of any asset-backed investment trusts.

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 trusts issue

various senior interests, subordinated interests or both. We guarantee and purchase certain of the senior interests.

Simultaneous with this guarantee and purchase, we issue and guarantee 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. At December 31, 2005 and 2004, we were not the primary

beneÑciary of any T-Series transactions.

Consolidated VIEs

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

December 31,

Consolidated Balance Sheets Line Item 2005 2004

(in millions)

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 45 $ 51

Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 170

Total assets of consolidated VIEs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $212 $221

VIEs Not Consolidated

Low-Income Housing Tax Credit Partnerships

At December 31, 2005 and 2004, we had unconsolidated investments in 168 and 149 low-income housing tax credit

partnerships, respectively, in which we had a signiÑcant variable interest. The size of these partnerships at December 31,

2005 and 2004, as measured in total assets, was $8.1 billion and $6.7 billion, respectively. These partnerships are accounted

for using the equity method, as described in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

As a limited partner, our maximum exposure to loss equals the undiscounted book value of our equity investment. At

December 31, 2005 and 2004, our maximum exposure to loss on unconsolidated low-income housing tax credit partnerships,

in which we had a signiÑcant variable interest, was $3.7 billion and $3.1 billion, respectively.

Asset-Backed Investment Trusts

At December 31, 2005, we no longer had a signiÑcant variable interest in any trusts related to non-mortgage-related,

asset-backed securities. At December 31, 2004, we had investments in three trusts related to non-mortgage-related, assetbacked securities in which we had a signiÑcant variable interest. These investments had been made between 2000 and 2004

and were typically senior interests rated A1 and P1 by Standard & Poor's, or S&P, and Moody's, respectively. These

ratings are the short-term equivalent of between A and AAA in typical long-term rating scales. These trusts had total assets

at December 31, 2004 of $12.8 billion. As an investor, our maximum exposure to loss consisted of the book value of our

investment. At December 31, 2004, our maximum exposure to loss on non-mortgage-related, asset-backed investment

trusts, in which we had a signiÑcant variable interest, was approximately $3.4 billion.

Structured Securities Ì T-Series Transactions

At both December 31, 2005 and 2004, we had investments or guarantees related to two T-Series transactions in which

we had a signiÑcant variable interest. Our involvement in these two T-Series transactions began in 1996 and 2002,

respectively. The size of these two transactions at December 31, 2005 and 2004, as measured in total assets, was

$105 million and $170 million, respectively. At December 31, 2005 and 2004, our maximum exposure to loss on these

113 Freddie Mac
T-Series transactions, in which we had a signiÑcant variable interest, was $88 million and $147 million, respectively,

consisting of the book value of our investments plus incremental guarantees of the senior interests that are held by third

parties.

NOTE 4: FINANCIAL GUARANTEES

Principal and Interest Guarantees of PCs and Structured Securities

We guarantee the payment of principal and interest on the PCs and Structured Securities we issue that are held by third

parties. At December 31, 2005 and 2004, the maximum potential amount of future payments under these guarantees is

approximately the amount of the total unpaid principal balance of our PCs and Structured Securities held by third parties

which was $974 billion and $852 billion, respectively. However, the actual amount of future payments under these

guarantees will be determined by the performance of the mortgage loans that underlie these PCs and Structured Securities.

During 2005 and 2004, we guaranteed $397.9 billion and $365.1 billion, respectively, of PCs and Structured Securities

to third parties. Upon completion of the transfer of PCs or Structured Securities to third parties, we recognize the initial fair

value of our obligation to make guarantee payments. The accounting methods for our guarantees of PCs and Structured

Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'' At

December 31, 2005 and 2004, we had a recognized Guarantee obligation on the consolidated balance sheets of $5.5 billion

and $4.1 billion, respectively, which included $1.8 billion and $1.4 billion, respectively, of Deferred Guarantee Income. In

addition, we have a Reserve for guarantee losses on Participation CertiÑcates that totals $295 million and $150 million at

December 31, 2005 and 2004, respectively, for incurred credit losses that were recognized in conjunction with PCs and

Structured Securities held by third parties. The balance of PCs and Structured Securities held by third parties also includes

securities issued by third parties that we guarantee totaling $6.6 billion and $6.8 billion at December 31, 2005 and 2004,

respectively. Details of these guarantees are as follows:

‚ Multifamily: We guarantee multifamily housing revenue bonds totaling $5.8 billion and $5.0 billion at

December 31, 2005 and 2004, respectively, via two principal forms. First, we provide 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 lowand moderate-income multifamily housing projects. Second, we provide a guarantee of principal and interest on

multifamily mortgage loans that are originated and held by state and municipal housing Ñnance agencies to

support tax-exempt multifamily housing revenue bonds.

‚ Single-family: We guarantee single-family mortgage loans held by third parties totaling $0.8 billon and

$1.8 billion at December 31, 2005 and 2004, respectively.

As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we also provide a commitment

to advance funds, commonly referred to as ""liquidity guarantees,'' totaling $5.7 billion and $5.1 billion at December 31,

2005 and 2004, 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 us to secure such

funding until such time as the securities could be remarketed. We have not made any payments to date under these liquidity

guarantees.

Generally, the contractual terms of our 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 term due to the prepayment characteristics of

the mortgage-related assets that back PCs and Structured Securities. We do not expect the maximum potential interest

payments we would be required to make associated with these guarantees to signiÑcantly exceed 120 days of interest at the

certiÑcate rate, given that we generally begin a process to purchase the defaulted mortgages when they have been delinquent

for 120 consecutive days.

At December 31, 2005 and 2004, in connection with PCs or Structured Securities backed by single-family mortgage

loans, we had maximum coverage totaling $27.5 billion and $27.2 billion, respectively, in primary mortgage insurance,

$3.6 billion and $3.5 billion, respectively, in pool insurance and other credit enhancements and $5.6 billion and $4.1 billion,

respectively, in recourse to lenders. In addition, at December 31, 2005 and 2004, $1.9 billion and $2.6 billion, respectively, of

outstanding Structured Securities related to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the

U.S. government. With respect to PCs and Structured Securities backed by multifamily mortgage loans, we had maximum

combined credit enhancements totaling $7.3 billion and $9.1 billion at December 31, 2005 and 2004, respectively. At

December 31, 2005 and 2004, our recorded balance of credit enhancements on our consolidated balance sheets was

$420 million and $295 million, respectively.

114 Freddie Mac
Guarantees of Stated Final Maturity of Issued Structured Securities

We commonly issue 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, we may sponsor an auction of the underlying assets. To the extent that auction proceeds

are insuÇcient to cover unpaid principal amounts due to investors in such Structured Securities, we are obligated to fund

such principal. Such guarantees of stated Ñnal maturity are accounted for as derivative instruments.

At December 31, 2005 and 2004, the maximum potential amount of payments we could be required to make under

guarantees of stated Ñnal maturity of issued Structured Securities was $11.7 billion and $9.0 billion, respectively, which

represents the outstanding unpaid principal balance of the underlying mortgage loans. At December 31, 2005 and 2004, the

total fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.

IndemniÑcations

In connection with various business transactions, we provide 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 our

maximum exposure under these indemniÑcation arrangements since in many cases there are no stated or notional amounts

included in the indemniÑcation clauses. However, no claim for indemniÑcation pursuant to these provisions has been made.

At December 31, 2005, our assessment is that the risk of such claim for indemniÑcation is 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. We have not recorded any liabilities related to these

indemniÑcations in our consolidated balance sheets at December 31, 2005 and 2004 because we do not expect material

amounts to be paid under these agreements.

Other Guarantees

We have guaranteed the performance of interest-rate swap contracts in two circumstances. First, as part of a

resecuritization transaction, we transferred certain swaps and related assets to a third party. We guaranteed that interest

income generated from the assets would be suÇcient to cover the required payments under the interest-rate swap contracts.

Second, we guaranteed that a borrower would perform under an interest-rate swap contract linked to a customer's variablerate mortgage. The maximum remaining terms of any of these guarantees at both December 31, 2005 and 2004 was

29 years; however, the actual terms may be signiÑcantly less than the contractual terms because the mortgage loans

underlying the swaps are prepayable. The maximum potential amount of future undiscounted payments under the guarantees

was $717 million and $591 million at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the total

fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.

During 2005, we issued written call options with a notional amount of $25 million with respect to PCs issued by us. The

maximum amount of future payments under these call options is unlimited. The fair value of these options recorded on our

consolidated balance sheet at December 31, 2005 was not material. We did not issue written options on our PCs in 2004.

We provide guarantees to reimburse servicers for premiums paid to acquire servicing in situations where we require the

original seller to repurchase the loan and the original seller is unable to perform under its separate servicing agreement to

reimburse the servicer for those servicing premiums. Our servicing-related premium guarantees are payable according to a

vesting schedule for up to Ñve years from the date of purchase of servicing rights. The maximum potential amount of future

payments under these servicing-related premium guarantees was $54 million and $113 million at December 31, 2005 and

2004, respectively. We have not established a liability on our consolidated balance sheets at December 31, 2005 and 2004

because we do not expect material amounts to be paid under these arrangements.

115 Freddie Mac
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 securities.

Table 5.1 Ì Available-For-Sale Securities

Gross Gross

Amortized Unrealized Unrealized

December 31, 2005 Cost Gains Losses Fair Value

(in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $354,573 $1,848 $(4,974) $351,447

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,784 389 (867) 43,306

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,085 33 (3) 1,115

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231,693 692 (1,029) 231,356

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,022 272 (53) 11,241

Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 642,157 3,234 (6,926) 638,465

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,712 22 (156) 30,578

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,835 Ì (12) 5,823

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,764 Ì Ì 5,764

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,311 22 (168) 42,165

Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $684,468 $3,256 $(7,094) $680,630

December 31, 2004

Retained portfolio

Mortgage-related securities issued by:

Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $348,034 $5,506 $(1,438) $352,102

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,922 950 (353) 59,519

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,677 86 (1) 1,762

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,738 1,700 (380) 168,058

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,751 301 (32) 9,020

Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584,122 8,543 (2,204) 590,461

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,668 120 (55) 21,733

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,098 Ì (1) 8,097

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,766 120 (56) 29,830

Total available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $613,888 $8,663 $(2,260) $620,291

Table 5.2 shows the fair value of available-for-sale securities in a gross unrealized loss position at December 31, 2005,

and how long they have been in that position.

Table 5.2 Ì Available-For-Sale Securities in a Gross Unrealized Loss Position

Less than 12 months 12 months or Greater Total

Gross Gross Gross

Unrealized Unrealized Unrealized

December 31, 2005 Fair Value Losses Fair Value Losses Fair Value Losses

(in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $158,235 $(1,975) $ 93,056 $(2,999) $251,291 $(4,974)

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,084 (182) 19,918 (685) 32,002 (867)

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111 (3) 25 Ì 136 (3)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,213 (627) 13,859 (402) 69,072 (1,029)

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,186 (32) 860 (21) 3,046 (53)

Total mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227,829 (2,819) 127,718 (4,107) 355,547 (6,926)

Cash and investments portfolio

Non-mortgage related securities:

Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,715 (78) 5,485 (78) 17,200 (156)

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,207 (12) Ì Ì 1,207 (12)

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,922 (90) 5,485 (78) 18,407 (168)

Total available-for-sale securities in a gross unrealized loss position ÏÏÏÏÏÏ $240,751 $(2,909) $133,203 $(4,185) $373,954 $(7,094)

At December 31, 2005, gross unrealized losses on available-for-sale securities were $(7,094) million, or approximately

2 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 85,000 individual lots representing approximately 16,000 separate securities. We

116 Freddie Mac
routinely purchase multiple lots of individual securities at diÅerent times and at diÅerent costs. We determine gross

unrealized gains and gross unrealized losses by speciÑcally identifying investment positions at the lot level; therefore, some of

the lots we hold for a single security may be in an unrealized gain position while other lots for that security are in an

unrealized loss position, depending upon the amortized cost of the speciÑc lot.

We have the ability and intent to hold the available-for-sale securities in an unrealized loss position for a period of time

suÇcient to recover all unrealized losses. Based on our ability and intent to hold the available-for-sale securities and our

consideration of other factors described below, we have concluded that the impairment of these securities is temporary.

‚ Freddie Mac securities. The unrealized losses on our securities are primarily a result of movements in interest

rates. Since we guarantee the payment of principal and interest on these securities, we review the estimated

credit exposure of the mortgages underlying these securities in evaluating potential impairment. The extent and

duration of the decline in fair value relative to the amortized cost have met our criteria that are used to indicate

that the impairment of these securities is temporary.

‚ 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 met our criteria

that are used to indicate that the impairment of these securities is temporary and no other facts or

circumstances existed to suggest that the decline was not temporary. The issuer guarantees related to these

securities have led us to conclude that any credit risk is minimal.

‚ Other securities in the Retained portfolio and Asset-backed securities in the Cash and Investment portfolio.

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 met our criteria that are used to indicate that the impairment of these securities is

temporary. The vast majority of these securities are investment grade (i.e., rated BBB¿ or better on a S&P

equivalent scale).

Table 5.3 below illustrates the gross realized gains and gross realized losses received from the sale of available-for-sale

securities.

Table 5.3 Ì Gross Realized Gains and Gross Realized Losses on Available-For-Sale Securities

Year Ended December 31,

2005 2004 2003

(in millions)

Gross realized gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 891 $ 787 $ 1,903

Gross realized (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (345) (203) (1,077)

Net realized gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 546 $ 584 $ 826

117 Freddie Mac
Table 5.4 summarizes, by major security type, the remaining contractual maturities and weighted average yield of

available-for-sale securities at December 31, 2005.

Table 5.4 Ì Maturities and Weighted Average Yield of Available-For-Sale Securities

Weighted

December 31, 2005 Amortized Cost Fair Value Average Yield(1)

(dollars in millions)

Retained portfolio

Total mortgage-related securities(2)

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22 $ 22 5.80%

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,565 3,609 5.35

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,078 13,227 5.73

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 625,492 621,607 4.94

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $642,157 $638,465 4.96

Cash and investments portfolio

Non-mortgage-related securities:

Asset-backed securities(2)

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3 $ 3 4.29

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,466 21,369 4.12

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,132 7,095 4.16

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,111 2,111 4.42

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,712 30,578 4.15

Obligations of states and political subdivisions

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95 95 3.13

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,163 1,153 3.07

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82 82 3.40

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,495 4,493 3.71

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,835 5,823 3.57

Commercial paper

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,764 5,764 3.67

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,764 5,764 3.67

Total non-mortgage-related securities

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,862 5,862 3.66

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,629 22,522 4.07

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,214 7,177 4.16

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,606 6,604 3.94

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,311 $ 42,165 4.01

Total available-for-sale securities for Retained portfolio and Cash and investments portfolio

Due 1 year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,884 $ 5,884 3.67

Due after 1 through 5 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,194 26,131 4.24

Due after 5 through 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,292 20,404 5.17

Due after 10 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 632,098 628,211 4.93

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $684,468 $680,630 4.90

(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 2005 (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 on the unpaid principal balances of impaired securities.

(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.

118 Freddie Mac
Table 5.5 presents the changes in AOCI, net of taxes, related to available-for-sale securities. The Net unrealized

holding (losses), net of tax, represents the net fair value adjustments recorded on available-for-sale securities throughout the

year, after the eÅects of our statutory tax rate of 35 percent. The Net reclassiÑcation adjustment for net realized (gains), net

of tax, represents the amount of those fair value adjustments, after the eÅects of our 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 available-for-sale securities.

Table 5.5 Ì AOCI, Net of Taxes, Related to Available-For-Sale Securities

Year Ended December 31,

2005 2004 2003

(in millions)

Beginning balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,339 $ 6,349 $12,217

Net unrealized holding (losses), net of tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,707) (1,709) (5,770)

Net reclassiÑcation adjustment for net realized (gains), net of tax(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (117) (301) (98)

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(2,485) $ 4,339 $ 6,349

(1) Net of tax (beneÑt) of $(3,611) million, $(920) million and $(3,107) million for the years ended December 31, 2005, 2004 and 2003, respectively.

(2) Net of tax (expense) of $(63) million, $(162) million and $(53) million for the years ended December 31, 2005, 2004 and 2003, respectively.

(3) Includes the reversal of previously recorded unrealized losses that have been recognized as impairment losses on available-for-sale securities of

$234 million, $72 million and $438 million, net of taxes, for the years ended December 31, 2005, 2004 and 2003, respectively.

Table 5.6 summarizes the estimated fair values by major security type for trading securities held in our Retained

portfolio.

Table 5.6 Ì Trading Securities in the Retained Portfolio

December 31,

2005 2004

(in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie MacÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,156 $11,398

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 534 385

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 204 59

Total trading securities in the Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,894 $11,842

The net unrealized holding losses on trading securities we still hold that have been recognized in earnings for the years

ended December 31, 2005, 2004 and 2003 were $(261) million, $(240) million and $(402) million, respectively.

Collateral Pledged

Collateral Pledged to Freddie Mac

Our counterparties are required to pledge collateral for reverse repurchase transactions and most interest-rate swap

agreements, after giving consideration to collateral posting thresholds generally related to a counterparty's credit rating. Even

though it is our practice not to repledge assets held as collateral, based on master agreements a portion of the collateral may

be repledged. At December 31, 2005, we did not have collateral in the form of securities pledged to and held by us under

secured lending transactions and interest-rate swap agreements. At December 31, 2004, the fair value amount of collateral

pledged to and held by us, in the form of securities, was $466 million, of which approximately $3 million was available for

repledging.

Collateral Pledged by Freddie Mac

We are also required to pledge collateral for margin requirements with third-party custodians in connection with secured

Ñnancings, interest-rate swap agreements, futures and daily trade activities with some counterparties. We pledge collateral

to meet these requirements upon a demand by the respective counterparty. Based on agreements with our custodians, some

collateral may be permitted by contract to be repledged by the custodian. Table 5.7 summarizes all securities pledged as

collateral by us, including assets that the secured party may repledge and those that may not be repledged.

119 Freddie Mac
Table 5.7 Ì Collateral in the Form of Securities Pledged

December 31,

2005 2004

(in millions)

Securities pledged with ability for secured party to repledge (parenthetically disclosed on our consolidated balance

sheets)

Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $168 $194

Securities pledged without ability for secured party to repledge

Available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 161 221

Total assets pledged ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $329 $415

NOTE 6: LOAN LOSS RESERVES

We maintain separate loan loss reserves for mortgage loans in the Retained portfolio that we classify as held-forinvestment and for credit-related losses associated with certain mortgage loans that underlie guaranteed PCs and Structured

Securities held by third parties.

Table 6.1 summarizes loan loss reserve activity during 2005, 2004 and 2003.

Table 6.1 Ì Detail of Loan Loss Reserves

Year-Ended December 31,

2005 2004 2003

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

(in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114 $150 $ 264 $ 174 $125 $ 299 $ 177 $ 88 $ 265

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 106 145 251 111 32 143 76 (81) (5)

Charge-oÅs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (294) Ì (294) (300) Ì (300) (224) Ì (224)

Recoveries(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 Ì 185 160 Ì 160 145 Ì 145

Adjustment for change in accounting(2) ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì 110 110

Transfers-out(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (11) (11) Ì (20) (20) Ì (11) (11)

Other, net(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 11 19 (31) 13 (18) Ì 19 19

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 119 $295 $ 414 $ 114 $150 $ 264 $ 174 $125 $ 299

(1) It is our 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.

(2) On January 1, 2003, $110 million of the recognized Guarantee obligation that was attributable to estimated incurred losses on outstanding PCs or

Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.

(3) 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.

(4) Represents the portion of the Guarantee obligation 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 amount

includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004, respectively, 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,'' 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 $398 million, $261 million and $289 million at December 31, 2005, 2004 and 2003, respectively. Our

recorded investment in impaired loans and the related valuation allowance are summarized in Table 6.2.

Table 6.2 Ì Impaired Loans(1)

December 31,

2005 2004 2003

Recorded SpeciÑc Net Recorded SpeciÑc Net Recorded SpeciÑc Net

Investment(2) Reserve Investment Investment(2) Reserve Investment Investment(2) Reserve Investment

(in millions)

Impaired loans having:

Related-valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54 $(16) $ 38 $ 46 $ (3) $ 43 $ 60 $(10) $ 50

No related-valuation allowance(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,536 Ì 2,536 2,261 Ì 2,261 2,309 Ì 2,309

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,590 $(16) $2,574 $2,307 $ (3) $2,304 $2,369 $(10) $2,359

(1) Single-family impaired loans include performing and non-performing troubled debt restructurings. Multifamily impaired loans are deÑned as

performing and non-performing troubled debt restructurings, loans that are 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 troubled debt restructuring loans.

120 Freddie Mac
For the years ended December 31, 2005, 2004 and 2003, the average recorded investment in impaired loans was

$2,601 million, $2,311 million and $2,330 million, respectively. The increase in impaired loans in 2005 is primarily due to

Hurricane Katrina.

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 $24 million,

$13 million and $16 million for the years ended December 31, 2005, 2004 and 2003, respectively. For single-family

performing and non-performing loans, we recognize interest income on an accrual basis and establish reserves for estimated

accrued but uncollectible interest for these loans at the consolidated balance sheet dates. Gross interest income on impaired

single-family loans totaled $149 million, $157 million and $160 million for the years ended December 31, 2005, 2004 and

2003, respectively.

Delinquency Rates

Table 6.3 summarizes the delinquency rates for our Total mortgage portfolio, excluding non-Freddie Mac mortgagerelated securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates, at December 31,

2005, 2004 and 2003.

Table 6.3 Ì Delinquency Performance(1)

December 31,

2005 2004 2003

Delinquencies, end of period:

Single-family:(2)

Non-credit-enhanced portfolio:

Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30% 0.24% 0.27%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,037 19,691 21,063

Credit-enhanced portfolio:

Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.46% 2.75% 2.96%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,000 54,913 66,283

Total portfolio:

Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.69% 0.73% 0.86%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,037 74,604 87,346

Multifamily:(3)

Total portfolio:

Delinquency rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% 0.06% 0.05%

Net carrying value of delinquent loans (in millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ 35 $ 24

(1) Based on mortgage loans in the Retained portfolio and Total Guaranteed PCs and Structured Securities Issues, excluding that portion of Structured

Securities backed by Ginnie Mae CertiÑcates.

(2) Based on the number of mortgage loans 90 days or more delinquent or in foreclosure.

(3) Based on net carrying value of mortgage loans 60 days or more delinquent.

NOTE 7: REAL ESTATE OWNED

We obtain REO properties when we are the highest bidder at foreclosure sales of properties that collateralize nonperforming single-family and multifamily mortgage loans owned by us. Upon acquiring single-family properties, we establish

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, we may operate them with third-party propertymanagement Ñrms for a period to stabilize value and then sell the properties through commercial real estate brokers. For

each of the years ended December 31, 2005, 2004 and 2003, the weighted average holding period for our disposed REO

properties was less than one year. Table 7.1 provides a summary of our REO activity.

Table 7.1 Ì Real Estate Owned

REO, Valuation REO,

Gross Allowance Net

(in millions)

Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 670 $ (76) $ 594

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,663 (93) 1,570

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,422) 53 (1,369)

Balance, December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 911 (116) 795

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,641 (95) 1,546

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,685) 85 (1,600)

Balance, December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 867 (126) 741

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,390 (78) 1,312

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,513) 89 (1,424)

Balance, December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 744 $(115) $ 629

We recognized losses of $67 million, $67 million and $50 million on REO dispositions for the years ended December 31,

2005, 2004 and 2003, respectively, which are included in REO operations income (expense).

121 Freddie Mac
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, 2005 and 2004 for debt securities,

as well as subordinated borrowings.

Table 8.1 Ì Total Debt Securities, Net

December 31,

2005 2004

Balance, EÅective Balance, EÅective

Net(1) Rate(2) Net(1) Rate(2)

(dollars in millions)

Senior debt, due within one year:

Short-term debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $192,713 4.02% $196,639 2.05%

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,819 3.42 85,664 3.33

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 288,532 3.82 282,303 2.44

Senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 454,627 4.64 443,772 4.36

Subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,633 6.15 5,622 6.15

Senior and subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 460,260 4.66 449,394 4.38

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $748,792 $731,697

(1) Includes unamortized discounts and premiums, and 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.

We Ñnance 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 Reference Bills» securities and discount notes, paying only principal at maturity. Reference Bills» securities,

discount notes and Medium-term 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 we sell 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.

Table 8.2 provides additional information related to our debt securities due within one year.

Table 8.2 Ì Senior Debt, Due Within One Year

December 31,

2005 2004

Balance, Balance,

Par Value Net(1) EÅective Rate(2) Par Value Net(1) EÅective Rate(2)

(dollars in millions)

Reference Bills» securities and discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $183,357 $181,468 4.00% $181,071 $180,198 2.04%

Medium-term Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,035 2,032 4.17 162 162 2.51

Securities sold under agreements to repurchase and Federal

funds purchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 450 450 4.26 Ì Ì Ì

Swap collateral obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,736 8,768 4.30 16,279 16,279 2.24

Hedging-related basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A (5) N/A N/A Ì N/A

Short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,578 192,713 4.02 197,512 196,639 2.05

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,596 95,819 3.42 83,625 85,664 3.33

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $290,174 $288,532 3.82 $281,137 $282,303 2.44

(1) Represents par value, net of associated discounts or premiums. Swap collateral obligations include the related accrued interest payable.

(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.

122 Freddie Mac
Senior and Subordinated Debt, Due After One Year

Table 8.3 summarizes our Senior and subordinated debt, due after one year at December 31, 2005 and 2004.

Table 8.3 Ì Senior and Subordinated Debt, Due After One Year

December 31,

2005 2004

Contractual Balance, Interest Balance, Interest

Maturity(1) Par Value Net(2) Rates Par Value Net(2) Rates

(dollars in millions)

Senior debt, due after one year:(3)

Fixed-rate:

Medium-term Notes Ì Callable(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2035 $182,251 $182,173 2.00% - 7.91% $181,094 $180,957 1.63% - 8.05%

Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2028 19,927 19,936 1.00% - 7.69% 8,574 8,587 1.00% - 7.69%

U.S. dollar Reference Notes» securities Ì Non-callableÏÏÏÏÏÏ 2007 - 2032 172,551 171,962 2.38% - 7.00% 167,836 167,622 1.88% - 7.00%

4Reference Notes» securities Ì Non-callableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2014 25,528 25,478 3.50% - 5.75% 29,035 28,967 3.50% - 5.75%

Variable-rate:

Medium-term Notes Ì Callable(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2030 28,709 28,709 Various 33,033 33,041 Various

Medium-term Notes Ì Non-callable(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2026 5,809 5,858 Various 1,183 1,207 Various

Zero-coupon:

Medium-term Notes Ì CallableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2035 39,939 7,675 Ì% 35,903 7,078 Ì%

Medium-term Notes Ì Non-callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 - 2034 9,598 5,287 Ì% 5,528 1,968 Ì%

Foreign-currency-related and hedging-related basis adjustments ÏÏÏ N/A 7,549 N/A 14,345

Total senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 484,312 454,627 462,186 443,772

Subordinated debt, due after one year:

Fixed-rate(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2011 - 2016 5,564 5,550 5.25% - 8.25% 5,564 5,547 5.25% - 8.25%

Zero coupon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2019 332 83 Ì% 332 75 Ì%

Total subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,896 5,633 5,896 5,622

Total senior and subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏ $490,208 $460,260 $468,082 $449,394

(1) Represents contractual maturities at December 31, 2005.

(2) Represents par value 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 securities and FreddieNotes» securities of $11,805 million and $11,850 million at December 31, 2005 and 2004,

respectively. These debt instruments represent Medium-term Notes that permit persons acting on behalf of deceased beneÑcial owners to require us to

repay principal prior to the contractual maturity date.

(5) Includes callable Estate NotesSM securities and FreddieNotes» securities of $6,987 million and $6,142 million at December 31, 2005 and 2004,

respectively. See related footnote (4) above concerning the nature of these debt instruments.

(6) Includes Medium-term Notes of $800 million at December 31, 2005 and 2004, 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 percent of the principal amount plus accrued

interest.

(7) Balance, Net includes callable subordinated debt of $3,493 million and $3,491 million at December 31, 2005 and 2004, respectively.

A portion of our long-term debt is callable. Callable debt gives us 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 contractual maturities of long-term debt securities (including current portion of long-term

debt) and subordinated borrowings outstanding at December 31, 2005, assuming callable debt is paid at contractual

maturity.

Table 8.4 Ì Senior and Subordinated Debt, Due After One Year (including current portion of long-term debt)

Contractual

Annual Maturities Maturity(1)(2)

(in millions)

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 95,596

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 106,696

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,125

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,348

2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,249

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,790

Total(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 585,804

Net discounts, premiums and foreign-currency-related and hedging-related basis adjustments(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29,725)

Senior and subordinated debt, due after one year, including current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $556,079

(1) Represents par value of long-term debt securities and subordinated borrowings.

(2) For debt denominated in a currency other than the U.S. dollar, the par value is based on the exchange rate at the date of the debt issuance. Subsequent

changes in exchange rates are reÖected in Net discounts, premiums and foreign-currency-related and hedging-related basis adjustments.

We record gains and losses on debt repurchases that are accounted for as debt extinguishments based on the diÅerence

between the principal amount of the debt securities repurchased (adjusted for deferred premiums, discounts and hedging

gains and losses) and proceeds paid and the write-oÅ of related deferred debt issuance costs. We recognized a pre-tax gain

of $206 million and pre-tax losses of $(327) million and $(1,775) million on the repurchase of approximately $11.7 billion,

$14.5 billion and $27.3 billion in principal amount of debt outstanding in 2005, 2004 and 2003, respectively.

123 Freddie Mac
NOTE 9: STOCKHOLDERS' EQUITY

Preferred Stock

During 2005 and 2004, we completed no preferred stock oÅerings. All 17 classes of preferred stock outstanding at

December 31, 2005 have a par value of $1 per share. We have 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 our preferred stock outstanding at December 31, 2005.

Table 9.1 Ì Preferred Stock

Redemption Total

Shares Shares Total Par Price per Outstanding Redeemable NYSE

Issue Date Authorized Outstanding Value Share Balance(1) On or After(2) Symbol(3)

(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, or 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, or NYSE, unless otherwise noted.

(4) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1 percent divided by 1.377, and is capped at 9.00 percent.

(5) Not listed on any exchange.

(6) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1 percent divided by 1.377, and is capped at 7.50 percent.

(7) Dividend rate resets on January 1 every Ñve years after January 1, 2005 based on a Ñve-year Constant Maturity Treasury, or CMT, rate, and 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 12-month LIBOR 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.

Stock Repurchase and Issuance Programs

On October 5, 2005, our board of directors authorized us to repurchase up to $2 billion of outstanding shares of our

common stock, all of which remained available for repurchase at December 31, 2005, and to issue up to $2 billion of noncumulative, perpetual preferred stock, in each case, from time to time depending on market conditions and other factors.

Completion of the authorized capital transactions will have no material impact on our regulatory minimum capital surplus,

including the 30 percent mandatory target set in January 2004 by OFHEO. In accordance with the existing capital

monitoring framework established by OFHEO in January 2004, we obtained OFHEO's approval for this common stock

repurchase. The repurchase authorization replaces all unused repurchase authority remaining under the common stock

repurchase plan approved by our board of directors in September 1997.

NOTE 10: REGULATORY CAPITAL

Regulatory Capital Standards

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or GSE Act, established minimum,

critical and risk-based capital standards for us.

Those standards determine the amounts of Core capital and Total capital that we must maintain to meet regulatory

capital requirements. Core capital consists of the par value of outstanding common stock (common stock issued less

124 Freddie Mac
common stock held in treasury), the par value of outstanding non-cumulative perpetual preferred stock, additional paid-in

capital and retained earnings, as determined in accordance with GAAP. 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.

Minimum Capital

The minimum capital standard requires us to hold an amount of Core capital that is generally equal to the sum of

2.50 percent of aggregate on-balance sheet assets and approximately 0.45 percent of the sum of outstanding mortgage-related

securities we guaranteed and other aggregate oÅ-balance sheet obligations. As discussed below, in 2004 OFHEO

implemented a framework for monitoring our capital adequacy, which includes a mandatory target capital surplus of

30 percent over the minimum capital requirement.

Critical Capital

The critical capital standard requires us to hold an amount of Core capital that is generally equal to the sum of

1.25 percent of aggregate on-balance sheet assets and approximately 0.25 percent of the sum of outstanding mortgage-related

securities we guaranteed and other aggregate oÅ-balance sheet obligations.

Risk-Based Capital

The risk-based capital standard requires the application of a stress test to determine the amount of Total capital that we

must hold to absorb projected losses resulting from adverse interest-rate and credit-risk conditions speciÑed by the GSE Act

and adds 30 percent additional capital to provide for management and operations risk. The adverse interest-rate conditions

prescribed by the GSE Act include one scenario 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 risk component of the stress

tests simulates the performance of our mortgage portfolio based on loss rates for a benchmark region. The criteria for the

benchmark region are established by the GSE Act and are intended to capture the credit-loss experience of the region that

experienced the highest historical rates of default and severity of mortgage losses for two consecutive origination years.

ClassiÑcation

OFHEO monitors our performance with respect to the three regulatory capital standards by classifying our capital

adequacy not less than quarterly.

To be classiÑed as ""adequately capitalized,'' we must meet both the risk-based and minimum capital standards. If we

fail to meet the risk-based capital standard, we cannot be classiÑed higher than ""undercapitalized.'' If we fail to meet the

minimum capital requirement but exceed the critical capital requirement, we cannot be classiÑed higher than ""signiÑcantly

undercapitalized.'' If we fail to meet the critical capital standard, we must be classiÑed as ""critically undercapitalized.'' In

addition, OFHEO has discretion to reduce our capital classiÑcation by one level if OFHEO determines that we are engaging

in conduct OFHEO did not approve that could result in a rapid depletion of Core capital or determines that the value of

property subject to mortgage loans we hold or guarantee has decreased signiÑcantly.

When we are classiÑed as adequately capitalized, we generally can pay a dividend on our common or preferred stock or

make other capital distributions (which includes common stock repurchases and preferred stock redemptions) without prior

OFHEO approval so long as the payment would not decrease Total capital to an amount less than our risk-based capital

requirement and would not decrease our Core capital to an amount less than our minimum capital requirement.

If we were classiÑed as undercapitalized, we would be prohibited from making a capital distribution that would decrease

our Core capital to an amount less than our minimum capital requirement. We also would be required to submit a capital

restoration plan for OFHEO approval, which could adversely aÅect our ability to make capital distributions.

If we were classiÑed as signiÑcantly undercapitalized, we would be able to make a capital distribution only if OFHEO

determined that the distribution satisÑed certain statutory standards. Under these circumstances, we would be prohibited

from making any capital distribution that would decrease our Core capital to less than the critical capital level, and

OFHEO also could take action to limit our growth, require us to acquire new capital or restrict us from activities that create

excessive risk. We also would be required to submit a capital restoration plan for OFHEO approval, which could adversely

aÅect our ability to make capital distributions.

If we were classiÑed as critically undercapitalized, OFHEO would be required to appoint a conservator for us unless

OFHEO made a written Ñnding that it should not do so and the Secretary of the Treasury concurred in that determination.

Performance Against Regulatory Capital Standards

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

consistent compliance with the minimum, critical and risk-based capital requirements.

125 Freddie Mac
Table 10.1 summarizes our regulatory capital requirements and surpluses.

Table 10.1 Ì Regulatory Capital Requirements(1)

December 31,

2005 2004

(in millions)

Minimum capital requirement(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,010 $24,131

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,964 35,009

Minimum capital surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,954 10,878

Critical capital requirement(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,782 $12,308

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,964 35,009

Critical capital surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,182 22,701

Risk-based capital requirement(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,282 $11,108

Total capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,781 34,691

Risk-based capital surplus(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,499 23,583

(1) OFHEO is the authoritative source of the capital calculations that underlie our capital classiÑcations.

(2) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.

(3) Amounts for 2005 and 2004 are those calculated by OFHEO prior to the issuance of our 2005 and 2004 Ñnancial results.

Factors that could adversely aÅect the adequacy of our regulatory capital for future periods include declines in GAAP

income; increases in our risk proÑle; changes in the economic environment, such as large interest-rate or implied volatility

moves or house-price declines; changes in option-adjusted spreads; legislative or regulatory action that could increase

capital requirements or changes in or adoption of new accounting standards such as SFAS 155. See ""NOTE 1: SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Ì Recently Issued Accounting Standards, Not Yet Adopted'' for more

information regarding SFAS 155. In particular, interest-rate levels or implied volatility can aÅect the amount of our Core

capital, even if we were 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. Changes in option-adjusted spreads can

also aÅect the amount of our Core capital, because option-adjusted spreads are a factor in the valuation of our guaranteed

mortgage portfolio.

Subordinated Debt Commitment

In October 2000, we announced our voluntary adoption of a series of commitments designed to enhance market

discipline, liquidity and capital. In September 2005, we entered into a written agreement with OFHEO that updated those

commitments and set forth a process for implementing them. Under the terms of this agreement, we committed to issue

qualifying subordinated debt for public secondary market trading and rated by no less than two nationally recognized

statistical rating organizations in a quantity such that the sum of Total capital plus the outstanding balance of qualifying

subordinated debt will equal or exceed the sum of 0.45 percent of outstanding guaranteed PCs and Structured Securities

and 4 percent of on-balance sheet assets at the end of each quarter. Qualifying subordinated debt is deÑned as subordinated

debt that contains a deferral of interest payments for up to Ñve years if our Core capital falls below 125 percent of our

critical capital requirement or our Core capital falls below our minimum capital requirement and pursuant to our request,

the Secretary of the Treasury exercises discretionary authority to purchase our obligations under Section 306(c) of our

charter. Qualifying subordinated debt will be discounted for the purposes of this commitment as it approaches maturity with

one-Ñfth of the outstanding amount excluded each year during the instrument's last Ñve years before maturity. When the

remaining maturity is less than one year, the instrument is entirely excluded.

Table 10.2 summarizes our compliance with our subordinated debt commitment.

Table 10.2 Ì Subordinated Debt Commitment

December 31, 2005

(in millions)

Total on-balance sheet assets and guaranteed PCs and Structured Securities outstanding target(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $36,633

Total capital plus qualifying subordinated debt(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,831

Surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,198

(1) Equals the sum of 0.45 percent of outstanding guaranteed PCs and Structured Securities and 4 percent of on-balance sheet assets.

(2) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.

Regulatory Capital Monitoring Framework

In a letter dated January 28, 2004, OFHEO created a framework for monitoring our capital due to our higher

operational risk, including our inability to produce timely Ñnancial statements in accordance with GAAP. The letter directed

that we maintain a mandatory target capital surplus of 30 percent over our minimum capital requirement, subject to certain

conditions and variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of

certain capital transactions.

126 Freddie Mac
Our failure to meet the mandatory target capital surplus would result in an OFHEO inquiry regarding the reason for

such failure. If OFHEO were to determine that we had acted unreasonably regarding our compliance with the framework,

as set forth in OFHEO's letter, OFHEO could seek to require us to submit a remedial plan or take other remedial steps.

In addition, under this framework, 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 must also 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.

This framework will remain in eÅect until the Director of OFHEO determines that it should be modiÑed or expire.

OFHEO's letter indicated that this determination would consider our resumption of timely Ñnancial and regulatory reporting

that complies with GAAP, among other factors.

Table 10.3 summarizes our compliance with the mandatory target capital surplus portion of OFHEO's capital

monitoring framework.

Table 10.3 Ì Mandatory Target Capital Surplus

December 31,

2005 2004

(in millions)

Minimum capital requirement plus 30% add-on(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,513 $31,370

Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,964 35,009

Surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,451 3,639

(1) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.

NOTE 11: STOCK-BASED COMPENSATION

We have three stock-based compensation plans under which grants are currently being made: (i) the Employee Stock

Purchase Plan, or ESPP, as amended and restated in 2004; (ii) the 2004 Stock Compensation Plan, or 2004 Employee Plan;

and (iii) the 1995 Directors' Stock Compensation Plan, or 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, or 1995 Employee Plan. We collectively refer 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 us as treasury stock, shares purchased by us

in the open market or authorized but previously unissued shares. At December 31, 2005, our stock-based awards consisted

of stock options, restricted stock units and restricted stock. Such awards, discussed below, are generally forfeitable for at

least one year after the grant date, with vesting provisions contingent upon service requirements.

‚ Stock options granted allow for the purchase of our common stock at an exercise price equal to the fair market value

of our 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 commencing on the grant date. Stock options granted by us include dividend

equivalent rights.

On November 30, 2005, the Compensation and Human Resources Committee of our board of directors approved a

change in the manner in which dividend equivalents are paid out on certain stock option awards. This change

aÅected all stock options outstanding at December 31, 2005 and unvested at December 31, 2004 (aÅected stock

options) and was made to bring the awards into operational and documentary compliance with Internal Revenue

Code Section 409A. In 2006, we made a lump sum payment for all previously accrued dividend equivalents to

grantees holding aÅected stock options at December 31, 2005. With the change, dividend equivalents on aÅected

stock options are paid when and as dividends on common stock are declared. In addition, dividend equivalent rights

will no longer be granted in connection with awards of stock options to grantees. For options not aÅected by the

change approved on November 30, 2005, the dividend equivalent right provides option holders 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 grant date.

‚ A restricted stock unit entitles the grantee to receive one share of common stock at a speciÑed future date. Restricted

stock units do not have voting rights, but do have dividend equivalent rights, which are (a) paid to restricted stock

127 Freddie Mac
unit holders who are employees as and when dividends on common stock are declared or (b) which are accrued as

additional restricted stock units for non-employee directors.

‚ 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 at the time of grant.

ESPP: We have established a stockholder-approved ESPP, which was amended and restated as of January 1, 2005,

that is qualiÑed under Internal Revenue Code Section 423. Under the ESPP, substantially all full-time and part-time

employees that choose to participate in the ESPP have the option to purchase shares of common stock at speciÑed dates,

with an annual maximum market value of $20,000 per employee as determined on the subscription (grant) date. The

purchase price is equal to 85 percent of the lower of the average price (average of the daily high and low prices) of the stock

on the subscription date or the average price of the stock on the purchase (exercise) date.

On November 4, 2004, stockholders approved the amendment and restatement of the ESPP eÅective as of January 1,

2005. The restated ESPP authorized granting 3.6 million shares in addition to the 3.2 million shares remaining under the

former ESPP. At December 31, 2005, the maximum number of shares of common stock authorized for grant to employees,

including those additional shares granted in accordance with the amended and restated ESPP, totaled 6.8 million shares, of

which approximately 0.2 million shares had been issued and approximately 6.6 million shares remained available for grant.

At December 31, 2005, 2004 and 2003, no options were exercisable under the ESPP, as the options outstanding at year-end

become exercisable subsequent to year-end, and are exercised or forfeited during the subsequent year.

2004 Employee Plan: Under the stockholder-approved 2004 Employee Plan, we may grant employees stock-based

awards, including stock options, restricted stock units and restricted stock. In addition, we have the right to impose

performance conditions with respect to these awards. Under the 2004 Employee Plan, employees may also be granted stock

appreciation rights; however, at December 31, 2005, no stock appreciation rights had been granted under the 2004

Employee Plan. At December 31, 2005, the maximum number of shares of common stock authorized for grant to employees

in accordance with the 2004 Employee Plan totaled 13.8 million shares, of which approximately 1.8 million shares had been

issued and approximately 12.0 million shares remained available for grant.

Directors' Plan: Under the stockholder-approved Directors' Plan, which was amended and restated in 1998, we are

permitted to grant to non-employee directors stock options, restricted stock units and restricted stock. At December 31,

2005, the maximum number of shares of common stock authorized for grant to directors in accordance with the Directors'

Plan totaled 2.4 million shares, of which approximately 0.8 million shares had been issued and approximately 1.6 million

shares remained available for grant.

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, Employee Plans and Directors' Plan.

Table 11.1 provides a summary of activity related to the option to purchase stock under the ESPP.

Table 11.1 Ì ESPP Activity

Year Ended December 31,

2005 2004 2003

Options to Weighted Options to Weighted Options to Weighted

Purchase Average Exercise Purchase Average Exercise Purchase Average Exercise

Stock Price Stock Price Stock Price

Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,416 $56.83 65,257 $48.08 1,000,370 $52.27

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 258,061 53.58 250,899 53.40 145,866 44.16

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (239,873) 52.78 (244,625) 50.53 (355,485) 41.76

Forfeited or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,020) 53.22 (11,115) 50.77 (725,494) 43.02

Outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,584 52.16 60,416 56.83 65,257 48.08

Weighted-average fair value of options

granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.56 $ 11.23 $ 10.72

128 Freddie Mac
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,

2005 2004 2003

Weighted Weighted Weighted

Stock Average Stock Average Stock Average

Options Exercise Price Options Exercise Price Options Exercise Price

Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,627,941 $52.94 8,656,340 $46.89 9,231,105 $44.21

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,199,586 62.80 1,343,554 61.09 1,216,442 53.28

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,563,477) 43.55 (1,861,617) 29.06 (1,052,156) 23.12

Forfeited or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (570,366) 61.17 (510,336) 58.84 (739,051) 57.18

Outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,693,684 56.20 7,627,941 52.94 8,656,340 46.89

Options exercisable at year-end ÏÏÏÏÏÏÏÏÏÏÏÏ 3,590,168 52.14 4,018,666 47.46 4,755,640 38.23

Weighted-average fair value of options

granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26.84 $ 25.04 $ 21.84

Table 11.3 provides a summary of activity related to restricted stock and restricted stock units under the Employee

Plans and the Directors' Plan.

Table 11.3 Ì Employee Plans and Directors' Plan Restricted Stock and Restricted Stock Unit Activity

Year Ended December 31,

2005 2004 2003

Restricted Restricted Stock Restricted Restricted Stock Restricted Restricted Stock

Stock Units Stock Units Stock Units

Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 164,781 1,624,628 566,635 1,295,722 1,089,327 359,227

Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 838,576 Ì 698,587 Ì 1,146,164

Lapse of restrictionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (79,961) (659,946) (240,514) (145,340) (381,103) (114,240)

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15,118) (329,075) (161,340) (224,341) (141,589) (95,429)

Outstanding, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,702 1,474,183 164,781 1,624,628 566,635 1,295,722

Weighted-average fair value of awards granted

during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 62.68 $ 62.97 $ 55.01

(1) Restricted stock units granted under the Employee Plans were 831,730, 673,720 and 1,143,810 in 2005, 2004 and 2003, respectively. Restricted stock

units granted under the Directors' Plan were 6,846, 24,867 and 2,354 in 2005, 2004 and 2003, respectively.

Table 11.4 provides additional information for stock options outstanding under the Employee Plans and the Directors'

Plan at December 31, 2005 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, 2005 Life in Years Exercise Price December 31, 2005 Exercise Price

$15.00 - 24.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 235,040 0.4 $20.90 235,040 $20.90

25.00 - 34.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266,550 1.4 34.27 266,550 34.27

35.00 - 44.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 703,326 4.0 41.57 703,326 41.57

45.00 - 54.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,145,870 5.8 51.23 553,125 49.37

55.00 - 64.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,595,381 7.3 62.21 1,300,868 62.01

65.00 - 68.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 747,517 5.3 67.59 531,259 67.65

$15.00 - 68.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,693,684 6.0 56.20 3,590,168 52.14

Table 11.5 summarizes the weighted-average assumptions used in determining the fair values of options granted under

our stock-based compensation plans using a Black-Scholes option pricing model. Estimates used to determine the weightedaverage assumptions noted in the table below are determined as follows: (i) the expected dividend yield is based on the

most recent dividend announcement relative to the grant date and the stock price at the grant date, (ii) the expected

129 Freddie Mac
volatility is based on the historical volatility of the stock over a time period equal to the expected life and (iii) the expected

life is based on historical option exercise trends.

Table 11.5 Ì Weighted Average Assumptions Used to Determine the Fair Value of Options

Employee Stock Purchase Plan Employee Plans and Directors' Plan

2005 2004 2003 2005 2004 2003

Expected dividend yield(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.15% 1.85% 2.01% Ì Ì Ì

Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 months 3 months 3 months 7.4 years 7.0 years 7.0 years

Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.7% 17.8% 35.0% 30.0% 31.5% 32.0%

Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.20% 1.33% 0.95% 4.23% 3.55% 3.40%

(1) The value of the dividend equivalent feature of options for the Employee Plans and Directors' Plan was incorporated into the Black-Scholes model by

using an expected dividend yield of zero percent. To account for a modiÑcation of stock options on November 30, 2005, the dividend equivalent feature

of aÅected stock options for the Employee Plans and Directors' Plan was valued separately. Other assumptions used to value the aÅected stock

options were as follows: (i) expected dividend yield of 2.96 percent, (ii) expected life of 5.1 years, (iii) expected volatility of 25.4 percent, and

(iv) risk-free interest rate of 4.34 percent.

Compensation Expense: Compensation expense related to stock-based compensation plans recorded in Salaries and

employee beneÑts was $69 million, $59 million and $65 million for the years ended December 31, 2005, 2004 and 2003,

respectively.

NOTE 12: DERIVATIVES

We use derivatives to conduct our risk management activities. We principally use the following types of derivatives:

‚ LIBOR-based interest-rate swaps;

‚ LIBOR- and Treasury-based options (including swaptions);

‚ LIBOR- and Treasury-based exchange-traded futures; and

‚ Foreign-currency swaps.

Our derivative portfolio also includes certain forward purchase and sale commitments and other contractual agreements

including (a) credit risk sharing agreements where we remit and receive payments based upon the default performance of

certain mortgage loans; (b) swap guarantee derivatives where we guarantee the sponsor's or the borrower's performance as

a counterparty on certain interest-rate swaps; and (c) a prepayment management agreement (which was terminated

eÅective December 31, 2005) in which we were partially compensated for the adverse impacts caused by disproportionately

higher mortgage prepayments on certain mortgage pools.

Hedging Activity

Derivative instruments are reported at their fair value, generally netted by counterparty (provided that a legally

enforceable master netting agreement exists), as either Derivative assets, at fair value, or Derivative liabilities, at fair value,

on the consolidated balance sheets. See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' for

further information related to our derivative counterparties.

No Hedge Designation

At December 31, 2005 and 2004, most of our derivative portfolio was not designated in hedge accounting relationships.

We report changes in the fair value of derivatives not in hedge accounting relationships as Derivative gains (losses) on the

consolidated statements of income. For derivatives that are not designated in hedge accounting relationships, any associated

interest received or paid is recognized on an accrual basis and recorded in Derivative gains (losses) on the consolidated

statements of income.

EÅective at 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 hedged

item shared risk exposure requirement and hedge eÅectiveness assessment as required by SFAS 133. Consequently, we

discontinued hedge accounting treatment for these relationships for Ñnancial reporting purposes at that time, 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. We also voluntarily discontinued hedge accounting treatment for a signiÑcant amount of our 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. EÅective at the

beginning of the second quarter of 2005, we voluntarily discontinued hedge accounting treatment for all new forward

purchase commitments and the majority of our new commitments to forward sell mortgage-related securities.

Fair Value Hedges

Fair value hedges represent hedges of exposure to foreign-currency Öuctuations and changes in the fair value of a

recognized liability. We primarily use interest-rate swaps and foreign-currency swaps to hedge against the changes in fair

value of Ñxed-rate debt due to changes in benchmark interest rates, either LIBOR or the Euro Interbank OÅered Rate, or

130 Freddie Mac
Euribor, or foreign-currency Öuctuations, or a combination of both. During 2005 and 2004, these derivatives in fair value

hedge relationships were executed to manage interest-rate risk or foreign-currency risk at an individual debt instrument level.

In 2004, these derivatives in fair value hedge relationships were also used to manage interest-rate risk at an aggregate

portfolio level. Derivatives executed to manage interest-rate risk at an aggregate portfolio level were linked to speciÑc debt

positions for hedge accounting purposes. We frequently reset the amount of Ñxed-rate debt being hedged in order to

maintain highly eÅective accounting hedges. 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.

Alternatively, when derivatives are executed for speciÑc debt instruments, redesignation is not necessary to maintain highly

eÅective accounting hedges. Derivatives used to manage interest-rate risk at an aggregate portfolio level were moved to no

hedge designation eÅective November 1, 2004 as part of the voluntary discontinuance of hedge accounting treatment, as

discussed above.

For a derivative in a fair value hedge relationship, we report changes in the fair value of the derivative as Hedge

accounting gains (losses) on the consolidated statements of income along with the oÅsetting changes in the fair value of the

hedged item attributable to the risk being hedged. Any diÅerences arising from fair value changes that are not exactly oÅset

result in hedge ineÅectiveness. 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 of hedge ineÅectiveness.

Table 12.1 summarizes certain gains (losses) recognized related to our hedge accounting categories.

Table 12.1 Ì Hedge Accounting Categories Information

Year Ended December 31,

2005 2004 2003

(in millions)

Fair value hedges

Hedge ineÅectiveness recognized in Hedge accounting gains (losses) Ì pre-tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22 $742 $697

Cash Öow hedges

Hedge ineÅectiveness recognized in Hedge accounting gains (losses) Ì pre-tax(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 (53)

Net pre-tax gains (losses) resulting from the determination that it was probable that forecasted transactions would

not occurÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25) 2 29

(1) No amounts have been excluded from the assessment of eÅectiveness.

Cash Flow Hedges

Cash Öow hedges represent hedges of exposure to the variability in the cash Öows of a variable-rate or foreign-currency

denominated instrument or relate to a forecasted transaction. We use interest-rate swaps, 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 of changes in fair

value is reported as Hedge accounting gains (losses) on the consolidated statements of income. As shown in Table 12.2

below, the total AOCI, net of taxes, related to cash Öow hedge relationships was a loss of $(6,287) million at December 31,

2005, primarily composed of deferred net losses on closed cash Öow hedges. 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.

Over the next 12 months, we estimate that approximately $1,280 million of deferred losses in AOCI, net of taxes, will be

reclassiÑed into earnings. The maximum remaining length of time over which we have hedged the exposure related to the

variability in future cash Öows on forecasted transactions, primarily forecasted debt issuances, is 28 years. However, over

90 percent of the AOCI, net of taxes, balance at December 31, 2005 relating to cash Öow hedges is linked to 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.

Table 12.2 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Öow hedges. Net change

in fair value related to cash Öow hedging activities, net of tax, represents the net change in the fair value of the derivatives

that were designated as cash Öow hedges, after the eÅects of our statutory tax rate of 35 percent, to the extent the hedges

were eÅective. Net reclassiÑcations of losses to earnings, net of tax, represent the AOCI amount, after the eÅects of our

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.

131 Freddie Mac
Table 12.2 Ì AOCI, Net of Taxes, Related to Cash Flow Hedge Relationships

Year Ended December 31,

2005 2004 2003

(in millions)

Beginning balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,924) $(7,837) $(9,877)

Net change in fair value related to cash Öow hedging activities, net of tax (beneÑt) expense of $27,

$(1,089) and $(352), respectively(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 (2,021) (653)

Net reclassiÑcations of losses to earnings, net of tax beneÑt of $855, $1,042 and $1,450, respectively(2) ÏÏÏ 1,587 1,934 2,693

Ending balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(6,287) $(7,924) $(7,837)

(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) Includes the accrual of periodic cash settlements for derivatives designated in cash Öow hedge relationships.

NOTE 13: LEGAL CONTINGENCIES

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, employment-related litigation and other legal

proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage

foreclosures. From time to time, we are also 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 typically 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 subject to various other legal proceedings, including regulatory investigations and administrative and civil

litigation, arising from the restatement of our 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''). We established a reserve in accordance with SFAS 5 of $75 million in the

second quarter of 2003 for this loss contingency. In the Ñrst quarter of 2005, we recorded a $339 million expense related to

our litigation reserves for legal settlements including our settlement of the securities class action lawsuits and the

shareholder derivative lawsuits discussed below. We continue to believe that an additional loss is probable in connection

with the remaining legal proceedings related to the restatement. Litigation and claims resolution are subject to many

uncertainties and are not susceptible to accurate prediction. It is not possible for us to reasonably estimate the upper end of

the range of any additional losses that might result from the adverse resolution of any of the remaining legal proceedings and

such losses could be greater than our current reserves.

SEC Investigation. In June 2003, the SEC initiated a formal investigation of us in connection with the restatement.

On August 18, 2004, we announced that we had received a ""Wells Notice'' from the staÅ of the SEC. The Wells Notice

advised us that the SEC staÅ is considering recommending that the SEC initiate a civil injunctive action against us 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. We

continue to cooperate fully with the SEC's investigation as we evaluate our response to the Wells Notice.

Securities Class Action Lawsuits. In June 2003, and thereafter, securities class action lawsuits were brought in three

separate federal district courts against us 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 in the U.S. District

Court for the Southern District of New York. In essence, the plaintiÅs in the consolidated action claimed that the

defendants improperly managed earnings to create a misleading impression of steady earnings by Freddie Mac. PlaintiÅs

further alleged that the defendants engaged in a number of improper transactions that violated GAAP and that they made

false and misleading statements regarding our Ñnancial status. The complaint covered the period from June 15, 1999

through June 6, 2003.

On April 20, 2006, we announced an agreement in principle to settle the securities class action lawsuits, as well as the

shareholder derivative actions described below. The settlement of these actions includes a cash payment of $410 million,

including the application of expected net insurance proceeds. The settlement does not include any admission of wrongdoing

by the company. The parties have completed and Ñled with the court the necessary settlement documents and are awaiting

preliminary court approval. However, no assurances can be made that the court will approve the settlement or its terms in

the form and substance negotiated among the parties.

132 Freddie Mac
Shareholder Derivative Lawsuits. Two shareholder derivative lawsuits were Ñled during 2003 against us and certain

former and current executives and, in one of the suits, members of our 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,

we 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. Subsequently, the Sadowsky

plaintiÅ sent a demand notice to us and on March 4, 2005, Ñled a new complaint in an action in the same court.

On May 13, 2005, the Sadowsky plaintiÅ Ñled an amended complaint that was purportedly brought on our behalf (as a

nominal defendant) as a derivative action by a purported shareholder to recover damages we allegedly suÅered in

connection with certain events underlying the restatement. The defendants in the action included former oÇcers, ten current

Directors, ten former Directors, and Ñve counterparties to transactions we executed. The plaintiÅ alleged claims for breach

of Ñduciary duties, indemniÑcation, waste of corporate assets, unjust enrichment, and aiding and abetting breach of Ñduciary

duties.

As described above, we announced on April 20, 2006, an agreement in principle to settle both shareholder derivative

actions. The settlement of these cases was based in part on corporate governance reforms we instituted under our current

management. The parties have completed and Ñled with the court the necessary settlement documents and are awaiting

preliminary court approval. However, no assurances can be made that the court will approve the settlement or its terms in the

form and substance negotiated among the parties.

ERISA Lawsuits. Two class action lawsuits were Ñled in 2003 in the U.S. District Court for the Southern District of

Ohio against us, certain individuals, and our Retirement Committee alleging violations of the Employee Retirement Income

Security Act, or ERISA. Both actions were consolidated and transferred to the same judge in New York who is handling

the securities and derivative lawsuits described above and are still pending.

Department of Labor Investigation. In July 2003, the Department of Labor, or DOL, began an investigation of our

Thrift/401(k) Savings Plan in relation to the restatement. On December 28, 2005, we and five former members of our

Retirement Committee entered into an agreement with the DOL that extended the period for DOL to commence an action until

December 28, 2006. The investigation is still pending and we continue to cooperate fully with the DOL.

OFHEO Proceedings. In June 2003, OFHEO commenced a special investigation of the company in connection with

the restatement. On December 9, 2003, Freddie Mac and OFHEO entered into a consent order and settlement that

concluded OFHEO's investigation of the company. Under the terms of the consent order, we 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, we made no admission regarding

any wrongdoing or any asserted or implied Ñndings.

In December 2003, OFHEO Ñled administrative notices of charges against us and Messrs. Brendsel and Clarke, two of

our former executive oÇcers. In its charge against us, OFHEO sought to have us take certain actions in connection with

these individuals' salaries and compensation as well as their termination status with the company. 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 clearly setting forth the factual and

legal bases for the charges and satisfying several other requirements identiÑed by the judge. On June 24, 2005 OFHEO Ñled

its second amended notice of charges against Messrs. Brendsel and Clarke. The parties are also engaged in the discovery

phase of the case.

On September 9, 2005, we entered into a stipulated consent order with OFHEO to settle the administrative notice of

charges against us. Under the terms of the consent order, we agreed to produce certain documents and make available any

current employees that OFHEO requests to interview in connection with its ongoing administrative actions against

Messrs. Brendsel and Clarke, and to take certain additional steps following the administrative actions against the former

oÇcers in accordance with any Ñnal order resulting in those actions. The text of this consent order and a related production

agreement are available on OFHEO's website at www.ofheo.gov. In agreeing to the consent order, we made no admission

regarding any wrongdoing or any asserted or implied Ñndings. Based on the consent order, OFHEO has dismissed the

administrative notice of charges against us.

133 Freddie Mac
U.S. Attorney's Investigation. In June 2003, the U.S. Attorney's OÇce in Alexandria, Virginia commenced an

investigation of us surrounding the restatement. We will continue to cooperate with the U.S. Attorney's OÇce if and as

requested.

Antitrust Lawsuits. We and Fannie Mae were named in a consolidated lawsuit alleging that both companies conspired

to establish and maintain artiÑcially high guarantee fees. The complaint covers the period January 1, 2001 to the present and

asserts a variety of claims under federal and state antitrust laws, as well as claims under consumer-protection and similar

state laws. The plaintiÅs seek injunctive relief, unspeciÑed damages (including treble damages with respect to the antitrust

claims and punitive damages with respect to some of the state claims) and other forms of relief. We Ñled a motion to

dismiss the action and are awaiting a ruling from the court. At present, it is not possible for us to predict the probable

outcome of the consolidated lawsuit or any potential impact on our business, Ñnancial condition or results of operations.

Other Inquiries. We receive inquiries from the Internal Revenue Service, or IRS, in connection with its regular audits

of our tax returns for prior years, some of which relate to matters connected with the restatement. We continue to respond to

these inquiries. See ""NOTE 14: INCOME TAXES'' for more information.

FEC Investigation. In March 2004, we provided certain information to the Federal Election Commission, or FEC,

concerning compliance with federal election laws. The FEC conducted an investigation into this matter and, on April 18,

2006, we announced we had entered into a conciliation agreement with the FEC. Under the terms of the conciliation

agreement, we agreed to pay a civil penalty of $3.8 million and to cease and desist from engaging in activities that violate

speciÑed provisions of the Federal Election Campaign Act relating to prohibitions on the use of corporate resources for

political fundraising. This amount was recorded in the 2005 consolidated statements of income as a component of Other

expense.

NOTE 14: INCOME TAXES

We are exempt from state and local income taxes. Table 14.1 presents the components of our provision for income

taxes.

Table 14.1 Ì Provision for Income Taxes

Year Ended December 31,

2005 2004 2003

(in millions)

Current tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,819 $1,136 $1,465

Deferred tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,452) (346) 737

Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 367 $ 790 $2,202

Table 14.2 summarizes our deferred tax assets and liabilities.

Table 14.2 Ì Deferred Tax Assets and (Liabilities)

December 31,

2005 2004

(in millions)

Deferred tax assets:

Deferred fees related to securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,779 $ 1,612

Credit related items and reserve for loan lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61 5

Employee compensation and beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168 166

Cash Öow hedge deferrals and unrealized (gains) losses related to available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,724 1,930

Other items, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 Ì

Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,771 3,713

Deferred tax liabilities:

Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,679) (1,961)

Basis diÅerences related to assets held-for-investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (307) (502)

Basis diÅerences related to derivative instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,779) (2,478)

Other items, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (43)

Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,765) (4,984)

Net deferred tax assets and (liabilities) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,006 $(1,271)

Included in deferred taxes is the tax eÅect on the (a) net unrealized (gains) losses on available-for-sale securities and

(b) net (gains) losses related to derivatives designated in cash Öow hedge relationships, which are both reported in AOCI,

net of taxes and (c) cumulative eÅect of change in accounting principles.

We have not established a valuation allowance against our deferred tax assets at December 31, 2005 or 2004, because

we have determined that it is more likely than not that all such tax assets will be realized in the future.

134 Freddie Mac
Table 14.3 reconciles the statutory federal tax rate to the eÅective tax rate for 2005, 2004 and 2003.

Table 14.3 Ì Reconciliation of Statutory to EÅective Tax Rate

Year Ended December 31,

2005 2004 2003

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%

Tax-exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8.7) (4.7) (2.1)

Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.3) (7.3) (3.0)

Provision related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 (2.0) 0.4

Penalties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 Ì 1.0

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.4 0.2 0.1

EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.4% 21.2% 31.4%

Impact of tax issues. The IRS has a policy to examine the income tax returns of large corporate taxpayers, including

us, generally every year. We believe that an adequate provision has been made for contingencies related to all income taxes

and related interest and potential penalties in accordance with SFAS 5. However, the ultimate outcome of these tax

contingencies could result in a tax beneÑt or tax provision that could be material to our quarterly or annual results of

operations. We do not believe that liabilities arising from these matters, if any, will have a material adverse eÅect on our

consolidated Ñnancial condition.

Tax Years 1985 through 1990. We are currently in litigation in the U.S. Tax Court, or Court, to contest income tax

deÑciencies asserted by the IRS for years 1985 through 1990. The principal matters in controversy in the case involve

questions of tax law as applied to our 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 we

had entered into the respective arrangements; and

‚ Customer Relationships. Our business relationships with a substantial number of mortgage originating

institutions that sold mortgages to us on a regular basis.

Tax Court Rulings. On September 4, 2003 and September 29, 2003, the Court decided favorably for us on two

preliminary motions involving questions of law in the case. On September 4, the Court ruled favorably for us on the question

whether our 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 us on the question whether, as

a matter of law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this case, we 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. In

November 2005, the Court ruled favorably on another less signiÑcant issue 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, we still had to 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 was completed in early June

2005. We are awaiting the Court's decision.

In view of the favorable rulings in September 2003 described above, we recorded in 2002 a reduction in our tax reserves

in the amount of $155 million. If the IRS were to appeal the Court decisions and an adverse ruling resulted, we may

reconsider our reserves related to this matter.

If our tax position on the customer relationship amortization issue described above is upheld through the legal process,

we will be able to recognize tax beneÑts not previously recorded that could be material in the quarter during which they are

recognized. However, we are unable to provide assurances that any such tax beneÑts will be realized.

Tax Years 1991 through 1993. The IRS examination of our federal income tax returns for the years 1991 through

1993 has been completed. In 2002, we Ñled a petition in the Court to contest the deÑciencies asserted by the IRS in a

Statutory Notice of deÑciency. 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

our Management and guarantee income.

Tax Years 1994 through 1997. In 2002, the IRS completed its examination of our federal income tax returns for the

years 1994 through 1997. In October 2005 we Ñled a Petition in the Court to contest tax deÑciencies asserted by the IRS for

these years. The principal matter in controversy, other than the same questions at issue in the 1985 through 1993 cases

described above, involves the character of losses on dispositions of mortgage-related securities.

135 Freddie Mac
Tax Treatment of REITs. In February 1997, we 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, we believed that

the dividend payments by the REITs to holders of the REITs' step-down preferred stock were fully tax deductible. We

entered into a closing agreement with the IRS that resolved issues related to the tax treatment of dividends paid on the stepdown preferred stock. We and the IRS agreed that we will only be entitled to deductions attributable to the step-down

preferred stock transactions as if we had borrowed directly from the REITs' preferred shareholders. As a result of this

closing agreement, we recorded a reduction in tax reserves of $94 million in 2004. See ""NOTE 18: MINORITY

INTERESTS'' for more information concerning the REITs.

Tax Years 1998 through 2002. This examination cycle includes the years for which we have restated our Ñnancial

statements. The IRS has completed its regular examination of our 1998 through 2002 tax returns, but could raise additional

issues. As a result of the regular examination, the principal matter in controversy, other than the same questions at issue in

the 1985 through 1997 cases described above, involves questions of timing and potential penalties regarding our tax

accounting method for certain hedging transactions. We believe the risk of loss due to the assertion of penalties by the IRS

related to our tax accounting methods is remote. As to the questions of timing, we believe that an adequate provision has

been made for contingencies related to income taxes and related interest.

Tax Treatment of Paired Swap Transactions. In August and September of 2001, we entered into a series of nine sets

of paired swap transactions. We reported and paid tax treating each pair of those swap transactions as a single integrated

transaction for federal income tax purposes. Two additional swaps were executed in November 2001. Although the facts

and circumstances surrounding these swaps were diÅerent from the earlier swaps, we also reported and paid tax treating

these swaps as a single integrated transaction for federal income tax purposes. The IRS examination report did not assert a

tax deÑciency related to any of these paired swap transactions.

NOTE 15: EMPLOYEE BENEFITS

DeÑned BeneÑt Plans

We maintain a tax-qualiÑed deÑned beneÑt pension plan, or Pension Plan, covering substantially all of our employees.

Pension Plan beneÑts are based on an employee's years of service and highest average compensation, up to legal plan limits,

over any consecutive 36 months of employment. Pension Plan assets are held in trust and the investments consist primarily

of funds comprised of listed stocks and corporate bonds. In addition to our Pension Plan, we maintain a nonqualiÑed,

unfunded deÑned beneÑt pension plan for our oÇcers, referred to as our non-qualiÑed pension plan. The related retirement

beneÑts for our nonqualiÑed pension plan are paid from our general assets. These nonqualiÑed and qualiÑed deÑned beneÑt

pension plans are collectively referred to as deÑned beneÑt pension plans.

We maintain a deÑned beneÑt postretirement health care plan, or Retiree Health Plan, that generally provides

postretirement health care beneÑts on a contributory basis to retired employees age 55 or older who rendered at least 10 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. Our Retiree

Health Plan is currently unfunded and the beneÑts are paid from our general assets. This plan and our deÑned beneÑt

pension plans are collectively referred to as deÑned beneÑt plans.

For Ñnancial reporting purposes, we use a September 30 valuation measurement date for all of our deÑned beneÑt plans.

We are required to accrue the estimated cost of retiree beneÑts as employees render the services necessary to earn their

pension and postretirement health beneÑts. Our pension and postretirement health care costs related to these deÑned beneÑt

plans for 2005, 2004 and 2003 presented in the following tables were calculated using assumptions as of September 30,

2004, 2003 and 2002, respectively. The funded status of our deÑned beneÑt plans for 2005, 2004 and 2003 presented in the

following tables was calculated using assumptions as of September 30, 2005, 2004 and 2003, respectively.

136 Freddie Mac
Table 15.1 below shows the changes in our projected beneÑt obligations and fair value of plan assets using a

September 30 valuation measurement date for amounts recognized on our consolidated balance sheets at December 31, 2005

and 2004, respectively.

Table 15.1 Ì DeÑned BeneÑt Plan Obligation and Funded Status

Postretirement

Pension BeneÑts Health BeneÑts

2005 2004 2005 2004

(in millions)

Change in Projected BeneÑt Obligation:

Projected beneÑt obligation at October 1 (prior year)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 385 $ 339 $ 102 $ 102

Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 24 9 10

Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 20 6 6

Net actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 6 (6) (15)

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) (4) (1) (1)

Projected beneÑt obligation at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 457 385 110 102

Change in Fair Value of Plan Assets:

Fair value of plan assets at October 1 (prior year) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 260 229

Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 22

Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 13

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) (4)

Fair value of plan assets at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 333 260

Funded Status:

Funded status at September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (124) (125) (110) (102)

Unrecognized net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 112 31 40

Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 (5) (6)

Initial unrecognized net transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ (11) $ (84) $ (68)

Amounts Recognized on our Consolidated Balance Sheets:

Other assets:

Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 28 $ Ì $ Ì $ Ì

Intangible and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 6 Ì Ì

Other liabilities:

Accrued beneÑt liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28) (25) (84) (68)

AOCI:

Minimum pension liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 8 Ì Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ (11) $ (84) $ (68)

The change in the minimum pension liability recognized in AOCI, net of taxes, was a $7 million decrease for the year

ended December 31, 2005, and a $2 million decrease for the year ended December 31, 2004. The accumulated beneÑt

obligation for all deÑned beneÑt pension plans was $316 million and $282 million at September 30, 2005 and 2004,

respectively. The accumulated beneÑt obligation represents the actuarial present value of future expected beneÑts, assuming

current salary levels remain in eÅect.

Table 15.2 provides additional information for our deÑned beneÑt pension plans. The aggregate accumulated beneÑt

obligation and fair value of plan assets are disclosed as of September 30, 2005, with the projected beneÑt obligation included

for illustrative purposes.

Table 15.2 Ì Additional Information for DeÑned BeneÑt Pension Plans

2005 2004

Pension Non-qualiÑed Pension Non-qualiÑed

Plan Pension Plans Total Plan Pension Plans Total

(in millions)

Projected beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $416 $ 41 $457 $356 $ 29 $385

Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $333 $ Ì $333 $260 $ Ì $260

Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 288 28 316 262 20 282

Fair value of plan assets over (under) accumulated beneÑt obligation ÏÏÏ $ 45 $(28) $ 17 $ (2) $(20) $(22)

137 Freddie Mac
The measurement of our beneÑt obligations includes assumptions about the rate of future compensation increases

included in Table 15.3 below.

Table 15.3 Ì Weighted Average Assumptions Used to Determine Projected and Accumulated BeneÑt Obligations

Postretirement

Pension BeneÑts Health BeneÑts

September 30, September 30,

2005 2004 2005 2004

Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.75% 5.75% 5.75% 5.75%

Rate of future compensation increase(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.10% to 6.50% 4.50 Ì Ì

(1) For the 2005 plan year for our deÑned beneÑt pension plans, we reÑned our assumptions used to determine our beneÑt obligations to include the

dispersion of compensation from a Öat rate to an age-graded rate.

Table 15.4 presents the components of the net periodic beneÑt costs with respect to pensions and postretirement health

beneÑts for the years ended December 31, 2005, 2004 and 2003. Net periodic beneÑt costs are included in Salaries and

employee beneÑts on our consolidated statements of income.

Table 15.4 Ì Net Periodic BeneÑt Cost Detail

Postretirement

Pension BeneÑts Health BeneÑts

Year Ended December 31, Year Ended December 31,

2005 2004 2003 2005 2004 2003

(in millions)

Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27 $ 24 $ 16 $ 9 $10 $ 6

Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 20 16 6 6 3

Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) (16) (12) Ì Ì Ì

Recognized net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 7 3 3 5 2

Recognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì Ì (1) (1) (1)

Net periodic beneÑt costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 37 $ 35 $ 23 $17 $20 $10

Table 15.5 Ì Weighted Average Assumptions Used to Determine Net Periodic BeneÑt Cost

Postretirement

Pension BeneÑts Health BeneÑts

Year Ended December 31, Year Ended December 31,

2005 2004 2003 2005 2004 2003

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.75% 6.00% 7.00% 5.75% 6.00% 7.00%

Rate of future compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.50 4.50 4.50 Ì Ì Ì

Expected long-term rate of return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.00 7.00 7.25 Ì Ì Ì

For the 2005 beneÑt obligations, we determined the discount rate using a yield curve consisting of spot interest rates at

half-year increments for each of the next 30 years, developed with pricing and yield information from high-quality bonds.

The future beneÑt plan cash Öows were then matched to the appropriate spot rates and discounted back to the

measurement date. Finally, a single equivalent discount rate was calculated that, when applied to the same cash Öows, results

in the same present value of the cash Öows as of the measurement date. In 2004 and 2003, we used the Moody's Aa

Corporate Bond Rate Index as a basis for selecting the discount rate shown in Table 15.5. The eÅect of the change in our

estimate of the discount rate was not material.

The expected long-term rate of return on plan assets was estimated using a portfolio return calculator model. The model

considered the historical returns and the future expectations for returns for each asset class in our deÑned beneÑt plans in

conjunction with our target investment allocation to arrive at the expected rate of return.

The assumed health care cost trend rates used in measuring the accumulated postretirement beneÑt obligation as of

September 30, 2005 are 11 percent in 2006, gradually declining to an ultimate rate of 5 percent in 2011 and remaining at that

level thereafter.

Table 15.6 sets forth the eÅect on the accumulated postretirement beneÑt obligation for health care beneÑts as of

September 30, 2005, 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 our Retiree Health Plan

One Percent One Percent

Increase Decrease

(in millions)

EÅect on the accumulated postretirement beneÑt obligation for health care beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25 $(19)

EÅect on the service and interest cost components of the net periodic postretirement health beneÑt costs ÏÏÏÏÏÏÏÏ 4 (3)

138 Freddie Mac
Plan Assets

Table 15.7 sets forth our Pension Plan weighted average asset allocations, based on fair value, at September 30, 2005

and 2004, and target allocation by asset category.

Table 15.7 Ì Pension Plan Assets by Category

Plan Assets at

September 30, Target

Asset Category Allocation 2005 2004

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65% 55.9% 61.2%

Debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 29.4 34.0

Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 14.7 4.8

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100.0% 100.0%

(1) Consists of cash contributions made on September 30, 2005 and 2004, respectively, which were not fully invested by September 30th of that year.

The Pension Plan's retirement committee had Ñduciary responsibility for establishing and overseeing our Pension Plan's

investment policies and objectives. The Pension Plan's retirement committee reviewed the appropriateness of our Pension

Plan's investment strategy on an ongoing basis. Our Pension Plan employed a total return investment approach whereby a

diversiÑed blend of equities and Ñxed income investments is 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 characteristics, such as business and

Ñnancial characteristics, demographics, and actuarial and company funding policies. 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 our securities at September 30, 2005 and 2004.

DeÑned BeneÑt Pension Plan Contributions

Our general practice is to contribute to our 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. On

September 30, 2005, we made a tax-deductible contribution of $48 million to our Pension Plan. We currently believe that

under applicable law, no minimum contribution will be required for 2006. However, in 2006, we expect to contribute

approximately $20 million to our Pension Plan and an additional amount yet to be determined. Any contributions to our

Retiree Health Plan and non-qualiÑed pension plan will be in the form of beneÑt payments as these plans are required to be

unfunded.

Estimated Future BeneÑt Payments

Table 15.8 sets forth estimated future beneÑt payments expected to be paid for our deÑned beneÑt plans. The expected

beneÑts are based on the same assumptions used to measure our beneÑt obligation at September 30, 2005.

Table 15.8 Ì Estimated Future BeneÑt Payments

Postretirement

Pension BeneÑts Health BeneÑts

(in millions)

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5 $ 1

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 2

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 2

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 2

2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 3

Years 2011-2015ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 22

DeÑned Contribution Plans

Our Thrift/401(k) Savings Plan, or Savings Plan, is a tax-qualiÑed deÑned contribution pension plan oÅered to all

eligible employees. Employees are permitted to contribute from 1 percent to 25 percent of their eligible compensation to the

Savings Plan, subject to limits set by the Internal Revenue Code. We match employees' contributions up to 6 percent of

their eligible compensation per pay period; the percentage matched depends upon the employee's length of service.

Employee contributions and our matching contributions are immediately vested. In addition, we have discretionary authority

to make additional contributions to our Savings Plan that are allocated uniformly on behalf of each eligible employee, based

on the employee's eligible compensation. Employees become vested in our discretionary contributions after 5 years of

service. We also maintain a non-qualiÑed deÑned contribution plan for our oÇcers, designed to make up for beneÑts lost due

to limitations on eligible compensation imposed by the Internal Revenue Code and to make up for deferrals of eligible

compensation under our Executive Deferred Compensation Plan. We incurred costs of $31 million, $29 million and

139 Freddie Mac
$28 million for the years ended December 31, 2005, 2004 and 2003, respectively, related to these plans. These expenses were

included in Salaries and employee beneÑts on our consolidated statements of income.

See ""NOTE 13: LEGAL CONTINGENCIES'' for more information regarding civil litigation and a Department of

Labor investigation of our Savings Plan in relation to our restatement.

Executive Deferred Compensation Plan

Our Executive Deferred Compensation Plan is an unfunded, non-qualiÑed plan that allows certain key employees to

elect to defer substantially all or a portion of their annual salary and cash bonus, and certain key management employees to

defer the settlement of restricted stock units received from us, as well as substantially all or 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. During 2005, we amended the plan to modify certain provisions to comply with Internal

Revenue Code Section 409A as a result of the issuance of proposed regulations and other guidance. Distributions are paid

from our general assets. We record 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. We recognize 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.

NOTE 16: FAIR VALUE DISCLOSURES

The supplemental consolidated fair value balance sheets in Table 16.1 present our estimates of the fair value of our

recorded Ñnancial assets and liabilities and oÅ-balance sheet Ñnancial instruments at December 31, 2005 and 2004. Our

consolidated fair value balance sheets include the estimated fair values of Ñnancial instruments recorded in our

consolidated balance sheets prepared in accordance with GAAP, as well as oÅ-balance sheet Ñnancial instruments that

represent our assets or liabilities that are not recorded in our GAAP consolidated balance sheets. These oÅ-balance sheet

items predominantly consist of: (a) the unrecognized Guarantee asset and Guarantee obligation associated with our PCs

issued through our Guarantor Swap program prior to the implementation of FIN 45, (b) commitments to purchase

multifamily and single-family mortgage loans that will be classiÑed as held-for-investment in our GAAP consolidated

Ñnancial statements and (c) certain credit enhancements on manufactured housing asset-backed securities. The valuations

of Ñnancial instruments on our 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,'' or SFAS 107, and other relevant

pronouncements.

140 Freddie Mac
Table 16.1 Ì Consolidated Fair Value Balance Sheets(1)

December 31,

2005 2004

Carrying Fair Carrying Fair

Amount(2) Value Amount(2) Value

(in billions)

Assets

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61.4 $ 62.3 $ 61.3 $ 63.3

Mortgage-related securities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 648.0 648.0 603.2 603.4

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 709.4 710.3 664.5 666.7

Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.5 10.5 35.3 35.3

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42.2 42.2 29.8 29.8

Securities purchased under agreements to resell and Federal funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.2 15.2 32.2 32.2

Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.1 7.1 15.3 15.3

Guarantee asset(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1 5.6 4.5 5.0

Other assets(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16.7 14.3 13.7 13.3

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $806.2 $805.2 $795.3 $797.6

Liabilities and minority interests

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $748.8 $747.0 $731.7 $737.0

Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.5 3.7 4.1 2.1

Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.6 0.6 0.2 0.2

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3 Ì 0.2 Ì

Other liabilities(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.9 22.0 26.2 25.7

Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.9 1.0 1.5 1.7

Total liabilities and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 779.0 774.3 763.9 766.7

Net assets attributable to stockholders

Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6 4.1 4.6 4.1

Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.6 26.8 26.8 26.8

Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.2 30.9 31.4 30.9

Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $806.2 $805.2 $795.3 $797.6

(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 the disposition of assets or settlement of liabilities may vary signiÑcantly from the fair values presented.

(2) Carrying amounts equal the amounts reported on our consolidated balance sheets prepared in accordance with GAAP.

(3) The fair value of Mortgage-related securities reported exceeds the carrying value because the fair value includes PC residuals related to some PCs held

in the Retained portfolio that are not recognized in accordance with GAAP because such PCs were issued prior to the implementation of FIN 45 in

2003. The diÅerence at December 31, 2005, rounds to zero.

(4) The fair value of the Guarantee asset reported exceeds the carrying value primarily because the fair value includes the Guarantee asset related to some

PCs held by third parties that are not recognized in accordance with GAAP because such PCs were issued prior to the implementation of FIN 45 in

2003.

(5) Fair values include estimated income taxes calculated using the 35 percent statutory rate on the diÅerence between the consolidated fair value balance

sheets net assets, including deferred taxes from the GAAP consolidated balance sheets, and the GAAP consolidated balance sheet equity attributable

to common stockholders.

Limitations

Our consolidated fair value balance sheets do not capture all elements of value that are implicit in our operations as a

going concern since our consolidated fair value balance sheets only capture the values of the current investment and

securitization portfolios. For example, our 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, our consolidated fair value

balance sheets do not capture the value associated with future growth opportunities in our investment and securitization

portfolios. Thus, the fair value of net assets attributable to stockholders presented in our consolidated fair value balance

sheets does not represent an estimate of our net realizable, liquidation or market value as a whole.

We report certain 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 carrying amounts in accordance with GAAP in our consolidated fair value balance sheets. We

believe these items do not have a signiÑcant impact on our overall fair value results. Other non-Ñnancial assets and liabilities

in our GAAP consolidated balance sheets represent deferrals of costs and revenues that are amortized in accordance with

GAAP, such as deferred debt issuance costs and deferred credit fees. Cash receipts and payments related to these items are

generally recognized in the fair value of net assets when received or paid, with no basis reÖected in the fair value balance

sheets.

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

141 Freddie Mac
available, fair value is based on internal valuation models using market data inputs or internally developed assumptions,

where appropriate.

During 2005 and 2004, our fair value results were impacted by several improvements in our approach for estimating fair

values of certain Ñnancial instruments. In the Ñrst quarter of 2005, we improved our approach for estimating the fair values

of certain Ñnancial instruments resulting in (a) a decrease in the fair value of Total net assets of approximately $0.8 billion

(after-tax) related to our guarantee-related assets and liabilities and (b) an increase in the fair value of Total net assets of

approximately $0.3 billion (after-tax) related to our multifamily whole loans, the minority interests in our consolidated

REIT subsidiaries and other Ñnancial instruments. Also, in the second quarter of 2005, we improved our approach for

estimating the fair values of certain securities we hold, which increased the fair value of Total net assets by approximately

$0.1 billion. The changes in our approach for estimating the fair values of these Ñnancial instruments are described below. In

the fourth quarter of 2004, we began using newly available market prices received from broker/dealers and third-party

pricing providers for the valuation of a greater portion of our debt instruments resulting in an increase in the fair value of

Total net assets of approximately $0.6 billion (after-tax).

The following methods and assumptions were used to estimate the fair value of assets and liabilities at December 31,

2005 and 2004.

Mortgage loans

Mortgage loans represent single-family and multifamily whole loans held in our Retained portfolio. For GAAP

purposes, we must determine the fair value of these mortgage loans to calculate lower-of-cost-or-market adjustments for

mortgages classiÑed as held-for-sale. We use this same approach when determining the fair value of whole loans, including

those held-for-investment, for fair value balance sheet purposes.

We determine the fair value of mortgage loans, excluding delinquent single-family loans purchased out of pools, based

on comparisons to actively traded mortgage-related securities with similar characteristics, with adjustments for yield, credit

and liquidity diÅerences. SpeciÑcally, we aggregate mortgage loans into pools by product type, coupon and maturity and

then convert the pools into notional mortgage-related securities based on their speciÑc characteristics. We then calculate fair

values for these notional mortgage-related securities using the process that is described in ""Mortgage-related securities.''

Part of the adjustments for yield, credit and liquidity diÅerences represent an implied guarantee fee. To accomplish this,

the fair value of the single-family whole loans, excluding delinquent single-family loans purchased out of pools, includes an

adjustment representing the estimated present value of the additional cash Öows on the mortgage coupon 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 we expect to retain. 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 for both single-family and multifamily whole loans is also net of the related credit and other

components inherent in our 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'' 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.

Beginning in 2005, we reÑned the fair value estimates of multifamily whole loans by incorporating additional

information and guidance from active market participants into the pricing of notional mortgage-related securities. In

addition, beginning in 2005, for single-family whole loans that are extremely delinquent and have been purchased out of

pools, we obtained dealer indications on aggregated groups of similar loans that reÖect their current performance status.

These market price indications reÖect the estimated present value of all cash Öows related to the whole loans, including

expected credit losses and recoveries.

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 our GAAP consolidated balance sheets. Mortgage-related securities

consist of securities issued by us, 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

142 Freddie Mac
are estimated by deriving the option-adjusted spread for the most closely comparable security with an available market

price, using proprietary interest-rate and prepayment models. If necessary, our 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 us and reported in the mortgage-related

securities line item. PC residuals are reported at fair value on our consolidated balance sheets. Fair value for PC residuals is

estimated in the same manner as described for the Guarantee asset and the Guarantee obligation 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 our derivative counterparties. Given

that these assets are short-term in nature with limited market value volatility, the carrying amount on our GAAP

consolidated balance sheets is deemed to be a reasonable approximation of fair value.

Investments 

At December 31, 2005 and 2004, Investments consists solely of non-mortgage-related securities, which are reported at

fair value on our consolidated balance sheets. During 2004, Investments also 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 our consolidated balance sheets. We ceased 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.

The fair values of those Investments were 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 our GAAP consolidated

balance sheets is deemed to be a reasonable approximation of fair value.

Guarantee asset

At December 31, 2005 and 2004, we had a Guarantee asset on our GAAP consolidated balance sheets for

approximately 93 percent and 89 percent, respectively, of PCs and Structured Securities held by third parties. For more

information regarding the accounting for the Guarantee asset related to PCs and Structured Securities, see ""NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

For fair value balance sheet purposes, the Guarantee asset is reÖected for all PCs and Structured Securities held by

third parties and is valued using the same method as used for GAAP fair value purposes. For a description of how we

determine the fair value of our Guarantee asset, see ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN

MORTGAGE-RELATED ASSETS.''

Derivative assets

Derivative assets, at fair value largely consists of interest-rate swaps, option-based derivatives, futures, and forward

purchase and sale commitments that we account for as derivatives, which are reÖected at fair value on our 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 variable-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 exchangetraded 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. Our fair value of derivatives is not adjusted for expected credit losses because we obtain

collateral from most counterparties typically within one business day of the daily market value calculation and substantially

all of our credit risk arises from counterparties with investment-grade credit ratings of A¿ or above.

143 Freddie Mac
Other assets

Other assets consists of accrued interest and other receivables, investments in qualiÑed LIHTC partnerships that are

eligible for federal tax credits, credit enhancement contracts related to PCs and Structured Securities (pool insurance and

recourse and/or indemniÑcation agreements), Ñnancial guarantee contracts for additional credit enhancements on certain

manufactured housing asset-backed securities, REO, 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, we believe the carrying amount on our GAAP

consolidated balance sheets is a reasonable approximation of their fair values. Our investments in LIHTC partnerships,

reported as consolidated entities or equity method investments in the GAAP Ñnancial statements, are not within the scope of

SFAS 107 disclosure requirements. However, we present the fair value of these investments in Other assets. For the

LIHTC partnerships, the fair value of expected tax beneÑts is estimated using expected cash Öows discounted at a marketbased yield.

For the credit enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or

indemniÑcation agreements), fair value is estimated using an expected cash Öow approach, and is intended to reÖect the

estimated amount that a third party would be willing to pay for the contracts. On our consolidated fair value balance sheets,

these contracts are reported at fair value at each balance sheet date based on current market conditions; on our GAAP

consolidated balance sheets, these contracts are initially recorded at fair value at inception, then amortized to expense.

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 our estimate of a risk premium attributable

to the Ñnancial guarantee contracts. The value of the contracts, over time, will be determined by the actual credit-related

losses incurred and, therefore, may have a value that is higher or lower than our market-based estimate. On our GAAP

consolidated Ñnancial statements, these contracts are recognized as realized.

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 and property, plant and equipment. For the majority of these non-Ñnancial assets in Other

assets, we use the carrying amounts from our GAAP consolidated balance sheets as the reported values on our consolidated

fair value balance sheets, without any adjustment. These assets represent an insigniÑcant portion of our GAAP consolidated

balance sheets, and any change in their fair value would not be a meaningful part of our fair value of net assets business

results. Certain non-Ñnancial assets in Other assets on our GAAP consolidated balance sheets are assigned a zero value on

our consolidated fair value balance sheets. This treatment is applied to deferred items such as deferred debt issuance costs.

We adjust the GAAP-basis deferred taxes for consolidated fair value balance sheets purposes to include estimated

income taxes on the diÅerence between our consolidated fair value balance sheets net assets, including deferred taxes from

the GAAP consolidated balance sheets, and our GAAP consolidated balance sheets equity attributable to common

stockholders. To the extent the adjusted deferred taxes are a net asset, this amount is included in Other assets. If the

adjusted deferred taxes are a net liability, this amount is included in Other liabilities.

Total debt securities, net

Total debt securities, net represents short-term and long-term debt used to Ñnance our 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, we began using newly available market prices received from

broker/dealers and reliable third-party pricing services 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.

Guarantee obligation

We did not establish a Guarantee obligation for GAAP purposes for PCs and Structured Securities held by third parties

that were issued through our Guarantor Swap program prior to adoption of FIN 45. In addition, after it is initially recorded

at fair value the Guarantee obligation is not subsequently carried at fair value for GAAP purposes. For fair value balance

sheet purposes, the Guarantee obligation reÖects the fair value of our Guarantee obligation on all PCs held by third parties.

Additionally, for fair value balance sheet purposes, the Guarantee obligation is valued using the same method as used for

GAAP to determine its initial fair value. For information concerning our valuation approach and accounting policies related

144 Freddie Mac
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 our GAAP consolidated

balance sheets represents loan loss reserves for oÅ-balance sheet PCs in accordance with GAAP that are not already

accounted for under SFAS 125/140. This line item has no basis in our consolidated fair value balance sheets, because the

estimated fair value of all expected default losses is included in the Guarantee obligation reported on our 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. We believe 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. Furthermore, certain deferred items reported as Other

liabilities on our GAAP consolidated balance sheets are assigned zero value on our consolidated fair value balance sheets,

such as deferred credit fees. Also, as discussed in ""Other assets,'' Other liabilities may include a deferred tax liability

adjusted for fair value balance sheet purposes.

Minority interests in consolidated subsidiaries

Minority interests in consolidated subsidiaries primarily represent preferred stock interests that third parties hold in our

two majority-owned REIT subsidiaries. In accordance with GAAP, we consolidated the REITs. The preferred stock

interests are not within the scope of SFAS 107 disclosure requirements. However, we present the fair value of these interests

in our fair value balance sheets. The fair value of the third-party minority interests in these REITs was based on the

estimated value of the underlying REIT preferred stock we determined based on a valuation model. In 2005, we improved

our fair value estimates to reÖect observed market activity.

Net assets attributable to preferred stockholders

To determine the preferred stock fair value, we use a market-based approach incorporating quoted dealer prices.

Net assets attributable to common stockholders

Net assets attributable to common stockholders is equal to the diÅerence between the fair value of total assets and the

sum of total liabilities and minority interests reported on our consolidated fair value balance sheets, less the fair value of net

assets attributable to preferred stockholders.

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 us

or that are collateral for PCs and Structured Securities, excluding:

‚ $2,021 million and $3,015 million of mortgage-related securities issued by Ginnie Mae that back Structured

Securities at December 31, 2005 and 2004, respectively, because these securities do not expose us to meaningful

amounts of credit risk;

‚ $44,626 million and $59,715 million of agency mortgage-related securities at December 31, 2005 and 2004,

respectively, because these securities do not expose us to meaningful amounts of credit risk; and

‚ $242,586 million and $175,163 million of non-agency mortgage-related securities held in the Retained portfolio

at December 31, 2005 and 2004, respectively, because geographic information regarding these securities is not

available. With respect to these securities, we look to third party credit enhancements (e.g., bond insurance) or

other credit enhancements resulting from the securitization structure supporting such securities (e.g., subordination levels) as a primary means of managing credit risk.

See ""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for more information

about the securities we hold.

145 Freddie Mac
Table 17.1 Ì Concentration of Credit Risk

December 31,

2005 2004

Amount(1) Percentage Amount(1)(2) Percentage

(dollars in millions)

By Region(3)

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 340,960 24% $ 306,281 24%

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 326,952 23 296,390 23

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 304,378 22 280,618 22

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 247,494 18 223,921 18

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,200 13 160,249 13

$1,394,984 100% $1,267,459 100%

By State

California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 182,178 13% $ 171,209 14%

Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,988 6 75,879 6

IllinoisÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,986 5 65,750 5

New York ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,998 5 65,344 5

All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 980,834 71 889,277 70

$1,394,984 100% $1,267,459 100%

(1) Calculated as Total mortgage portfolio less Structured Securities backed by Ginnie Mae CertiÑcates as well as agency and non-agency mortgagerelated securities held in the Retained portfolio.

(2) Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast. The 2004 results were changed to conform with 2005

presentation.

(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,

VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,

CO, KS, LA, MO, NE, NM, OK, TX, WY).

Mortgage Lenders

A signiÑcant portion of our single-family mortgage purchase volume is generated from several key mortgage lenders that

have entered into special business arrangements with us. These individually negotiated arrangements generally involve a

lender's commitment to sell a high proportion of its conforming mortgage origination volume to us. During 2005, three

mortgage lenders each accounted for 10 percent or more of our mortgage purchase volume and in the aggregate they

accounted for approximately 47 percent of this volume. These three lenders are among the largest mortgage loan originators

in the United States. We are exposed to the risk that we could lose purchase volume to the extent these arrangements are

terminated or modiÑed without replacement from other lenders.

Derivative Portfolio

On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to conÑrm that they

continue to meet our internal standards. We assign internal ratings, credit, capital and trading limits to each counterparty

based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional

reviews when market conditions dictate or events aÅecting an individual counterparty occur.

Derivative Counterparties. Our use of derivatives exposes us to counterparty credit risk, which arises from the

possibility that the derivative counterparty will not be able to meet its contractual obligations. 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. Over-thecounter, or OTC, derivatives, however, expose us to counterparty credit risk because transactions are executed and settled

between us and the counterparty. Our use of OTC interest-rate swaps, option-based derivatives and foreign-currency swaps

is subject to 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. 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. Bilateral collateral agreements are in place for the majority of our counterparties. Collateral posting thresholds

are 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. Collateral is typically transferred within one business day based on the

146 Freddie Mac
values of the related derivatives. This time lag in posting collateral can aÅect our net uncollateralized exposure to derivative

counterparties.

Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities, our PCs and

Structured Securities or our debt 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 non-cash collateral, to sell the collateral and

transfer the proceeds to us.

Our uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based derivatives and foreigncurrency swaps, after applying netting agreements and collateral, was $190 million and $601 million at December 31, 2005

and 2004, respectively. In the event that all of our counterparties for these derivatives were to have defaulted simultaneously

on December 31, 2005, our maximum loss for accounting purposes would have been approximately $190 million.

Our exposure to counterparties for OTC forward purchase and sale commitments treated as derivatives was $35 million

and $40 million at December 31, 2005 and 2004, respectively. 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, the exposure to our OTC commitments counterparties is uncollateralized. Similar to counterparties for our 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.

NOTE 18: MINORITY INTERESTS

The equity and net earnings attributable to the minority stockholder interests in consolidated subsidiaries are reported

on our consolidated balance sheets as Minority interests in consolidated subsidiaries and on our consolidated statements of

income as Minority interests in earnings of consolidated subsidiaries. The majority of the balances in these accounts relate

to our two majority-owned REITs.

In February 1997, we formed two majority-owned REIT subsidiaries funded through the issuance of common stock

(99.9 percent of which is held by us) 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 December 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 our consolidated balance sheets totaled $934 million and $1,488 million at December 31, 2005

and 2004, respectively.

On November 10, 2005, we oÅered to purchase for cash any and all of the outstanding shares of the outstanding stepdown preferred stock, of which $142 million was purchased between the oÅer date and December 31, 2005. The preferred

stock continues to be redeemable by the REITs under certain circumstances described in the preferred stock oÅering

documents as a ""tax event redemption.'' See ""NOTE 14: INCOME TAXES'' for more information concerning the REITs.

NOTE 19: EARNINGS PER COMMON SHARE

Basic earnings per common share are computed as Net income available to common stockholders divided by 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 Weighted average common shares outstanding-diluted for the period, which

consider the eÅect of dilutive common equivalent shares outstanding. 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. See

""NOTE 11: STOCK-BASED COMPENSATION'' for additional information. Net income available to common stockholders is not aÅected by dilutive potential common shares for the years ended December 31, 2005, 2004 and 2003. For the

years ended December 31, 2005, 2004 and 2003, there are approximately 1,929,000, 2,239,000 and 1,581,000 of dilutive

common equivalent shares outstanding that could potentially dilute earnings per common share, based on the treasury stock

method.

Options to purchase 2.3 million, 2.4 million and 3.4 million shares of common stock were excluded from the

computation of Diluted earnings per common share at December 31, 2005, 2004 and 2003, respectively, because the options'

exercise price exceeded the average market price of the common stock for the years ended December 31, 2005, 2004 and

2003, respectively.

147 Freddie Mac
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURES

None.

CONTROLS AND PROCEDURES

See ""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting'' for a

description of our material weaknesses and other deÑciencies.

DIRECTORS AND EXECUTIVE OFFICERS

Information regarding our Directors and Executive OÇcers is set forth under ""Proposal 1: Election of Directors Ì

Nominees for Election'' and ""Executive OÇcers'' of our Proxy Statement for our annual meeting of stockholders to be held

on September 8, 2006, and is incorporated herein by reference. Additional information concerning our Audit Committee

may be found under the caption ""Corporate Governance Ì Audit Committee Financial Expert'' in our Proxy Statement.

We also provide information regarding our Section 16 compliance under ""Section 16(a) BeneÑcial Ownership Reporting'' in

our Proxy Statement, incorporated by reference herein.

148 Freddie Mac
BOARD OF DIRECTORS (as of June 1, 2006)(1)

Richard F. Syron Eugene M. McQuade

Chairman and Chief Executive OÇcer President and Chief Operating OÇcer

Freddie Mac Freddie Mac

McLean, Virginia McLean, Virginia

Shaun F. O'Malley (Lead Director)A, B, D Barbara T. AlexanderC, E

Independent Consultant Chairman Emeritus

Monarch Beach, California Price Waterhouse LLP

GeoÅrey T. BoisiB, D, E An accounting and consulting Ñrm

Chairman and Senior Partner Philadelphia, Pennsylvania

JeÅrey M. PeekC, E Roundtable Investment Partners LLC

A private investment management Ñrm Chairman and Chief Executive OÇcer

New York, New York CIT Group, Inc.

Michelle EnglerB, E A provider of commercial and consumer Ñnance solutions

New York, New York Trustee

Ronald F. PoeB, D, E

JNL Investor Series Trust and JNL Series Trust

President and Member of Board of Managers Ronald F. Poe & Associates JNL/NY Variable Funds

Each an investment company A private real estate investment Ñrm

Lansing, Michigan White Plains, New York

Stephen A. RossA, C, D

Richard Karl GoeltzA, C, D

Professor Retired Vice Chairman and Chief Financial OÇcer

American Express Company Massachusetts Institute of Technology

A Ñnancial services company Cambridge, Massachusetts

William J. TurnerA, C New York, New York

Manager Thomas S. JohnsonA, B

Signature Capital, Inc. Retired Chairman and Chief Executive OÇcer A venture capital investment Ñrm GreenPoint Financial Corp. Portland, Maine A Ñnancial services company

New York, New York

William M. Lewis, Jr.C, E

Managing Director and Co-Chairman

of Investment Banking

Lazard Ltd.

An investment banking company

New York, New York

Committees A Audit

B Compensation and Human Resources

C Finance and Capital Deployment

D Governance, Nominating and Risk Oversight

E Mission and Sourcing

(1) Our 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, 2006.

149 Freddie Mac
EXECUTIVE COMPENSATION

Information regarding executive compensation is set forth under the section titled ""Executive Compensation'' of our

Proxy Statement and is incorporated by reference into this Information Statement. Information regarding compensation of

our board of directors is set forth under the section titled ""Proposal 1: Election of Directors Ì Board Compensation'' and

information concerning members of the Compensation and Human Resources Committee is set forth under ""Proposal 1: Election of Directors Ì Compensation Committee Interlocks and Insider Participation'' of our Proxy Statement,

incorporated by reference herein.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance under Equity Compensation Plans

Table 52 provides information about our common stock that may be issued upon the exercise of options, warrants and

rights under our existing equity compensation plans at December 31, 2005. Our stockholders have approved the ESPP, the

2004 Employee Plan, the 1995 Employee Plan and the Directors' Plan.

Table 52 Ì Equity Compensation Plan Information

(c)

(a) Number of securities

Number of securities remaining available for

to 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,229,451(1) $46.10(2) 20,159,506(3)

Equity compensation plans not approved by stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None N/A None

(1) Includes 1,474,183 restricted stock units issued under the Directors' Plan and the Employee Plans and options to purchase up to 61,584 shares under

the ESPP, which are issuable in connection with the oÅering period ended on January 31, 2006.

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

(3) Consists of 12,005,314 shares, 6,597,276 shares and 1,556,916 shares available for issuance under the 2004 Employee Plan, the ESPP and Directors'

Plan, respectively.

Security Ownership of Management

Information regarding the beneÑcial ownership of our common stock by each of our directors, each director nominee,

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, Executive OÇcers and Greater than 5% Holders'' of our Proxy Statement

for our annual meeting of stockholders to be held on September 8, 2006 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 certain beneÑcial owners is set forth under the

section titled ""Corporate Governance Ì Stock Ownership by Directors, Executive OÇcers and Greater than 5% Holders''

of our Proxy Statement for our annual meeting of stockholders to be held on September 8, 2006 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 September 8, 2006 and is incorporated by reference into this Information Statement.

PRINCIPAL ACCOUNTING 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 September 8, 2006 and is incorporated by reference into this Information Statement.

150 Freddie Mac
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 28, 2006

Richard F. Syron

Chairman and Chief Executive OÇcer

CERTIFICATION*

I, Eugene M. McQuade, 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 28, 2006

Eugene M. McQuade

President and Chief Operating OÇcer

* For a detailed discussion of our progress with respect to our internal control over Ñnancial reporting and disclosure controls and procedures, see ""RISK

MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''

151 Freddie Mac
RATIO OF EARNINGS TO FIXED CHARGES

Year Ended December 31,

2005 2004 2003 2002 2001

(dollars in millions)

Net income before cumulative eÅect of changes in accounting principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,189 $ 2,937 $ 4,816 $10,090 $ 3,115

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 367 790 2,202 4,713 1,339

Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 129 157 184 208

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,899 26,566 26,509 26,876 27,577

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 6 5 5 5

Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì 1 1

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,557 $30,429 $33,689 $41,869 $32,245

Fixed charges:

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,899 $26,566 $26,509 $26,876 $27,577

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 6 5 5 5

Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì 1 1

Total Ñxed charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,905 $26,573 $26,514 $26,882 $27,583

Ratio of earnings to Ñxed charges(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.09 1.15 1.27 1.56 1.17

(1) 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,

2005 2004 2003 2002 2001

(dollars in millions)

Net income before cumulative eÅect of changes in accounting principlesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,189 $ 2,937 $ 4,816 $10,090 $ 3,115

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 367 790 2,202 4,713 1,339

Minority interests in earnings of consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96 129 157 184 208

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,899 26,566 26,509 26,876 27,577

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 6 5 5 5

Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì 1 1

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,557 $30,429 $33,689 $41,869 $32,245

Fixed charges:

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,899 $26,566 $26,509 $26,876 $27,577

Interest factor in rental expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 6 5 5 5

Capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 Ì 1 1

Preferred stock dividends(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 261 266 315 351 310

Total Ñxed charges including preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,166 $26,839 $26,829 $27,233 $27,893

Ratio of earnings to combined Ñxed charges and preferred stock dividends(2) ÏÏÏÏÏÏÏÏÏÏ 1.08 1.13 1.26 1.54 1.16

(1) Preferred stock dividends represent pre-tax earnings required to cover any preferred stock dividend requirements using our eÅective tax rate for the

relevant periods.

(2) 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.

152 Freddie Mac
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: SOUTHEAST REGION

North Tower, Suite 200 September 8, 2006 2300 Windy Ridge Parkway SE 9:00 a.m. eastern time

Atlanta, Georgia 30339-5665 8000 Jones Branch Drive

McLean, Virginia 22102 (770) 857-8800

SOUTHWEST REGION Proxy materials will be mailed to stockholders of record in 5000 Plano Parkway accordance with Freddie Mac's bylaws and New York Carrollton, Texas 75010-4902 Stock Exchange requirements. (972) 395-4000

DIVIDEND PAYMENTS WESTERN REGION

Approved by Freddie Mac's board of directors, dividends 21700 Oxnard Street, Suite 1900

on the company's common stock and non-cumulative pre- Woodland Hills, California 91367-3642

ferred stock in 2005 and the Ñrst six months of 2006 were (818) 710-3000

or are expected to be paid on:

March 31, 2005

June 30, 2005

September 29, 2005

December 29, 2005

March 31, 2006

June 30, 2006

Subject to approval by Freddie Mac's board of directors,

dividends on the company's common stock and noncumulative preferred stock in the last six months of 2006

are expected to be paid on or about:

September 30, 2006

December 31, 2006

153 Freddie Mac
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.

AOCI Accumulated other comprehensive income (loss), net of taxes

ARM Adjustable-rate mortgage

CMBS Commercial mortgage-backed securities

CMT Constant Maturity Treasury

DOL Department of Labor

EITF Emerging Issues Task Force

ERISA Employee Retirement Income Security Act

ESPP Employee Stock Purchase Plan

Euribor Euro Interbank OÅered Rate

Fannie Mae Federal National Mortgage Association

FASB Financial Accounting Standards Board

FEC Federal Election Commission

FHA Federal Housing Administration

FICO Credit scores initially developed by Fair, Issac and Co., Inc.

FIN Financial Accounting Standards Board Interpretation

FSP Financial Accounting Standards Board StaÅ Position

GAAP U.S. generally accepted accounting principles

Ginnie Mae Government National Mortgage Association

GSE Government-sponsored enterprise

GSE Act The Federal Housing Enterprises Financial Safety and Soundness Act of 1992

HUD Department of Housing and Urban Development

IO Interest only

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

OAS Option-Adjusted Spread

OFHEO OÇce of Federal Housing Enterprise Oversight

OTC Over-the-Counter

PC Mortgage Participation CertiÑcate

PCAOB Public Company Accounting Oversight Board

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

S&P Standard & Poor's

SEC Securities and Exchange Commission

SFAS Statement of Financial Accounting Standards

SS&TG Securities Sales and Trading Group

TBA To Be Announced

VA Department of Veterans AÅairs

VIE Variable interest entity

154 Freddie Mac