2002 ANNUAL REPORT
February 2004

To our Shareholders:

The following is Freddie Mac's annual report for 2002. As you know, 2003 was an especially diÇcult year

for the company and, as a consequence, we are late issuing the 2002 annual report. We very much regret the

delay. Throughout the past year, we have worked to complete the restatement of Ñnancial results for 2000,

2001 and 2002 and provide you the information as quickly as possible, but our guiding principle has been to

ensure that we did not sacriÑce accuracy for the sake of speed. This was part of our two-track strategy to

complete the review of Ñnancial processes and controls, while maintaining business performance and focus on

our mission.

In November 2003, Freddie Mac issued its restated results. As restated, Freddie Mac's net income for

2002 was $10.09 billion, or $14.18 per diluted common share. The company reported regulatory core capital of

$28.99 billion as of December 31, 2002, and stockholders' equity at that date was $31.33 billion. While these

results were presented publicly in November, the complete restated Ñnancial results are discussed in detail in

the pages that follow.

Industry Environment

Despite the issues surrounding the company's Ñnancial reporting, as our restated results demonstrate,

2002 was a good year for Freddie Mac's underlying business. First, in the midst of a sluggish U.S. and global

economy, the U.S. housing market and the mortgage Ñnance industry were key drivers for American economic

growth. The availability of low-cost mortgage Ñnancing in 2002 helped millions of American families purchase

a home for the Ñrst time or move up to a larger home, and enabled millions of other American families to

reÑnance their mortgages at lower interest rates and save substantial amounts of money, which helped keep

the U.S. economy moving forward.

America's homeownership level reached 67.9 percent in 2002 Ó a new high. Spurred by the lowest interest

rates in a generation, American families borrowed record amounts of mortgage credit in 2002. An all-timehigh of approximately $2.6 trillion in single-family mortgages were originated in 2002. That volume of

economic activity simply would not have been possible without a vibrant and liquid secondary mortgage

market.

2002 Business Performance

In 2002, Freddie Mac maintained its Ñnancial safety and soundness, while Ñnancing record numbers of

homes.

Freddie Mac's capital levels remained well above required minimum levels, and our interest-rate risk

levels remained low, in spite of a turbulent interest-rate environment. The restatement did not have a

signiÑcant eÅect on Freddie Mac's previously reported monthly interest-rate risk sensitivity disclosures. As

restated, for December 2002, the company's reported portfolio market value sensitivity, or PMVS, measure

improved slightly to 2.3 percent (from the previously reported Ñgure for 2002) and its reported duration gap,

measured in months, remained unchanged at zero.

In 2002, Freddie Mac Ñnanced 4.2 million single-family homes and 330,000 multifamily apartments Ì

more than ever before. Freddie Mac's single-family purchase volume reached a record total of $548 billion.

Early in 2002, Freddie Mac's single-family servicing portfolio reached $1 trillion in unpaid principal balances.

A short time later, we added the 10 millionth loan to our portfolio.

The company also continued to serve its mission of bringing quality, aÅordable housing within the reach

of more and more of America's families. In 2002, for the seventh consecutive year, Freddie Mac met all

aÅordable housing goals set by the U.S. Department of Housing and Urban Development, or HUD. The

company Ñnanced homes for nearly 2.5 million low- and moderate-income families and families living in

underserved areas of the country. Under HUD's regulations, 51 percent of the homes Ñnanced by Freddie Mac

were for low- and moderate-income families; 32 percent of the homes we Ñnanced were in underserved areas.

In 2002, Freddie Mac exceeded its special aÅordable housing goal of 20 percent of mortgage purchases. The

company also purchased $5.01 billion of qualifying multifamily mortgages, exceeding the requirement for

multifamily purchases of $2.11 billion.
2003 and Beyond

As I mentioned, 2003 was a diÇcult year, but Freddie Mac begins 2004 on solid footing, and I believe

that these are promising times for your company. I am particularly pleased that we began the new year with a

new Chief Executive OÇcer and Chairman of the Board Ó Richard Syron.

Dick brings to Freddie Mac a wealth of experience in the three cornerstones of our business: housing,

Ñnance and public policy. Most recently, as executive chairman of Thermo Electron Corporation, Dick

demonstrated his vision and hands-on management skills as he transformed a company with a wide variety of

business interests into a streamlined organization keenly focused on delivering substantial shareholder value.

Earlier in his career, Dick served as chairman and chief executive oÇcer of the American Stock Exchange; as

president of the Federal Reserve Bank of Boston; as president of the Federal Home Loan Bank of Boston; as a

senior aide to the Federal Reserve chairman; and as a senior Treasury Department oÇcial.

It has been my privilege to serve as chairman of Freddie Mac's Board during the past year. I am proud to

turn over the reins to Dick, who shares with our Board and management the same Ñerce commitment to

Freddie Mac's chartered mission to make housing Ñnance more aÅordable for American families.

I would like to say a word of thanks to the dedicated employees of Freddie Mac, who worked tirelessly to

complete the restatement and continue to serve our vital mission.

On behalf of the Board and Freddie Mac's employees, I also want to thank you for your support during

the past year. Together, we will work every day to earn your trust as we continue to carry out our mission to

make the dream of owning a home a reality for every American family.

Sincerely,

Shaun F. O'Malley

Presiding Director, Freddie Mac Board of Directors
BOARD OF DIRECTORS (as of January 31, 2004)

Richard F. Syron John B. McCoy

Chairman and Chief Executive OÇcer Retired Chairman and Chief Executive OÇcer

Freddie Mac BANK ONE CORPORATION

McLean, Virginia A Ñnancial institution

Columbus, Ohio Cesar B. Cabrera*

President Shaun F. O'Malley Rocca Development Corporation Retired Chairman

A residential and commercial development Price Waterhouse, LLP

company An accounting and consulting Ñrm San Juan, Puerto Rico Philadelphia, Pennsylvania

Michelle Engler* Ronald F. Poe Trustee President JNL Investor Series Trust Ronald F. Poe & Associates and Member of Board of Managers A mortgage banking company JNL Variable Funds White Plains, New York Both investment companies

Lansing, Michigan William D. Powers*

Richard Karl Goeltz Principal

Former Vice Chairman and Chief Financial OÇcer Powers, Crane & Company, LLC

American Express Company A lobbying and consulting company

A Ñnancial services company Albany, New York

New York, New York Stephen A. Ross

George D. Gould Professor

Vice Chairman Massachusetts Institute of Technology

Klingenstein, Fields & Company, LP Cambridge, Massachusetts

An investment management Ñrm

New York, New York Donald J. Schuenke

Retired Chairman

David J. Gribbin III* Northwestern Mutual Life Insurance Company

Former Managing Director Milwaukee, Wisconsin

Clark & Weinstock and Non-Executive Chairman

A lobbying Ñrm Allen-Edmonds Shoe Company Washington, DC Port Washington, Wisconsin

Thomas W. Jones Christina Seix Chairman and Chief Executive OÇcer Chairman, Chief Executive OÇcer and Chief Global Investment Management Investment OÇcer A division of Citigroup, Inc. Seix Investment Advisors, Inc. New York, New York An investment management Ñrm

Henry Kaufman WoodcliÅ Lake, New Jersey

President

Henry Kaufman & Company, Inc. Catherine Stepp*

An economic and Ñnancial consulting and Vice President

First Stepp Builders, Inc. investment management Ñrm

New York, New York A residential homebuilding Ñrm

Racine, Wisconsin Martin L. Leibowitz

Vice Chairman and Chief Investment OÇcer William J. Turner

Teacher's Insurance and Annuity Association Ì Manager

College Retirement Equities Fund Signature Capital, Inc.

An investment management Ñrm A venture capital investment Ñrm

New York, New York Winnetka, Illinois

* Appointed by the President of the United States
SENIOR MANAGEMENT (as of January 31, 2004)

Richard F. Syron Ì Chairman and Chief Executive Michael W. Hager Ì Senior Vice President,

OÇcer Human Resources

Paul T. Peterson Ì Executive Vice President and Melvin M. Kann Ì Senior Vice President, General

Chief Operating OÇcer Auditor*

Martin F. Baumann Ì Executive Vice President William I. Ledman Ì Senior Vice President,

and Chief Financial OÇcer Information Systems and Services

David A. Andrukonis Ì Senior Vice President Jerome T. Lienhard Ì Senior Vice President, Debt

and Chief Enterprise Risk OÇcer and Equity Financing

Donald J. Bisenius Ì Senior Vice President, Credit Michael C. May Ì Senior Vice President,

Policy and Portfolio Management Mortgage Sourcing, Operations and Funding

Margaret A. Colon Ì Senior Vice President, Chief Milton Moore Ì Senior Vice President,

Administrative OÇcer Technology Infrastructure and Operations

Adrian B. Corbiere Ì Senior Vice President, Dwight P. Robinson Ì Senior Vice President,

Multifamily Corporate Relations

R. Mitchell Delk Ì Senior Vice President, Edmond J. Sannini Ì Senior Vice President,

Government Relations and Public Policy Corporate Controller

Catherine Dondzila Ì Senior Vice President, David H. Stevens Ì Senior Vice President,

Investments and Capital Markets Accounting Mortgage Sourcing

Joan E. Donoghue Ì Vice President and Acting Robert Y. Tsien Ì Senior Vice President,

General Counsel Multifamily Loan Production

Nazir G. Dossani Ì Senior Vice President, Jerry Weiss Ì Senior Vice President and Chief

Investments and Capital Markets Compliance OÇcer

Cindy Gertz Ì Senior Vice President, Operational John F. Woods Ì Senior Vice President and

Risk Oversight Principal Accounting OÇcer

Edward L. Golding Ì Senior Vice President,

Capital Oversight and Economics

* Mr. Kann has announced his retirement from Freddie Mac eÅective April 1, 2004.
INFORMATION STATEMENT

AND

ANNUAL REPORT TO SHAREHOLDERS

For the Ñscal year ended December 31, 2002

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

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

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

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

registered under the Securities Act of 1933, or the Securities Act, or under the Securities Exchange Act of

1934, or the Exchange Act, and we are not currently required to Ñle periodic reports with the Securities and

Exchange Commission, or SEC, under the Exchange Act. However, we are committed to the voluntary

registration of our common stock under the Exchange Act, which we expect to complete once we return to

timely Ñnancial reporting. We alone are responsible for making payments on our securities. Neither the United

States nor any agency or instrumentality of the United States is obligated to fund our mortgage purchase or

Ñnancing activities or to guarantee our securities or other obligations.

On November 21, 2003, Freddie Mac announced the results of our restatement of previously issued

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 are in the process of preparing our quarterly and annual Ñnancial statements for the year 2003.

For more details, see ""EXPLANATORY NOTE.''

This Information Statement and Annual Report, or the Information Statement, contains important

Ñnancial and other information about Freddie Mac. The 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

web site (www.freddiemac.com) or by writing or calling us at:

Freddie Mac

Investor Relations Department

1551 Park Run Drive

McLean, Virginia 22102-3110

Telephone: 1-800-FREDDIE (800-373-3343)

Our principal oÇce is located at 8200 Jones Branch Drive, McLean, Virginia 22102

(telephone: 703-903-2000).

THIS INFORMATION STATEMENT IS DATED FEBRUARY 27, 2004

TABLE OF CONTENTS

Page

FORWARD-LOOKING STATEMENTSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1

EXPLANATORY NOTE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

BUSINESSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

General Development of Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Financial Information about Segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4

Business Review ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4

Market Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Mortgage Purchase and Guarantee Activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

The To Be Announced, or TBA, Market ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

ResecuritizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12

Portfolio Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

PC Market-Making and Support ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Regulation and Governmental Relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

SUBSEQUENT EVENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Board of Directors and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Legal ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

Legislative Developments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21

Regulatory Developments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22

Mortgage Security Performance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

AÅordable Housing Initiatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

Tax Contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

Market Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

Securities Authorized for Issuance under Equity Compensation Plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28

RESTATEMENT RESULTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28

FINANCIAL HIGHLIGHTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31

CRITICAL ACCOUNTING POLICIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32

CONSOLIDATED RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37

CONSOLIDATED BALANCE SHEETS ANALYSIS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53

AVERAGE BALANCE SHEETS AND RATE/VOLUME ANALYSISÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56

CONSOLIDATED FAIR VALUE BALANCE SHEETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58

VOLUME STATISTICS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61

LIQUIDITY AND CAPITAL RESOURCES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63

Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63

Capital Resources ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66

RISK MANAGEMENT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Operational Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Internal Control Weaknesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Overview of Operational Risk ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73

Management of Freddie Mac's Operational Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73

Freddie Mac

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Page

Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75

Sources of Interest-Rate Risk and Other Market Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75

Interest-Rate Risk Management and Use of Derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77

Derivative-Related Risks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80

Interest-Rate Derivative Tables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83

Measurement of Interest-Rate Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90

Credit Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93

Mortgage Credit Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93

Institutional Credit Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107

OTHER REGULATORY MATTERSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110

QUARTERLY SELECTED FINANCIAL DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111

SUBSEQUENT ACCOUNTING REVISIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115

VOLUNTARY COMMITMENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 217

DIRECTORS AND EXECUTIVE OFFICERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 218

EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220

INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS, OFFICERS

AND EMPLOYEES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220

PRINCIPAL ACCOUNTANT FEES AND SERVICES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220

CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221

RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED

CHARGES AND PREFERRED STOCK DIVIDENDS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 222

Freddie Mac

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FORWARD-LOOKING STATEMENTS

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

the news media and others as part of our normal operations. Some of these communications include ""forwardlooking statements'' pertaining to our current expectations about our future business plans, results of

operations and Ñnancial condition. Forward-looking statements are typically accompanied by, and identiÑed

with, terms such as ""anticipates,'' ""believes,'' ""expects,'' ""intends,'' ""objectives,'' ""will,'' ""may'' and similar

phrases. This Information Statement includes forward-looking statements. These statements are based on

current plans, estimates and projections, and you should not rely on them. Forward-looking statements involve

known and unknown risks, uncertainties and other factors, some of which are beyond Freddie Mac's control.

Factors that could cause actual results to diÅer materially from the expectations expressed in these and other

forward-looking statements by management include, among others:

‚ Changes in the level and volatility of interest rates, house prices, employment rates and the

general economy;

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

risk management activities and investment activities;

‚ The availability of debt funding 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 standards;

‚ The availability from acceptable counterparties of options, interest-rate and currency swaps, and

other derivative Ñnancial instruments, or derivatives, of the types and in the quantities needed for

investment funding and risk management purposes;

‚ The rate of growth in total outstanding U.S. residential mortgage debt;

‚ The size of the residential mortgage market;

‚ Borrower preferences for Ñxed-rate mortgages or adjustable-rate mortgages, which we refer to as

ARMs;

‚ Preferences of originators to sell mortgages into the secondary market;

‚ Changes in investor preferences for mortgage loans and mortgage-related and debt securities

versus other investments;

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

‚ Our ability to eÅectively manage operational risk;

‚ Our ability to implement solutions to business processing systems issues;

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

restatement of our Ñnancial statements and the consent order entered into with our safety and

soundness regulator, the OÇce of Federal Housing Enterprise Oversight, or OFHEO, including in

particular initiatives relating to technical infrastructure and controls;

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

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

mortgage portfolio is heavily concentrated;

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

results;

‚ The impact of new accounting standards, including the timely development of supporting systems;

and

‚ Changes in the legislative or regulatory environment, aÅordable housing goals, regulatory capital

requirements or our Congressional charter.

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1
We undertake no obligation to update these forward-looking statements to reÖect events or circumstances

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

EXPLANATORY NOTE

The publication of this Information Statement for the year 2002 has been delayed signiÑcantly as a result

of our restatement. The need for our restatement was announced in January 2003, when we, with the

concurrence of our independent auditors, PricewaterhouseCoopers LLP, or PwC, concluded that in some

instances our application of certain accounting policies was not consistent with generally accepted accounting

principles in the United States, or GAAP.

A number of signiÑcant events aÅecting the company occurred during the course of the restatement

eÅort. These included:

‚ Major changes in the senior management of the company (commencing in June 2003 with the

departures of the former Chairman and Chief Executive OÇcer, President and Chief Operating

OÇcer and Chief Financial OÇcer and culminating in the December 2003 announcement of the

election of Richard F. Syron as Chairman and Chief Executive OÇcer);

‚ The commencement of various investigations relating to Freddie Mac (including by OFHEO, the

SEC and the U.S. Attorney's OÇce for the Eastern District of Virginia);

‚ The publication of the results of the investigation by Baker Botts L.L.P., or Baker Botts,

independent outside counsel to the Board of Directors; and

‚ The initiation of numerous private lawsuits.

During this period, we also began a comprehensive remediation program, under the oversight of our

Board of Directors, to address each of the principal factors that contributed to the need for the restatement.

This program includes initiatives relating to corporate culture, governance, accounting staÇng and expertise,

accounting policies, processes and controls as well as Ñnancial reporting and disclosure, and is discussed in

more detail in ""MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS, or MD&A, Ì RESTATEMENT RESULTS Ì Restatement Background and Remediation Program'' and ""MD&A Ì RISK MANAGEMENT Ì Operational Risk Ì Internal Control Weaknesses.'' Freddie Mac has generally resolved certain matters relating to OFHEO's

investigation pursuant to the consent order entered into on December 9, 2003, under which we paid a civil

money penalty of $125 million and are undertaking additional remedial actions relating to many of the same

areas as our remediation program. We continue to cooperate fully with all pending investigations by

governmental authorities. The Director of OFHEO, or the Director, has indicated his intent to adopt

additional regulations aÅecting the activities of Freddie Mac and the Federal National Mortgage Association,

or Fannie Mae, based on the recommendations of the OFHEO staÅ report released in connection with the

investigation. See ""SUBSEQUENT EVENTS Ì Legal Proceedings Ì OFHEO Investigation'' and ""SUBSEQUENT EVENTS Ì Regulatory Developments Ì OFHEO'' for further information.

Our restatement eÅort was completed and announced on November 21, 2003. Our restated and revised

Ñnancial statements, referred to as the restated Ñnancial statements, are contained in this Information

Statement. Unless otherwise indicated, all Ñnancial information in this Information Statement is derived from

the restated consolidated Ñnancial statements. As discussed in ""MD&AÌ RESTATEMENT RESULTS,''

our restated net income reÖects signiÑcantly greater volatility than results reported before the restatement, in

large part due to the impact on earnings of changes in the fair values of a signiÑcantly higher proportion of our

derivative portfolio, mortgage-related securities, guarantee assets and guarantee obligations. A detailed

discussion of the accounting errors that were corrected and other accounting changes that were made in

conjunction with the restatement is provided in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.''

We intend to return to timely Ñnancial reporting as soon as possible. However, we currently are not able

to predict when we will do so. SigniÑcant revisions to our accounting systems are necessary to implement the

revised accounting policies adopted in connection with the restatement, as well as new accounting guidance

Freddie Mac

2
applicable for 2003, so that those accounting systems can fully support the preparation of consolidated

Ñnancial statements in accordance with GAAP. As a result, the public release of our 2003 Ñnancial results also

has been delayed. While this Information Statement focuses on a presentation and analysis of our Ñnancial

results for the years 2002, 2001 and 2000, it also includes selected information about certain topics pertaining

to the year 2003 that are not aÅected by the restatement or our current inability to produce timely Ñnancial

statements. Our objective is to release combined quarterly and full-year results for 2003 by June 30, 2004 and

to provide our 2003 annual report and hold our related annual stockholders' meeting as soon as practicable

thereafter. However, there can be no assurance that we will meet this objective. Although we have put plans in

place to address the operational weaknesses that are contributing to our current inability to release Ñnancial

results on a timely basis, uncertainty regarding the expected success of these activities remains. See

""MD&A Ì RISK MANAGEMENT Ì Operational Risk Ì Internal Control Weaknesses'' for more

information.

While we are not yet subject to the SEC's disclosure requirements with respect to this Information

Statement, we have attempted to comply with them to the extent possible. However, in some instances we

have departed from speciÑc SEC data requirements, principally in cases where we have provided data for

fewer years than would be required if we were an SEC registrant. The omission of data for these years

primarily arises because we have not restated our consolidated Ñnancial statements for periods prior to 2000.

We do not believe the omissions are material to an understanding of our results as restated for the periods

presented. We will be subject to all applicable SEC requirements when we complete the voluntary registration

of our common stock with the SEC.

In addition, this Information Statement and the certiÑcations by our Chief Executive OÇcer and Chief

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

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

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

controls over Ñnancial reporting as of the end of the period covered by this Information Statement. This is

because the required evaluation and assessment of the eÅectiveness of these controls and procedures were not

adequately performed as of December 31, 2002. See ""MD&A Ì RISK MANAGEMENT Ì Operational

Risk Ì Internal Control Weaknesses'' for additional information regarding our internal control weaknesses

and remediation eÅort.

BUSINESS

General Development of Business

Freddie Mac is one of the largest participants in the U.S. mortgage market. We are a shareholder-owned

GSE chartered by Congress on July 24, 1970 under the Federal Home Loan Mortgage Corporation Act, as

amended, which we refer to as the Freddie Mac Act or our charter.

Our statutory purposes are:

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

‚ To respond appropriately to the private capital markets;

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

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

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

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

We fulÑll these statutory purposes primarily by purchasing residential mortgage loans and mortgagerelated securities from mortgage lenders and securities dealers, Ñnancing these purchases with debt, equity and

mortgage-related securities, and guaranteeing the timely payment of principal and interest on these mortgagerelated securities. For purposes of this discussion, and as further described in ""Ì Business Review'' below, the

Freddie Mac

3
terms ""purchase'' and ""mortgage purchase'' encompass both the purchase of mortgages Ñnanced with debt

and equity securities and the issuance of guaranteed securities representing undivided interests in mortgage

loans and mortgage-related securities.

We purchase mortgages that Ñnance homes in every geographic segment of the U.S. In this way, we

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

dream of decent, accessible housing a reality. For more than three decades, we have been a successful

competitor in a large and consistently growing market.

Our principal oÇces are located in McLean, Virginia. We have additional oÇces in Washington, D.C.;

Reston, Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; New York, New York; and Woodland

Hills, California. As of January 15, 2004, we had 4,275 full-time and 139 part-time employees.

We do not currently Ñle periodic reports with the SEC, although we will begin to do so upon completion

of the voluntary registration of our common stock under the Exchange Act. We make our Ñnancial disclosure

documents available free of charge on our web site. Our Internet address is www.freddiemac.com. (We are

providing this Internet address solely for the information of prospective investors. We do not intend this

Internet address to be an active link, and are not using references to this address here or elsewhere in this

Information Statement to incorporate additional information into this Information Statement.)

Financial Information about Segments

During the periods covered by the restatement, we did not meet the criteria for reporting business

segments that are prescribed in Statement of Financial Accounting Standards, or SFAS, ""Disclosures About

Segments of an Enterprise and Related Information, or SFAS 131.'' For example, we did not maintain, as

required by SFAS 131, discretely available and reliable Ñnancial information that we used to allocate internal

resources and to evaluate the performance of internal business units. As a result, we have determined that we

have only one business segment for Ñnancial reporting purposes, rather than two as previously reported prior to

the restatement.

Business Review

Freddie Mac plays a fundamental role in the American housing Ñnance system, linking the domestic

mortgage market and the global capital markets. In this role, we focus on the following business strategies:

‚ Maintaining the lowest possible cost of Ñnancing for our mortgage investments by creating broader

and more liquid markets for our mortgage-related and debt securities;

‚ Delivering these low-cost funds to a broad spectrum of America's homeowners by bringing

innovation and eÇciency to the mortgage market; and

‚ Managing the operational risk, interest-rate risk, credit risk and other business and market risks

that arise from these business activities.

Our participation in the secondary mortgage market includes providing our credit guarantee for

residential mortgages originated by mortgage lenders and investing in mortgages and mortgage-related

securities held in our retained portfolio. These activities are summarized below:

‚ Credit Guarantee. In our credit guarantee activities, we securitize mortgages by issuing Mortgage Participation CertiÑcates, or PCs, to third party investors. We also resecuritize mortgagerelated securities that are issued by the Government National Mortgage Association, or Ginnie

Mae, as well as non-agency entities. Securities issued through our resecuritization activities are

one type of Structured Securities, a term deÑned and further discussed under ""Resecuritization''

below. In each case, securitized mortgage-related assets that back PCs and Structured Securities

that are held by third parties are not reÖected as assets of Freddie Mac under GAAP. However,

we do retain an obligation to provide the payment of principal and interest on issued PCs and

Structured Securities, which may result in the recognition of an asset and obligation on our

consolidated balance sheets. For further details, see ""FINANCIAL STATEMENTS AND

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4
SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES.''

‚ Portfolio Investment. In our retained portfolio investment activities, we purchase mortgage loans

and mortgage-related securities (including PCs and Structured Securities previously issued by us)

and hold such securities for investment purposes in our retained portfolio. We Ñnance these

purchases by issuing debt and equity securities. Portfolio investments (including PCs in our

retained portfolio) are recorded on our consolidated balance sheets as assets within our retained

portfolio.

Most of our credit guarantee activity occurs through the Guarantor Program in the form of mortgage

swap transactions. In a mortgage swap transaction, a mortgage lender or other seller delivers mortgages to us

in exchange for our PCs, which represent undivided interests in those same mortgages for which we guarantee

the payment of principal and interest.

Mortgage lenders and other originators also sell mortgages to us for cash. In these cash transactions, we

decide whether to hold the mortgage loans in our retained portfolio and Ñnance them with debt and equity

securities (portfolio investment), or sell them in the secondary market in the form of PCs that carry our

guarantee of timely payment of principal and interest (credit guarantee).

Figure 1 illustrates our basic credit guarantee and portfolio investment activities:

Figure 1

CREDIT GUARANTEE Ì SWAP TRANSACTION

Mortgage Loans

Mortgage 4 Freddie Mac Lenders PCs

1

CREDIT GUARANTEE Ì CASH TRANSACTION

Mortgage Loans PCs

4 4 Securities Mortgage Freddie Mac Dealers and Lenders Cash Cash Investors

1 1

PORTFOLIO INVESTMENT

Mortgage-related Securities Dealers Securities and Mortgage Loans and 4 Freddie Mac Mortgage

Lenders Cash

1

Freddie Mac

5
Our retained portfolio consists of our investments in mortgage loans and mortgage-related securities,

including previously issued PCs and Structured Securities that we have acquired.

Our total mortgage portfolio consists of:

‚ PCs and Structured Securities held by us in our retained portfolio;

‚ Non-Freddie Mac mortgage-related securities held by us in our retained portfolio;

‚ Mortgage loans held by us in our retained portfolio;

‚ PCs and Structured Securities held for our PC market-making and support activities; and

‚ PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities that are

held by third parties.

Table 1 Ì Freddie Mac's Total Mortgage Portfolio(1)(2)

December 31,

2002 2001

(dollars in millions)

Outstanding PCs and Structured Securities(3)(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 729,225 $ 631,150

Retained portfolio:

PCs and Structured Securities(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 341,287 308,427

Non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,099 126,420

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,886 62,792

Total retained portfolio(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 567,272 497,639

Other PCs and Structured Securities held by Freddie Mac(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,112 21,934

Total mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,316,609 $1,150,723

Total PCs issued and Structured Securities backed by non-Freddie Mac

mortgage-related securities(4)(5)(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,090,624 $ 961,511

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

(2) Based on unpaid principal balances, or UPB.

(3) Represents PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities that are held by third parties.

(4) Reported UPB of Structured Securities relates only to that portion of issued Structured Securities that is backed by non-Freddie

Mac mortgage-related securities.

(5) Historically, these balances included PCs as well as Structured Securities backed by non-agency mortgage-related securities (i.e.,

excluding Ginnie Mae CertiÑcates). These balances now include all Structured Securities backed by all non-Freddie Mac securities

(including Ginnie Mae CertiÑcates). All Structured Securities which are backed by Freddie Mac mortgage-related securities

continue to be excluded.

(6) The retained portfolio presented in this table diÅers from the ""Retained portfolio, net of reserve'' presented in our consolidated

balance sheets because the consolidated balance sheet caption includes valuation adjustments (e.g., fair value adjustments for

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

deferred balances (e.g., premiums and discounts).

(7) Represents PCs and Structured Securities held by us in connection with PC market-making and support activities, which are

reÖected in ""Investments'' on our consolidated balance sheets.

(8) Includes $8.6 billion and $13.1 billion of Structured Securities backed by Ginnie Mae CertiÑcates at December 31, 2002 and 2001,

respectively. Also includes approximately $5 billion and $3 billion at December 31, 2002 and 2001, respectively, of housing authority

bonds that were issued by third parties to fund the origination of multifamily mortgage loans and for which Freddie Mac provided a

credit guarantee.

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6
Table 2 Ì Reconciliation of Retained Portfolio Unpaid Principal Balance to the Consolidated Balance

Sheets

December 31,

2002 2001

(dollars in millions)

Mortgage loans in the retained portfolio:

Unpaid principal balances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63,886 $ 62,792

Premiums, discounts, deferred fees and other basis adjustments(1) ÏÏÏÏÏÏÏÏÏÏÏÏ 232 (70)

Less: Reserve for losses on mortgage loans held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (177) (103)

Mortgage loans, net of reserve per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,941 62,619

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

Unpaid principal balances(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 503,386 434,847

Premiums, discounts, deferred fees and other basis adjustments(4) ÏÏÏÏÏÏÏÏÏÏÏÏ 3,463 (918)

Unrealized gains on mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,520 6,392

Participation CertiÑcate residuals, or PCRs, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412 726

Mortgage-related securities per consolidated balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 525,781 441,047

Total retained portfolio per consolidated balance sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $589,722 $503,666

(1) Other basis adjustments include valuation adjustments to record lower of cost or market value, or LOCOM, as well as basis

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

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

(3) Includes other-than-temporary impairments of manufactured housing securities. Impairments to UPB are recorded in certain

circumstances when the fair value declines below the amortized cost basis of a security.

(4) Other basis adjustments are related to hedging activities. Basis adjustments are modiÑcations to the carrying value of these securities.

Our cash and investments portfolio, which primarily consists of non-mortgage-related securities, is

excluded from our retained portfolio. Our cash and investments portfolio includes investments we acquire to

manage recurring cash Öows, provide a source of liquidity, temporarily deploy capital until the capital can be

redeployed into retained portfolio investments and manage interest-rate risk exposure. The cash and

investments portfolio also includes certain mortgage-related securities that are not included in the retained

portfolio since they are acquired in conjunction with our PC market-making and support activities.

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

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

Management and guarantee income represents the fee we charge on PCs and Structured Securities for

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

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

‚ Costs incurred in administering payments on these securities, including expenses related to the

timing diÅerence between the receipt of principal and interest payments from seller/servicers and

the remittance of those payments to security holders. (See ""Due to Participation CertiÑcate

Investors'' in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for further information regarding the timing diÅerence related to the PC remittance cycle).

Our credit guarantee activities signiÑcantly impact the volatility of reported earnings through the initial

recognition of guarantee assets and obligations in connection with sales of PCs and Structured Securities, and

subsequent unrealized gains or losses from the change in fair value of credit guarantee assets and obligations

generated from such sales.

Net interest income is the diÅerence between interest income earned on investments held by us and

interest expense incurred on the debt funding those investments. To manage the interest-rate and other market

risks associated with these investments and to reduce Ñnancing costs, we enter into interest-rate swaps, options

and other derivatives. Although we execute derivative transactions to manage interest-rate risk, they may

signiÑcantly impact, and increase the volatility of, our reported earnings, particularly when they are not

accounted for in hedge relationships.

Freddie Mac

7
In addition to management and guarantee income and net interest income, Freddie Mac generates

revenue from fee-based activities. For instance, we earn resecuritization fees in connection with the creation of

Structured Securities, primarily Real Estate Mortgage Investment Conduits, or REMICs. We also earn fees

associated with servicing and technology-related programs, including Loan Prospector» (our automated

underwriting system).

For information regarding the components of net interest income, management and guarantee income

and other sources of income, including derivative and investment gains (losses), as well as expenses related to

net income, see ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS.''

Market Overview

We conduct business in the U.S. residential mortgage market and the global securities market. Our

participation in these markets links America's homebuyers with the world's capital markets.

In general terms, the U.S. residential mortgage market consists of a primary mortgage market that links

homebuyers and lenders and a secondary mortgage market that links lenders and investors. In the primary

market, residential mortgage lenders such as mortgage banking companies, commercial banks, savings

institutions, credit unions and other Ñnancial institutions originate or provide mortgages to borrowers. They

obtain the funds they lend to mortgage borrowers in a variety of ways, including by selling mortgages into the

secondary market. Our charter does not permit us to originate loans in the primary mortgage market.

The secondary market consists of institutions engaged in buying and selling mortgages in the form of

whole loans (i.e., mortgages that have not been securitized) and mortgage-related securities. The magnitude

of investment and trading activity in the secondary mortgage market supports a continuous Öow of funds to the

primary market. This stable Öow of funds helps moderate cyclical swings in the housing market and helps

ensure that mortgage funds are available at all times.

Various other participants also play signiÑcant roles in the residential mortgage market. Mortgage brokers

advise prospective borrowers about mortgage products and lending rates, and they connect borrowers with

lenders. Mortgage servicers administer mortgage loans by collecting payments of principal and interest from

borrowers as well as amounts related to property taxes and insurance. They remit the principal and interest

payments to us, less a servicing fee, and we pass these payments through to mortgage investors, less a fee we

charge to guarantee the timely payment of principal and interest. The servicing fee charged by mortgage

servicers varies by mortgage product. As of December 31, 2002, the required minimum percentage fee

typically retained by our servicers was 0.25 percent of the UPB of the mortgage loans. Mortgage servicers also

help us manage our loss mitigation and foreclosure process for mortgages that we own or guarantee. In

addition, private mortgage insurance companies and other Ñnancial institutions sometimes provide third-party

insurance for mortgage loans or pools of loans. Our charter requires third-party insurance or other credit

protections on some loans that we purchase.

Freddie Mac and Fannie Mae are the largest participants in the U.S. secondary mortgage market.

Freddie Mac and Fannie Mae are both GSEs with the public purpose of increasing the supply and availability

of home mortgage Ñnancing. As discussed below, our statutory mission requires us to participate in the

conforming mortgage market at all times. By contrast, non-GSE market participants are free to enter and exit

the mortgage market as part of business strategies that allow them to pursue multiple lines of business in a

variety of economic conditions.

Freddie Mac and Fannie Mae have charters that prohibit them from originating mortgage loans and limit

them to purchasing mortgages with original principal balances at or below prescribed dollar limits. These

limits are referred to as conforming loan limits and are subject to annual adjustment based on an index of

national average house prices. The conforming loan limit for a Ñrst-lien conventional single-family mortgage in

2002 was $300,700 for a one-family dwelling, $384,900 for a two-family dwelling, $465,200 for a three-family

dwelling and $578,150 for a four-family dwelling. For 2003, the conforming loan limit was $322,700 for a onefamily dwelling, $413,100 for a two-family dwelling, $499,300 for a three-family dwelling and $620,500 for a

four-family dwelling. The conforming loan limit for second-lien mortgages on one-family dwellings is

50 percent of the limit for Ñrst-lien mortgages on such dwellings. When we purchase both the Ñrst-lien and

Freddie Mac

8
second-lien mortgage on the same property, the total amount that we may purchase may not exceed the

applicable conforming Ñrst-lien loan limit. The applicable conforming loan limits are 50 percent higher for

mortgages secured by properties in Alaska, Guam, Hawaii or the U.S. Virgin Islands. No comparable limits

apply to multifamily mortgage purchases.

With the exceptions noted below, the Freddie Mac Act also prohibits us from purchasing Ñrst-lien

conventional (not guaranteed or insured by any agency or instrumentality of the U.S. government) singlefamily mortgages if the outstanding principal balance at the time of purchase exceeds 80 percent of the value

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

insurance from an approved mortgage insurer; a seller's agreement to repurchase or replace (for periods and

under conditions as we may determine) any mortgage that has defaulted; or retention by the seller of at least a

10 percent participation interest in the mortgages. This requirement does not apply to multifamily mortgages

or to mortgages insured by the Federal Housing Administration, or FHA, or partially guaranteed by the

Department of Veterans AÅairs, or VA.

Under the Freddie Mac Act, so far as practicable, we may only purchase mortgages that are of a quality,

type and class that generally meet the purchase standards of private institutional mortgage investors. This

means the mortgages we purchase must be readily marketable to institutional mortgage investors.

The U.S. residential mortgage debt outstanding exceeded $6.9 trillion and $6.1 trillion at December 31,

2002 and 2001, respectively. Mortgage debt outstanding has grown every year since World War II and grew at

a 12 percent rate in 2002 and 10 percent rate in 2001, even while the economy slowed during these same

periods.

During 2002, we estimate that approximately $2.6 trillion of conventional, conforming single-family

mortgages were originated in the U.S. and that Freddie Mac and Fannie Mae purchased 21 percent and

26 percent of that amount, respectively. During 2001, we estimate that approximately $1.9 trillion of

conventional, conforming single-family mortgages were originated in the U.S. and that Freddie Mac and

Fannie Mae purchased 19 percent and 23 percent of that amount, respectively. Freddie Mac's and Fannie

Mae's relatively high market share resulted from the high level of reÑnance activity in 2002 and 2001 as a

consequence of declining interest rates and a strong demand for Ñxed-rate mortgage products, which loan

originators tend to deliver to Freddie Mac and Fannie Mae.

We compete in the secondary mortgage market primarily with Fannie Mae. We also compete with other

Ñnancial institutions that retain or securitize mortgages, such as banks and thrift institutions, and with the

Federal Home Loan Banks. Competition from these entities can vary with economic, Ñnancial market and

regulatory environments. Among other things, these factors may aÅect the degree to which depository and

other institutions sell mortgages in the secondary market rather than retain them in their own portfolios.

We also compete in the global securities market as an issuer of mortgage-related and debt securities. Our

securities have a number of attributes that help us operate eÇciently and on a large scale in both our mortgage

securitization and debt Ñnancing activities. These attributes include the high credit quality and liquidity of our

securities. They also include legal attributes under our charter and other federal laws and regulations. These

legal attributes, which facilitate our development and maintenance of the liquid markets that are essential to

fulÑlling our Congressional mandate, include the following:

‚ Exemption from securities registration under the Securities Act and the Exchange Act. We are,

however, fully subject to the antifraud provisions of the federal securities laws. In addition, we are

committed to the voluntary registration of our common stock under the Exchange Act;

‚ Access to the book-entry system operated by the Federal Reserve Banks that provides book-entry

issuance, transfer, payment and settlement for U.S. dollar-denominated securities issued by the

U.S. government, some government agencies, and other institutions such as Freddie Mac and

Fannie Mae. This system enables participants to hold and transfer securities and funds through

the Federal Reserve Banks' Fedwire System; and

‚ The ability of many Ñnancial and other institutions to invest in our mortgage-related and debt

securities free of legal limits that would otherwise apply. The Secondary Mortgage Market

Freddie Mac

9
Enhancement Act of 1984 and other federal laws and regulations allow these investors to buy and

hold securities issued or guaranteed by Freddie Mac or Fannie Mae to the same extent they can

invest in obligations issued or guaranteed by the United States or its agencies, subject to limited

exceptions.

Mortgage Purchase and Guarantee Activity

We purchase single-family mortgages mainly from mortgage bankers and federally insured Ñnancial

institutions. We purchase multifamily mortgages from mortgage lenders, including federally insured Ñnancial

institutions, mortgage bankers, investment bankers and insurance companies.

Our single-family mortgage products, services and initiatives are designed to provide a steady source of

low-cost mortgage funding to America's homebuyers. Our multifamily mortgage products, services and

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

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

mortgage lenders. During 2002 and 2001, Wells Fargo Home Mortgage, Inc., or Wells Fargo, ABN Amro

Mortgage Group, Inc., or ABN Amro, Bank of America N.A. and Principal Residential Mortgage Inc.

together accounted for approximately 61 percent and 55 percent, respectively, of our mortgage volume. In

2002, Wells Fargo accounted for approximately 32 percent of our mortgage volume while ABN Amro

accounted for approximately 16 percent of our mortgage volume. We have contracts with some of these

lenders that include a commitment by the lender to sell us a minimum share or dollar amount of its

conventional conforming mortgage origination volume. Because the typical length of these contracts is one

year, some of the contracts may expire in close proximity to each other at any given time. We actively monitor

these lenders' share volume and if a mortgage lender fails to meet its contractual commitment, we have a

variety of contractual protections, including the assessment of Ñnancial penalties.

We are exposed to the risk that we will lose signiÑcant business volume and will be unable to replace this

business if one or more of these key lenders chooses to signiÑcantly reduce the volume of mortgages it delivers

to us. The loss of any one of these 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.

See ""SUBSEQUENT EVENTS Ì Mortgage Security Performance'' for more information. We believe that

we would be able to recover from a signiÑcant decrease in, or loss of, business volume from one or more of our

largest customers, through such means as strengthening our relationships with other major lenders and

servicers or modifying our business strategies. This anticipated recovery, however, might not occur quickly or

at all.

Single-Family Mortgages

Single-family mortgages are mortgages secured by one- to four-family properties. We purchase singlefamily mortgages of various types, including 30-year, 20-year and 15-year Ñxed-rate mortgages, ARMs and

balloon/reset mortgages. The substantial majority of the mortgages we purchase are conventional mortgages.

However, we purchase some mortgages that are fully insured by the FHA, and some mortgages that are

partially guaranteed by the VA.

Single-family mortgages generally are subject to our internal credit policies and the credit, appraisal,

underwriting and other purchase policies and guidelines incorporated into Loan Prospector and set forth in our

Single-Family Seller/Servicer Guide. However, we may modify or grant waivers to these policies and

guidelines.

Multifamily Mortgages

We purchase multifamily mortgages, which are secured by structures with 5 or more units designed

principally for residential use, with terms generally ranging from 5 to 30 years from approved lenders. We have

established multifamily mortgage credit, appraisal and underwriting guidelines as set forth in our internal

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

Freddie Mac

10
for some multifamily mortgages when compensating factors (such as higher debt coverage ratios or credit

enhancements) are present.

Credit Guarantee

We typically assume the mortgage credit risk on the mortgages underlying PCs by guaranteeing the

timely payment of principal and interest to PC holders. We manage this risk carefully, sharing the risk in some

cases with third parties through the use of primary loan-level mortgage insurance, insurance on pools of loans

(known as ""pool insurance'') and other credit enhancements. See ""MD&A Ì RISK MANAGEMENT Ì

Credit Risk'' for more information.

We form PCs under our Mortgage Participation CertiÑcates Agreement, which we refer to as the PC

Agreement, among Freddie Mac and the holders of our PCs. The PC Agreement describes the manner in

which mortgages are transferred to a pool and, upon sale of a PC, a proportional undivided interest in the

mortgages in the pool is conveyed to the holder of the PC. The PC Agreement also describes our obligations as

guarantor of principal and interest on the PCs, and the manner in which those payments are passed through to

the PC holders. In addition, the PC Agreement describes the rights of the PC holders in the event of our

default. Once mortgages are placed in a pool, the mortgages cannot be removed from the pool except in

limited circumstances speciÑed in the PC Agreement. We generally begin a process to repurchase defaulted

mortgages when they have been identiÑed as being delinquent for 120 consecutive days. We then hold these

repurchased mortgages in our retained portfolio. In order to manage and resolve troubled assets and lower

credit losses, we utilize a number of loss mitigation strategies, which emphasize early intervention in

delinquent mortgages and alternatives to foreclosure. See ""MD&A Ì RISK MANAGEMENT Ì Credit

Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Loss Mitigation Activities''

for more information.

OFHEO is our safety and soundness regulator. If we were to experience signiÑcant Ñnancial diÇculties

and the Director were to appoint a conservator, we believe, based on an opinion of counsel analyzing various

provisions in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or the GSE Act,

and other relevant law, that the conservator would determine that the mortgages underlying the PCs held by

investors would be beyond the reach of the conservator or any other entity appointed to operate Freddie Mac.

This means that the proportional undivided interests of the PC holders would be preserved and borrowers'

payments and other recoveries on the mortgage loans would continue to be passed through to the PC holders.

Payments due to PC holders pursuant to our guarantees could be made only from our general funds to the

extent and so long as they were available. See ""Ì Regulation and Governmental Relationships'' for more

information about OFHEO. If we were unable to meet our guarantee obligations, the primary sources of funds

available to investors would be payments by mortgage borrowers and recoveries on mortgage loans. In that

case, payments to the PC holders could be adversely aÅected by loan delinquencies and defaults.

The proÑtability of our credit guarantee activities and our ability to compete for mortgage purchases and

guarantee business tend to be aÅected, and may be aÅected signiÑcantly, by the price diÅerence, or spread,

between PCs and competing securities, primarily those issued by Fannie Mae. See ""Ì PC Market-Making

and Support Activities.'' Other key factors aÅecting the proÑtability of credit guarantee activities include the

assumption of mortgage credit risk, the costs incurred to administer PC pools and net interest income or

expense from security program cycles.

The To Be Announced, or TBA, Market

Most of the PCs we issue represent pools of mortgages that have similar characteristics Ó such as PCs

comprising 30-year fully amortizing Ñxed-rate mortgages with mortgage coupons within a speciÑed range.

Because these PCs are homogeneous and are issued in high volume, they are highly liquid and trade on a

""generic'' basis, also referred to as trading in the TBA market. A TBA trade represents a contract for the

purchase or sale of PCs to be delivered at a future agreed-upon date; however, the speciÑc PCs, and thus the

speciÑc characteristics of the mortgages underlying those PCs, that will be delivered to fulÑll the trade

obligation are not known, i.e., ""announced,'' at the time of the trade, but only subsequently when the trade is

to be settled.

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11
Any two (or more) market participants may be involved as parties to a TBA trade. Counterparties to a

particular trade may include: mortgage originator to dealer, dealer to dealer, dealer to investor, institution to

institution, or parties dealing through an electronic trading system Ó anonymous or not. While the majority of

TBA trades are performed manually, with purchases and sales occurring through direct contact between or

among the parties to the trade, broker-dealers often trade as anonymous participants through an inter-dealer

broker or electronic trading system.

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

upon the name of the issuer (for example, Freddie Mac), the type of PC (for example, 30-year Ñxed rate), the

coupon of the PC, the quantity and the settlement month, all of which is similar to the manner in which U.S.

Treasury securities are quoted. Each type of PC has a single designated settlement date in each month, and 48

hours before the settlement date, the parties identify the PCs to be delivered to fulÑll the trade obligation.

During 2002 and 2001, we issued approximately $434.0 billion and $329.9 billion, respectively, of PCs that

were eligible to be delivered to settle TBA trades, representing approximately 81 percent and 87 percent,

respectively, of our total PC issuances.

Lenders use the TBA market to hedge the risk of Öuctuations in mortgage interest rates after they ""lock

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

in a rate for a borrower, the lender may sell PCs in the TBA market. After the lender originates the mortgages,

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

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

generic terms of the TBA trade.

We also use the TBA market to hedge cash transactions. When a lender commits to deliver mortgages to

us in exchange for cash at a speciÑed price, we may sell PCs in the TBA market for delivery at a future date.

By using the TBA market, we can hedge the risk of Öuctuations in interest rates by locking in the price at

which we will sell the PCs that will ultimately be formed from the mortgages we purchase from lenders in cash

transactions.

These uses of the TBA market by lenders and Freddie Mac increase the liquidity of mortgage

investments and improve the distribution of investment capital available for residential mortgage Ñnancing,

thereby helping us accomplish our statutory mission.

Resecuritization

We resecuritize PCs and non-Freddie Mac mortgage-related securities into single-class securities and

multi-class securities (collectively, ""Structured Securities''). We also resecuritize Structured Securities into

other Structured Securities.

Single-Class Structured Securities

We issue single-class Structured Securities backed by PCs and by non-Freddie Mac mortgage-related

securities, including Ginnie Mae CertiÑcates and non-agency mortgage-related securities. The non-agency

mortgage-related securities may be backed by mortgages originated using underwriting standards that are less

stringent than our normal criteria. By issuing these securities, we seek to provide liquidity to alternative

segments of the mortgage market. See ""MD&A Ó RISK MANAGEMENT Ó Credit Risk Ó Mortgage Credit

Risk Ó Mortgage Credit Risk Management Strategies Ó Portfolio DiversiÑcation'' for more information

concerning the additional credit risk related to these transactions.

Multi-Class Structured Securities

We issue multi-class Structured Securities that divide the cash Öows of the underlying PCs or nonFreddie Mac mortgage-related securities into two or more classes that meet the investment criteria and

portfolio needs of diÅerent types of investors. Our principal multi-class Structured Securities activity is the

issuance and sale of securities that qualify for tax treatment as REMICs. A multi-class Structured Security

may include short-, intermediate-, and long-term classes, classes that are paid diÅerent allocations of principal

and interest from the underlying PCs or other securities according to speciÑed criteria (such as principal-only,

or PO, strips, or interest-only, or IO, strips, or securities with Ñxed- or variable-rate coupons) and residual

classes that receive any cash Öow not required to be distributed to the other classes of the REMIC. Some

Freddie Mac

12
multi-class Structured Securities are structured to provide investors with more predictable cash Öows than a

typical PC, while other multi-class Structured Securities generate less predictable cash Öows.

The issuance of multi-class Structured Securities backed directly or indirectly by PCs improves the

demand for and value of PCs and ultimately reduces mortgage rates. Issuing multi-class Structured Securities

generally does not generate additional management and guarantee income for us or expose us to additional

credit risk. We typically collect a fee upon the formation of each multi-class Structured Security based on the

dollar amount and type of structure issued. We may purchase previously issued multi-class Structured

Securities for our retained portfolio, although we currently do not invest in REMIC residual classes. Some of

the multi-class Structured Securities in our retained portfolio are less liquid than PCs. Consequently, it may

be more diÇcult to sell these assets at their estimated fair value. We also may issue multi-class Structured

Securities with the intent of purchasing and retaining one or more classes that meet our portfolio investment

needs and selling the other classes.

Portfolio Investment

We manage a large and diversiÑed retained mortgage portfolio through a disciplined strategy of long-term

capital deployment. We apply extensive mortgage market expertise and a deep understanding of this asset

class to support prudent and timely asset selection while managing our interest-rate risk. We invest in

mortgage-backed securities issued by GSEs or governmental agencies, which we refer to as agency securities,

non-agency mortgage-related and asset-backed securities, and whole mortgage loans.

We issue debt principally to Ñnance our purchases of mortgage-related securities and mortgage loans for

our retained portfolio. We issue a mixture of debt of various maturities, and the debt is either callable (that is,

redeemable at our option at one or more times before its scheduled maturity) or non-callable. We use this

funding mix to manage our interest-rate risk through the Öexibility to closely match the interest obligations on

our debt with the expected cash inÖows from our mortgage-related investments. We also manage interest-rate

risk and reduce funding costs by using a variety of derivatives. See ""MD&A Ì RISK MANAGEMENT Ì

Interest-Rate Risk and Other Market Risks'' for more information. We also manage interest-rate risk by

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

Öows as Structured Securities.

In 2002 and 2001, our retained portfolio grew by 14 percent and 27 percent, respectively. At both

December 31, 2002 and December 31, 2001, our retained portfolio represented approximately 43 percent of

our total mortgage portfolio.

Debt Securities

We issue three main categories of debt: short-term debt; medium- and long-term debt; and subordinated

debt.

Short-Term Debt. We raise funds to meet our operating cash needs primarily through the issuance of

Reference Bills» securities and other discount notes, which are short-term instruments with maturities of one

year or less that are sold on a discounted basis, paying only principal at maturity. Our Reference Bills program

consists of large issues of short-term debt that we auction to dealers through the Internet on a regular

schedule. We currently auction Reference Bills with 1-, 3- and 6-month maturities weekly. (Prior to 2004, we

also auctioned Reference Bills with 2-month maturities weekly.) We auction Reference Bills with 12-month

maturities every four weeks. We issue discount notes with maturities ranging from one day to one year in

response to investor demand and our cash needs.

Medium- and Long-Term Debt. We issue medium- and long-term debt primarily through our

medium-term note program and our global debt facility. Each of these programs accommodates a variety of

structures, including callable and non-callable Ñxed-rate securities, zero coupon securities and variable-rate

securities. Through our Reference Notes» securities program, we sell large issues of medium- and long-term

debt that provide investors worldwide with a high-quality, liquid investment vehicle. Some of our Reference

Notes securities are sold through Internet auctions. We primarily issue securities denominated in U.S. dollars,

although we may issue securities denominated in various other currencies, particularly euros. We publish an

annual Ñnancing calendar that is intended to provide clarity and transparency with regard to the timing of our

oÅerings of Reference Notes and settlement dates for issuances.

Freddie Mac

13
The investor base for our medium- and long-term debt is predominantly institutional. However, we also

conduct weekly oÅerings of FreddieNotesSM securities, a medium- and long-term debt program designed to

meet the needs of retail investors.

Subordinated Debt. In October 2000, we announced plans to initiate periodic issuances of subordinated

debt securities, which we refer to as Freddie SUBS» securities, as part of a series of voluntary commitments

regarding our Ñnancial operations and disclosures designed to further strengthen our transparency, capital

adequacy and market discipline. During 2001 and 2002, we completed four oÅerings of Freddie SUBS that

provided approximately $5.5 billion in net proceeds. At December 31, 2002, the sum of our core capital, loan

loss reserves and Freddie SUBS outstanding was 4.2 percent of total assets. See ""MD&A Ì VOLUNTARY

COMMITMENTS'' and our Internet web site (www.freddiemac.com) for additional information about these

commitments.

PC Market-Making and Support Activities

Securities Sales and Trading Group, or SS&TG

We make markets in PCs and Structured Securities by distributing these securities to, and trading these

securities with, various counterparties, including mortgage sellers, institutional investors and securities dealers.

We manage and conduct these trading activities primarily through a business unit we call SS&TG. SS&TG

buys, sells and exchanges our PCs and Structured Securities in various Ñnancial transactions (including

forward sales, dollar rolls and reverse repurchase transactions that provide further liquidity to this market).

SS&TG transacts in such securities in large volumes to ensure that there is a reliable market for them.

SS&TG also regularly purchases mortgage-related securities on behalf of our retained portfolio. This sourcing

activity leverages SS&TG's daily purchases of mortgage-related securities through its direct trading relationships with mortgage sellers and investors.

We manage market risks associated with SS&TG's securities positions primarily through forward

purchases and sales of PCs and Structured Securities as well as the purchase and sale of mortgage passthrough securities of Fannie Mae and Ginnie Mae. To accomplish this objective, we also may use U.S.

Treasury securities, agency debt securities, Eurodollar futures and options to buy or sell agency debt and

mortgage-related securities. To manage institutional credit risk, SS&TG analyzes and monitors the Ñnancial

condition and trading positions of all counterparties and establishes trading limits consistent with these

reviews.

SS&TG also assists in the distribution of PCs and Structured Securities to institutional investors and

other market participants. Distribution activities may include participation in dealer auctions of these

securities, resecuritization of outstanding PCs and Structured Securities, participation in dealer syndicates for

underwritten oÅerings of Structured Securities and other transactions.

Market Support Activities

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

and selling PCs through the retained portfolio, actively trading PCs through SS&TG, participating with

external money management Ñrms to buy and sell PCs, marketing to dealers and investors the relative merits

of trading and investing in PCs, and introducing new mortgage-related securities products and initiatives. We

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

liquidity and depth of the market for our PCs. In 2003, we adopted certain strategies that were speciÑcally

directed at improving our mortgage security performance. For more information on these activities, see

""SUBSEQUENT EVENTS Ì Mortgage Security Performance.''

Freddie Mac

14
Regulation and Governmental Relationships

Regulation

Freddie Mac and Fannie Mae are currently subject to oversight by three agencies of the federal

government:

‚ The U.S. Department of Housing and Urban Development, or HUD;

‚ OFHEO, a separate oÇce within HUD, created by the GSE Act; and

‚ The U.S. Department of the Treasury, or Treasury.

See ""Ì Legislative and Regulatory Environment Ì Voluntary SEC Reporting'' below for information

concerning the SEC's future oversight of us and ""SUBSEQUENT EVENTS Ì Legislative Developments''

for recent proposals that could signiÑcantly change the structure or scope of regulatory oversight of the GSEs.

HUD. We are subject to HUD oversight in three main areas: housing goals, fair lending and new

program approval.

Housing Goals. The GSE Act requires the Secretary of HUD to establish three goals related to our

Ñnancing of:

‚ Housing for low- and moderate-income families, which we refer to as the Low- and ModerateIncome Goal;

‚ Housing located in central cities, rural areas and other underserved areas, which we refer to as the

Underserved Areas Goal; and

‚ Housing for low-income families in low-income areas and for very-low-income families, including

a dollar amount for multifamily housing, which we refer to as the Special AÅordable Goal.

We seek to purchase most single-family and multifamily mortgages in support of aÅordable housing

through our standard mortgage purchase programs and under the same credit standards as our other mortgage

purchases. We met each of the aÅordable housing goals in 2001 and 2002. In December 2003, HUD notiÑed

us that it would not renew for 2004 certain incentives under the aÅordable housing goals that contributed

signiÑcantly to our achievement of the goals in 2001 and 2002. See ""SUBSEQUENT EVENTS Ì

Regulatory Developments'' and ""MD&A Ì OTHER REGULATORY MATTERS Ì Housing Goals'' for

more information on our housing goals.

HUD could compel Freddie Mac to submit a housing plan to meet the housing goals if we fail, or if HUD

Ñnds a substantial probability that we will fail, to meet any of the goals. HUD also has the authority to issue a

cease and desist order and to assess civil money penalties against Freddie Mac in the event that we fail to

submit a required housing plan or fail to make a good faith eÅort to comply with a plan approved by HUD.

Fair Lending. Our mortgage purchase activities are subject to federal anti-discrimination law. In

addition, the GSE Act requires the Secretary of HUD to adopt regulations prohibiting discriminatory

practices in the mortgage purchase activities of both GSEs and periodically to review and comment on our

underwriting and appraisal guidelines for consistency with the Fair Housing Act and the GSE Act. The GSE

Act also requires the Secretary of HUD to direct that we:

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

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

ECOA; and

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

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

Housing Act or ECOA pursuant to a Ñnal adjudication and after opportunity for an administrative

hearing.

Freddie Mac

15
New Program Approval. Under the GSE Act, we must obtain the approval of the Secretary of HUD for

any new program for the purchasing, servicing, selling, lending on the security of, or otherwise dealing in,

conventional mortgages that:

‚ Is signiÑcantly diÅerent from programs that were previously approved or programs that we

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

‚ Represents a material expansion of programs above limits expressly contained in any prior

approval.

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

Act, but has not to date imposed limits on our mortgage programs under these regulations. The Secretary of

HUD is required to approve any new program unless the Secretary determines that the new program is not

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

OFHEO. The GSE Act created OFHEO as a separate oÇce within HUD, substantially independent of

the Secretary of HUD. OFHEO is headed by the Director, who is appointed by the President of the United

States and conÑrmed by the Senate for a Ñve-year term. The Director has exclusive regulatory authority for

ensuring our adequate capitalization and safe and sound operation in accordance with the GSE Act. Among

other matters, the GSE Act subjects both Freddie Mac and Fannie Mae to certain minimum, critical and riskbased capital standards issued by OFHEO. See ""MD&A Ì LIQUIDITY AND CAPITAL RESOURCES Ì Capital Resources'' for a discussion of OFHEO's oversight and these capital standards.

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

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

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

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

The Secretary of the Treasury performs its debt securities approval function by coordinating GSE debt

oÅerings with Treasury funding activities. Under that authority, we provide the Secretary of the Treasury with

monthly reports about our debt security issuances.

Regulations AÅecting Mortgage Loans, Mortgage-Related Securities and Debt Securities

Our purchases of mortgage loans and issuances of mortgage-related and debt securities are 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

for these securities. Among the legislative and regulatory provisions applicable to these entities are:

‚ Regulatory capital requirements for federally insured depository institutions and regulated bank

holding companies;

‚ Limitations on investments by federally insured depository institutions in certain types of

mortgage securities; and

‚ Legislation and regulations regarding the subprime lending activities of federally insured depository institutions.

Legislative and Regulatory Environment

Our Congressional charter provides us with special attributes such as:

‚ Exemption from Securities Act and Exchange Act registration requirements (although we are

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

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

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

‚ Access to the Federal Reserve Banks' book-entry system for our mortgage-related and debt

securities;

‚ Discretionary authority of the Secretary of the Treasury to purchase obligations issued by us up to

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

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

Freddie Mac

16
These special attributes, combined with our Ñnancial strength and the eÇciency we bring to the market, help

us to develop and maintain the liquid markets that are essential to fulÑlling our Congressional mandate.

We could be required to 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 the Freddie Mac Act or other federal legislation bearing on us were signiÑcantly

amended. Any of these changes could materially adversely aÅect the scope of our activities, Ñnancial condition

and results of operations. Any amendments to the Freddie Mac Act, including repeal of any of our

exemptions, would require legislative action. In addition, our business also could be adversely aÅected by any

modiÑcation, reduction or repeal of the federal income tax deductibility of mortgage interest payments. For

further discussion of legislative proposals that could aÅect regulatory oversight of our business activities, see

""SUBSEQUENT EVENTS Ì Legislative Developments.''

Voluntary SEC Reporting. On July 12, 2002, we announced an agreement, as a result of a consensus

among the Treasury, the OÇce of Management and Budget, the SEC, OFHEO and us, to initiate a Ñling

process with the SEC committing us to the ongoing SEC Ñnancial reporting requirements applicable to

publicly traded companies under the Exchange Act. Exchange Act reporting encompasses Ñling with the SEC

annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. We will

complete our voluntary registration with the SEC after we return to timely Ñnancial reporting and will become

subject to these SEC reporting requirements when our registration statement is declared eÅective by the SEC.

See ""EXPLANATORY NOTE'' for information regarding our eÅorts to return to timely Ñnancial reporting.

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 governing publicly traded

companies under the Exchange Act.

These actions do not aÅect the SEC exemption that Congress provided for our equity, debt and

mortgage-related securities in our Congressional charter. As part of our July 12, 2002 announcement, the SEC

provided written conÑrmation that 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. See

""SUBSEQUENT EVENTS Ì Legal Proceedings'' for information regarding OFHEO's staÅ report that

includes a recommendation to possibly implement a mandatory disclosure regime similar to that required for

companies with securities registered under the Securities Act and the Exchange Act.

Predatory Lending. We have instituted a comprehensive set of 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, or HOEPA; or

‚ Subprime mortgages with prepayment penalty terms that exceed three years.

In addition, we require our servicers to report all borrower credit information, including monthly mortgage

payments. In 2003, we also announced that, beginning on August 1, 2004, we no longer would invest in

subprime loans originated on or after that date that contain mandatory arbitration clauses.

In 2003, several states enacted laws aimed at 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 broader than liabilities imposed upon such purchasers or

assignees under HOEPA. Currently, we do not purchase high-cost home loans in the states of Arkansas,

Georgia, Illinois, Kentucky, Maine, 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.

Capital Requirements and Capital Distribution Rules. The GSE Act establishes our capital standards,

and OFHEO has issued regulations that set our minimum, critical and risk-based capital requirements.

Freddie Mac

17
OFHEO is required to classify Freddie Mac's capital adequacy at least quarterly. OFHEO has never classiÑed

Freddie Mac as other than ""adequately capitalized,'' the highest possible classiÑcation. See ""MD&A Ì

LIQUIDITY AND CAPITAL RESOURCES Ì Capital Resources'' for additional information regarding

OFHEO's capital rules.

We may pay a dividend on our common or preferred stock without prior OFHEO approval only if our

payment would not decrease our total capital to an amount less than our risk-based capital level and would not

decrease our core capital to an amount less than our minimum capital level. If our total capital were to fall

below the risk-based capital level, but our core capital equaled or exceeded the minimum capital level, we

would be prohibited from making a capital distribution (which includes dividend payments, common stock

repurchases and preferred stock redemptions) that would decrease our core capital to an amount less than the

minimum capital level. If our core capital were to fall below the minimum capital level, we would be able to

make a capital distribution only if the Director 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. See ""SUBSEQUENT EVENTS Ì

Regulatory Developments'' for further information relating to the reporting of dividends to OFHEO.

In addition to the preceding requirements, the Director has authority, under certain conditions, to require

us to submit for the Director's approval a capital restoration plan or to restrict our activities, either of which

also could aÅect adversely our ability to make capital distributions. See ""SUBSEQUENT EVENTS Ì

Regulatory Developments'' for information concerning the framework OFHEO has established for monitoring

our capital until we are able to resume timely Ñnancial reporting. In connection with the legislative proposals

being considered by Congress, the Director's authority to set capital levels may be expanded. See ""SUBSEQUENT EVENTS Ì Legislative Developments'' below. See ""MD&A Ì LIQUIDITY AND CAPITAL

RESOURCES Ì Capital Resources'' for further detail relating to the Director's authority in capital matters.

PROPERTIES

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

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

headquarters complex under a lease from the partnership. We also have oÇces in Washington, D.C.; Reston,

Virginia; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; New York, New York; and Woodland Hills,

California.

LEGAL PROCEEDINGS

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

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

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

prediction. We are now subject to various legal proceedings, including regulatory and judicial investigations

and civil litigation, arising from the restatement. For information on these proceedings, see ""SUBSEQUENT

EVENTS Ì Legal Proceedings.''

SUBSEQUENT EVENTS

This section discusses certain events occurring after December 31, 2002.

Board of Directors and Management

On June 9, 2003, Freddie Mac announced that the Board of Directors had named (i) Gregory Parseghian

as Chief Executive OÇcer and President and (ii) Paul Peterson as Executive Vice President and Chief

Freddie Mac

18
Operating OÇcer. The Board also elected Shaun F. O'Malley as non-executive Chairman of the Board and

appointed Executive Vice President Ì Finance, Martin Baumann, to the additional position of Chief

Financial OÇcer. Freddie Mac also announced (i) the resignation of Leland C. Brendsel as Chairman and

Chief Executive OÇcer and from the Board of Directors, (ii) the resignation of Vaughn Clarke, formerly

Executive Vice President and Chief Financial OÇcer and (iii) the termination of David Glenn, formerly

President and Chief Operating OÇcer and his resignation from the Board of Directors.

In a letter dated August 22, 2003, OFHEO directed Freddie Mac's Board of Directors to replace the

company's Chief Executive OÇcer and President, Gregory Parseghian, and to commence a search for his

successor. In addition, OFHEO directed that the Board replace Freddie Mac's Executive Vice President and

General Counsel, Maud Mater. Vice President and Deputy General Counsel Joan Donoghue was appointed to

serve as Acting General Counsel until a General Counsel is named.

On October 29, 2003, Freddie Mac announced that it had made several changes to its senior management

and organizational structure, including the appointments of (i) David Andrukonis as Senior Vice President

and Chief Enterprise Risk OÇcer, (ii) Margaret Colon as Senior Vice President and Chief Administrative

OÇcer, (iii) Nazir Dossani as Senior Vice President, Investments and Capital Markets, (iv) Mike May as

Senior Vice President, Mortgage Sourcing, Operations and Funding, (v) Jerry Weiss as Senior Vice President

and Chief Compliance OÇcer, (vi) John Woods as Senior Vice President and Principal Accounting OÇcer

and (vii) Jerome Lienhard as Senior Vice President of Debt and Equity Financing.

On December 4, 2003, Freddie Mac announced that the Board of Directors had elected Richard Karl

Goeltz as a member of the Board. Mr. Goeltz's term will expire on the date of the next annual meeting of

shareholders. He is a former Vice Chairman and Chief Financial OÇcer of American Express Corporation.

On December 7, 2003, Freddie Mac announced that the Board of Directors had appointed Richard F.

Syron as Chairman and Chief Executive OÇcer. Mr. Syron's appointment became eÅective on December 31,

2003. Mr. Syron, 60, previously served as Executive Chairman of Thermo Electron Corporation, a position he

assumed in November 2002. He joined Thermo Electron in June 1999 as its Chief Executive OÇcer and

became its Chairman of the Board in January 2000. Prior to that, he was Chairman and Chief Executive

OÇcer of the American Stock Exchange for Ñve years, President of the Federal Reserve Bank of Boston for

Ñve years and President of the Federal Home Loan Bank of Boston for three years. Earlier, he served as

assistant to then-Federal Reserve Chairman Paul Volcker, and as Deputy Assistant Secretary of the Treasury.

Mr. Syron replaced Shaun F. O'Malley as Chairman of the Board of Directors. Mr. O'Malley assumed

the role of Presiding Director. George Gould, the former Presiding Director, continues to chair the Board's

Governance Committee.

Legal Proceedings

Class Action Lawsuits. On June 9, 2003, Freddie Mac and certain former executive oÇcers were

named as defendants in a securities class action lawsuit alleging violations of federal securities laws and

regulations. This action was Ñled in the U.S. District Court for the Southern District of New York. The

plaintiÅs claimed that the defendants disseminated materially false and misleading statements to the market

and failed to disclose material information concerning, among others, the following matters: (1) the lack of

adequate internal accounting controls and personnel expertise; (2) the failure to follow accounting rules that

require derivative securities to be marked to market; (3) the use of accounting techniques to lower earnings

results in good times and lift results when business conditions deteriorated; and (4) providing investigators

with altered records to conceal improper accounting techniques. These allegations covered the period from

January 27, 2003 through June 9, 2003. The plaintiÅs sought unspeciÑed compensatory damages, costs and

expenses.

Subsequent to the Ñling of that initial lawsuit, additional class action lawsuits relating to the same matters

were Ñled against Freddie Mac and certain former executive oÇcers. These lawsuits included slightly diÅerent

allegations, covered diÅerent class periods (which begin on dates ranging from January 1, 2000 to January 27,

2003, and end on dates ranging from June 6, 2003 to August 22, 2003), and sought unspeciÑed compensatory

damages, costs and expenses. Among these later lawsuits was one Ñled by the Ohio Public Employees

Retirement System and the State Teachers Retirement System of Ohio, and another by the West Virginia

Investment Management Board and the Central States, Southeast and Southwest Areas Pension Fund. The

Freddie Mac

19
latter suit also named Gregory Parseghian, Freddie Mac's former Chief Executive OÇcer and President, as a

defendant and included allegations that he, as well as Leland Brendsel, David Glenn and Vaughn Clarke,

engaged in insider trading. Two of these class action lawsuits were Ñled by separate participants in Freddie

Mac's Thrift/401(k) Savings Plan against the company, certain individuals, and the company's Retirement

Committee alleging Employee Retirement Income Security Act, or ERISA, violations. In particular, the

plaintiÅs claimed that the defendants breached their Ñduciary duty because Freddie Mac stock was an

imprudent investment for the Thrift/401(k) Savings Plan. The two ERISA lawsuits have now been

consolidated as a single suit.

Many of the lawsuits described above, which had been Ñled in either the U.S. District Court for the

Eastern District of Virginia or the U.S. District Court for the Southern District of New York, were voluntarily

dismissed by the plaintiÅs. The dismissal of those suits and the consolidation of the ERISA suits reduces the

locations of the pending lawsuits to three jurisdictions Ì the U.S. District Court for the Southern District of

New York, with two cases pending (one class action and the shareholder derivative action discussed below),

the U.S. District Court for the Southern District of Ohio, with two cases pending (the consolidated ERISA

action and the action Ñled by the Ohio Public Employees Retirement System and the State Teachers

Retirement System of Ohio) and the U.S. District Court for the Eastern District of Virginia, with one case

pending (the shareholder derivative action discussed below).

On January 15, 2004, the plaintiÅs in the securities class action in the Southern District of Ohio Ñled an

amended complaint, incorporating information disclosed in Freddie Mac's restatement. The basis of the

claims remains the same, although the class period alleged now ranges from July 15, 1999 to June 6, 2003.

On February 18, 2004, the Judicial Panel on Multidistrict Litigation transferred the action Ñled by the

Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio to the United

States District Court for the Southern District of New York for coordinated or consolidated pretrial

proceedings with the actions pending there. We expect that the other pending cases will also be transferred to

the Southern District of New York.

Shareholder Derivative Lawsuits. On July 1, 2003, certain former and current members of the Board of

Directors of Freddie Mac were named as defendants in a shareholder derivative action alleging breach of

Ñduciary duty. The current members of the Board of Directors were subsequently dismissed as defendants

from this lawsuit with the consent of the plaintiÅ. The remaining individual defendants in this suit are Messrs.

Brendsel and Glenn, Vaughn Clarke and John Gibbons (both former Chief Financial OÇcers) and Gregory

Parseghian. Freddie Mac is named as a nominal defendant in that action, which is still pending in the U.S.

District Court for the Southern District of New York. A similar lawsuit was Ñled against Messrs. Brendsel,

Glenn, Clarke, Gibbons and Parseghian and Freddie Mac in the U.S. District Court for the Eastern District of

Virginia on December 11, 2003.

Freddie Mac anticipates that additional lawsuits relating to the matters described above may be Ñled.

SEC Formal Investigation. On June 11, 2003, Freddie Mac announced that it had been informed by

the staÅ of the SEC that the SEC had commenced a formal investigation. Freddie Mac received a subpoena

from the SEC on June 11, 2003 requesting document production and testimony. In addition, Gregory

Parseghian, PwC (Freddie Mac's current independent auditors) and a former member of the Board of

Directors also received subpoenas for documents and testimony. Beginning in August 2003, the SEC

subpoenaed documents and began to take witness testimony from certain present and former Freddie Mac

employees and directors, as well as third parties. Freddie Mac is fully cooperating with the SEC and will

continue to do so.

OFHEO Investigation. On June 7, 2003, OFHEO directed Freddie Mac and its Board of Directors to

take certain actions to address the issues surrounding the restatement. OFHEO also announced that it had

deployed a special investigative team to review accounting practices and controls relevant to the restatement

process at Freddie Mac and to investigate employee misconduct. As part of this investigation, OFHEO

submitted to Freddie Mac multiple requests for documents, and it also subpoenaed certain current Freddie

Mac employees and directors, as well as former employees, requesting testimony and documents. In July

2003, OFHEO began to conduct interviews in which it took sworn testimony from certain Freddie Mac

employees and directors, external third parties and former employees.

Freddie Mac

20
On October 23, 2003, OFHEO announced that it had entered into a consent order with David Glenn, in

which Mr. Glenn agreed to cooperate fully with OFHEO's special examination and also with any supervisory

and/or enforcement proceeding initiated by OFHEO, to pay a civil money penalty of $125,000, and not to

participate in any manner in the conduct of the aÅairs of Freddie Mac or Fannie Mae without prior OFHEO

approval.

On December 10, 2003, Freddie Mac announced that it had entered into a consent order and settlement

generally resolving certain matters with OFHEO relating to the restatement. Under the terms of the consent

order, we are undertaking remedial actions relating to many of the same areas as our remediation program,

including governance, corporate culture, internal controls, accounting practices, disclosure and oversight. In

addition, the company has paid a civil money penalty in the amount of $125 million. The text of the consent

order detailing the remediation steps agreed to with OFHEO is available on Freddie Mac's web site,

www.freddiemac.com.

Separately on the same date, OFHEO released its staÅ report on its investigation of matters relating to

the restatement. The report, which is available on OFHEO's website, www.ofheo.gov, included recommendations by the staÅ to the Director to consider increasing OFHEO's regulation of our activities, for example, by

setting restrictions on the growth of our retained portfolio, or by requiring that we hold a capital surplus until

we produce timely and certiÑed Ñnancial statements, or possibly implementing a mandatory disclosure regime

similar to that required for companies with securities registered under the Securities Act and the Exchange

Act. Depending on the manner in which such recommendations were implemented, the adoption of one or

more of them could have an adverse eÅect on our Ñnancial results. As discussed in ""Ì Regulatory

Developments'' below, the Director has acted upon the report's recommendation regarding a capital surplus.

On December 17, 2003, OFHEO Ñled administrative Notices of Charges against Messrs. Brendsel and

Clarke seeking to have them pay civil money penalties, to have them make restitution to the company in the

amount of the bonuses paid to them in 2000 and 2001, to prohibit Mr. Brendsel from pursuing or accepting

any payments from the company that exceed the payments to which he would be entitled if he had been

terminated for cause under his employment agreement, and to prohibit Mr. Clarke from pursuing or accepting

any payments from the company that exceed the payments to which he would be entitled if he had been

terminated for loss of conÑdence by the company. OFHEO also issued an administrative Notice of Charges

against Freddie Mac to require the company to convert Mr. Brendsel's termination to a termination for cause

under his employment contract, to convert Mr. Clarke's termination to a termination for loss of conÑdence, to

prohibit the company from making any payments to Mr. Brendsel that would exceed the payments to which

he would be entitled if he had been terminated for cause under his employment contract, and to prohibit the

company from making any payments to Mr. Clarke that would exceed the payments to which he would be

entitled if he had been terminated for loss of conÑdence by the company. Prior to the issuance of these

administrative Notices of Charges, the Board of Directors had advised OFHEO that Freddie Mac has existing

contractual obligations to both former executives, which it is required to perform unless those obligations are

superseded by valid authority, and that the company intends to comply fully with any valid and eÅective order

that OFHEO may issue.

U.S. Attorney's Criminal Investigation. On June 11, 2003, Freddie Mac was informed that the U.S.

Attorney's OÇce in Alexandria, Virginia had opened a criminal investigation involving the company. As part

of its investigation, the U.S. Attorney's OÇce has made requests for documents and information, interviewed

certain Freddie Mac employees and possibly other parties, and taken testimony before the grand jury. Freddie

Mac is cooperating in all respects with this investigation.

At present, it is not possible for us to predict the outcome of the civil litigation, the administrative

proceedings or the investigations described above or reasonably to estimate the amount of loss (or range of

possible loss) that might result from adverse results or settlements of these matters, or their eÅect on our

Ñnancial condition and results of operations.

Legislative Developments

Several Members of Congress have introduced bills to change Freddie Mac's and Fannie Mae's

regulatory oversight. Management believes it is possible that additional bills may be introduced by other

Freddie Mac

21
Members of Congress. At this time, management cannot predict with certainty whether or in what form any of

these bills will be enacted.

Each of these bills includes provisions that would change the location of the safety and soundness

regulator for Freddie Mac and Fannie Mae. Each bill would also enhance certain of the safety and soundness

regulator's supervisory and enforcement authorities over Freddie Mac and Fannie Mae and transfer certain

other authorities from the Secretary of HUD to the new regulatory agency.

On May 7, 2003, Representatives Shays and Markey introduced a bill that would repeal Freddie Mac's

and Fannie Mae's exemption from registering their securities with the SEC. Representatives Shays and

Markey introduced a similar bill in 2002.

As previously noted, Freddie Mac and Fannie Mae are exempt by federal statute from taxation by state,

county, municipal or local authorities (except for taxes on real property). On May 15, 2003, Representative

Stark introduced a bill that would eliminate this state and local tax exemption.

On September 10, 2003, Representative Paul introduced a bill that would repeal various aspects of the

special status accorded to Freddie Mac, Fannie Mae and any Federal Home Loan Bank under federal law.

Regulatory Developments

OFHEO. On January 29, 2004, OFHEO announced the creation of a framework for monitoring our

capital due to the temporarily higher operational risk arising from our current inability to produce timely

Ñnancial statements in accordance with GAAP.

The framework includes a target capital surplus of 30 percent of our minimum capital requirement,

subject to certain conditions and variations; weekly monitoring; and prior approval of certain capital

transactions, to ensure that appropriate levels of capital are maintained. The full text of the letter establishing

the framework is available on OFHEO's web site, www.ofheo.gov.

While OFHEO's framework includes stringent monitoring and imposes restrictions on share repurchases,

we do not expect it to adversely aÅect our disciplined growth strategy or require us to raise additional capital.

OFHEO's oversight of Freddie Mac's actions is intended to ensure that any growth is reasonable given

market conditions and our capital position. OFHEO will monitor Freddie Mac's estimated capital position on

a weekly basis. A failure by Freddie Mac to meet the target capital surplus would result in discussions between

Freddie Mac and OFHEO concerning the reason for such failure. If OFHEO were to determine, based on

these discussions and weekly monitoring, that we had unreasonably deviated from the framework established

in the letter, OFHEO would require us to submit a remedial plan or to take other remedial steps.

In addition, 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 or the

redemption of any preferred stock. We also must submit a written report to the Director of OFHEO after the

declaration, but before the payment, of any dividend on our common stock. The report must contain

information on the amount of the dividend, the rationale for the payment and the impact on our capital

surplus.

OFHEO indicated that this framework is temporary and will be lifted when the Director of OFHEO

determines that it should expire based on Freddie Mac's resumption of timely Ñnancial reporting that complies

with GAAP and other factors described in the letter.

Management believes that this framework will provide OFHEO with a mechanism to ensure that we

manage our business with continued prudence and appropriate levels of capital, taking into account that we are

not currently able to produce timely Ñnancial statements.

HUD. On December 24, 2003, HUD notiÑed Freddie Mac that it would not renew for 2004 certain

incentives under the aÅordable housing goals that had contributed signiÑcantly to our achievement of the goals

since 2001. HUD's action eÅectively raises each of the goals for 2004 and will require an increased level of

eÅort on our part to meet them. Freddie Mac remains committed to meeting the goals, and is taking a number

of actions to achieve this objective.

On February 2, 2004, the President submitted the Administration's proposed budget for Ñscal year 2005,

which includes a request that a total of $6.25 million be assessed against Freddie Mac and Fannie Mae on a

Freddie Mac

22
combined basis to fund HUD's oversight and compliance activities related to them. Such assessment authority

would have to be created by an act of Congress.

Other. Freddie Mac has received inquiries from the Internal Revenue Service, or IRS, in connection

with its regular audits of the company's tax returns for prior years, some of which relate to matters connected

with the restatement. In addition, the Department of Labor, or DOL, has advised the company that it has

opened an investigation of Freddie Mac's Thrift/401(k) Savings Plan. Freddie Mac has responded to the

DOL's requests for the production of certain plan-related material. The DOL also is conducting interviews

with certain individuals who have responsibilities with respect to the Thrift/401(k) Savings Plan.

On February 5, 2004, the Board of Governors of the Federal Reserve System, or the Federal Reserve,

proposed certain revisions to its policy on payments system risk. Among other things, the proposal would

require GSEs to fully fund payments of interest on, and redemptions of, GSE securities by the Federal

Reserve Banks before the Federal Reserve Banks make payments to the record holders of those securities. The

proposal would also require the GSEs, if they incur intraday overdrafts with the Federal Reserve Banks, to pay

additional penalty fees on those overdrafts to the same extent as institutions that do not have access to the

Federal Reserve's discount window. The Federal Reserve has requested public comment on this proposal and

does not currently intend to implement it until at least July 2006. If we do not make any changes to our

payment processes, then this proposal (if adopted) would require us to pay penalty fees to the Federal

Reserve. Based on 2003 overdraft activity, we estimate these penalty costs to be less than $10 million.

However, we expect to modify our payment processes to reduce or eliminate our exposure to these fees prior to

July 2006.

Mortgage Security Performance

During 2003, the price performance of, and demand for, our PCs relative to comparable Fannie Mae

securities weakened considerably and we implemented certain strategies to address that development.

Although we cannot assure success, Freddie Mac is committed to creating PCs that more closely match

market characteristics and supporting the market for its PCs and is evaluating additional strategies to improve

their price performance. From time to time, these strategies may involve trade-oÅs between the guarantee fee

pricing of our securities, investment returns on our securities that we hold, and security performance relative to

both portfolio investment decisions and securitization and resecuritization activities. For example, in the

second half of 2003, we provided guarantee fee price adjustments to partially oÅset weaknesses in prevailing

security prices. The eÅect of these adjustments on our future results will depend substantially on whether

security price performance improves or deteriorates.

During 2003, Freddie Mac's eÅorts to support PC price performance included the purchase by the

retained portfolio of TBA PCs and both the purchase and sale of other agency securities, including the sale of

Fannie Mae securities. While some purchases of PCs may result in an expected return on equity, or ROE,

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

performance of our retained portfolio overall. The sale of Fannie Mae securities facilitates the funding of TBA

PC purchases and the management of incremental funding and interest-rate risk that may result from these

purchases, and contributes to a more favorable balance in the supply of PCs relative to Fannie Mae securities.

In connection with this initiative, Freddie Mac expects to solicit oÅers of TBA PCs directly from dealers

on a frequent basis. However, there may be substantial variability in the volume of weekly purchases and in

the total amount of TBA PCs purchased under this initiative in any quarter. Freddie Mac may increase,

reduce, modify or discontinue this initiative and any or all of its other price performance support activities at

any time. If the price performance of, and demand for, our PCs is not comparable to Fannie Mae securities,

this could have a material adverse eÅect on the proÑtability of Freddie Mac.

AÅordable Housing Initiatives

From time to time, Freddie Mac enters into transactions on an unusually large scale or with non-standard

terms in order to advance our progress toward meeting the aÅordable housing goals set by HUD. We entered

into two transactions of this type during 2003. One of the largest aÅordable housing transactions involved the

acquisition of approximately $6 billion of multifamily mortgages from Washington Mutual Bank, FA and

Washington Mutual Bank (collectively, ""WaMu'') during September and October 2003. Among other

Freddie Mac

23
provisions, the transaction contained a number of contractual incentives, including the payment of fees to

WaMu totaling $100 million. Similarly, in December 2003, Freddie Mac agreed to acquire from Citibank, NA

and its aÇliates a portfolio of multifamily mortgages that could total as much as $5 billion. The transaction,

which involves deliveries of mortgages in 2003 and 2004, included a number of contractual incentives,

including payment of fees to Citibank of approximately $24 million in 2003 and up to an additional $41 million

in 2004. Freddie Mac paid these fees to encourage WaMu and Citibank to enter into these transactions in part

because HUD regulations oÅered incentives to encourage the acquisition of the type of mortgages involved.

However, as noted above under ""Regulatory Developments,'' HUD has notiÑed Freddie Mac that it will not

renew for 2004 the incentives under the housing goals for the acquisition of the particular type of mortgages

involved in the WaMu and Citibank transactions.

Tax Contingencies

Recent Tax Court Rulings. In 1998, the IRS issued to Freddie Mac a Statutory Notice asserting

income tax deÑciencies for the company's Ñrst two tax years, 1985 and 1986. In the Ñrst quarter of 1999,

Freddie Mac Ñled a petition in the U.S. Tax Court, or Court, to contest the deÑciencies. In the third quarter of

1999, the IRS issued a Statutory Notice for Freddie Mac's tax years 1987 to 1990, and Freddie Mac Ñled a

petition in the Court. Subsequently, the Court combined the 1985 to 1990 tax years into one case. The

principal matters in controversy in the case involve questions of tax law as applied to Freddie Mac's transition

from non-taxable to taxable status in 1985 and primarily involve the amortization of certain intangible assets,

the two most signiÑcant of which are:

‚ Favorable Financing. A number of Ñnancing arrangements where the contract rates of interest

were less than the market rates of interest as of January 1, 1985 due to an increase in interest rates

since the date on which Freddie Mac had entered into the respective arrangements; and

‚ Customer Relationships. Freddie Mac's business relationships with a substantial number of

mortgage originating institutions that sold mortgages to Freddie Mac on a regular basis.

In September 2003, the Court decided favorably for Freddie Mac on two preliminary motions involving

questions of law in the case. On September 4, the Court ruled favorably for Freddie Mac on the question of

whether Freddie Mac's intangibles are amortizable using as the adjusted basis the higher of (i) the regular

adjusted cost basis or (ii) the fair market value on January 1, 1985. On September 29, the Court ruled

favorably for Freddie Mac on the question of whether, as a matter of law, ""favorable Ñnancing'' (as deÑned

above) was amortizable for tax purposes. As part of this case, Freddie Mac claimed, and the Court agreed,

that the economic beneÑt of this below-market Ñnancing as of January 1, 1985 is an intangible asset subject to

amortization. In October 2003, the Court ruled unfavorably on two other less signiÑcant issues in the case.

While signiÑcant, the Court's rulings to date do not dispose of all of the matters in controversy in the

case, which, upon Ñnal resolution by the Court of all such matters, are subject to appeal by the parties. In

addition, Freddie Mac still must demonstrate that the intangible assets in question have an ascertainable value

and have a limited useful life, the duration of which can be ascertained with reasonable accuracy.

In view of the favorable rulings described above and in accordance with GAAP, Freddie Mac recorded in

the fourth quarter of 2002 a reduction in its tax reserves in the amount of $155 million. If the IRS were to

appeal the Court decisions and an adverse ruling resulted, Freddie Mac may reconsider its reserves related to

this matter.

If Freddie Mac's tax position on the customer relationship amortization issue described above is upheld

through the administrative and legal process, Freddie Mac will be able to recognize additional tax beneÑts that

could be material in the quarter during which they are recognized. However, Freddie Mac is unable to provide

assurances that any such tax beneÑts will be realized.

Tax Treatment of Linked Swaps. As discussed in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT,'' in August and September of 2001, Freddie Mac

entered into a series of nine sets of paired transactions known as ""Linked Swaps.'' Freddie Mac has reported

and paid tax treating each pair of Linked Swaps as a single integrated transaction for federal income tax

purposes. There is a risk, however, that the IRS could challenge Freddie Mac's tax treatment of the Linked

Freddie Mac

24
Swaps and make an adverse determination relating to this tax treatment. If this should occur, the potential

aggregate additional tax liability could be as much as approximately $750 million plus interest.

In addition, two additional swaps were executed in November 2001. Although the facts and circumstances surrounding these swaps were diÅerent from the Linked Swaps, Freddie Mac also reported and paid

tax treating these swaps as a single integrated transaction for federal income tax purposes. We believe there

are no signiÑcant tax exposures related to these swaps for the periods covered by the restatement.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to shareholders during the fourth quarter of 2002 or during 2003.

MARKET PRICE FOR THE COMPANY'S

COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

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

and the PaciÑc Stock Exchange, or the PSE, under the symbol FRE. From time to time, our common stock

may be admitted to unlisted trading status on other national securities exchanges. Put and call options on our

common stock are traded on U.S. options exchanges. As of December 31, 2002, there were 687,375,999 shares

outstanding of our common stock.

Table 3 sets forth the high and low sale prices of our common stock for each quarter during the Ñscal

years 2003, 2002 and 2001.

Table 3 Ì Quarterly Common Stock Information

Closing Sale Prices(1)

High Low

Quarter Ended 2003

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59.07 $53.28

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55.71 48.10

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61.32 47.35

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.73 50.80

Quarter Ended 2002

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $63.50 $53.98

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.85 54.67

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67.66 60.42

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68.60 61.00

Quarter Ended 2001

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $70.79 $63.31

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.57 60.80

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.89 60.15

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67.68 60.00

(1) The principal market is the NYSE, and prices are based on the Composite Tape. Our common stock is also listed on the PSE.

As of February 12, 2004, the closing price for our common stock was $63.71 per share.

Freddie Mac

25
Dividends

Table 4 sets forth the dividend per common share that we have paid for each quarter during Ñscal years

2003, 2002 and 2001.

Table 4 Ì Dividends Per Common Share

Regular Cash

Dividend Per Share

Quarter Ended 2003

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.26

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .26

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .26

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .26

Quarter Ended 2002

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.22

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .22

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .22

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .22

Quarter Ended 2001

December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.20

September 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .20

June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .20

March 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .20

Each stockholder is entitled to receive dividends that may be declared by our Board of Directors out of

legally available funds. We have historically paid dividends to our stockholders in each quarter. Our Board of

Directors intends to retain this policy of providing dividends quarterly, but further dividends will depend upon

earnings, Ñnancial condition and other factors relevant at the time our Board of Directors considers our

dividend policy. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 10:

REGULATORY CAPITAL'' for additional information regarding dividends.

Holders

As of February 12, 2004, we had approximately 2,870 common stockholders of record. Based on the

number of requests for proxies, we estimate that approximately 247,000 additional common stockholders held

shares through banks, brokers and nominees as of February 12, 2004.

Securities Authorized for Issuance under Equity Compensation Plans

Table 5 provides information about Freddie Mac common stock that may be issued upon the exercise of

options, warrants and rights under Freddie Mac's existing equity compensation plans as of December 31, 2002.

Freddie Mac stockholders have approved the 1995 Directors' Stock Compensation Plan, the 1995 Stock

Compensation Plan, as amended and restated, the 1995 Employee Stock Purchase Plan and the terms of the

1990 Stock Compensation Plan.

Table 5 Ì Securities Authorized for Issuance under Equity Compensation Plans

(c)

(a) Number of securities

Number of securities remaining available for

to be issued upon (b) future issuance under

exercise of Weighted-average equity compensation

outstanding exercise price of plans (excluding

options, warrants outstanding options, securities reÖected in

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

Equity compensation plans approved by

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,590,702(1) $43.42(1) 11,542,876(2)

Equity compensation plans not approved by

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None N/A None

(1) Includes 359,227 restricted stock units, or RSUs, issued under the 1995 Directors' Stock Compensation Plan and the 1995 Stock

Compensation Plan and options to purchase 1,000,370 shares under the Employee Stock Purchase Plan.

(2) Includes 3,837,324 shares available for issuance under the 1995 Employee Stock Purchase Plan. No shares are available for issuance

under the 1990 Stock Compensation Plan.

Freddie Mac

26
SELECTED FINANCIAL DATA(1)(2)

At or for the Year Ended December 31,

2002 2001 2000

(dollars in millions, except

share-related amounts)

Income Statement Data

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,886 $ 6,992 $ 3,758

Income before cumulative eÅect of change in accounting principles, net of

taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,090 3,115 3,666

Cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏ Ì 43 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,090 $ 3,158 $ 3,666

Earnings per common share before cumulative eÅect of change in accounting

principles, net of taxes

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.19 $ 5.04

DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.18 4.17 5.01

Earnings per common share after cumulative eÅect of change in accounting

principles, net of taxes

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.25 $ 5.04

DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.18 4.23 5.01

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.88 0.80 0.68

Weighted average common shares outstanding Ì diluted (in thousands)ÏÏÏÏÏ 695,116 695,973 695,307

Balance Sheet Data

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 752,249 $ 641,100 $ 462,803

Debt Securities, net due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,429 264,227 183,374

Debt Securities, net due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,662 311,013 244,732

Subordinated borrowings, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,605 3,128 144

Miscellaneous liabilities(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,914 40,489 14,252

Minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,309 2,619 2,944

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,330 19,624 17,357

Portfolio Balances(4)

Retained portfolio (unpaid principal balances)(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 567,272 $ 497,639 $ 392,298

Total PCs issued and Structured Securities that are backed by non-Freddie

Mac mortgage-related securities(6)(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,090,624 961,511 838,323

Total mortgage portfolio (unpaid principal balances) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,316,609 1,150,723 975,612

Ratios

Return on average assets(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.4% 0.6% 0.9%

Return on common equity(9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47.2 20.2 39.0

Return on total equity(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39.6 17.1 30.2

Dividend payout ratio on common stock(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.2 18.9 13.6

Equity to assets ratio(12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.7 3.4 2.9

(1) We adopted the provisions of SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' and the provisions of

Emerging Issues Task Force, or EITF, 99-20 ""Recognition of Interest Income and Impairment on Purchased and Retained

BeneÑcial Interests in Securitized Financial Assets,'' as of January 1, 2001 and April 1, 2001, respectively. See ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more information.

(2) See ""MD&A Ì QUARTERLY SELECTED FINANCIAL DATA'' for a reconciliation of previously reported to restated/revised

results by selected consolidated statements of income captions.

(3) Includes ""Due to Participation CertiÑcate investors,'' ""Guarantee obligation for Participation CertiÑcates, at fair value,'' ""Reserve

for guarantee losses on Participation CertiÑcates,'' ""Derivative liabilities, at fair value,'' ""Accrued interest payable,'' and ""Other

liabilities.''

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

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

consolidated balance sheet caption includes valuation adjustments (e.g., fair value adjustments for securities classiÑed as availablefor-sale and trading and the ""Reserve for losses on mortgage loans held for investment'') and deferred balances (e.g., premiums and

discounts).

(6) Includes $8.6 billion, $13.1 billion and $16.0 billion of Structured Securities backed by Ginnie Mae CertiÑcates at December 31,

2002, 2001 and 2000, respectively. Reported totals are based upon UPB. Also includes approximately $5 billion and $3 billion at

December 31, 2002 and 2001, respectively, of housing authority bonds that were issued by third parties to fund the origination of

multifamily mortgage loans and for which Freddie Mac provided a credit guarantee.

(7) Reported UPB of Structured Securities relates only to that portion of issued Structured Securities that is backed by non-Freddie

Mac mortgage-related securities.

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

(9) 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).

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

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

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

ending Total assets.

Freddie Mac

27
MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESTATEMENT RESULTS

As announced on November 21, 2003, the net cumulative eÅect of the restatement through December 31, 2002 was an increase to our net income of $5.0 billion, which includes a net cumulative increase of $4.4

billion for 2000, 2001 and 2002 and $0.6 billion related to periods prior to 2000. While the net cumulative

eÅect of the restatement provided a signiÑcant increase in net income, 2001's net income decreased by

$1.0 billion compared to previously reported results, primarily due to unrealized losses on derivatives not in

hedge accounting relationships. The restatement also resulted in a net increase in regulatory core capital for

each of the year ends aÅected and in a cumulative increase of $5.2 billion in our regulatory core capital as of

December 31, 2002. Our core capital equals Stockholders' equity excluding Accumulated other comprehensive income, or AOCI.

Summary of Restatement Results

The restatement and related re-audit arose from our re-evaluation, in conjunction with PwC, our

independent auditors, of numerous accounting policies and their application to our transactions. Our Board of

Directors appointed PwC in March 2002, replacing Arthur Andersen LLP. We are responsible for the

preparation, integrity and fair presentation of the company's consolidated Ñnancial statements. Table 6

summarizes key results of the restatement for the three years ended December 31, 2002.

Table 6 Ì Restated Financial Results for the Three Years Ended December 31, 2002

Net Income Diluted EPS Regulatory Core Capital Stockholders' Equity

(in millions)(1) (in dollars) (in millions)(2) (in millions)

As Previously As Previously As Previously As Previously

Year Ended Reported As Restated Change Reported As Restated Change Reported As Restated Change Reported As Restated Change

December 31, 2000 ÏÏÏÏ $2,547 $ 3,666 $1,119 $3.40 $ 5.01 $ 1.61 $14,380 $16,273 $1,893 $14,837 $17,357 $2,520

December 31, 2001 ÏÏÏÏ 4,147 3,158 (989) 5.64 4.23 (1.41) 19,336 20,181 845 15,373 19,624 4,251

December 31, 2002 ÏÏÏÏ 5,764 10,090 4,326 7.95 14.18 6.23 23,792 28,990 5,198 24,629 31,330 6,701

(1) The net cumulative eÅect of the restatement through December 31, 2002 also includes $0.6 billion for periods prior to 2000. Included in 2002 results is

$82 million of net income related to events occurring in 2003, but aÅecting 2002. The $82 million of net income consists of $155 million of tax beneÑt

attributable to favorable Court rulings occurring in 2003 oÅset by $73 million in additional expense, net of tax, related to adjustments in reserves and

accruals due to events occurring in 2003.

(2) See ""Ì Restatement EÅect on Regulatory Capital,'' below, for more information.

Restatement EÅect on Volatility of Income

Our restated net income reÖects signiÑcantly greater volatility than previously reported, and we anticipate

that our net income for periods following the restatement will continue to reÖect greater volatility than

previously reported from quarter to quarter. For example, during 2001 and 2002, quarterly net income ranged

from a loss of $111 million in the Ñrst quarter of 2001 to income of $5.7 billion in the third quarter of 2002.

This volatility results in large part from recording in current period earnings changes in fair values of a

signiÑcantly higher proportion of our derivatives portfolio, mortgage-related securities, guarantee assets and

guarantee obligations.

Our securities portfolio classiÑed as trading totaled approximately $64 billion at December 31, 2002. Of

this amount, approximately $29 billion was held in the retained portfolio. We expect that the income

statement eÅects of these retained portfolio securities classiÑed as trading will diminish in results reported for

periods following restated periods. However, we expect that net income going forward will continue to reÖect

potentially signiÑcant sources of volatility, including the eÅects of our derivatives portfolio and certain

mortgage guarantee activities. With respect to derivatives, our entire portfolio of option-based derivatives

(e.g., swaptions) as well as certain other derivatives were not in hedge accounting relationships at

December 31, 2002. We are evaluating whether to designate these and other derivatives in qualifying hedge

relationships for purposes of GAAP accounting. However, there is uncertainty as to whether we will ultimately

pursue such designations, which, in any event, were not executed in 2003 and therefore will not aÅect Ñnancial

results for 2003. With respect to our guarantee activities, the potential additional source of income volatility is

attributable to the possible eÅect of the implementation of Financial Accounting Standards Board InterpretaFreddie Mac

28
tion, or FIN, No. 45, ""Guarantor's Accounting and Disclosure Requirements for Guarantees, Including

Indirect Guarantees of Indebtedness of Others,'' which applies to reporting periods beginning in 2003.

Restatement EÅect on Interest-Rate Risk Measures

We provide investors with monthly interest-rate risk sensitivity disclosures using two separate estimates:

‚ Portfolio market value sensitivity, or PMVS, which estimates the percentage of our fair value of

common Stockholders' equity at risk from immediate, adverse interest-rate shifts; and

‚ Duration gap, which estimates the average daily diÅerence (measured in months) between the

estimated weighted-average lives of our Ñnancial assets, liabilities and derivatives.

In connection with the restatement, we have reviewed our interest-rate risk sensitivity disclosures for

2002 and 2001 to assess the impact of securities and derivatives valuation errors, described in ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT,'' and to correct other

identiÑed errors. We believe the errors identiÑed in connection with this review do not signiÑcantly impact our

interest-rate risk position as previously reported in our monthly interest-rate risk sensitivity disclosures. We

estimate that the errors do not change monthly average PMVS estimates by more than 2 percentage points or

duration gap by more than one month for each previously reported month in 2002 and 2001. For example,

Table 7 below summarizes the daily average portfolio market value sensitivity, or PMVS-L, and duration gap

estimates for December 2002 and December 2001, as originally reported and as restated. See ""Ì RISK

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

for more detail.

Table 7 Ì Impact of Valuation Errors on Portfolio Market Value Sensitivity and Duration Gap Estimates

Portfolio Market Value

Sensitivity Estimate Duration Gap Estimate

(PMVS-L) (in months)

Monthly Average As Reported As Restated As Reported As Restated

December 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.7% 2.3% 0 0

December 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.9% 3.6% 1 1

Restatement EÅect on Regulatory Capital

On December 17, 2003, OFHEO aÇrmed that Freddie Mac, following the restatement process, remains

adequately capitalized for the periods presented in Table 8.

Table 8 Ì Estimated Regulatory Minimum Capital Surplus(1)

2000 2001 2002

Year-End 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

(dollars in millions)

As reported regulatory minimum

capital surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 202 $ 606 $ 567 $ 408 $ 821 $1,169 $1,925 $2,118 $2,172

As restated regulatory minimum

capital surplus(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,876 $1,383 $1,113 $2,109 $1,167 $1,014 $2,514 $6,634 $6,651

(1) We are required to hold ""Core Capital'' generally equal to the sum of 2.5 percent of aggregate on-balance sheet assets, as measured

under GAAP, and 0.45 percent of aggregate oÅ-balance sheet obligations. Core Capital available to meet the minimum capital

requirement is eÅectively equal to Stockholders' equity less AOCI. This table shows the excess of estimated Core Capital over the

regulatory minimum capital requirement for prior periods.

(2) Minimum capital amounts for each quarter in 2002 and 2001, as well as for year-end 2000, are based on amended reports to OFHEO

that correct results included in our November 21, 2003 Information Statement Supplement. The impact of this change on the

restated regulatory minimum capital surplus was a decrease of $1 million as of December 31, 2002, as compared to those results

presented in our November 21, 2003 Information Statement Supplement. The impacts on other periods presented were also

reductions, but in no one period did such reductions exceed $11 million.

Starting in the third quarter of 2002, to be classiÑed as adequately capitalized, we must meet both riskbased and minimum capital standards. On December 17, 2003, OFHEO concluded that Freddie Mac is not

required to resubmit risk-based capital reports for September 2002 and December 2002, based on OFHEO's

Freddie Mac

29
conclusion that our minimum capital remains binding as the determining factor for our capital adequacy

classiÑcation for these periods.

We believe the current level of our capital is adequate to meet regulatory capital requirements. We do not

expect to engage in share repurchases until we resume timely Ñnancial reporting. See ""SUBSEQUENT

EVENTS Ì Regulatory Developments'' for information concerning the capital monitoring framework

OFHEO has established, which includes restrictions on share repurchases and certain other capital

transactions.

Restatement Background and Remediation Program

We announced the need to restate our Ñnancial results in January 2003. In connection with that

announcement, the outside directors of our Board of Directors retained Baker Botts as our independent

investigative counsel to review the facts and circumstances relating to certain of the accounting errors

identiÑed during the restatement process. In June 2003, we reported on Baker Botts' preliminary Ñndings

presented to the Audit Committee and the Board of Directors as to the factors contributing to the need for the

restatement. In July 2003, we released the Baker Botts report. In November 2003, Baker Botts submitted to

the Board additional Ñndings covering certain transactions known to require further inquiry or raised after

delivery of the original report. The speciÑc events described in the Baker Botts reports have been considered

by the Board and appropriate remedial action has been taken by the Board and management. Baker Botts'

reports are available on our website, and certain of the transactions reviewed in them are discussed in

""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.'' We

accept the conclusions of Baker Botts, which are summarized in ""FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.''

In connection with their audits of the restatement of the previously issued Ñnancial statements and our

2002 Ñnancial statements, PwC has identiÑed and communicated to management and the Audit Committee

that ""material weaknesses'' (as deÑned under standards established by the American Institute of CertiÑed

Public Accountants, or AICPA) in internal controls existed during the time periods covered by the restated

Ñnancial statements. See ""Ì RISK MANAGEMENT Ì Operational Risk Ì Internal Control Weaknesses''

for more information.

The Board of Directors is overseeing our implementation of a comprehensive remediation program to

address each of the principal factors that contributed to the need for the restatement. In 2003, the Board's

Governance Committee overseeing the remediation program, and the Audit and Ad Hoc Committees

overseeing the restatement, held individual or joint committee meetings on 55 separate occasions. The

remediation program addresses the actions required by the consent order Freddie Mac entered into with

OFHEO in December 2003 as well as areas of improvement identiÑed by the Board of Directors and

management, by Baker Botts in the course of their reviews and reports to the Board of Directors, and by PwC.

The program is eÅecting sweeping changes in our Ñnancial reporting and management functions. It includes

initiatives relating to corporate culture, governance, accounting staÇng and expertise, accounting policies,

processes and controls as well as Ñnancial reporting and disclosure. We report our progress on this initiative on

an ongoing basis to OFHEO and to the Governance Committee.

To date, we have made signiÑcant progress in strengthening resources and personnel dedicated to

accounting, control and reporting issues. We have hired a host of accounting professionals, including a

signiÑcant number of new oÇcers and senior managers. In addition, in October 2003 we announced the

creation of a new position of Senior Vice President and Chief Compliance OÇcer. We also have retained

David Martin, the immediate-past Director of the SEC's Division of Corporation Finance, to assist us in

designing and implementing exemplary disclosure processes and practices, and Charles Elson, the Edgar S.

Woolard, Jr. Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate

Governance at the University of Delaware, to assist us in designing and implementing exemplary corporate

governance principles and practices.

In addition to addressing accounting staÇng and expertise issues, remediation activities include an

assessment of corporate culture, signiÑcant enhancements to the documentation of all accounting policies and

implementation of corporate-wide employee training on the Sarbanes-Oxley Act and our Code of Conduct.

Freddie Mac

30
Summary of Accounting Corrections and Changes by Category

Table 9 summarizes the net cumulative impact of the changes to net income through December 31, 2002.

We have classiÑed the accounting errors and related corrections that have been addressed by the restatement

into the Ñve categories listed in Table 9 below. The Ñve error categories involve subjective judgments by us

regarding classiÑcation of amounts and particular accounting errors that may fall within more than one

category. While such classiÑcations are not required under GAAP, we believe these classiÑcations may assist

investors in understanding the nature and impact of the corrections made in completing the restatement. The

descriptions of the Ñve classiÑcations provide only a summary of primary accounting issues and are not a

comprehensive discussion of accounting errors and corrections, which are described in ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.'' In addition, we

made changes in our accounting for two other matters as reported in the ""Other accounting changes'' caption

in Table 9.

Table 9 Ì Net Cumulative Income (Expense) Impact Through December 31, 2002(1)

Net Cumulative

Income (Expense)

Impact Through

12/31/02

(dollars in

millions)

Security classiÑcation (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,700

Accounting for derivative instruments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,980

Asset transfers and securitizations (pre-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181

Valuation of Ñnancial instruments (pre-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214

All other corrections (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 383

Subtotal of accounting corrections (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,458

Other accounting changes (pre-tax)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168

Total accounting corrections and changes (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,626

Tax impact of accounting corrections and changes(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,591)

Total net income impact (including subsequent events)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,035

Total net income impact (excluding subsequent events)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,953

(1) See ""Ì QUARTERLY SELECTED FINANCIAL DATA'' for a reconciliation of previously reported to restated/revised results

by selected consolidated statements of income captions.

(2) Represents the net cumulative impact of (i) accounting changes we elected to make related to stock-based compensation and

(ii) enhancements to the methodology used to estimate the lives used in the amortization of certain premiums and discounts.

(3) Virtually all of the $2.6 billion tax impact represents an increase in deferred taxes not currently payable. See ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT'' for more information.

(4) Included in 2002 results is $82 million of net income related to events occurring in 2003 but aÅecting 2002. The $82 million of net

income consists of $155 million of tax beneÑt attributable to favorable Court rulings occurring in 2003 oÅset by $73 million in

additional expense, net of tax, related to adjustments in reserves and accruals due to events occurring in 2003.

FINANCIAL HIGHLIGHTS

2002, 2001 and 2000 Performance

Net income for 2002, 2001 and 2000 totaled $10.1 billion, $3.2 billion and $3.7 billion, respectively.

These results were primarily driven by increases in net interest income, or NII, and Öuctuations in total noninterest income.

Net interest income totaled $8.9 billion, $7.0 billion and $3.8 billion for 2002, 2001 and 2000,

respectively. The increases in net interest income were attributable to a decrease in short-term interest rates

along with growth in the retained portfolio, which grew by 14 percent in 2002 and 27 percent in 2001. The

decrease in short-term interest rates, along with an increase in amortization income, was chieÖy responsible for

Freddie Mac

31
a 40 basis point increase in net interest yield, to 137 basis points in 2001 from 97 basis points in 2000. One

basis point, or bp, is equivalent to one one-hundredth of a percent. Net interest yield increased by 3 basis

points in 2002 to 140 basis points. This modest increase was the result of generally falling interest rates oÅset

by accelerated amortization expense due to a decrease in the estimated life of the mortgage assets in the

retained portfolio.

Non-interest income totaled $7.8 billion in 2002, compared to expense of $1.1 billion in 2001 and income

of $2.6 billion in 2000. The volatility in non-interest income was largely due to the amount of derivatives,

mortgage securities and guarantee assets and guarantee obligations marked to fair value through earnings, with

the most signiÑcant driver being derivatives gains and losses.

We achieved these results while adhering to our credit and interest-rate risk disciplines. See ""Ì CONSOLIDATED RESULTS OF OPERATIONS'' for more information concerning our Ñnancial results.

CRITICAL ACCOUNTING POLICIES

Our Ñnancial statements are prepared in accordance with GAAP. In the application of GAAP, we are

required to make certain estimates and assumptions. We have presented below a summary of those accounting

policies that are particularly sensitive to management judgment and also are considered highly complex in

nature. Actual results could diÅer from estimates used and it is possible that such diÅerences could have a

material impact on the Ñnancial statements. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for additional

information regarding these and other accounting policies.

Fair Value

A signiÑcant estimate that is pervasive in our Ñnancial statements is the determination of fair value for

Ñnancial instruments required to be recorded at fair value under GAAP. The measurement of fair value is

fundamental to the presentation of our Ñnancial condition and results of operations and in many instances

requires management to make complex judgments. In general, we record many of our Ñnancial instruments at

fair value in the consolidated balance sheets and changes in these fair values as gains and losses in the

consolidated results of operations. Fair value is an estimate of the amount at which the instrument could be

bought and sold between willing parties, in an active market and not in a forced or liquidation sale.

The assumptions used to determine or estimate fair values reÖect our best judgment regarding

appropriate valuation methods. Under SFAS 107, ""Disclosures about Fair Values of Financial Instruments,''

or SFAS 107, and other GAAP guidance, the method used to determine fair value for each type of Ñnancial

instrument depends on the reliability and availability of relevant market data, which is known as price

transparency. The price transparency of a particular Ñnancial instrument determines the amount of judgment

involved in estimating the fair value of our Ñnancial instruments. Price transparency is aÅected by a signiÑcant

number of factors, including, for example, the type of Ñnancial instrument, whether it is new and not yet

established in the marketplace, and the characteristics of the Ñnancial instrument. Financial instruments for

which actively quoted prices or pricing parameters are available or for which fair value is derived from actively

quoted prices or pricing parameters will generally have a higher degree of price transparency. The fair value of

a substantial portion of our Ñnancial instruments is based on observable prices or market parameters obtained

from third-party pricing services or broker-dealers in active markets or derived from such prices or parameters.

Examples of these Ñnancial instruments include securities issued by the U.S. government and its agencies,

most mortgage-related securities, most derivatives and mortgage loans.

In contrast, certain of our Ñnancial instruments exhibit little or no price transparency. Examples include

guarantee assets and guarantee obligations recognized pursuant to sales of PCs. Generally, the fair value of

guarantee assets is determined using internally developed models that facilitate simulation of multiple future

scenarios that may occur. The guarantee obligation uses internal models incorporating empirical data coupled

with the results of an eÅort to benchmark default and capital assumptions observed in actual jumbo securities

market trades adjusted (as appropriate) to reÖect diÅerences in underlying collateral and other factors. The

use of diÅerent pricing models and assumptions could produce materially diÅerent estimates of fair value.

However, we believe the fair values used are reasonable based on internal reviews of signiÑcant pricing models

Freddie Mac

32
and methodologies as well as veriÑcation of Ñnancial instrument pricing with third party broker-dealers or

pricing services.

Table 10 summarizes our assets and liabilities that are recorded at fair value.

Table 10 Ì Assets and Liabilities Recorded at Fair Value

December 31,

2002 2001

(dollars in millions)

Retained portfolio

Mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $496,265 $398,921

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,104 41,400

Investments

Mortgage-related securities:

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,366 27,194

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,419 54,810

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,409 1,539

Other assets

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,393 1,996

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,445 3,156

Other liabilities

Guarantee obligation for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,427 1,155

Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 967 2,644

Transfers of Financial Assets

Freddie Mac purchases residential mortgage loans originated by mortgage lenders, as well as mortgagerelated securities. One of the means by which we fund purchases of mortgage loans is through the use of

securitization-based Ñnancing. That is, we fund the purchases of such Ñnancial assets by issuing undivided

interests in purchased mortgage loans and transferring such interests to investors in exchange for cash

consideration. We account for transfers of Ñnancial assets pursuant to the requirements of SFAS 140,

""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' and, prior to

April 1, 2001, SFAS 125, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments

of Liabilities'' (collectively, ""SFAS 125 / 140''). If we determine that we have surrendered control over assets

that we transfer to a third party, we account for the transfers as sales to the extent the counterparty provides

consideration other than beneÑcial interests in the transferred assets.

If a transfer of Ñnancial assets qualiÑes as a sale, we continue to carry on our consolidated balance sheets

any retained interests in Ñnancial assets that were securitized or re-securitized. These retained interests

include guarantee assets, PCs and Structured Securities that are not transferred to third parties. Retained PCs

and Structured Securities are accounted for as either available-for-sale or trading securities in accordance with

SFAS 115, ""Accounting for Certain Investments in Debt and Equity Securities,'' or SFAS 115. The carrying

amount of retained interests is determined by allocating the previous carrying amount of the transferred assets

between assets sold and the retained interests based on their relative fair value at the date of transfer. We also

recognize as part of a securitization the fair value of our recourse obligation to guarantee the timely payment

of principal and interest of PCs and Structured Securities transferred in sale transactions. The securitization

gain or loss involves our best estimate of key assumptions, including expected credit losses and the exposure to

credit losses that could deviate from expected credit losses, prepayment rates, forward yield curves and

discount rates. We believe that the above assumptions are comparable to those used by the other market

participants.

Freddie Mac

33
Table 11 summarizes securitization activity in 2002 and 2001.

Table 11 Ì Securitization Activity

Year Ended

2002 2001

(dollars in millions)

Assets transferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $241,214 $158,166

Gain on sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,072 468

The recording of a sale also requires an estimation of the fair value of the retained interests and the

recourse obligations. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 3:

SECURITIZATION OF MORTGAGE-RELATED ASSETS'' for discussion of the fair values above. The

use of diÅerent pricing models and assumptions could produce materially diÅerent results.

Hedge Accounting

We recognize all derivatives as either assets or liabilities on our consolidated balance sheets at fair value.

Subject to certain qualifying conditions, we may designate a derivative as either a hedge of the cash Öows

of a variable-rate instrument or a forecasted transaction (or cash Öow hedge), a hedge of the changes in fair

value of a Ñxed-rate instrument (or fair value hedge), or a foreign currency fair value or cash Öow hedge (or

foreign currency hedge). The determination of whether a derivative qualiÑes for hedge accounting requires

judgment about the application of SFAS 133, ""Accounting for Derivative Instruments and Hedging

Activities,'' as amended by SFAS 138, ""Accounting for Certain Derivative Instruments and Certain Hedging

Activities'' (collectively, ""SFAS 133''). SFAS 133 requires us to develop documentation of our hedges and to

perform certain computations to assess the historical and expected eÅectiveness of the hedge to qualify for

hedge accounting. Even if hedge accounting is not pursued, all derivatives are recorded at their estimated fair

value on our consolidated balance sheets.

A portion of our derivative portfolio is designated in fair value and cash Öow hedge accounting

relationships. For a derivative qualifying as a cash Öow hedge, we report changes in the fair value of these

instruments in a separate component of ""Accumulated other comprehensive income (loss), net of taxes'' to

the extent the hedge is eÅective. For a derivative qualifying as a fair value hedge, we report changes in the fair

value of the derivative along with the changes in the fair value of the hedged item attributable to the risk being

hedged in the consolidated statements of income. When the hedge is terminated or redesignated, the fair value

adjustment to the carrying amount of the hedged asset or liability is amortized to earnings as a component of

the hedged item's interest income or expense over the remaining life of the hedged item using the eÅective

yield method. If a derivative no longer qualiÑes as a cash Öow or fair value hedge, we discontinue hedge

accounting prospectively. We continue to carry the derivative on the consolidated balance sheets at fair value

and record subsequent fair value gains and losses in the consolidated statements of income as ""Derivative

gains (losses)'' until the derivative is terminated or redesignated. Thus, not qualifying for hedge accounting

may introduce material income statement volatility. See Table 39 for additional information regarding

derivatives in hedge accounting relationships.

For a more detailed description of our use of derivatives and summaries of derivative positions, see

""Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Interest-Rate Risk Management and Use of Derivatives.''

Reserves for Losses on Mortgage Loans Held for Investments and Losses on PCs

We maintain a ""Reserve for losses on mortgage loans held for investment'' to provide for credit losses on

mortgages included in our retained portfolio (excluding mortgage loans held for sale). We also maintain a

""Reserve for guarantee losses on Participation CertiÑcates'' to provide for credit losses on mortgages

underlying PCs held by third parties that have never previously been accounted for as sales by us under SFAS

125 / 140 (and which, therefore, have no recognized guarantee obligation).

Freddie Mac

34
The ""Reserve for losses on mortgage loans held for investment'' and ""Reserve for guarantee losses on

Participation CertiÑcates'' are increased through charges to the ""Provision for credit losses'' and decreased by

charge-oÅs, net of recoveries. Setting the level of reserves requires signiÑcant judgment and the resulting

reserve levels are regularly evaluated by us. These reserves are also aÅected by SFAS 125/140. More

speciÑcally, if the underlying loans are subject to a SFAS 125/140 sale, then the SFAS 5, ""Accounting for

Contingencies,'' reserve is reduced because the guarantee obligation recognized under SFAS 125/140 will

now incorporate the fair value of the credit loss expectations. However, these reserves will increase upon

repurchase of delinquent loans out of PC pools that have been sold pursuant to SFAS 125/140, reducing the

related guarantee obligation previously recognized under SFAS 125/140.

We estimate incurred credit losses on homogeneous pools of single-family loans using statistically based

models that evaluate a variety of factors, resulting in a range of probable losses related to impaired singlefamily loans at the balance sheet date. The factors used to estimate incurred losses as of period-end include:

actual and estimated loss severity trends for similar loans; actual and estimated default experience; actual and

estimated proceeds from private mortgage insurance and other credit enhancements; actual and estimated preforeclosure real estate taxes and insurance; the year of the loan origination; geographic location; and estimated

selling costs should the underlying property ultimately be foreclosed upon and sold.

We review the range of probable losses to determine the point within the range that represents the best

estimate of incurred losses. The level of reserves is then adjusted to our best estimate of incurred losses. We

also consider macroeconomic factors, including regional housing trends, applicable home price indices,

unemployment and the employment dislocation trends, consumer credit statistics, recent changes in credit

underwriting practices, extent of third party insurance, and other measurable factors that inÖuence the quality

of the portfolio at the balance sheet date. Favorable trends in these factors produce a reserve requirement

toward the lower end of the range; adverse trends in these factors produce a reserve requirement toward the

higher end of the range.

We estimate a range of incurred credit losses on the multifamily portfolio based on an individual review

of each loan as well as an evaluation of loan-level and market level risk characteristics of the portfolio in the

aggregate to determine reserve needs. We review the range of probable losses to determine the point within the

range that represents the best estimate of incurred losses. The level of reserves is then adjusted to our best

estimate of incurred losses. Loans individually evaluated for impairment include loans that become 60 days

past due for principal and interest, loans with observable collateral deÑciencies, and loans whose contractual

terms have been modiÑed due to credit concerns.

Emphasizing one of the above factors over another or considering additional factors could materially

impact the loan loss reserves. We believe the loan loss reserves are appropriate for the incurred losses inherent

in the portfolio as of the reported balance sheet dates.

Table 12 summarizes the activity in Loan Loss Reserves in 2002 and 2001.

Table 12 Ì Loan Loss Reserves

December 31,

2002 2001

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 224 $ 229

Provision for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 32

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171) (129)

Recoveries(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 92

Charge-oÅs, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (87) (37)

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 265 $ 224

(1) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and real estate owned, or REO, acquisitions on

loans where the primary default risk has been assumed by servicers, mortgage insurers, or third parties through credit enhancements.

Freddie Mac

35
Premiums and Discounts

For most of our investments in mortgage-related securities and non-mortgage related securities classiÑed

as available-for-sale, which had a carrying value at December 31, 2002 of $496 billion and $66 billion,

respectively, interest income is recognized using the eÅective interest method in accordance with SFAS 91,

""Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial

Direct Costs of Leases,'' or SFAS 91. Deferred items, including premiums, discounts and other basis

adjustments, are amortized into interest income over the estimated lives of the securities using the eÅective

interest method in accordance with SFAS 91.

We use actual prepayment experience and estimates of future prepayments to determine the constant

yield needed to apply the eÅective interest method. In estimating future prepayments and cash Öows, we

aggregate securities by similar characteristics of their underlying collateral such as origination date, coupon

and maturity. For securities with structured cash Öow payments, such as Structured Securities, estimates of

future prepayments and cash Öows also consider the characteristics of other security classes within the same

transaction structure. Estimates of future prepayments are derived from market sources and prepayment

models.

On a periodic basis, we recalculate the constant eÅective yield based on changes in estimated

prepayments as a result of changes in interest rates and actual prepayments versus anticipated prepayments.

When the constant eÅective yield changes, an adjustment to interest income is made for the amount of

premiums and discounts that would have been recorded if the new eÅective yield had been applied since the

mortgage assets were acquired.

For a signiÑcant portion of our investments in mortgage-related securities and non-mortgage related

securities classiÑed as available-for-sale, interest income is recognized using the prospective eÅective interest

method in accordance with EITF 99-20, ""Recognition of Interest Income and Impairment on Purchased and

Retained BeneÑcial Interests in Securitized Financial Assets,'' or EITF 99-20. The company speciÑcally

applies such guidance to beneÑcial interests (including undivided interests similar to beneÑcial interests) in

securitized Ñnancial assets that (i) can contractually be prepaid or otherwise settled in such a way that the

company may not recover substantially all of its recorded investment (such as IO strips) or (ii) are not of high

credit quality at the eÅective date of EITF 99-20 (April 1, 2001) or at the date that Freddie Mac acquired

them, if later.

EITF 99-20 requires that we recognize as interest income (throughout the life of a retained interest) the

excess of all estimated cash Öows attributable to the retained beneÑcial interest of our initial investment 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.

The above accounting estimates require us to use judgment and make assumptions about borrower

prepayments that involve a signiÑcant amount of uncertainty. We periodically re-evaluate our estimates used

in amortization calculations and appropriately adjust interest income based on the above amortization policies.

We believe that the above assumptions are comparable to those used by other market participants.

See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES'' for more information concerning new accounting

pronouncements.

Freddie Mac

36
CONSOLIDATED RESULTS OF OPERATIONS

The MD&A, and the following discussion of our consolidated results of operations in particular, should be

read in conjunction with the notes to our consolidated Ñnancial statements.

Table 13 summarizes our Ñnancial performance for the periods presented.

Table 13 Ì Summary of Consolidated Results

2002 vs. 2001 2001 vs. 2000

Year Ended Year Ended December 31, Dollar Percent December 31, Dollar Percent

2002 2001 Change Change 2000 Change Change

(in millions, except per share amounts)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,886 $6,992 $1,894 27% $ 3,758 $3,234 86%

Non-interest income

Management and guarantee income ÏÏÏÏÏÏÏÏÏ 1,516 1,392 124 9 1,252 140 11

Gains (losses) on ""Guarantee asset for

Participation CertiÑcates, at fair value'' ÏÏÏÏ (2,176) (789) (1,387) 176 (1,197) 408 (34)

Gains (losses) on ""Guarantee obligation for

Participation CertiÑcates, at fair value'' ÏÏÏÏ 592 203 389 192 443 (240) (54)

Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,941 (1,857) 7,798 (420) 1,483 (3,340) (225)

Hedge accounting gains (losses)ÏÏÏÏÏÏÏÏÏÏÏÏ 187 (294) 481 (164) Ì (294) (100)

Gains (losses) on investment activityÏÏÏÏÏÏÏÏ 1,812 191 1,621 849 492 (301) (61)

Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏ (674) (356) (318) 89 13 (369) (2,838)

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276 135 141 104 15 120 800

Other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 308 229 79 34 146 83 57

Total non-interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,782 (1,146) 8,928 (779) 2,647 (3,793) (143)

Non-interest expense

Provision for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (128) (32) (96) 300 (79) 47 (59)

REO operations income (expense)ÏÏÏÏÏÏÏÏÏÏ 13 (7) 20 (286) 4 (11) (275)

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏ (593) (537) (56) 10 (433) (104) 24

Occupancy expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (42) (35) (7) 20 (35) Ì Ì

Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏ (160) (121) (39) 32 (104) (17) 16

Minority interests in earnings of consolidated

subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (184) (208) 24 (12) (231) 23 (10)

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) (452) (319) 71 (357) (95) 27

Total non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,865) (1,392) $ (473) 34 (1,235) (157) 13

Income before income tax expense and

cumulative eÅect of change in accounting

principles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,803 4,454 10,349 232 5,170 (716) (14)

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,713) (1,339) (3,374) 252 (1,504) 165 (11)

Income before cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏ 10,090 3,115 6,975 224 3,666 (551) (15)

Cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 (43) (100) Ì 43 100

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,090 3,158 6,932 220 3,666 (508) (14)

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (234) (217) (17) 8 (179) (38) 21

Net income available to common stockholders ÏÏ 9,856 2,941 6,915 235 3,487 (546) (16)

Diluted earnings per common share after

cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.23 $ 9.95 235% $ 5.01 $(0.78) (16)%

Freddie Mac

37
Net Interest Income

Net interest income, the principal source of earnings for us, is the diÅerence between interest income and

interest expense. Net interest income is aÅected by changes in the balance and contractual rates associated with

our assets, liabilities and derivative contracts, as adjusted for amortization of purchase premiums and

discounts and hedging gains and losses as explained below in ""Analysis of Quarterly Results.'' We discuss net

interest income and the related interest yield on a taxable-equivalent basis to consistently reÖect income from

taxable and tax-exempt investments based on a 35 percent marginal tax rate.

2002 versus 2001

Table 14 summarizes net interest income for 2002 compared to 2001, and the related rate/volume

analysis for the changes between 2002 and 2001.

Table 14 Ì Net Interest Income and Rate/Volume Analysis (2002 compared to 2001)

Attributable to Increase

2002 2001 Changes in(1)

(Decrease)

NII Yield NII Yield to NII Rate Volume

(dollars in millions)

Interest income:

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,290 7.04% $ 4,385 7.23% $ (95) $ (116) $ 21

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏ 30,039 6.38 26,847 6.91 3,192 (2,187) 5,379

Total retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏ 34,329 6.46 31,232 6.96 3,097 (2,303) 5,400

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,147 3.41 4,136 4.82 11 (1,448) 1,459

Total interest-earning assets ÏÏÏÏÏÏÏÏ 38,476 5.89 35,368 6.62 3,108 (3,751) 6,859

Interest expense:

Short-termdebt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,303) (2.03) (9,056) (4.23) 4,753 4,670 83

Long-termdebt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21,025) (5.16) (17,466) (5.99) (3,559) 2,678 (6,237)

Total contractual debtÏÏÏÏÏÏÏÏÏÏÏÏÏ (25,328) (4.09) (26,522) (5.25) 1,194 7,348 (6,154)

Due to Participation CertiÑcate investors (1,236) (6.82) (1,027) (7.27) (209) 66 (275)

Total interest-bearing liabilities ÏÏÏÏÏ (26,564) (4.17) (27,549) (5.30) 985 7,414 (6,429)

Income (expense) related to derivativesÏÏ (3,026) (0.47) (827) (0.16) (2,199) (2,199) Ì

Impact of net non-interest-bearing

funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.12 Ì 0.18 Ì Ì Ì

Net interest income(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,886 1.36 $ 6,992 1.32 $ 1,894 $ 1,464 $ 430

Fully taxable-equivalent adjustment ÏÏÏÏÏ 252 0.04 237 0.04 15 4 11

Net interest income (fully taxableequivalent basis)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,138 1.40% $ 7,229 1.37% $ 1,909 $ 1,468 $ 441

(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.

(2) May not sum due to rounding.

Net interest income on a fully taxable-equivalent basis increased $1.9 billion, or 26 percent, to $9.1 billion

in 2002 from $7.2 billion in 2001. The increase in net interest income was primarily due to a continuation

during 2002 of the steep yield curve environment that existed in 2001. A steepening yield curve means that

short-term interest rates are decreasing more than long-term rates, or are increasing at a slower rate than longterm rates. This environment resulted in (i) wide initial spreads between the yield on asset purchases and the

cost of the debt issued to fund those purchases (referred to as ""mortgage-to-debt spreads'') since a portion of

the debt issued is shorter-term than the corresponding asset funded, as well as (ii) continued decreases in

short-term debt costs in 2002. An increase of $83 billion, or 18 percent, in the average balance of the retained

portfolio also contributed to the increase in net interest income (see ""Ì CONSOLIDATED BALANCE

SHEETS ANALYSIS Ì Retained Portfolio'' for a discussion regarding changes in the balance of the

retained portfolio).

The positive eÅects of the steep yield curve and retained portfolio growth on net interest income were

partially oÅset by increased amortization expense associated with (i) net purchase premiums on mortgage

investments and (ii) deferred hedging losses related to terminated pay-Ñxed swaps. These expenses were

Freddie Mac

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caused by decreases in long-term rates during 2002, which shortened the expected lives of mortgage

investments resulting in accelerated amortization of related premiums, as well as the termination of pay-Ñxed

swaps. As discussed in ""Ì CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Total Debt Securities, Net,'' we terminated pay-Ñxed swaps during 2002 as a result of the decrease in the expected lives of

mortgage investments and an increase in the balance of long-term debt. For further information regarding

amortization of premiums, discounts and hedging gains and losses, see ""Ì Analysis of Quarterly Results''

below and ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Ì Securities'' and ""Ì Derivatives.''

Net interest yield on a fully taxable-equivalent basis increased by 3 basis points to 140 basis points in

2002 from 137 basis points in 2001. This relatively small change in net interest yield was the net result of the

eÅects of the steep yield curve and increased amortization expense, as discussed above, as well as a shift in the

mix of interest-earning assets toward cash and investments. The average balance of cash and investments

increased by 42 percent, fueled by cash inÖows to us from prepayments on outstanding PCs. Prepayments on

outstanding PCs tend to increase the balance of short-term investments since we invest the prepayments

pending remittance to investors. In addition, limited retained portfolio investment opportunities during certain

periods of 2002 also contributed to growth in the average balance of cash and investments. When growth in

capital, generally driven by net income, outpaces opportunities to grow the retained portfolio, we may

temporarily deploy capital in cash and investments until the capital can be redeployed into retained portfolio

investments. Increases in short-term investments contribute to net interest income, but generally decrease net

interest yield since the net yield on short-term investments is generally lower than the net yield on longer-term

retained portfolio assets.

2001 versus 2000

Table 15 summarizes net interest income for 2001 compared to 2000, and the related rate/volume

analysis for the changes between 2001 and 2000.

Table 15 Ì Net Interest Income and Rate/Volume Analysis (2001 compared to 2000)

Attributable to Increase 2001 2000 Changes in(1)

(Decrease)

NII Yield NII Yield to NII Rate Volume

(dollars in millions)

Interest income:

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,385 7.23% $ 4,177 7.32% $ 208 $ (54) $ 262

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏ 26,847 6.91 20,536 7.01 6,311 (285) 6,596

Total retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏ 31,232 6.96 24,713 7.06 6,519 (339) 6,858

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,136 4.82 4,469 6.01 (333) (1,006) 673

Total interest-earning assets ÏÏÏÏÏÏÏÏ 35,368 6.62 29,182 6.88 6,186 (1,345) 7,531

Interest expense:

Short-termdebt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,056) (4.23) (10,492) (6.00) 1,436 3,535 (2,099)

Long-termdebt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,466) (5.99) (14,639) (6.39) (2,827) 964 (3,791)

Total contractual debtÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,522) (5.25) (25,131) (6.22) (1,391) 4,499 (5,890)

Due to Participation CertiÑcate investors (1,027) (7.27) (352) (6.53) (675) (44) (631)

Total interest-bearing liabilities ÏÏÏÏÏ (27,549) (5.30) (25,483) (6.23) (2,066) 4,455 (6,521)

Income (expense) related to derivativesÏÏ (827) (0.16) 59 0.01 (886) (886) Ì

Impact of net non-interest-bearing

funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.18 Ì 0.26 Ì Ì Ì

Net interest income(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,992 1.32 $ 3,758 0.92 $ 3,234 $ 2,224 $ 1,010

Fully taxable-equivalent adjustment ÏÏÏÏÏ 237 0.04 224 0.05 13 (16) 29

Net interest income (fully taxableequivalent basis)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,229 1.37% $ 3,982 0.97% $ 3,247 $ 2,208 $ 1,039

(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.

(2) May not sum due to rounding.

Freddie Mac

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Net interest income on a fully taxable-equivalent basis increased by $3.2 billion, or 82 percent, to

$7.2 billion in 2001 from $4.0 billion in 2000. Net interest income was driven by a signiÑcant decrease in

short-term interest rates, a steepening of the yield curve, and growth in interest-earning assets, particularly the

retained portfolio. The decrease in short-term interest rates coupled with the steepening yield curve resulted in

a reduction in short-term debt costs and wider initial mortgage-to-debt spreads on additions to the retained

portfolio. Retained portfolio purchases in 2001 totaled approximately $253 billion, which, net of repayments

and sales, resulted in a 28 percent increase in the average balance of the retained portfolio.

Also contributing to the increase in net interest income was an increase in amortization income related to

net purchase discounts and deferred hedging gains, and the change in accounting for the cost of purchased

options as a result of the implementation of SFAS 133 on January 1, 2001. Prior to the implementation of

SFAS 133, we amortized purchased option premiums and amounts paid or received to acquire interest-rate

swaps to net interest income. This amortization expense totaled $168 million in 2000. After the adoption of

SFAS 133, options are marked to fair value with changes in fair value reported as ""Derivative gains (losses).''

Net interest yield on a fully taxable-equivalent basis increased by 40 basis points from 97 basis points in

2000 to 137 basis points in 2001. This increase was primarily due to the reduction in short-term interest rates,

wider spreads on new purchases as described above and the increase in amortization income.

Analysis of Quarterly Results

Table 16 summarizes quarterly net interest income and net interest yield for 2001 and 2002.

Table 16 Ì Quarterly Net Interest Income (quarterly yields annualized)

1Q 2001 2Q 2001 3Q 2001 4Q 2001 2001

(dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,295 $1,518 $2,158 $2,021 $6,992

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 63 59 58 237

Net interest income (fully taxable-equivalent basis) ÏÏÏÏ $1,352 $1,581 $2,217 $2,079 $7,229

Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏÏ 1.14% 1.23% 1.63% 1.43% 1.37%

1Q 2002 2Q 2002 3Q 2002 4Q 2002 2002

(dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,414 $2,123 $2,079 $2,270 $8,886

Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 65 66 55 252

Net interest income (fully taxable-equivalent basis) ÏÏÏÏ $2,480 $2,188 $2,145 $2,325 $9,138

Net interest yield (fully taxable-equivalent basis) ÏÏÏÏÏÏ 1.59% 1.38% 1.32% 1.34% 1.40%

Changes in quarterly net interest income and net interest yield in 2001 and 2002 were driven primarily by

changes in short-term interest rates and growth in the retained portfolio during 2001 and 2002 as described

above in the analysis of annual results. However, quarterly results were also aÅected by Öuctuations in the

amortization of deferred purchase premiums and discounts, amortization of hedging gains and losses, interest

expense related to amounts due to PC investors and changes in the mix of short- and long-term debt funding.

These drivers are described in detail below, followed by a tabular presentation (see Table 17) discussing the

impact of these drivers on net interest income during the quarterly periods of 2002 and 2001.

‚ Amortization of premiums and discounts. When we buy mortgage-related securities, the

amount we pay for the asset generally does not equal the security UPB. We pay more than the

UPB (referred to as a premium) when the coupon on the security is greater than the current

market yield for that security. We pay less than the UPB (referred to as a discount) when the

coupon on the security is less than the current market yield for that security. During 2001,

premiums and discounts related to the retained portfolio resulted in a net discount position.

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Because of declining interest rates during 2002, we paid premiums on a higher percentage of the

mortgage-related securities acquired during the year. This resulted in a shift to a net premium

position during 2002 for the portfolio.

As described in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Securities,'' these

premiums and discounts are amortized over the estimated life of the purchased assets as an

adjustment to interest income based on the eÅective interest method in accordance with SFAS 91.

This method of amortization results in periodic adjustments to interest income when the eÅective

interest rate changes due to diÅerences between actual and estimated prepayments and changes in

estimated future prepayments. In addition, we implemented several enhancements as described in

""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT'' resulting in a $305 million increase to net interest income during the fourth quarter of

2002.

‚ Amortization of hedging gains and losses. Certain derivative contracts are accounted for as cash

Öow hedges of forecasted debt issuances (primarily pay-Ñxed swaps and Eurodollar futures), while

other derivative contracts are accounted for as fair value hedges of existing debt (primarily

receive-Ñxed swaps). In both cases, termination of the hedge relationship results in the associated

deferred hedging gain or loss being amortized into net interest income. Amortization related to

terminated cash Öow hedges is included in ""Income (expense) related to derivatives,'' while

amortization related to terminated fair value hedges is included in interest expense on long-term

debt. For further information concerning our accounting policies related to cash Öow and fair

value hedge relationships, see ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives Ì Accounting for Derivatives under SFAS 133.'' As a result of increased long-term debt

issuances and declining interest rates during 2002, we terminated pay-Ñxed swaps, triggering

amortization of deferred hedging losses.

‚ Interest expense related to amounts due to Participation CertiÑcate investors. As a result of the

payment remittance cycle associated with Gold PCs, which is described in ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors,'' interest

expense related to amounts due to PC investors will increase during periods of high prepayments

and decrease during periods of low prepayments. Because of changes in interest rates and

mortgage prepayment rates, interest expense related to amounts due to PC investors Öuctuated

from period to period in 2001 and 2002.

‚ Debt funding mix. As discussed in ""Ì CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Total Debt Securities, Net,'' we use our derivative portfolio to address diÅerences between

outstanding debt and our funding needs. Because of declining interest rates in 2002, the expected

lives of assets held in the retained portfolio decreased, reducing the need from an asset/liability

management perspective for long-term debt. However, the volume of long-term debt issued is

generally determined by our commitment to our Reference Notes securities calendar. To shorten

the eÅective duration of our debt and thereby manage the funding mismatch created by the

decline in interest rates, we terminated certain pay-Ñxed swaps and entered into receive-Ñxed

swaps. Receive-Ñxed swaps eÅectively convert a Ñxed-rate debt payment into a variable-rate

payment.

Freddie Mac

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The following discussion describes the eÅect of these factors on changes in quarterly net interest income.

Table 17 Ì Explanation of Quarterly Changes in Net Interest Income and Net Interest Yield

Increase Increase

(Decrease) (Decrease)

in Net in Net

Interest Interest

Income Yield

Period (in millions) (in bps) Comments

2Q01 vs. 1Q01 $ 229 9 Increases were driven by retained portfolio growth of $25 billion

and reductions in short-term interest rates. These positive factors

were partially oÅset by an increase in interest expense related to

amounts due to PC investors as the liquidation rate on total PCs

issued increased to 30 percent from 21 percent in the Ñrst quarter

of 2001. Liquidation rate is deÑned as the balance of scheduled

and unscheduled principal payments during the period as a

percent of the balance of total PCs issued at the beginning of the

period.

3Q01 vs. 2Q01 636 40 Increases were driven by retained portfolio growth of $20 billion

and decreases in short-term interest rates. Accelerated

amortization income on deferred discounts (due to shortened

expected asset lives in response to decreases in long-term interest

rates) and a decrease in interest expense related to amounts due

to PC investors also contributed to the increase in net interest

income and net interest yield. The decrease in interest expense

related to amounts due to PC investors was due to a decrease in

liquidation rates on total PCs issued, combined with a change in

the PC remittance cycle implemented during the quarter that

accelerated the remittance of mortgage prepayments to PC

investors.

4Q01 vs. 3Q01 (138) (20) Decreases were driven by a decrease in amortization income from

deferred discounts and an increase in interest expense related to

amounts due to PC investors. The decrease in amortization

income was due to an increase in long-term interest rates, which

resulted in an increase in expected asset lives causing the reversal

of amortization income recognized in the prior periods in

accordance with SFAS 91. The increase in interest expense

related to amounts due to PC investors was driven by an increase

in the liquidation rate on total PCs issued to 43 percent due to

decreases in long-term interest rates in the third quarter.

Liquidation rates are typically driven by changes in interest rates

in the prior quarter given the time lag between decreases in

interest rates and the mortgage prepayments. These negative

factors were partially oÅset by retained portfolio growth of

$26 billion and a decrease in short-term debt costs as a result of

continued decreases in short-term interest rates.

1Q02 vs. 4Q01 401 16 Increases were driven by retained portfolio growth of $38 billion

and a return to more typical amortization income on the retained

portfolio's net deferred discount position as a result of relatively

stable interest rates during the quarter. These favorable factors

were partially oÅset by a shift in funding mix from short-term to

long-term debt.

2Q02 vs. 1Q02 (292) (21) Decreases were driven by a continued shift in debt funding from

short-term debt to long-term debt and increased amortization of

deferred hedging losses resulting from terminated pay-Ñxed

swaps, as described above in ""Debt funding mix.''

Freddie Mac

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Table 17 Ì Explanation of Quarterly Changes in Net Interest Income and Net Interest Yield (continued)

Increase Increase

(Decrease) (Decrease)

in Net in Net

Interest Interest

Income Yield

Period (in millions) (in bps) Comments

3Q02 vs. 2Q02 (43) (6) Decreases were due to increased amortization expense related to

(i) deferred premiums on retained portfolio purchases and

(ii) hedging losses associated with terminated pay-Ñxed swaps.

As discussed above in ""Amortization of premiums and

discounts,'' the deferred amount related to the retained portfolio

shifted to a premium position in 2002. The increase in

amortization expense was partially oÅset by an increase in

interest income from derivative contracts as a result of increases

in the notional amount of receive-Ñxed swaps.

4Q02 vs. 3Q02 180 2 Increases were driven by an increase in amortization income and

interest income on derivative contracts, partially oÅset by

increased amortization of deferred hedging losses and increased

interest expense related to amounts due to PC investors. The

increase in amortization income was due to a $305 million

adjustment related to the enhancements described above in

""Amortization of premiums and discounts.'' The increase in

interest income on derivative contracts and amortization of

deferred hedging losses was due to an increase in the notional

amount of receive-Ñxed swaps combined with the termination of

pay-Ñxed swaps. Interest expense on amounts due to PC investors

increased as the liquidation rate on total PCs issued increased

from 40 percent in the third quarter of 2002 to 65 percent in the

fourth quarter of 2002.

Non-Interest Income

Management and Guarantee Income

Management and guarantee income primarily represents the net contractual cash Öows we receive on

mortgage-related securities issued and guaranteed by us and held by third party investors. For securities we

hold, the associated components of guarantee income are included in ""Net interest income.''

Table 18 provides summary information about management and guarantee income for 2002, 2001 and

2000.

Table 18 Ì Management and Guarantee Income

2002 2001 2000

(dollars in millions)

Management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,516 $ 1,392 $ 1,252

Average outstanding PCs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $687,942 $589,772 $531,207

Management and guarantee rate (in basis points) ÏÏÏÏÏÏÏÏÏÏ 22.0 23.6 23.6

(1) Average outstanding PCs were calculated by including PCs and Structured Securities that are backed by non-agency

mortgage-related securities held by third parties.

Management and guarantee income increased by $124 million, or 9 percent, to $1.5 billion in 2002 from

$1.4 billion in 2001. In 2001, management and guarantee income increased $140 million, or 11 percent. These

increases in guarantee income were primarily due to an increase in the average balance of outstanding PCs,

which increased by 17 percent in 2002 and 11 percent in 2001.

The eÅective management and guarantee rate, which consists of the contractual management and

guarantee rate as adjusted for amortization of deferred fees, including credit fees, buy-down fees and other

items, as described in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Guarantee Fees, Buy-Up Fees and BuyFreddie Mac

43
Down Fees,'' decreased by 1.6 basis points to 22.0 basis points in 2002 from 23.6 basis points in 2001 and was

unchanged from 23.6 basis points in 2000. These results were driven by decreases in contractual management

and guarantee rates as a result of declining market prices for guarantee fees and a shift away from guarantees

with buy-up fees, oÅset by accelerated amortization of deferred fees.

As explained in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Guarantee Fees, Buy-Up Fees and BuyDown Fees,'' we pay buy-up fees to increase the contractual management and guarantee rate we receive from

the counterparty so that a mortgage loan will ""Ñt'' into a PC. Cash inÖows resulting from when we buy-up the

contractual fee rate are included in management and guarantee income, although the buy-up fee asset is

marked to fair value through ""Gains (losses) on "Guarantee asset for Participation CertiÑcates, at fair value.' ''

As a result, the average management and guarantee rate reported on guarantees with buy-up fees will tend to

be higher than the rate reported on guarantees without buy-up fees.

The eÅect of declining contractual management and guarantee rates was partially oÅset in 2002 and more

than oÅset in 2001 by an acceleration of amortization income related to deferred fees due to a decrease in the

expected lives of outstanding PCs that was driven by declining interest rates and increased prepayments.

Upfront fees we receive related to guarantees issued through the Guarantor Program are deferred and

amortized using the interest method in accordance with SFAS 91 and as described above under ""Net Interest

Income.''

Table 19 summarizes management and guarantee income and rates for each quarter in 2001 and 2002.

Table 19 Ì Quarterly Management and Guarantee Income

1Q 2001 2Q 2001 3Q 2001 4Q 2001

(dollars in millions)

Management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 347 $ 340 $ 396 $ 309

Average outstanding PCs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $556,597 $571,456 $607,169 $623,866

Management and guarantee rate (in basis points)ÏÏÏÏÏÏÏÏ 24.9 23.8 26.1 19.8

1Q 2002 2Q 2002 3Q 2002 4Q 2002

(dollars in millions)

Management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 372 $ 385 $ 370 $ 389

Average outstanding PCs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $640,816 $686,180 $708,003 $716,770

Management and guarantee rate (in basis points)ÏÏÏÏÏÏÏÏ 23.2 22.4 20.9 21.7

(1) Average outstanding PCs were calculated by including PCs and Structured Securities that are backed by non-agency mortgagerelated securities held by third parties.

Changes in management and guarantee income and rates on a quarterly basis in 2002 and 2001 were

primarily driven by declining contractual management and guarantee rates and changes in amortization of

deferred fees, with the largest Öuctuations in amortization occurring in the third and fourth quarters of 2001

and fourth quarter of 2002. These were periods marked by signiÑcant changes in interest rates and in the

expected lives of outstanding PCs, which resulted in changes in the amount of amortization income recognized

in those periods.

Gains (Losses) on Guarantee Asset and Guarantee Obligation

""Gains (losses) on "Guarantee asset for Participation CertiÑcates, at fair value' '' and ""Gains (losses) on

"Guarantee obligation for Participation CertiÑcates, at fair value' '' represent the change in fair value of the

guarantee asset and guarantee obligation. For information regarding the accounting for the guarantee asset

and guarantee obligation, see ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

Freddie Mac

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Gains and losses on guarantee asset and guarantee obligation represent the change in fair value of the

asset and obligation due to:

‚ The portion of actual cash received that is a considered a return (payment) of principal as

opposed to interest earned (paid) on the guarantee asset (guarantee obligation); and

‚ Changes in the value of future cash Öows. The portion of the gains and losses on the guarantee

asset and guarantee obligation attributable to these two factors is shown in Table 20.

Table 20 Ì Attribution of Change in Fair Value

2002 2001 2000

Guarantee Guarantee Guarantee Guarantee Guarantee Guarantee

Asset Obligation Asset Obligation Asset Obligation

(dollars in millions)

Total cash Öows (received) paid ÏÏÏÏ $ (820) $ 422 $ (803) $ 278 $ (777) $ 200

Portion of cash Öows received (paid)

related to imputed interest ÏÏÏÏÏÏÏ 259 (64) 273 (57) 257 (59)

(Return of principal on guarantee

assets) Reduction of principal on

guarantee obligations ÏÏÏÏÏÏÏÏÏÏÏÏ (561) 358 (530) 221 (520) 141

Change in fair value of future cash

Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,615) 234 (259) (18) (677) 302

Gains (losses) on guarantee asset

and guarantee obligation ÏÏÏÏÏÏÏÏÏ $(2,176) $ 592 $ (789) $ 203 $(1,197) $ 443

With the passage of time, actual cash Öows are realized and no longer included in the valuation of the

guarantee asset and the guarantee obligation. As such, actual cash Öows represent a reduction of the guarantee

asset and guarantee obligation (or the ""principal'' component of total expected gross cash Öows). As depicted

in Table 20, 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 principal (the portion of actual cash Öows that represents a reduction of the guarantee asset receivable).

Similarly, cash Öows paid on the guarantee obligation can be allocated between interest expense and a

reduction of the liability. Because the cash Öows are reported as income and expense based on the nature of

the cash Öows (e.g., guarantee fee income, provision for credit losses) and not as a direct reduction in the

guarantee asset and guarantee obligation, realized cash Öows result in a corresponding change in the valuation

of the asset and the obligation.

The other component of gains and losses on guarantee asset and guarantee obligation is the gain or loss

due to changes in the value of future expected cash Öows. The value of expected cash Öows is driven by the

estimated lives of the mortgages underlying the outstanding PCs and other economic factors that inÖuence the

amount and timing of the future cash Öows such as changes in actual and expected interest rates. Changes in

the estimated lives aÅect the value of the guarantee asset and the guarantee obligation because Freddie Mac's

right to receive guarantee fees and its obligation to pay related expenses cease when the underlying mortgages

prepay. Changes in expected lives can also aÅect the value of the guarantee obligation due to the remittance

cycle associated with most PCs. As described in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' when a

prepayment occurs, we assume the obligation to pay interest due to the PC investor on the prepayment

proceeds from the time the mortgage prepays to the time the PC balance is reduced. We seek to oÅset this

cost by investing the prepayment proceeds until they are remitted to the PC investor, which typically occurs

15 days after the PC balance is reduced. However, when income expected to be earned from the investment of

the prepayment proceeds is less than the interest expected to be due to PC investors, the increase in expected

future prepayments increases the fair value of the remaining guarantee obligation. Conversely, when the

income expected to be earned is greater than the interest expected to be due to PC investors, the increase in

expected prepayments decreases the fair value of the remaining guarantee obligation. The amount and timing

of cash Öows related to the guarantee obligation are also driven by changes in house price appreciation, shortFreddie Mac

45
term interest rates and other economic factors that inÖuence expected credit losses and expected income

earned on mortgage principal and interest payments held pending remittance to PC investors.

Losses on the guarantee asset increased in 2002 mainly due to decreases in mortgage interest rates during

the year, which reduced the expected lives of the mortgages underlying outstanding PCs and the amount of

estimated future guarantee fee cash Öows. The reduction in expected lives also resulted in an increase in gains

on the guarantee obligation in 2002, although not to the same extent as the loss on the guarantee asset since

higher prepayment estimates combined with lower short-term interest rates increased the expected net

expense associated with amounts due to PC investors.

During 2001, losses on the guarantee asset and gains on the guarantee obligation decreased compared to

2000. These decreases were primarily driven by interest rate changes in 2001 compared to 2000, which

resulted in a slight increase in the expected lives of the mortgages underlying outstanding PCs at the end of

2001 compared to the end of 2000.

Table 21 summarizes gains and losses on the guarantee asset and guarantee obligation for each quarter in

2001 and 2002.

Table 21 Ì Quarterly Gains (Losses) on Guarantee Asset and Guarantee Obligation

1Q 2001 2Q 2001 3Q 2001 4Q 2001

(dollars in millions)

Gains (losses) on guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(261) $24 $(454) $(98)

Gains (losses) on guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (181) 41 190 153

1Q 2002 2Q 2002 3Q 2002 4Q 2002

(dollars in millions)

Gains (losses) on guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(213) $(658) $(890) $(415)

Gains (losses) on guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146 156 62 228

Changes in gains and losses on the guarantee asset and the guarantee obligation reported on a quarterly

basis were primarily attributable to changes in the expected lives of the mortgages underlying outstanding

PCs, which were driven by changes in mortgage interest rates. Fluctuations in the guarantee obligation were

also driven by changes in short-term interest rates and in the credit environment, which also aÅect the value of

future estimated cash Öows.

Derivative Gains (Losses)

Derivative gains (losses) represent the change in fair value of derivatives not accounted for in a hedge

relationship since these transactions did not qualify for, or we did not elect to pursue, hedge accounting,

resulting in fair value changes being recorded to earnings. Although derivatives are an important aspect of our

management of interest-rate risk, they may increase the volatility of reported net income, particularly when

they are not accounted for in a hedge relationship.

Derivative gains (losses) totaled $5.9 billion, ($1.9) billion and $1.5 billion in 2002, 2001 and 2000,

respectively. These gains and losses were primarily driven by changes in the fair value of certain receive- and

pay-Ñxed interest-rate swaps and call and put swaptions executed to manage interest-rate risk related to the

retained portfolio.

We use interest-rate swaps to mitigate contractual funding mismatches between our assets and liabilities.

A receive-Ñxed swap results in us receiving a Ñxed interest rate payment in exchange for a variable rate

payment. Conversely, a pay-Ñxed swap requires us to make a Ñxed interest-rate payment in exchange for a

variable rate payment. Call and put swaptions are options to enter into receive- and pay-Ñxed interest-rate

swaps, respectively. We use swaptions and other option-based derivatives to adjust the contractual funding of

our debt in response to changes in the expected lives of assets in the retained portfolio. Mortgage borrowers

generally have an option to prepay their mortgages prior to contractual maturity, and this prepayment option is

sensitive to changes in interest rates.

Freddie Mac

46
Interest-rate swaps and swaptions not accounted for in hedge relationships may increase the volatility of

reported net income since they are marked to fair value through earnings without the oÅsetting change in

value of the hedged risk being recognized in earnings. The fair value of receive- and pay-Ñxed interest-rate

swaps is primarily driven by changes in interest rates, with receive-Ñxed swaps increasing in value and payÑxed swaps decreasing in value when interest rates decrease (and the opposite being true when interest rates

increase). The fair value of call and put swaptions is sensitive to changes in interest rates in the same manner

as receive- and pay-Ñxed swaps, respectively. Swaption values are also driven by the market's expectation of

potential changes in interest rates in the future (referred to as ""implied volatility''), with swaptions generally

being more valuable as implied volatility increases and less valuable as implied volatility decreases. Because

the fair value of options is sensitive to changes in interest rates and the implied volatility of interest rates,

changes in the fair value of swaptions can be more signiÑcant than changes in the value of the underlying

interest-rate swaps; however, losses on such instruments are limited to the premium paid to purchase the

option plus any unrealized gains previously recognized.

Table 22 provides a quarterly summary of the period-end notional amount and gains and losses related to

interest-rate swaps and swaptions used to manage interest-rate risk but not accounted for in a hedge

relationship.

Table 22 Ì Derivatives Not in Hedge Accounting Relationships

1Q 2001 2Q 2001 3Q 2001 4Q 2001 2001

Gain Gain Gain Gain Gain

Notional (Loss) Notional (Loss) Notional (Loss) Notional (Loss) (Loss)

(dollars in billions)

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $83.0 $ Ì $88.9 $(0.7) $ 96.0 $ 1.8 $ 97.1 $(1.0) $ 0.1

Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.8 (0.1) 56.2 0.2 70.4 (0.6) 84.2 1.0 0.5

Receive-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏ 46.8 0.3 61.4 (1.1) 130.1 6.3 131.6 (3.7) 1.8

Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81.9 (1.4) 72.6 1.7 110.7 (7.2) 100.3 2.7 (4.2)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.2) 0.1 0.3 (1.0) (1.8)

Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 (0.2) 0.1 (0.1) (0.1)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1.1) $(0.1) $ 0.4 $(1.1) $(1.9)

1Q 2002 2Q 2002 3Q 2002 4Q 2002 2002

Gain Gain Gain Gain Gain

Notional (Loss) Notional (Loss) Notional (Loss) Notional (Loss) (Loss)

(dollars in billions)

Call swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $106.6 $(1.0) $129.0 $ 1.7 $120.9 $ 5.3 $131.4 $(0.6) $ 5.4

Put swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91.4 (0.2) 88.4 (1.3) 73.3 (0.5) 129.9 (0.6) (2.6)

Receive-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏ 82.3 (0.4) 54.2 2.0 70.2 4.1 65.4 Ì 5.7

Pay-Ñxed swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63.4 0.8 49.2 (1.9) 55.3 (2.9) 43.4 0.2 (3.8)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.8) 0.5 6.0 (1.0) 4.7

Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.2) 0.4 0.4 0.6 1.2

$(1.0) $ 0.9 $ 6.4 $(0.4) $ 5.9

(1) Other consists of basis swaps, asset swaps, purchased caps and Öoors, written options, futures and forward purchase and sale

commitments and other derivatives not accounted for in hedge relationships. For the total notional balance of derivatives not in hedge

accounting relationships, see Table 39.

Derivative gains (losses) were largest over this time period in the third quarter of 2002 when the gains

totaled $6.4 billion. This gain was driven by a $4.8 billion increase in the fair value of call swaptions, net of

losses on put swaptions, and a $1.2 billion increase in the fair value of receive-Ñxed swaps, net of losses on payÑxed swaps. The increase in the fair value of the call swaptions reÖects a decrease in interest rates and an

increase in the implied volatility of interest rates during the quarter. The decrease in interest rates increased

the fair value of the interest-rate swaps underlying the call swaptions, which, combined with the increase in

implied volatility, resulted in a signiÑcant increase in the value of the call swaptions. While increases in

implied volatility also had a favorable eÅect on the value of put swaptions, the decrease in fair value of the

underlying interest-rate swaps due to the decrease in interest rates resulted in a net decrease in the fair value of

these swaptions.

Freddie Mac

47
Hedge Accounting Gains (Losses)

For those derivatives that are accounted for in a hedge relationship,""Hedge accounting gains (losses),'' or

hedge accounting ineÅectiveness, generally arises when the fair value change of a derivative Ñnancial

instrument does not exactly oÅset the fair value change of the hedged item. Our hedge relationships primarily

consist of derivatives linked to either existing debt in a fair value hedge relationship or the forecasted issuance

of debt in a cash Öow hedge relationship. We began recording hedge accounting gains (losses) in 2001 in

conjunction with the implementation of SFAS 133.

Hedge accounting gains were $187 million in 2002, compared to hedge accounting losses of $294 million

in 2001. Hedge ineÅectiveness in both years related primarily to our fair value hedge relationships. Hedge

accounting gains (losses) will vary from period to period based on the notional amount of derivatives

accounted for in hedge relationships and the extent to which diÅerences in the characteristics or terms of the

derivative and the hedged item result in fair value or cash Öow changes that do not exactly oÅset.

Gains (Losses) on Investment Activity

Gains (losses) on investment activity include gains and losses on certain assets and liabilities marked to

fair value through earnings. Also included are gains and losses related to sales, impairments and other

valuation adjustments.

The following table summarizes the components of ""Gains (losses) on investment activity.''

Table 23 Ì Gains (Losses) on Investment Activity

2002 2001 2000

(dollars in millions)

Gains (losses) on trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 921 $144 $357

Gains (losses) on PCRsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (438) (121) (223)

Gains (losses) on sales of mortgage loans and available-for-sale

securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,958 619 216

Security impairments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (650) (350) (91)

LOCOM adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 (101) (15)

Gain on termination of options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 235

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 Ì 13

Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,812 $191 $492

(1) Subsequent to the announcement of our restatement results in our November 21, 2003 Information Statement Supplement, we

made a revision to reclassify impairment losses on IO securities. This revision decreased gains (losses) on sales of mortgage

loans and available-for-sale securities previously reported and increased losses on security impairments previously reported by

$124 million and $90 million for the years ended December 31, 2002 and 2001, respectively.

‚ Gains (Losses) on Trading Securities. Gains (losses) on trading securities represent changes in

the fair value of our trading position, which includes trading securities held, forward commitments

to purchase or sell trading securities, and Treasury and agency debt security ""short sale''

transactions (also referred to as ""securities sold, not yet purchased'') executed for asset/liability

management purposes. The trading position consists of security transactions executed in connection with our PC market-making and support activities and certain securities held in the retained

portfolio, including securities transferred into trading at the beginning of 2001. SpeciÑcally, we

transferred approximately $36 billion of securities to the trading category on January 1, 2001 in

conjunction with the implementation of SFAS 133, resulting in an unrealized loss of approximately $275 million being recorded to earnings. Excluding this loss, gains (losses) on trading

securities were driven by the balance of our trading position and changes in market prices during

each period.

‚ Gains (Losses) on PCRs. As explained in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Participation CertiÑcate Residuals,'' PCRs associated with certain PCs and Structured

Freddie Mac

48
Securities that we hold are marked to fair value as a component of ""Gains (losses) on investment

activity.'' Changes in the fair value of PCRs, which are residual interests we retain in PCs,

include gains and losses attributable to:

‚ The realization of cash Öows; and

‚ Changes in the amount and timing of future cash Öows and in market discount rates. Net cash

payments on PCRs we receive reduce the valuation of PCRs since those cash Öows are reported

in the income statement (primarily within net interest income) and not as a direct reduction of

the recorded investment. Realization of cash Öows and decreases in interest rates, which

reduced the expected lives of the associated securities, accounted for the reported loss in 2002.

In 2001, the loss was primarily due to the realization of cash Öows.

‚ Gains (Losses) on Sale of Mortgage Loans and Available-for-Sale Securities. Gains (losses)

on the sale of mortgage loans and available-for-sale securities were primarily attributable to sales

of PCs and Structured Securities, as well as Treasury and agency debt securities purchased for

asset/liability management purposes.

‚ Security Impairments. We record impairment losses on our investment portfolio when we have

concluded that a decrease in the fair value of a security is other than temporary. Impairment

losses recognized in 2002, 2001 and 2000 were related to certain investments in manufactured

housing securities, corporate bonds and IO securities, with the primary driver being impairments

of IO securities. Impairment losses on IO securities totaled $568 million, $325 million and

$44 million in 2002, 2001 and 2000, respectively.

The increase in IO security impairment losses in 2001 and 2002 was due to the implementation of

EITF 99-20 in the second quarter of 2001 and a general decline in interest rates during the third

quarter of 2001 and the second half of 2002, which resulted in a decrease in expected cash Öows

and a corresponding decrease in the fair value of IO securities. EITF 99-20, which was eÅective

April 1, 2001, requires the cost basis of an IO security to be written down to fair value when there

is a decrease in estimated cash Öows. EITF 99-20 introduced a lower threshold for impairment,

which resulted in impairment losses being recognized more frequently. See ""Cumulative EÅect of

Change in Accounting Principles, Net of Taxes'' for more information on the cumulative eÅect to

net income from the adoption of EITF 99-20. Also, see ""FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES Ì Securities'' for more information regarding our accounting policies concerning

impairment of IO securities.

Impairments recorded on non-IO securities totaled $82 million, $25 million and $47 million in

2002, 2001 and 2000, respectively, with impairments on manufactured housing securities totaling

$67 million, $23 million and $3 million during the same periods. Impairment losses on

manufactured housing securities exclude the eÅects of Ñnancial guarantee contracts since the

beneÑts of such contracts are not recognized until actual losses are realized and claims are made

under the contracts. For further information on these guarantee contracts, see ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 17: FAIR VALUE DISCLOSURES Ì Valuation Methods and Assumptions Ì Mortgage-related securities.''

‚ Mortgage LOCOM Adjustments. We record mortgage loans classiÑed as ""held-for-sale'' in

accordance with SFAS 65, ""Accounting for Certain Mortgage Banking Activities,'' at LOCOM,

with changes in the valuation of our held-for-sale portfolio recorded to this caption. LOCOM

losses recorded to the LOCOM valuation account become realized when we either:

‚ Sell the loans, in which case the loss is recorded to ""Gains (losses) on sale of mortgage loans

and available-for-sale securities'';

‚ Transfer the loans from the held-for-sale category to held-for-investment; or

‚ Securitize the loans and classify the resulting mortgage-related security as available-for-sale.

Freddie Mac

49
Losses related to transferred loans and securities are recorded as a reduction to the cost basis in

the retained assets and amortized back into income over the estimated life of the assets as an

addition to net interest income.

Mortgage LOCOM losses were greatest in the fourth quarter of 2001, totaling $99 million. These

losses were caused by an increase in interest rates at the end of the quarter, which reduced the

value of our held-for-sale portfolio.

‚ Gain on Termination of Options. Prior to the implementation of SFAS 133 on January 1, 2001,

premiums paid to purchase certain options were amortized as expense to net interest income over

the life of the option. When the option was terminated, the diÅerence between the fair value

received and the amortized cost basis was recognized as a gain or loss on termination. In 2000, the

gain on termination of options totaled $235 million. Because all derivatives are recorded at fair

value in accordance with SFAS 133 beginning in 2001, the termination of options in 2002 and

2001 did not result in the recognition of a gain or loss.

Gains (Losses) on Debt Retirement

We record gains and losses on debt repurchases based on the diÅerence between the contractual interest

rates on the debt securities repurchased, adjusted for deferred premiums, discounts and hedging gains and

losses, and current market interest rates. To the extent we issue new debt securities to replace the debt that we

retire, the diÅerence in the debt costs will positively or negatively aÅect net interest income to be reported in

future periods.

During the second quarter of 2002, we modiÑed our reporting of gains (losses) on debt retirements with

the adoption of SFAS 145, ""Rescission of Financial Accounting Standards Board, or FASB, Statements No. 4,

44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,'' or SFAS 145. This standard

eliminated the treatment of the gains and losses on our debt repurchases as extraordinary items due to their

recurring nature. For comparative purposes, all prior periods have been reclassiÑed to conform to the current

presentation.

We incurred pre-tax losses of $674 million and $356 million on the retirement of $20.3 billion and

$4.7 billion in principal amount of debt outstanding in 2002 and 2001, respectively. During 2000, we realized a

pre-tax gain of $13 million on the retirement of $3.6 billion in principal amount of debt.

Resecuritization Fees

Resecuritization fees are revenues we earn primarily in connection with the creation of Structured

Securities for which a REMIC election was made by Freddie Mac; however, these fees are also generated in

connection with the creation of IO and PO strips as well as other Structured Securities.

Resecuritization fees totaled $276 million, $135 million and $15 million in 2002, 2001 and 2000,

respectively. Investors' demand for REMIC securities increased signiÑcantly in 2001 and 2002 largely due to

the steepening of the yield curve during that period. A steep yield curve generally increases the value of

structured cash Öows, which results in greater value diÅerences between PCs and Structured Securities.

Other Income

Other income primarily consists of fees associated with servicing and technology-related programs,

including Loan Prospector, various fees related to multifamily loans (including application and other fees)

and various other fees received from mortgage originators and servicers.

""Other income'' totaled $308 million, $229 million and $146 million in 2002, 2001 and 2000, respectively.

The increases in other income are primarily due to an increase in servicing and transaction fees resulting from

increased business volumes and use of our automated underwriting tools.

Freddie Mac

50
Non-Interest Expense

Credit-Related Expenses

Credit-related expenses include the ""Provision for credit losses'' and ""REO operations income (expense).'' The ""Provision for credit losses'' includes provisions for losses incurred on mortgage loans held in the

retained portfolio and outstanding PCs and that portion of Structured Securities that are backed by nonagency mortgage-related securities not subject to sales treatment under SFAS 125 / 140 or impairments under

SFAS 115. ""REO operations income (expense)'' includes gains and losses on the sale of foreclosed properties

we hold, as well as the cost to hold these properties, including real estate taxes, insurance, repairs and fees

incurred to prepare the properties for sale, and valuation losses.

Table 24 summarizes the components of credit-related expenses (expenses are reÖected as negative

amounts in this table).

Table 24 Ì Credit-Related Expenses

2002 2001 2000

(dollars in millions)

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(128) $(32) $(79)

REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 (7) 4

Total credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(115) $(39) $(75)

Credit-related expenses increased by $76 million in 2002, compared to a decrease of $36 million in 2001.

The increase in total credit-related expenses in 2002 primarily reÖects an increase in expected losses on

multifamily mortgage loans due to higher vacancy rates and a decrease in net operating income of multifamily

properties in certain areas. The increase in ""Provision for credit losses'' was partially oÅset by an increase in

""REO operations income (expense).'' This increase was due to an increase in gains on single-family REO

properties as a result of house price appreciation over the past several years. Strong house price appreciation

also accounted for the reduction in credit-related expenses in 2001.

Salaries and Employee BeneÑts, Occupancy Expense and Other Expenses

Salaries and employee beneÑts, occupancy expense and other expenses, collectively referred to as

administrative expenses, include costs incurred to conduct daily operations and other miscellaneous expenses,

such as charitable contributions and professional service fees.

Table 25 summarizes administrative expenses (expenses are reÖected as negative amounts in this table).

Table 25 Ì Administrative Expenses

2002 2001 2000

(dollars in millions)

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (593) $ (537) $(433)

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (42) (35) (35)

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) (452) (357)

Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,406) $(1,024) $(825)

Total administrative expenses increased by $382 million, or 37 percent, in 2002 and $199 million, or

24 percent, in 2001. The year-over-year increases were driven by increased compensation costs, a fourth

quarter 2002 special contribution to our philanthropic program and a fourth quarter 2002 loss related to certain

technology-related initiatives. Increased compensation costs were largely caused by an increase in the average

number of employees, as well as annual salary increases, for all periods presented. During the fourth quarter of

2002, we announced a special $225 million cash contribution to the Freddie Mac Foundation and corporate

giving programs, which is included in ""Other expenses'' in the table above. This contribution is expected to

provide operating funds to the Freddie Mac Foundation for six to eight years. The ""Other expenses'' caption

also includes professional services, such as consulting, legal and audit fees, and technology-related costs,

Freddie Mac

51
including a $52 million loss recognized in the fourth quarter of 2002 related to the disposition of certain

technology-related initiatives.

See ""Ì RISK MANAGEMENT Ì Operational Risk'' for more information concerning administrative

expenses in 2003 and beyond.

Housing Tax Credit Partnerships

Housing tax credit partnerships represent our share of the net operating losses generated from investments

in partnerships that develop or rehabilitate low-income multifamily rental properties. Although these

partnerships generate operating losses, we realize a return on our investment through reductions in ""Income

tax expense,'' which result from tax credits and the deductibility of the operating losses.

Our share of net operating losses generated from our investment in ""Housing tax credit partnerships''

totaled $160 million, $121 million and $104 million in 2002, 2001 and 2000, respectively. The year-over-year

increases in this expense category correspond to our increased investment in such partnerships. The related tax

beneÑts, which are reported as a reduction in ""Income tax expense,'' totaled $220 million, $172 million and

$138 million in 2002, 2001 and 2000, respectively.

Minority Interest in Earnings of Consolidated Subsidiaries

Minority interest in earnings of consolidated subsidiaries represents the earnings due to third party

investors in our consolidated subsidiaries.

Minority interest in earnings of consolidated subsidiaries totaled $184 million, $208 million and

$231 million in 2002, 2001 and 2000, respectively. The majority of this amount relates to dividends on the

preferred stock issued by our two majority-owned real estate investment trust, or REIT, subsidiaries. The

dividend amount declines over the years in conjunction with the decrease in the reported balance of the

preferred stock.

Income Tax Expense

Income tax expense represents our current and deferred federal income tax liability associated with

current period income. We calculate income tax expense based on the statutory tax rate, which is 35 percent.

However, tax credits, interest income on tax-exempt securities and other items that adjust our income tax

expense result in our eÅective tax rate generally being less than the statutory tax rate. Income tax expense

excludes the tax eÅects related to the cumulative eÅect of change in accounting principles.

Income tax expense totaled $4.7 billion, $1.3 billion and $1.5 billion in 2002, 2001 and 2000, respectively.

Our eÅective tax rate for 2002, 2001 and 2000 was 32 percent, 30 percent and 29 percent, respectively. The

increase in the eÅective tax rate in 2002 was due to higher growth in pre-tax income than in tax credits and

interest income on tax-exempt securities, which reduce our income tax expense. Income tax expense in 2002

includes an adjustment related to favorable Court rulings issued in 2003 that caused us to reduce our tax

reserves by $155 million in the fourth quarter of 2002.

Cumulative EÅect of Change in Accounting Principles, Net of Taxes

Cumulative eÅect of change in accounting principles includes the eÅects of adopting SFAS 133 on

January 1, 2001 and EITF 99-20 on April 1, 2001. The accounting requirements related to these new

accounting standards are described in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

The after-tax adjustments required by SFAS 133 resulted in a $78 million increase in net income for the

Ñrst quarter of 2001. The cumulative eÅect on earnings from the change in accounting principle is primarily

attributable to an after-tax gain of $52 million resulting from recording certain options at their fair value and

an after-tax gain of $26 million due to cumulative accounting ineÅectiveness on hedge relationships involving

receive-Ñxed swaps previously accounted for under accrual accounting. The adoption of EITF 99-20 resulted

in a $35 million decrease to net income in the second quarter of 2001. This after-tax adjustment was related to

impairment losses required under EITF 99-20 on certain IO securities held at April 1, 2001.

Freddie Mac

52
CONSOLIDATED BALANCE SHEETS ANALYSIS

Table 26 provides summary balance sheets as of December 31, 2002 and 2001. This table should be

viewed in conjunction with the complete consolidated balance sheets.

Table 26 Ì Summary Balance Sheets

As of December 31,

2002 2001

(dollars in millions)

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $589,722 $503,666

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135,037 120,527

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,445 3,156

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,393 1,996

Other items included in total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,652 11,755

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752,249 $641,100

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $665,696 $578,368

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,080 27,375

Guarantee obligation for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏ 1,427 1,155

Derivative liabilities, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 967 2,644

Other items included in total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,440 9,315

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 718,610 618,857

Minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,309 2,619

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,330 19,624

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752,249 $641,100

During 2002, our total assets grew $111.1 billion or 17 percent. This increase was driven by increases in

the retained portfolio and cash and investments. During the same period, total liabilities increased by $99.8

billion, driven by an increase in total debt securities, and stockholders' equity increased by $11.7 billion. These

and other changes in our consolidated balance sheets are discussed below.

Retained Portfolio

The retained portfolio includes mortgage loans and mortgage-related securities that we acquire for

investment purposes and primarily consists of Freddie Mac and other agency securities.

The retained portfolio increased by $86.1 billion, or 17 percent, in 2002, with the largest growth occurring

in the Ñrst and fourth quarters of 2002. We generally increase our mortgage-related investment activity when

market conditions provide investment returns that exceed threshold levels. Such opportunities are more likely

to be available when there is less competition for mortgage-related investments from other investors. The

growth in the retained portfolio for the Ñrst quarter of 2002 was primarily the result of purchases initiated at

the end of 2001, when market conditions were characterized by volatile long-term interest rates and an

increase in the supply of mortgage securities in the market. This increased supply resulted in increased

investment opportunities, enabling us to increase our mortgage-related investment activity. Although similar

market conditions existed in the second half of 2002, continued high demand for traditional mortgage-related

securities (such as PCs) by other investors resulted in fewer investment opportunities. However, we were still

able to grow the retained portfolio through strong asset selection and by investing in other types of mortgagerelated securities, such as asset-backed securities, ARM securities and Structured Securities.

Cash and Investments

Cash and investments includes investments we acquire to manage recurring cash Öows, provide a source

of liquidity, temporarily deploy capital until the capital can be redeployed into retained portfolio investments

and manage interest-rate risk exposure. Cash and investments also includes certain mortgage-related securities

Freddie Mac

53
that are not included in the retained portfolio since they are acquired in conjunction with our PC marketmaking and support activities.

Our cash and investments portfolio increased by $14.5 billion, or 12 percent, in 2002 primarily due to an

increase in mortgage prepayments we hold pending remittance to PC investors (see discussion regarding ""Due

to Participation CertiÑcate Investors'' below). An increase in the balance of Treasury securities we hold in

conjunction with our risk management strategies also contributed to the increase.

Guarantee Asset and Guarantee Obligation for Participation CertiÑcates

The guarantee asset and guarantee obligation for Participation CertiÑcates represent the fair value of

future cash Öows related to PC guarantees issued by us in transactions that qualify as sales. The guarantee

asset also includes the fair value of future cash Öows related to buy-up fees paid by us in connection with PCs

issued through the Guarantor Program. Our accounting policies related to the guarantee asset and guarantee

obligation are described in ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

In 2002, the guarantee asset decreased by $711 million, while the guarantee obligation for Participation

CertiÑcates increased by $272 million. The changes in the guarantee asset and guarantee obligation balances

during 2001 and 2002 are summarized in Table 27.

Table 27 Ì Changes in Guarantee Asset and Guarantee Obligation

2002 2001

Guarantee Guarantee Guarantee Guarantee

Asset Obligation Asset Obligation

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,156 $1,155 $2,774 $ 778

Additions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,465 864 1,171 580

Changes in fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,176) (592) (789) (203)

Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,445 $1,427 $3,156 $1,155

Additions include the fair value of the asset and obligation related to guaranteed securities sold during the

period, net of reductions attributable to repurchases of guaranteed securities (repurchases result in a reduction

of the associated guarantee asset and guarantee obligation and re-establishment of those amounts as PCRs).

The increase in net additions to the guarantee asset and guarantee obligation in 2002 compared to 2001 was

primarily due to an increase in the volume of sales, which totaled approximately $240 billion and $160 billion,

respectively.

Factors contributing to the changes in the fair value of the guarantee asset and guarantee obligation are

discussed in ""Ì CONSOLIDATED RESULTS OF OPERATION Ì Non-Interest Income Ì Gains

(Losses) on Guarantee Asset and Guarantee Obligation.''

Derivative Assets and Liabilities, at Fair Value

All derivatives are reported at fair value in accordance with SFAS 133 with changes in fair value of

derivatives accounted for in hedge relationships recorded to AOCI or ""Hedge accounting gains (losses).''

Changes in fair value of derivatives not accounted for in hedge relationships are recorded to ""Derivative gains

(losses).'' We use derivatives to manage our interest-rate risk exposure. However, hedge accounting has only

been applied to some derivative transactions since a signiÑcant number of transactions did not meet hedge

accounting requirements or we elected not to pursue hedge accounting. For further information, see

""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.''

The fair value of derivatives in a gain position (reported as ""Derivative assets, at fair value'') increased by

$8.4 billion, while the fair value of derivatives in a loss position (reported as ""Derivative liabilities, at fair

value'') decreased by $1.7 billion during 2002. These changes in derivative fair values were driven by an

increase in the fair value of swaptions and foreign currency swaps we hold. Swaptions and foreign currency

Freddie Mac

54
swaps increased in fair value by approximately $4.1 billion and $5.1 billion, respectively, during 2002. The

increase in fair value of swaptions was due to increases in implied volatility, while the increase in fair value of

foreign currency swaps was driven by a decrease in the value of the U.S. dollar relative to the euro.

We purchase foreign currency swaps in connection with our 4Reference Notes» securities program and

other debt issuances denominated in foreign currencies. This debt and the related foreign currency swaps are

accounted for in qualiÑed hedge relationships under SFAS 133. Therefore, changes in fair value of foreign

currency swaps are largely oÅset by changes in fair value of the related debt.

Total Debt Securities, Net

We issue non-callable and callable short- and long-term debt securities in domestic and global capital

markets in a wide range of maturities to meet our funding needs. The balance of debt securities includes

deferred premiums, discounts and hedging gains and losses.

Total debt securities increased by $87.3 billion, or 15 percent, during 2002. This increase corresponds to

the increase in the retained portfolio as discussed above. During 2002, debt due within one year decreased by

$19.8 billion, while debt due after one year increased by $107.1 billion. The shift in the mix of short- and longterm debt was due to our practice of issuing most of our long-term debt on a regular schedule through our

Reference Notes securities program. We establish the Reference Notes securities issuance calendar based on

expected long-term debt needs. We adjust for diÅerences between scheduled long-term debt issuances and

actual funding needs by increasing or decreasing the balance of short-term debt and adjusting the composition

of our derivative portfolio. Because of declining interest rates in 2002, the expected lives of assets held in the

retained portfolio decreased, reducing the need for long-term debt. To shorten the eÅective weighted average

lives of our debt and thereby manage the funding mismatch created by the decline in interest rates, we

extinguished long-term debt through calls and debt repurchases, terminated pay-Ñxed swaps and entered into

additional receive-Ñxed swaps. Receive-Ñxed swaps reduce the eÅective lives of our debt by converting the

Ñxed-rate debt payment into a variable-rate payment, while pay-Ñxed swaps have the opposite eÅect.

Due to Participation CertiÑcate Investors

Timing diÅerences between our receipt of principal and interest payments from mortgage servicers and

the subsequent pass through to PC investors result in the liability ""Due to Participation CertiÑcate investors.''

Amounts due to PC investors increased by $7.7 billion during 2002. This increase was due to the decrease

in interest rates during 2002, which resulted in increased mortgage prepayments. The liquidation rate on total

PCs issued, including PCs we hold, was 65 percent in the fourth quarter of 2002, compared to 43 percent in

the fourth quarter of 2001.

Total Stockholders' Equity

Total stockholders' equity increased by $11.7 billion, or 60 percent, during 2002. Table 28 summarizes

the components of stockholders' equity.

Table 28 Ì Total Stockholders' Equity

2002 2001

(dollars in millions)

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,609 $ 4,596

Common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 152

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 744 671

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,955 15,710

Accumulated other comprehensive income (loss) related to:

Available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,217 4,200

Cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,877) (4,757)

Treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,470) (948)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $31,330 $19,624

Freddie Mac

55
The primary drivers of the increase in total stockholders' equity were an increase in retained earnings and

AOCI. Retained earnings increased as a result of net income in 2002, which was driven by net interest income,

derivative gains and gains on investment activity as discussed above. The increase in AOCI, which is on an

after-tax basis, was due to the decrease in interest rates in 2002, which resulted in an increase in the fair value

of available-for-sale securities, partially oÅset by a decrease in the fair value of the eÅective portion of

derivative Ñnancial instruments accounted for as cash Öow hedges. Derivatives accounted for in cash Öow

hedge relationships primarily consist of pay-Ñxed interest-rate swaps, which tend to decrease in fair value

when interest rates decrease. The carrying value of available-for-sale securities totaled $562.7 billion at

December 31, 2002, compared to $453.7 billion at December 31, 2001. The notional amount of derivatives

accounted for as cash Öow hedges totaled approximately $120.0 billion and $332.9 billion at December 31,

2002 and 2001, respectively.

AVERAGE BALANCE SHEETS AND RATE/VOLUME ANALYSIS

Table 29 reÖects an analysis of net interest income and presents average balances and related yields

earned on assets and rates paid on liabilities. Average balance sheet information is presented because we

believe end-of-period balances may not always be representative of activity throughout the periods presented.

We also believe that the rate/volume analysis may be helpful in understanding how changes in business

volumes and yields inÖuenced our Ñnancial results, particularly ""Net interest income on earning assets.'' For

most components of the average balances a daily weighted average balance is calculated for the period. When

daily weighted average balance information is not available, a simple monthly average balance is calculated. In

addition, ""Net interest income/yield (fully taxable equivalent basis)'' is presented on this table. Taxable

equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to

the equivalent amounts of interest income that would be necessary to derive the same net return if the

investments had been subject to income taxes using our incremental tax rate (35 percent).

Freddie Mac

56
Table 29 Ì Average Balance Sheets and Rate/Volume Analysis

Year Ended December 31,

2002 2001 2000

Interest Interest Interest

Average Income/ Average Average Income/ Average Average Income/ Average

Balance Expense Rate(1)(2) Balance Expense Rate(1)(2) Balance Expense Rate(1)(2)

(dollars in millions)

Interest-earning assets:

Mortgage loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 60,940 $ 4,290 7.04% $ 60,641 $ 4,385 7.23% $ 57,023 $ 4,177 7.32%

Mortgage-related securities in the retained

portfolio(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 470,813 30,039 6.38 388,338 26,847 6.91 292,980 20,536 7.01

Total retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 531,753 34,329 6.46 448,979 31,232 6.96 350,003 24,713 7.06

Investments(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,807 3,693 3.99 63,968 3,419 5.30 48,236 3,043 6.25

Securities purchased under agreements to

resell and Federal funds sold ÏÏÏÏÏÏÏÏÏ 29,026 454 1.56 21,262 717 3.37 25,700 1,426 5.55

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏ $ 652,586 $ 38,476 5.89 $534,209 $ 35,368 6.62 $423,939 $ 29,182 6.88

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 209,551 $ (4,303) (2.03) $211,493 $ (9,056) (4.23) $171,971 $(10,492) (6.00)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 407,520 (21,025) (5.16) 291,489 (17,466) (5.99) 228,998 (14,639) (6.39)

Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 617,071 (25,328) (4.09) 502,982 (26,522) (5.25) 400,969 (25,131) (6.22)

Due to Participation CertiÑcate investors 18,110 (1,236) (6.82) 14,136 (1,027) (7.27) 5,386 (352) (6.53)

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏ 635,181 (26,564) (4.17) 517,118 (27,549) (5.30) 406,355 (25,483) (6.23)

Income (expense) related to derivatives ÏÏ (3,026) (0.47) (827) (0.16) 59 0.01

Impact of net non-interest bearing funding 17,405 Ì 0.12 17,091 Ì 0.18 17,584 Ì 0.26

Total funding of interest-earning assetsÏÏ $ 652,586 $(29,590) (4.53) $534,209 $(28,376) (5.29) $423,939 $(25,424) (5.96)

Net interest income/yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,886 1.36 $ 6,992 1.32 $ 3,758 0.92

Fully taxable equivalent adjustmentÏÏÏÏÏÏÏÏ 252 0.04 237 0.04 224 0.05

Net interest income/yield (fully taxable

equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,138 1.40% $ 7,229 1.37% $ 3,982 0.97%

2002 vs. 2001 Variance Due to 2001 vs. 2000 Variance Due to

Total Total

Rate(6) Volume(6) Change Rate(6) Volume(6) Change

(dollars in millions)

Interest-earning assets:

Mortgages loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (116) $ 21 $ (95) $ (54) $ 262 $ 208

Mortgage-related securities in the retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,187) 5,379 3,192 (285) 6,596 6,311

Total retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,303) 5,400 3,097 (339) 6,858 6,519

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (980) 1,254 274 (513) 889 376

Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏ (468) 205 (263) (493) (216) (709)

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,751) $ 6,859 $ 3,108 $(1,345) $ 7,531 $ 6,186

Interest-bearing liabilities:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,670 $ 83 $ 4,753 $ 3,535 $(2,099) $ 1,436

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,678 (6,237) (3,559) 964 (3,791) (2,827)

Total debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,348 (6,154) 1,194 4,499 (5,890) (1,391)

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 (275) (209) (44) (631) (675)

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,414 (6,429) 985 4,455 (6,521) (2,066)

Income (expense) related to derivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,199) Ì (2,199) (886) Ì (886)

Total funding of interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,215 $(6,429) $(1,214) $ 3,569 $(6,521) $(2,952)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,464 $ 430 $ 1,894 $ 2,224 $ 1,010 $ 3,234

Fully taxable equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 11 15 (16) 29 13

Net interest income/yield (fully taxable equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,468 $ 441 $ 1,909 $ 2,208 $ 1,039 $ 3,247

(1) May not sum due to rounding.

(2) Average rates for securities classiÑed as available-for-sale are on the historical cost basis, which is not aÅected by the change in fair value

that is reÖected in the AOCI component of Stockholders' equity.

(3) Non-accrual loans are included in average balances.

(4) Rates calculated on a fully taxable equivalent basis were 6.43%, 6.97% and 7.07% for the years ended December 31, 2002, 2001 and 2000,

respectively, based upon related income of $30,253 million, $27,050 million and $20,717 million, respectively.

(5) Investments consist of ""Cash and cash equivalents'' and the ""Total mortgage-related and non-mortgage-related securities'' subtotal of

Investments as reported on the consolidated balance sheets.

(6) The combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.

Freddie Mac

57
CONSOLIDATED FAIR VALUE BALANCE SHEETS

The consolidated fair value balance sheets, or FVBS, in Table 30 present our estimates of the fair value of

the company's recorded assets and liabilities and oÅ-balance-sheet Ñnancial instruments as of December 31,

2002 and 2001.

Table 30 Ì Consolidated Fair Value Balance Sheets(1)

December 31,

2002 2001

Carrying Fair Carrying Fair

Amount(2) Value(3) Amount(2) Value(3)

(dollars in billions)

Assets

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63.9 $ 67.6 $ 62.6 $ 63.6

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 525.8 526.3 441.1 441.5

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 589.7 593.9 503.7 505.1

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.8 10.8 3.5 3.5

Investments(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101.2 101.2 83.6 83.5

Securities purchased under agreements to resell and Federal

funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23.0 23.0 33.5 33.5

Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.4 10.4 2.0 2.0

Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.4 3.8 3.1 4.7

Other assets(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.7 14.2 11.7 11.9

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752.2 $757.3 $641.1 $644.2

Liabilities and minority interest

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $665.7 $683.6 $578.4 $583.0

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏ 1.4 2.1 1.2 1.8

Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.0 1.0 2.6 2.6

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏ 0.1 Ì 0.1 Ì

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50.4 45.1 36.6 35.7

Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.3 2.6 2.6 2.8

Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 720.9 734.4 621.5 625.9

Net assets attributable to stockholders

Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6 4.6 4.6 4.5

Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.7 18.3 15.0 13.8

Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.3 22.9 19.6 18.3

Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752.2 $757.3 $641.1 $644.2

(1) The FVBSs do not purport to present the net realizable, liquidation or market value of Freddie Mac as a whole.

(2) Carrying amount is derived from our GAAP consolidated balance sheets.

(3) The valuation of Ñnancial instruments on the FVBS is in accordance with GAAP fair value guidelines prescribed by SFAS 107. See

""NOTE 17: FAIR VALUE DISCLOSURES'' for more information.

(4) Includes mortgage-related securities held in connection with PC market-making and support activities.

(5) Fair values at December 31, 2002 and 2001 include estimated income taxes on the diÅerence between FVBS and the GAAP balance

sheets.

Overview

The FVBS includes all items recorded in the consolidated balance sheets prepared in accordance with

GAAP, as well as all oÅ-balance-sheet Ñnancial instruments that are not recorded in the GAAP consolidated

balance sheets. These oÅ-balance-sheet items predominantly consist of the unrecognized portion of guarantee

contracts associated with PCs issued through our Guarantor Program as well as commitments to purchase

multifamily and single-family mortgage loans that will be classiÑed as held-for-investment in the GAAP

Ñnancial statements, and insurance contracts on manufactured housing investments. See ""FINANCIAL

STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more information.

Freddie Mac

58
The valuation of Ñnancial instruments on the FVBS is in accordance with GAAP fair value guidelines

prescribed by SFAS 107. The fair value of a Ñnancial instrument is deÑned in SFAS 107 as "". . . the amount at

which the instrument could be exchanged in a current transaction between willing parties, other than in a

forced or liquidation sale.'' The assumptions used to determine or estimate fair values reÖect management's

best judgment regarding appropriate valuation methods.

Under SFAS 107 and other GAAP guidance, the method used to determine fair value for each type of

Ñnancial instrument depends on the availability of relevant market data. For Ñnancial instruments with active

markets and readily available market prices, we determine fair value based on price quotations obtained from

third-party pricing services and broker-dealers or transaction data, where available. For Ñnancial instruments

where such prices are not available, we determine fair values using appropriate valuation techniques, including

estimates of the present value of expected future cash Öows using a discount rate commensurate with the risks

involved and internal valuation models that incorporate relevant market data inputs obtained from third-party

pricing services and broker-dealers. The use of diÅerent pricing models and assumptions could produce

materially diÅerent estimates of fair value. We use the same valuation techniques for preparing the FVBS as

we do for those elements of our GAAP consolidated Ñnancial statements which are recorded at fair value,

such as derivatives and securities as well as guarantee contracts for a portion of the PC portfolio. See

""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more information concerning how we determine fair values

for our GAAP consolidated balance sheets. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 17: FAIR VALUE DISCLOSURES'' for more information about our fair value

estimates and the valuation methods and assumptions we use to prepare the FVBS.

The FVBS does not capture all elements of value that are implicit in our operations as a going concern,

since it only captures the values of the current investment and securitization portfolios. For example, the

FVBS does not capture the value of new investment and securitization business that would likely replace

prepayments as they occur. In addition, the FVBS also does 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, or FVBS net assets, presented in the FVBS does not represent an estimate of the

net realizable, liquidation or market value of Freddie Mac as a whole.

We report assets and liabilities that are not Ñnancial instruments (such as our property, plant and

equipment and deferred taxes), as well as certain Ñnancial instruments that are not covered by the SFAS 107

disclosure requirements (such as pension liabilities), at their GAAP carrying amounts in the FVBS. We

believe these items do not have a signiÑcant impact on Freddie Mac's overall Ñnancial prospects or fair value

results.

Key Components of Changes in FVBS Net Assets

Changes in the FVBS net assets from period to period result from returns (measured on a fair value

basis) and capital transactions. The key components of returns on FVBS net assets are as follows:

‚ Core spread income. We deÑne core spread income as returns generated from the option-adjusted

spread between interest-bearing assets and liabilities in the retained portfolio. We estimate core spread

income for a given period to include estimated future costs related to the funding and hedging activities

that are likely to be required to achieve our risk management objectives for the retained portfolio.

‚ Fee-based income. This includes the guarantee income from our single-family and multifamily

securitization businesses, adjusted to account for estimated default costs, remittance cycle costs and

general and administrative costs. Fee-based income also includes delivery fees on some mortgage

purchases, fees collected through our automated underwriting service, fee income associated with

resecuritization activities and unrealized gains (losses) related to securities classiÑed as trading

associated with our PC market-making and support activities.

‚ Return on market risk positions. Our interest-rate risk positions and other risk positions, such as

basis risk and volatility risk, produce year-to-year fair value gains or losses that are reÖected in FVBS

net assets. We monitor the fair value returns associated with these risk positions and reÖect our

Freddie Mac

59
duration and convexity risk positions in our PMVS and duration gap risk estimates. See ""Ì RISK

MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Interest-Rate Derivative Tables''

for more information.

‚ Changes in mortgage-to-debt OAS. Any change in the relationship between the option-adjusted

yield on a previously acquired mortgage and the option-adjusted yield on previously issued debt will

lead to a change in the fair value of existing FVBS net assets. An increase in the mortgage-to-debt

OAS will result in a decrease in the fair value of our existing FVBS net assets. Conversely, a decline in

mortgage-to-debt OAS will result in an increase in the fair value of existing FVBS net assets.

Given the size of our retained mortgage portfolio, year-to-year changes in mortgage-to-debt OAS

could have a signiÑcant impact on annual fair value results. However, because we generally hold a

substantial portion of these assets for the long term and realize core spread income (as described

above) over this time frame, we do not believe period-to-period Öuctuations in fair value driven by

changes in mortgage-to-debt OAS will signiÑcantly aÅect the long-term return on our existing retained

portfolio.

‚ Change in fair value of guarantee portfolio. The fair value of the existing guarantee portfolio

Öuctuates with changes in interest rates and credit expectations. While year-to-year changes in the fair

value of the guarantee portfolio may have a signiÑcant impact on annual fair value results, we believe

that changes in the fair value of our existing guarantee portfolio are not a good indication of long-term

fair value expectations because such changes do not reÖect the strong probability that replacement

business will largely replenish any guarantee fee income lost because of prepayments over time.

Discussion of Fair Value Results

FVBS net assets increased by $4.6 billion during 2002, from $18.3 billion at December 31, 2001 to

$22.9 billion at December 31, 2002. The fair value of net assets attributable to common stockholders

(representing the FVBS net assets, less the fair value of net assets attributable to preferred stockholders)

increased by an estimated $4.5 billion during 2002, from $13.8 billion at December 31, 2001 to $18.3 billion at

December 31, 2002.

The increase in the fair value of net assets attributable to common stockholders in 2002 is presented net

of signiÑcant capital transactions executed during the year, including common stock repurchases totaling $0.6

billion and common dividends paid totaling $0.6 billion. Both common dividends and common stock

repurchases represent returns distributed to common stockholders and thereby reduce the remaining fair value

of net assets attributable to common stockholders. The change in fair value of net assets attributable to

common stockholders excluding these capital outÖows was approximately $5.7 billion in 2002.

Among the primary factors in the increase in 2002 FVBS net assets were core spread income and feebased income. Core spread income beneÑted from strong retained portfolio growth of approximately

14 percent and the attractiveness of mortgage-to-debt OAS at the time the mortgages were purchased.

Returns on market risk positions also provided a positive contribution. In addition to the factors noted above,

tighter mortgage-to-debt spreads, which were the result of the continuing high demand for mortgage-related

securities by other investors, contributed signiÑcantly to the overall increase in our 2002 fair value results. This

eÅect was partially oÅset by a signiÑcant decline in the fair value of our existing guarantee portfolio. As noted

above, we believe that changes in mortgage-to-debt OAS and the fair value of the existing guarantee portfolio

will Öuctuate from year to year, but will not have a signiÑcant impact on the FVBS net assets over the longer

term.

Our increase in 2002 FVBS net assets demonstrates that our investment and risk management discipline

can foster fair value growth in a year when there was high interest-rate volatility and a wide range of interestrate environments. We caution, however, that the strong fair value results achieved in 2002 exceed our longterm expectations for FVBS net asset growth.

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60
VOLUME STATISTICS

Table 31 summarizes our purchase and securitization activity for the periods presented.

Table 31 Ì Volume Statistics(1)

Year Ended December 31,

2002 2001 2000

(dollars in millions)

New business purchases(2)

Mortgage purchases

30-year Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,389 48% $273,850 57% $122,240 59%

15-year Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,354 23 79,494 16 16,780 8

ARMs/Öoating-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,918 7 22,206 5 20,579 10

Alternative collateral deals(3) ÏÏÏÏÏÏÏÏÏ 14,507 2 9,031 2 7,450 3

Balloon/resetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,533 3 8,574 2 1,213 1

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 547,701 83 393,155 82 168,262 81

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,654 2 9,510 2 6,032 3

Total mortgage purchases(4) ÏÏÏÏÏÏÏÏÏÏ 558,355 85 402,665 84 174,294 84

Non-Freddie Mac mortgage-related

securities

Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,195 10 67,270 14 29,503 14

ARMs/floating-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,515 5 12,433 2 4,840 2

Total new business purchases ÏÏÏÏÏ $659,065 100% $482,368 100% $208,637 100%

Percentage of reÑnance mortgage

purchases(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74% 62% 28%

Average LTV of purchases(5)

ReÑnance mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67 70 70

Purchase money mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 80 81

Total purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70 74 78

Mortgage liquidations(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $461,009 $295,414 $104,713

Mortgage liquidation rate(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40% 31% 12%

Securities settlements:(5)

Single-family PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $543,451 $387,234 $165,294

Multifamily PCsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,596 2,357 1,607

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $547,047 $389,591 $166,901

Structured securitizations(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $331,672 $192,437 $ 48,203

(1) Based on UPB.

(2) Based on our total mortgage portfolio, except these amounts exclude Structured Securities backed by Ginnie Mae CertiÑcates.

(3) Includes Structured Securities backed by non-agency securities, which are typically backed by subprime mortgages.

(4) The percentage of mortgages that were credit-enhanced was 20% and 28% for the years ended December 31, 2002 and 2001,

respectively. Credit enhancements include loans for which the lender or a third party has retained primary default risk by pledging

collateral or agreeing to accept losses on loans that default. In some cases, the lender's or the third party's risk is limited to a speciÑc

level of losses at the time the credit enhancement becomes eÅective.

(5) Amount excludes Structured Securities backed by non-Freddie Mac mortgage-related securities.

(6) Excludes sales of non-Freddie Mac mortgage-related securities and liquidations of Structured Securities that are backed by Ginnie

Mae CertiÑcates.

(7) Includes issuances of mortgage-related securities in which the cash Öows are structured into various classes, the majority of which

qualify for treatment as REMICs under the Internal Revenue Code.

Our 2002 business volume was the highest in our history. Interest rates for Ñxed-rate mortgages reached

36-year lows in 2002, and were also low in 2001, resulting in a surge of mortgage reÑnancing activity during

both years. As a result of these market trends, purchase volume increased by nearly 40 percent from 2001 to

2002 and more than doubled in 2001 compared to 2000. Mortgage lenders tend to deliver more Ñxed-rate

residential mortgages to the GSEs as compared to ARM/Öoating-rate products. Fixed-rate mortgages

represented 81 percent of our purchases for 2002, down from 87 percent in 2001. Fixed-rate 15-year mortgage

volume rose in 2001 and 2002, as declining mortgage rates increased the number of borrowers that qualiÑed

for this mortgage product. ReÑnanced mortgages represented 74 percent of our total 2002 purchases, up from

62 percent in 2001.

The average loan to value, or LTV, ratio on total purchases declined to 70 percent in 2002 from 74

percent in 2001 and 78 percent in 2000. Increases in home prices in 2002 and 2001, combined with the

Freddie Mac

61
previously mentioned rise in reÑnance volume, resulted in the reduction in the average LTV on total purchase

volume.

The liquidation rate on the total mortgage portfolio increased to 40 percent for 2002, compared to

31 percent for 2001. The higher liquidation rate in 2002 compared to 2001 reÖects accelerated borrower

prepayments due to lower Ñxed mortgage rates during much of 2002, as evidenced by the increase in the

percentage of reÑnance mortgage purchases in 2002 compared to 2001.

The percentage of credit-enhanced purchases decreased to 20 percent for 2002 from 28 percent for 2001

due primarily to a decline in the number of loans purchased that are covered by primary mortgage insurance,

or primary MI. The portion of our purchases with primary MI declined primarily because primary MI is not

required on loans with low LTV ratios. The low LTV ratio on purchases resulted from the increases in home

prices and rise in reÑnance activity in 2002. Our ability and desire to utilize credit enhancements will depend

on management's evaluation of the credit quality of new business purchase opportunities and the future

availability of eÅective credit enhancements at prices that permit an attractive return. See ""Ì RISK

MANAGEMENT Ì Credit Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for more information.

A signiÑcant portion of our mortgage purchase volume is generated from several key mortgage lenders

that have entered into special business arrangements with us. See ""BUSINESS Ì Mortgage Purchase and

Guarantee Activity'' for more information about these relationships and consequent risks.

Volumes associated with the issuance of Structured Securities, particularly REMICs, vary based on

market conditions that aÅect demand by us and other investors. Our structured securitization activity

(pertaining to REMICs, Structured Securities backed by non-agency securities and IO and PO strips) was a

record $332 billion in 2002, compared to $192 billion in 2001. The steep yield curve and signiÑcant reÑnance

activity in 2002 resulted in continued strong investor demand for REMIC securities and an increased supply of

REMIC collateral.

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62
LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our business activities present liquidity demands driven by maturities of our debt, purchases of mortgage

loans and mortgage-related securities, payments of principal and interest to PC holders, and general

operations. Our sources of cash to meet the needs of our business activities and general operations include:

‚ Issuances of long-term and short-term debt;

‚ Repayment and sales of, and borrowings against, mortgage-related and other investments;

‚ Cash Öows from operating activities; and

‚ Issuances of common and preferred stock.

Depending on market conditions and the mix of our derivatives employed in connection with our ongoing

risk management activities, our derivative portfolio can be either a net source or a net use of cash. For

example, depending on the prevailing interest-rate environment, interest-rate swap agreements could cause us

to either make interest payments to the counterparty or receive interest payments from the counterparty.

We will not issue common stock until we have returned to timely Ñnancial reporting. In addition, our

ability to issue preferred stock or subordinated debt may be limited during this period. See ""SUBSEQUENT

EVENTS Ì Regulatory Developments'' for more information concerning common stock repurchases, preferred stock redemptions and dividend payments on common and preferred stock. Furthermore, our inability

to prepare timely consolidated Ñnancial statements as discussed in ""Ì RISK MANAGEMENT Ì Operational Risk'' or any change in legislative or regulatory exemptions as described in ""BUSINESS Ì Regulation

and Governmental Relationships Ì Legislative Environment'' could adversely aÅect our access to some debt

investors, thereby potentially increasing our debt funding costs. In addition, to reÑnance maturing debt we

depend on the continuing willingness of investors to purchase and hold our debt securities (for more

information regarding the maturity proÑle of our outstanding debt securities, see Table 33 Ì Total Capitalization). However, because of our Ñnancial performance and our regular and signiÑcant participation as an issuer

in the funding markets, our sources of liquidity have remained adequate to meet our needs and we anticipate

that they will continue to do so.

Debt Securities

We Ñnance our purchases of mortgage loans and mortgage-related securities primarily through the

issuance of both long-term and short-term debt. During 2002, we received proceeds totaling $269 billion from

the issuance of long-term debt and $2.05 trillion from the issuance of short-term debt. During 2001, we

received proceeds totaling $205 billion from the issuance of long-term debt and $2.46 trillion from the

issuance of short-term debt.

We have two primary debt-Ñnancing programs: Reference Notes securities for longer-term Ñnancing and

Reference Bills securities for shorter-term Ñnancing. These debt-Ñnancing programs enable us to sell large

issues of long-term and short-term debt that provide investors with high-quality, liquid debt securities. During

2002, we issued $78.7 billion par value of non-callable U.S. dollar-denominated Reference Notes securities

and $446.3 billion of short-term debt under our Reference Bills securities program. During 2001, we issued

$84.0 billion par value of non-callable U.S. dollar-denominated Reference Notes securities and $567.2 billion

of short-term debt under our Reference Bills securities program.

We also issued $200.5 billion par value and $113.5 billion par value in long-term callable debt in 2002 and

2001, respectively. Additionally, we issued 415.0 billion and 415.0 billion of 4Reference Notes securities in

2002 and 2001, respectively. The 4Reference Notes securities are traded on Euro MTS (an interdealer trading

system), which facilitates more transparent secondary market prices and narrower spreads between the price

oÅered to purchase these securities and the price oÅered to sell them. During 2002, we completed two Freddie

SUBS subordinated debt oÅerings, raising approximately $2.5 billion in net proceeds, which increased the

principal amount of the outstanding Freddie SUBS to $5.5 billion. During 2001, we completed two Freddie

SUBS subordinated debt oÅerings, raising approximately $3.0 billion in net proceeds.

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63
We issued Reference Notes securities and 4Reference Notes securities during 2002 in accordance with

our previously announced Ñnancing calendar for 2002. Our Ñnancing calendar is intended to provide clarity

and transparency with regard to the timing of new debt issues and reopening of prior issues, the anticipated

size of individual oÅerings and settlement dates.

By adhering to our Ñnancing calendar, we are able to provide our debt investors with a predictable source

of investment opportunities. However, to continue our debt oÅerings as scheduled and properly manage our

asset/liability mix, we regularly conduct repurchases of outstanding debt securities. Our repurchase program

reÖects the input of numerous domestic and international investors and supports the transparency, liquidity,

and predictability of Reference Notes securities and 4Reference Notes securities. Repurchases focus on older,

oÅ-the-run securities and preserve the outstanding supply of active, on-the-run securities. During 2002 and

2001, we repurchased approximately $18.9 billion and $4.0 billion, respectively, of our higher-rate outstanding

debt under this program. In addition, as a response to declining interest rates, we called approximately

$99.3 billion and $124.8 billion of our higher-rate long-term callable debt during 2002 and 2001, respectively.

Equity Securities

During 2002, we redeemed $287 million of 6.125 percent preferred stock, issued in November 1996, and

replaced it with a 5.81 percent perpetual non-cumulative preferred stock issuance with a redemption value of

$300 million, raising approximately $13 million in net proceeds. During 2001, we completed six preferred

stock oÅerings, raising approximately $1.4 billion in net proceeds.

Liquid Investments

To protect ourselves against temporary disruptions in our ability to obtain funding for our business

operations, we maintain a cash and investments portfolio of liquid assets that can be sold or Ñnanced to

manage recurring cash Öows and meet other cash management needs, maintain capital reserves to meet

mortgage funding needs, provide diverse sources of liquidity and help manage the interest-rate risk inherent in

mortgage-related assets. Through this portfolio, we are also able to strategically utilize our available capital.

This portfolio is important to our Ñnancial management and our ability to provide liquidity and stability to the

mortgage market.

The cash and investments portfolio consists principally of cash and cash equivalents, asset-backed

securities, corporate debt securities, and other marketable assets that can be readily converted to cash. The

non-mortgage investments in this portfolio may expose us to institutional credit risk and the risk that the

investments will decline in value due to market-driven events such as credit downgrades or changes in interest

rates and other market conditions. See ""Ì RISK MANAGEMENT Ì Credit Risk Ì Institutional Credit

Risk'' for more information.

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64
Table 32 summarizes the majority of the non-mortgage-related products held in this portfolio at

December 31, 2002 and December 31, 2001. In addition, information regarding maturities and credit ratings is

provided to assist in understanding our credit risk related to this portfolio.

Table 32 Ì Investments

December 31, 2002 December 31, 2001

Average % of Portfolio A Average % of Portfolio A

Ending Balance Maturity Rated(1) Ending Balance Maturity Rated(1)

at Fair Value (Months) or Better at Fair Value (Months) or Better

(dollars in millions)

Investments:

Non-mortgage related securities

Asset-backed securities(2) ÏÏÏÏÏÏÏ $ 34,694 N/A 100% $26,275 N/A 100%

Debt securities issued by the U.S.

Treasury and other government

corporations and agencies ÏÏÏÏÏ 12,493 136 100 1,750 349 100

Corporate debt securitiesÏÏÏÏÏÏÏÏ 10,102 33 64 9,649 37 60

Obligations of states and

municipalities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,641 307 100 4,286 264 100

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,240 1 100 11,905 1 98

Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249 19 92 945 8 97

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,419 94% 54,810 93%

Other mortgage-related and nonmortgage-related securities held

for PC market-making and

support activities(3) ÏÏÏÏÏÏÏÏÏÏÏÏ 34,783 28,753

Total mortgage-related and nonmortgage-related securities in the

Investments per consolidated

balance sheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $101,202 $83,563

(1) The lower of Standard & Poor's, or S&P, and Moody's ratings.

(2) Consists primarily of securities that can be prepaid prior to their contractual maturity without penalty. Maturity information related

to these securities is not included because the contractual maturity does not represent the expected lives of the securities.

(3) See ""BUSINESS Ì PC Market-Making and Support Activities'' for more information. The majority of these securities are agency

mortgage-related securities and thus the disclosures concerning average maturity and rating are not provided.

See ""Ì VOLUNTARY COMMITMENTS Ì Liquidity Management and Contingency Planning'' for

more information on how we manage our liquidity.

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. This authority has never been

exercised, and would not be a meaningful source of liquidity to meet our obligations if it were exercised. See

""BUSINESS Ì Regulation and Governmental Relationships'' for more information.

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65
Capital Resources

We manage our capital resources to provide attractive returns on common equity, maintain suÇcient

capital to satisfy internal capital adequacy standards as well as regulatory capital requirements, and absorb

unforeseen losses that might arise in fulÑlling our obligations and conducting our business programs.

Capital Transactions

Table 33 sets forth our capitalization as of the dates presented.

Table 33 Ì Total Capitalization

December 31, December 31,

2002 2001

(dollars in millions)

Debt securities:

Due within one year:

Discount notes, medium-term notes and securities sold under agreements

to repurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $194,044 $245,722

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,385 18,505

Total due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,429 264,227

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,662 311,013

Subordinated borrowings due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,605 3,128

Total due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421,267 314,141

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 665,696 578,368

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,330 19,624

Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $697,026 $597,992

See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' and ""NOTE 9: STOCKHOLDERS' EQUITY'' for

further information.

We engage in transactions aÅecting stockholders' equity from time to time and issue or retire debt

obligations on an ongoing basis. In addition, implementation of SFAS 133 on January 1, 2001 aÅected the

volatility of both ""Net income'' and ""Total stockholders' equity'' in subsequent periods. On any date after

December 31, 2002, Stockholders' equity and the amount of debt obligations outstanding will diÅer (perhaps

substantially) from the Ñgures contained in this capitalization table.

Table 34 summarizes the components of our core capital. Core capital excludes AOCI, consistent with

our regulatory capital requirements, which are described under ""Ì Capital Adequacy'' below.

Table 34 Ì Summary of Core Capital

December 31, December 31,

2002 2001

(dollars in millions)

Common stock:

Par valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 152 $ 152

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 744 671

Qualifying preferred stock (at redemption value) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,609 4,596

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,955 15,710

Treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,470) (948)

Core capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,990 $20,181

During 2002, we added approximately $8.8 billion to ""Core capital'' primarily from retained earnings and

one preferred stock issuance, partially oÅset by payment of common and preferred stock dividends. During

2001, we added $3.9 billion to ""Core capital'' from retained earnings and six preferred stock issuances,

partially oÅset by payment of common and preferred stock dividends. We actively manage our capital to

ensure that we have a strong capital base and suÇcient capital to support future growth opportunities. Until we

Freddie Mac

66
resume timely Ñnancial reporting and are able to consider issuing and repurchasing common stock, our

changes in ""Core Capital'' will generally be limited to retained earnings, oÅset by stock dividends.

In periods of timely Ñnancial reporting and when attractive investment opportunities are not available, we

consider open market common share repurchases with the purpose of returning capital to our stockholders in

the form of capital gains rather than dividends. In addition, we periodically reissue treasury stock to employees

and non-employee directors as part of our stock-based compensation plans. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 11: STOCK-BASED COMPENSATION'' for a

description of these plans. The amount of capital available to repurchase common stock will be aÅected

primarily by:

‚ Mortgage portfolio growth opportunities;

‚ Our assessment of the adequacy of our capital; and

‚ Regulatory capital standards and supervisory requirements.

All common stock repurchases have been made as part of a plan approved by our Board of Directors. The

plan allows repurchases of common stock not to exceed 5 percent of shares outstanding as of September 5,

1997, which was approximately 34 million shares. During periods when current consolidated Ñnancial

statements are available, the frequency and amount of repurchases will depend on market conditions. We

repurchased approximately 9.1 million common shares during 2002 for approximately $555 million. During

2001, we did not repurchase any shares. We will not consider repurchasing common shares until we resume

timely Ñnancial reporting. See ""SUBSEQUENT EVENTS Ì Regulatory Developments'' for a discussion of

the framework established by OFHEO for monitoring our capital, which includes a requirement for prior

written approval of common share repurchases and preferred stock redemptions.

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Table 35 details, as of December 31, 2002, our outstanding preferred stock issuances that are redeemable

at December 31, 2002, redeemable beginning in 2003 and redeemable after more than one year (2004 or

later).

Table 35 Ì Preferred Stock

Redemption

Earliest Optional Value(1)

Redemption Dates(1) Rate (dollars in millions)

Issuances redeemable at December 31, 2002

October 27, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.81% $ 150

October 30, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.3% 200

June 30, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 250

June 30, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.14% 600

1,200

Issuances redeemable beginning in 2003

March 31, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.00% 400

March 31, 2003(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 325

March 31, 2003(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 230

June 30, 2003(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 201

September 30, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1% 400

September 30, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 220

1,776

Issuances redeemable beginning in 2004

March 31, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1% 150

December 31, 2004(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ variable 288

June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6% 173

December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.7% 300

March 31, 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.81% 300

June 30, 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.79% 250

March 31, 2011ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.81% 172

1,633

Total Preferred Stock at Redemption Value(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,609

(1) Optional redemption on or after dates indicated.

(2) Optional redemption on March 31, 2003 and on March 31 every two years thereafter.

(3) Optional redemption on March 31, 2003 and on March 31 every year thereafter.

(4) Optional redemption on June 30, 2003 and on June 30 every two years thereafter.

(5) Optional redemption on December 31, 2004 and on December 31 every Ñve years thereafter.

(6) No preferred stock was redeemed in 2003.

Capital Adequacy

We regularly assess the adequacy of our capital to ensure that we hold capital suÇcient to satisfy all of

our Ñnancial obligations, even if economic circumstances deteriorate unexpectedly and severely.

The GSE Act establishes our capital standards, and OFHEO has issued regulations that set our

minimum, critical and risk-based capital requirements. We operate so that our capital exceeds all regulatory

requirements. See ""SUBSEQUENT EVENTS Ì Regulatory Developments'' for a discussion of the framework established by OFHEO for monitoring our capital, which includes a target capital surplus.

In general, our minimum capital requirement is the sum of 2.50 percent of our on-balance sheet assets

and 0.45 percent of our oÅ-balance sheet obligations, subject to certain adjustments speciÑed in the GSE Act

and in OFHEO's regulations. Our critical capital requirement is approximately half of our minimum capital

requirement. The risk-based capital standard determines the amount of capital that Freddie Mac must hold to

absorb projected losses from future adverse interest-rate and credit-risk conditions speciÑed by the GSE Act.

The risk-based capital standard is based on stress test results calculated under two interest-rate scenarios

prescribed by the GSE Act. In general, the risk-based capital requirement for Freddie Mac is the amount of

Freddie Mac

68
capital that would enable us to absorb the stress test losses in whichever scenario is more adverse, plus 30

percent of that amount to cover management and operations risk.

OFHEO is required to classify Freddie Mac's capital adequacy not less than quarterly. Prior to the third

quarter of 2002, we were classiÑed using the minimum and critical capital standards only. In the third quarter

of 2002, OFHEO commenced quarterly classiÑcations using the risk-based, minimum and critical capital

standards.

To be classiÑed as ""adequately capitalized,'' Freddie Mac must meet both the risk-based and minimum

capital standard. If Freddie Mac fails to meet the risk-based capital standard, it cannot be classiÑed higher

than ""undercapitalized.'' If Freddie Mac fails to meet the minimum capital standard, it cannot be classiÑed

higher than ""signiÑcantly undercapitalized.'' If Freddie Mac fails to meet the critical capital standard, it must

be classiÑed as ""critically undercapitalized.'' OFHEO retains discretion to reduce Freddie Mac's capital

classiÑcation by one level if OFHEO determines that we are engaging in conduct not approved by OFHEO

that could result in a rapid depletion of our core capital or that the value of property subject to mortgages held

or secured by us has decreased signiÑcantly.

When Freddie Mac is classiÑed as adequately capitalized, we can pay a dividend on our common or

preferred stock without prior OFHEO approval so long as our payment would not cause us to fail to meet

either our risk-based capital requirement or our minimum capital requirement. If Freddie Mac were classiÑed

as undercapitalized, we would be prohibited from making capital distributions that would cause us to fail to

meet our minimum capital requirement. We also would be required to submit a capital restoration plan for

OFHEO's approval. If Freddie Mac 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 cause us to fail to meet our critical capital requirement, 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's approval. If Freddie Mac were classiÑed as

critically undercapitalized, OFHEO would be required to appoint a conservator for the company unless

OFHEO made a written Ñnding that it should not do so and the Secretary of the Treasury concurred in that

determination.

OFHEO has never classiÑed Freddie Mac as other than ""adequately capitalized,'' the highest possible

classiÑcation.

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Table 36 summarizes our regulatory capital requirements and surpluses at December 31, 2002 and 2001.

Our core capital and minimum and critical capital surpluses as presented in Table 36 are based on

restated net income for 2002 and 2001. However, our total capital and risk-based capital surpluses as

presented in Table 36 do not reÖect the eÅect of the restatement. OFHEO determined not to recalculate the

risk-based capital amounts given that the minimum capital requirement remained the determining requirement for Freddie Mac's classiÑcation as adequately capitalized.

Table 36 Ì Regulatory Capital Requirements

December 31, 2002 December 31, 2001

(dollars in millions)

As restated

Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22,339 $19,014

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,990 20,181

Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,651 1,167

Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,369 9,677

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,990 20,181

Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,621 10,504

As reported

Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,743 N/A

Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,222 N/A

Risk-based capital surplus(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,479 N/A

(1) Minimum and critical capital requirements are based on amended reports to OFHEO that correct results included in our

November 21, 2003 Information Statement Supplement. The impact of this change on the restated regulatory minimum capital

surplus was a decrease of $1 million and $7 million as of December 31, 2002 and 2001, respectively, as compared to those results

presented in our November 21, 2003 Information Statement Supplement.

(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par

value of outstanding perpetual preferred stock, additional paid in capital and retained earnings, as determined in accordance with

GAAP.

(3) Risk-based and total capital amounts are those calculated by OFHEO prior to the restatement of our 2002 Ñnancial results.

(4) Total capital includes ""core capital'' and general reserves for mortgage and foreclosure losses.

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RISK MANAGEMENT

We are subject to three main business risks:

‚ operational risk;

‚ interest-rate and other market risks; and

‚ credit risk.

Management of these risks is based upon the principle that business areas have direct responsibility for

risk management activities subject to oversight by an independent risk function. The level of our eÅectiveness

in managing risks aÅects both the level and stability of our earnings and long-term value.

In October 2003, we established an Enterprise Risk Oversight, or ERO, function which is led by a Chief

Enterprise Risk OÇcer currently reporting to our Chief Executive OÇcer. The ERO function oversees our

interest-rate and other market risks as well as credit risk functions. Operational Risk Oversight, or ORO, is led

by an Operational Risk OÇcer currently reporting to the Chief Financial OÇcer. Business area risk

management and line personnel manage these risks on a day-to-day basis. ERO and ORO are responsible for

providing independent oversight of these business area risk management activities to ensure that there is an

eÅective internal control framework in place. The Chief Enterprise Risk OÇcer and Operational Risk OÇcer

provide advice to senior management on key issues and provide independent reporting to the Risk and Audit

Committees of the Board of Directors.

Operational Risk

Operational risk is deÑned as the risk that Ñnancial loss could result from failures or inadequacies

involving people, processes, technology or external events. It is inherent in every aspect of business operations,

and can result from a range of factors including human judgments, process or system failures, or business

interruptions.

The Ñve major operational risks signiÑcant to Freddie Mac are:

‚ People Risk Ì the risk of loss related to the management of people, including inadequate staÇng

or expertise, training or supervision, key person dependencies and employee theft or fraud.

‚ Process Risk Ì the risk of loss arising from inadequate controls over transaction execution, model

risk, or vendor management risk.

‚ Technology Risk Ì the risk of loss due to deÑciencies in systems design, systems implementation,

systems security, or other systems operations.

‚ External Event Risk Ì the risk of loss due to external events such as catastrophes, natural

disasters, external fraud or theft.

‚ Reporting and Disclosure Risk Ì the risk of loss related to inaccurate or incomplete reporting or

disclosure to our stakeholders, including Ñnancial statements, oÅering documents for equity, debt

or mortgage-related securities, and regulatory disclosures.

Our management of each of these operational risks is discussed under ""Management of Freddie Mac's

Operational Risks'' below.

Internal Control Weaknesses

The factors contributing to the need for the recently completed restatement and the errors and corrections

made are discussed in ""Ì RESTATEMENT RESULTS Ì Restatement Background and Remediation

Program'' and ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.'' In addition, our independent auditors have identiÑed and communicated to management

and the Audit Committee certain deÑciencies in internal controls. These deÑciencies were characterized by

Freddie Mac

71
PwC as ""material weaknesses'' (as deÑned under standards established by the AICPA) in internal controls

during the period from 2000 through 2002, and were categorized by PwC as follows:

‚ DeÑciencies in the eÅectiveness of corporate governance and management oversight;

‚ Inadequate resources with requisite accounting and Ñnancial reporting expertise and unenforced

accountability in our accounting departments;

‚ Involvement by Market Risk Oversight, at the direction of senior management, in activities that

were incompatible with its oversight and independent control duties; and

‚ Inadequate independent monitoring controls over valuation of Ñnancial instruments.

To ensure that these deÑciencies and the principal factors that contributed to the need for the restatement

are properly addressed, management is implementing a comprehensive remediation program, under the

direction and oversight of the Governance Committee of the Board of Directors. The magnitude of the eÅorts

and the scope of remediation activities are considerable. During the period of the restatement, our resources

and skill sets in accounting policy and accounting operations did not increase commensurately with the

increased complexity of our activities. Actions have begun to be taken to address cultural issues and adequacy

of accounting resources. However, staÇng requirements in both the accounting policy and accounting

operations areas are considerable. In the interim, Freddie Mac has placed extensive reliance on external

consultants to Ñll the vacant positions. SigniÑcant eÅorts continue to hire and train the requisite number of

qualiÑed staÅ.

Our accounting systems infrastructure has not been suÇcient given the volume and complexity of our

operations. The result during the years aÅected by the restatement was processes that were highly reliant on

manual activities and that lacked the appropriate management information systems to eÅectively report our

Ñnancial results. Existing weaknesses in infrastructure (e.g., lack of business line subledgers, high reliance on

spreadsheet-based tools, manual work-around solutions, labor-intensive reconciliations, and limited management information systems) were compounded during the restatement process. To complete the restatement,

corrections of numerous errors led to further increases in manual, oÅ-line processes and a corresponding

increase in the time required to complete the Ñnancial reporting process for each period. Ad hoc reporting was

developed to support analysis of Ñnancial results. We are using similar oÅ-line processes and reports to prepare

our 2003 Ñnancial statements. Our remediation plan will integrate these oÅ-line processes and reports into

automated applications during 2004 with a goal of reducing the time-to-close to a level consistent with SEC

requirements as soon as practicable. Multi-year enhancements will, however, be required to bring our

accounting systems infrastructure to market standards.

In the area of process risk, during the years aÅected by the restatement, we made numerous errors in

estimating the fair value of our derivatives and securities. As part of our remediation activities, we have taken

steps to review and validate virtually all pricing methodologies and strengthened veriÑcation processes. While

manual controls are robust, our valuation processes remain labor-intensive, and this may aÅect the timing of

the preparation of our 2003 Ñnancial statements. Developing the infrastructure to support timely valuation of

Ñnancial instruments will be a signiÑcant undertaking for us.

Finally, the complexity of our accounting process has been compounded with the need to implement a

number of new accounting standards in 2003. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more

information concerning new accounting standards. Focus on restatement activities delayed the analysis of the

requirements of these standards until late in 2003. Implementation of these standards will require increased

staÇng and additional operations support for our process to prepare our 2003 Ñnancial statements. See

""Ì RESTATEMENT RESULTS Ì Restatement Background and Remediation Program'' for more information concerning our remediation program. In addition to the redesign of Ñnancial reporting processes, under

the terms of our consent order with OFHEO, we are undertaking remedial actions relating to many of the

same areas as the remediation plan. See ""SUBSEQUENT EVENTS Ì Legal Proceedings Ì OFHEO

Investigation'' for more information.

As part of the remediation program, we are strengthening our resources and personnel dedicated to

accounting, control, and Ñnancial reporting. In addition to eÅorts taken to address speciÑc control issues, we

Freddie Mac

72
have increased resources and corporate focus on enhanced tools and processes for operational risk management. In October 2003, we hired a Chief Compliance OÇcer, a new position currently reporting directly to the

Chief Executive OÇcer. We have also retained experts to assist us in designing and implementing exemplary

disclosure processes and practices and corporate governance principles and practices. Finally, a formal review

of internal controls over Ñnancial reporting is underway. See ""EXPLANATORY NOTE'' regarding the scope

of our past evaluation and assessment of the eÅectiveness of disclosure controls and procedures and internal

controls over Ñnancial reporting. The eÅorts described above are expected to cause a signiÑcant increase in our

administrative expenses for periods subsequent to 2002 due to the increased accounting, auditing and

consulting resources retained by us, as well as related restatement and remediation expenses. In 2003, the

estimated costs of these resources and related restatement and remediation expenses totaled approximately

$120 million, and we anticipate incurring additional costs at a comparable or greater level in 2004. In addition,

as discussed in ""SUBSEQUENT EVENTS Ì Legal Proceedings,'' we entered into a consent order with

OFHEO in December 2003 and paid a civil money penalty of $125 million, which we will record as a

component of administrative expenses in 2003 and also incurred estimated legal expenses of approximately

$47 million for investigations related to the restatement. See ""Ì CONSOLIDATED RESULTS OF

OPERATIONS Ì Non-Interest Expense'' for historical levels of administrative expenses.

Overview of Operational Risk Management

Our management of operational risk is based on the principle that operational risk should be managed

directly by our business areas, subject to oversight by an independent risk oversight function. Under this

principle, operational risks should be:

‚ understood by the business units;

‚ measured, aggregated and assessed on a regular basis;

‚ eÅectively communicated to senior management; and

‚ managed within appropriate standards and limits.

We manage operational risk through business-speciÑc controls that range from appropriate governance

and management oversight to documented policies and procedures for our business processes. A senior

management committee is responsible for oversight of risks, while business area risk management and line

personnel manage and monitor operational risk on a continuous basis as part of our daily operations.

We use Ñrm-wide risk management tools, including a self-assessment process, to report and analyze

operational risks, controls, issues, and action plans. On a periodic basis, managers in each business area

complete a self-assessment of operational risks and controls, based on the Internal Control-Integrated

Framework adopted by the Committee of Sponsoring Organizations, or COSO. In addition, internal audit and

external parties perform reviews or audits to validate the eÅectiveness of key controls and the level of

operational risk in our business processes.

Prior to the restatement, in 2002, we began executing a multi-year plan developed to enhance operational

risk management, which included establishing the ORO function to provide independent oversight of

operational risk.

Management of Freddie Mac's Operational Risks

People risk. People risk is a signiÑcant risk for Freddie Mac because of the complexity of our business

and the skills needed by key personnel. We use retention programs for critical talent and training to

mitigate people risk. In 2003, we signiÑcantly increased our senior-level accounting expertise and

Ñnancial reporting staÅ, though signiÑcant eÅort continues in the recruiting for both staÅ level and key

vacant senior management positions such as oÇcer vacancies for market risk and credit risk oversight.

Process risk. Process risk includes transaction execution risk, model risk, and vendor management risk.

Transaction execution risk is the risk arising from a failure to develop or follow appropriate internal

processes for executing our business transactions. Proper transaction execution depends on quality data

and internal operations. Our eÅorts to mitigate this risk range from maintaining appropriate policies and

Freddie Mac

73
procedures to delegations of authority, which establish levels of review and approval as well as dollar

limits for business transactions.

Model risk is the risk that business decisions are made using model results that are incorrect. Model risk

is an important area for us because of our signiÑcant use of business and Ñnancial models. We seek to

mitigate model risk by validating inputs and assumptions, model code and theory, and model outputs.

Vendor management risk is the risk that we will suÅer an operational loss, a loss of intellectual property, a

breach of conÑdentiality, or other business harm because of our reliance on external parties to perform or

assist us in performing critical business functions and processes. Freddie Mac currently outsources to

external parties certain key functions, including processing functions for trade capture and interest-rate

and other market risk management analytics and pricing information (BlackRock Financial Management, Inc.), processing functions for mortgage loan underwriting (Electronic Data Systems Corporation,

or EDS), and back oÇce support (Bear Stearns Securities Corp.). We may enter into similar outsourcing

relationships with other vendors in the same or other business areas in the future. If one or more of these

key external parties were not able to perform their functions for a period of time or at an acceptable

service level as determined by us, our Ñnancial condition or results of operations could be adversely

aÅected, perhaps materially. We seek to mitigate this risk through detailed vendor requirements,

including business continuity planning, monitoring, and oversight.

Technology risk. Technology risk includes systems security and systems implementation risks. Systems

security risk is the risk of loss due to unauthorized access to computer systems. This risk is mitigated by

computer security measures and applications, corporate information access policies, and periodic access

reviews to ensure only authorized personnel have access to our systems. Systems implementation risk is

the risk of loss due to new or modiÑed systems that fail to meet operational requirements and result in a

business interruption or failure. To mitigate this risk, we have established corporate requirements for

system implementations and monitor implementations for these requirements.

External event risk. External event risk is the risk that a catastrophic event, such as a terrorist event,

natural disaster, breach of physical security or external fraud or theft, results in a signiÑcant business

disruption and an inability to process transactions through normal business processes. To mitigate this

risk, we maintain and test a comprehensive business continuity plan and locate backup facilities for

critical business processes and systems away from, although in the same metropolitan area as our main

oÇces.

Reporting and disclosure risk. Reporting and disclosure risk is the risk that materially inaccurate or

incomplete Ñnancial reports or oÅering documents are prepared and distributed to our investors in our

equity, debt and mortgage-related securities or to our regulators, or that Ñnancial reports are not produced

on a timely basis. For the years covered by the restatement, we corrected numerous errors in complying

with GAAP in connection with the preparation of our Ñnancial statements. We also engaged in an

extensive review of our valuation methodologies and results, corrected valuation and other errors that

were identiÑed in the restatement and enhanced the accuracy of the market pricing data we use when

determining fair values. For further information, see ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT.'' We are conducting a comprehensive review of

internal controls over Ñnancial reporting to formally evaluate controls, identify potential gaps and

establish remediation plans where needed. We have also established mitigating controls and procedures to

address control weaknesses, including a comprehensive review in 2003 of our accounting policies and

enhancements to disclosure practices. Although signiÑcant eÅorts have been made in this area, we are not

yet able to produce timely Ñnancial reports. Extensive plans have been developed and implementation is

underway to enhance our controls over Ñnancial reporting and to accelerate the time required to produce

Ñnancial reports. See ""Ì Internal Control Weaknesses,'' above.

Freddie Mac

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Interest-Rate Risk and Other Market Risks

We are exposed to the risk that changes in the level of interest rates or in other market factors will

adversely aÅect our cash Öows, the fair value of net assets and/or future earnings. We actively manage

interest-rate risk and other related market risks and take a disciplined approach to risk management. Our

disciplined approach to risk management and our active deployment of capital are essential to generating fair

value growth for shareholders in a wide range of interest-rate environments. Our interest-rate risk exposure

results primarily from uncertainty related to the amount and timing of mortgage prepayments associated with

mortgage loans and mortgage-related securities held in our retained portfolio and the potential mismatch in

the duration of our assets and liabilities. To a lesser extent, we are also exposed to interest-rate risk through

our credit guarantee activities.

Our fair value of net assets represents management's estimation of the fair value of our existing net assets.

It does not include an estimate of our net assets as an ongoing concern or potential sources of value such as

goodwill or other intangibles. The fair value of our Ñnancial instruments reÖects an assessment of the present

value of expected future cash Öows at a given point in time. To the extent that market conditions change, the

expected future cash Öows may diÅer from our estimates. As a result, changes in our fair value of net assets

may, over time, be diÅerent than our realized cash Öows. Also, because we have a long-term investment

horizon, changes in fair value due to changes in mortgage-to-debt spreads will not signiÑcantly aÅect year-toyear cash Öows.

Sources of Interest-Rate Risk and Other Market Risks

Retained Portfolio. Our retained portfolio activities expose us to interest-rate risk and other market

risks. This exposure results primarily from the uncertainty as to when borrowers will pay the outstanding

principal balance of mortgage loans and mortgage-related securities held in the retained portfolio, or

prepayment risk, and the resulting potential mismatch in the timing of our receipt of cash Öows on our assets

and our obligation to make payments on our liabilities. For virtually all of our mortgage investments, the

mortgage borrower has the option to make unscheduled payments of additional principal or to completely pay

oÅ a mortgage loan at any time before its scheduled maturity date (without having to pay prepayment

penalties) or to hold the mortgage to its stated maturity. The borrower's option makes the timing and amount

of mortgage prepayments (and thus the timing and amount of mortgage cash Öows received by us) very

sensitive to changes in interest rates, among other factors.

The retained portfolio comprises mortgage investments with a range of diÅerent characteristics, including

diÅerent stated maturities, underlying collateral, principal and interest payment structures and prepayment

patterns. To manage the interest-rate risk associated with this wide range of mortgage-related investments, we

employ a risk management strategy that seeks to substantially match the duration characteristics of our assets

and liabilities. We use various instruments, including short-term debt, callable and non-callable long-term

debt and derivatives, to mitigate the interest-rate risk that mortgage investments may prepay faster or slower

than expected.

Types of Interest-Rate Risk and Other Market Risks. The types of interest-rate risk and other market

risks that we are exposed to through our retained portfolio are described below.

‚ Duration and Convexity Risk. The magnitude of our interest-rate risk is directly related to the

eÅective duration and convexity of our portfolio of assets, liabilities and derivatives. Duration is a

measure of a Ñnancial instrument's price sensitivity to changes in interest rates, while convexity is

a measure of how much duration itself changes as interest rates move. We actively manage

duration and convexity risk through asset selection and structuring (i.e., by identifying or

structuring mortgage-related securities with attractive prepayment and other characteristics), by

issuing a broad range of both callable and non-callable debt instruments and by purchasing both

option-based and non-option-based interest-rate derivatives. To mitigate mortgage prepayment

risk and therefore interest-rate risk, we maintain a high percentage of callable debt and optionbased derivatives relative to the Ñxed-rate mortgage assets held in the retained portfolio.

We do not, however, hedge all prepayment option risk that exists at the time a mortgage is

purchased or that arises over its life. For the portion of risk not hedged at the time of purchase, we

Freddie Mac

75
undertake frequent rebalancing actions in order to keep our interest-rate risk exposure within

management limits (see ""Ì Interest-Rate Risk Management and Use of Derivatives Ì Use of

Derivatives Ì Adjust Funding Mix'' below). Although duration and convexity risks have been

maintained at relatively low levels as indicated by our PMVS and duration gap estimates (see

""Ì Measurement of Interest-Rate Risk Ì PMVS and Duration Gap''), fair value gains or losses

will generally occur as market conditions change. For example, fair value gains or losses occur

when our duration gap is positive or negative and the level of interest rates or shape of the yield

curve changes. Similarly, because we do not hedge all of the prepayment risk inherent in our

mortgage investment portfolio, fair value gains or losses occur from changes in the relationship

between interest-rate volatility expected at the time a mortgage loan is acquired (also known as

implied volatility) and the volatility actually realized.

We monitor duration and convexity risk against limits and reporting thresholds established by

senior management and the Board of Directors. Our interest-rate sensitivity is estimated and

reported through PMVS and duration gap measures. These measures are estimated on a daily

basis and publicly reported on a monthly basis. See ""Ì Measurement of Interest-Rate Risk''

below.

‚ Yield Curve Risk. Yield curve risk is the risk that non-parallel shifts in the yield curve (such as

a Öattening or steepening) will adversely aÅect our cash Öows, fair value of net assets and/or

future earnings. Changes in the shape, or slope, of the yield curve often arise due to changes in the

market's expectation of future interest rates at diÅerent points along the yield curve. For this

reason, we evaluate our exposure to yield curve risk by examining potential reshaping scenarios at

various points along the yield curve. Our yield curve risk under a speciÑed yield curve scenario is

included in our PMVS measures.

‚ Volatility Risk. Volatility risk is the risk that changes in the market's expectation of future

interest rates will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.

The market's expectation about the future volatility of interest rates, or implied volatility, is a key

determinant of the value of an interest-rate option. Higher expected volatility implies a greater

likelihood that the mortgage asset will either extend or contract. For example, higher interest-rate

volatility implies a higher likelihood that interest rates will decline to levels that make mortgage

prepayments attractive to homeowners, thereby making their prepayment option more valuable

and making our mortgage assets subject to their prepayment option less valuable. We manage

volatility risk through asset selection and by maintaining a consistently high percentage of optionembedded liabilities and option-based derivatives relative to our Ñxed-rate 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. See ""Ì Duration and Convexity Risk'' above for

further discussion of implied and realized volatility.

‚ Basis Risk. Basis risk is the risk that interest rates in diÅerent markets will not move in tandem

and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings. This risk

arises principally because we fund and hedge mortgage investments with agency debt and London

Interbank OÅered Rate, or LIBOR, and Treasury-based interest rate derivatives. The basis risk

arising from funding retained portfolio investments with agency debt, which we do not actively

manage, is discussed below in ""Mortgage-to-Debt Spread Risk.'' We also incur basis risk when we

use LIBOR or Treasury-based instruments in our funding or risk management activities. We

monitor the fair value Öuctuations associated with these basis risks and manage this exposure by

adjusting our mix of LIBOR and Treasury-based instruments and company debt in response to

changes in the expected interest rate relationships in these diÅerent markets. We monitor basis

risk on a daily basis and maintain internal limits on the amount of basis risk exposure.

‚ Prepayment Model Risk. Prepayment model risk is the risk that actual mortgage prepayment

behavior will diÅer from the prepayment behaviors we forecast using our proprietary internal

models and will adversely aÅect our cash Öows, fair value of net assets and/or future earnings.

These models are used to determine the estimated duration of mortgage assets for PMVS and

duration gap measures. To mitigate prepayment model risk, we perform extensive monthly error

Freddie Mac

76
tracking and sensitivity analysis to facilitate informed asset selection and risk management

decisions. However, period-to-period returns can be aÅected by diÅerences between prepayments

forecasted by the models and actual prepayments or the integrity of data used in the models and

risk management systems.

‚ Mortgage-to-Debt Spread Risk. Mortgage-to-debt spread risk is the risk that an increase in the

spread between the interest rate on mortgage assets and debt used to Ñnance these investments

will, in the short term, adversely aÅect our cash Öows, fair value of net assets and/or future

earnings. Mortgage-to-debt spread risk is inherent to any mortgage investor that uses debt to

Ñnance mortgage purchases, as is the case with our retained portfolio and those of other large

mortgage investors.

We consider mortgage-to-debt spread risk in our asset purchase activities by establishing

thresholds for expected ROE for new asset purchases. Once mortgage assets have been purchased

for the retained portfolio, we generally hold a substantial portion of these assets for the long-term,

with an objective of realizing the expected initial ROE on those assets over this time frame.

Therefore, we do not take actions attempting to manage or hedge period-to-period Öuctuations in

the fair value of the existing retained portfolio resulting from changes in mortgage-to-debt spreads.

We do not believe such Öuctuations will signiÑcantly aÅect the long-term return on our existing

retained portfolio.

‚ Foreign Currency Risk. Foreign currency risk is the risk that Öuctuations in currency exchange

rates (e.g., foreign currencies to the U.S. dollar) will adversely aÅect our cash Öows, fair value of

net assets and/or future earnings. Our exposure to foreign currency risk arises primarily because

we issue debt denominated in currencies other than the U.S. dollar, our functional currency. In

the case of our 4Reference Notes securities program, we are obligated to make periodic interest

and principal payments in euros. We mitigate the risk associated with Öuctuations in currency

exchange rates by entering into swap transactions that eÅectively convert foreign-denominated

obligations into U.S. dollar denominated obligations. The exchange rate risk is completely hedged

when the debt's principal and the swap's notional amounts and the timing of the payments are

identical. In some market conditions, we use short-term currency hedges until permanent hedges

are secured. Our exposure to foreign currency risk is minimal because only a small percentage of

our debt is denominated in foreign currencies (approximately 6 percent as of December 31, 2002)

and because the vast majority of the currency-risk exposure arising from debt issuances is

eliminated when hedges are established for the entire debt maturity. Foreign currency swaps also

expose us to institutional credit risk, which we discuss under ""Ì Credit Risk Ì Institutional

Credit Risk.''

Credit Guarantee Activities. The fair value of the existing credit guarantee portfolio Öuctuates with

changes in interest rates and credit expectations. We do not hedge changes in the fair value of our existing

credit guarantee portfolio, other than the interest-rate exposure related to net buy-ups (upfront payments

made by us which increase the guarantee fee that we will receive in connection with our PC guarantee). We

also hedge expected gains (losses) resulting from our mortgage security program cycles. Timing diÅerences

caused by mortgage security program cycles can lead to signiÑcant interest expense, particularly in a rapidly

declining interest-rate environment. If the interest rate paid to a PC investor is higher than the reinvestment

rate on payments received from mortgage borrowers, we bear the cost diÅerence, recognized as interest

expense, for the time period between when the borrower pays us and when we reduce the PC balance.

While year-to-year changes in the fair value of the guarantee portfolio may have a signiÑcant impact on

annual fair value results, we believe that changes in the fair value of our existing guarantee portfolio are not a

good indication of long-term fair value expectations because such changes do not reÖect the strong probability

that over time replacement business will largely replenish guarantee fee income lost because of prepayments.

Interest-Rate Risk Management and Use of Derivatives

Our disciplined approach to interest-rate risk management utilizes a variety of asset and liability related

strategies that frequently involve the use of derivative transactions. The primary ways in which we use

derivatives to manage interest-rate risk are discussed below under ""Ì Use of Derivatives.'' Our management

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of interest-rate risk also involves asset-related strategies through which we seek to invest in mortgage assets

that are less sensitive to prepayment risk. These strategies include the creation of Structured Securities from

assets held in our retained portfolio, the sale of some of these securities, and the retention of those classes that

are expected to optimize our risk or return proÑle.

Interest-rate risk management activities can signiÑcantly aÅect the level and timing of our net income

due to a variety of factors. These factors include the amount of prepayment risk hedged at the time mortgage

assets are purchased versus the amount hedged over time through rebalancing actions, the risk tolerances that

management deems advisable at various times and changes in the cost of rebalancing transactions. Although

risk management activities may be highly eÅective when viewed from an economic perspective, they may

contribute to volatility in earnings under GAAP, particularly when derivatives are not in qualifying hedge

accounting relationships. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 1: RESTATEMENT'' for information concerning certain capital markets transactions, which had an

accounting eÅect disproportionate to the risk management eÅect.

Summary of Derivative Positions. The net fair value of our derivatives was a net asset balance of

$9,426 million at December 31, 2002 and a net liability balance of $648 million at December 31, 2001. This

includes certain commitments to purchase and sell mortgage loans, mortgage-related securities and agency

debt that we treat as derivative instruments. In our consolidated balance sheets, derivative instruments are

presented in ""Derivative assets, at fair value'' and ""Derivative liabilities, at fair value.'' Table 37 summarizes

our derivative positions at December 31, 2002 and December 31, 2001.

Table 37 Ì Total Derivative Portfolio

Net Asset

(Liability)

Notional at Fair

Balance Value(1)

(dollars in millions)

As of December 31, 2002

Interest-rate derivatives(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 969,080 $9,169

Commitments(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191,563 253

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,160,643 9,422

Credit derivatives(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,301 4

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,177,944 $9,426

As of December 31, 2001

Interest-rate derivatives(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,038,206 $ (537)

Commitments(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121,588 (111)

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,159,794 (648)

Credit derivatives(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,984 Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,170,778 $ (648)

(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. Collateral was held on approximately 90% of the exposure to derivative counterparty

risk as of December 31, 2002 and 96% of the exposure as of December 31, 2001. See Table 38 for more information about our

derivative counterparty credit exposure.

(2) Includes a prepayment management agreement entered into during 2002. See ""Ì Types of Derivatives'' for more information

concerning the nature of the prepayment management agreement.

(3) Commitments to purchase and sell mortgage loans, mortgage-related securities and various debt securities that are subject to the

requirements of SFAS 133 and accordingly must be recorded at fair value on the consolidated balance sheets.

(4) Consists of certain credit risk-sharing agreements that are subject to the requirements of SFAS 133 and accordingly must be

recorded at fair value on the consolidated balance sheets. See "" Ì Credit Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk

Management Strategies'' for more information.

(5) Of the nine Linked Swap pairs, six remained outstanding at December 31, 2001 with a notional amount of $60 billion. These six

remaining Linked Swap pairs were terminated during 2002. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 1: RESTATEMENT'' for further information.

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Types of Derivatives. We use derivatives that are common in the Ñnancial markets to conduct our risk

management activities. Substantially all of our derivative positions fall into the following four categories (see

Table 40 for notional balances for each of these derivative types):

‚ LIBOR-based interest-rate swaps;

‚ LIBOR and Treasury-based exchange-traded futures;

‚ LIBOR and Treasury-based options (including swaptions); and

‚ Foreign currency swaps.

In addition to swaps, futures and options, our derivative positions include certain purchase and sale

commitments and other contractual agreements as discussed further below.

Forward Purchase and Sale Commitments. We routinely enter into forward purchase and sale

commitments for mortgage loans, mortgage-related securities and agency debt. Some of these commitments

are subject to the requirements of SFAS 133 and accordingly must be recorded at fair value on our

consolidated balance sheets.

Prepayment Management Agreement. Practices of seller/servicers may aÅect prepayment levels on

mortgages that underlie PCs. As a result, mortgages underlying some PCs may prepay faster than similar

mortgages underlying other PCs, adversely aÅecting our management and guarantee income and the

performance of our mortgage-related securities. We have taken steps to achieve our corporate objective that

prepayment experience on Freddie Mac PCs be consistent with market norms. In 2002, we required that

certain mortgage pools we considered to pose elevated risk of prepayment be covered by a prepayment

management agreement to partially compensate us for the adverse Ñnancial impacts caused by disproportionately higher mortgage prepayments. We have also oÅered an incentive through an adjusted guarantee fee level

when the prepayment experience of the mortgage pools is within deÑned ranges. This type of agreement is

accounted for as a derivative in accordance with SFAS 133 and classiÑed as no hedge designation with

changes in fair value recorded as ""Derivative gains (losses)'' on the consolidated statements of income. At

December 31, 2002, approximately $117.2 billion of the mortgages underlying PCs included in Freddie Mac's

total mortgage portfolio (see Table 1) were subject to this type of agreement. Amounts due to us under this

type of agreement will be reported as a component of our management and guarantee income. Other

contractual incentives and penalties based on sellers' prepayment experience on outstanding and new PCs are

being developed.

Use of Derivatives. To manage interest-rate and other market risks, we use derivatives primarily to:

‚ Hedge forecasted issuances of debt and synthetically create callable and non-callable funding;

‚ Hedge foreign currency exposure associated with certain debt issuances; and

‚ Regularly adjust or rebalance our funding mix in order to more closely match changes in the

interest-rate characteristics of our mortgage assets.

Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase

mortgage investments on an opportunistic basis for a future settlement date that often ranges from two weeks

to three months after the date of the commitment. To facilitate larger and more predictable debt issuances

that contribute to lower funding costs, we use interest-rate derivatives to hedge the anticipated debt issuances

associated with these periodic mortgage purchases. In doing so, we eÅectively hedge the interest-rate risk

exposure from the time the mortgage is committed to be purchased to the time the debt is issued. We typically

fund mortgage investments with a combination of callable and non-callable debt of various maturities in order

to better match the cash Öow and optionality characteristics of the mortgage investments. Through the use of

interest-rate derivatives, we can synthetically create the economic equivalent of these various funding

structures. For example, the combination of a short-term debt instrument and a pay Ñxed-swap is the

economic equivalent of a long-term debt instrument of comparable maturity. Similarly, the combination of

non-callable debt and a swaption (or option to enter into a swap) is the economic equivalent of callable debt.

The ability to either issue debt or synthetically create the economic equivalent through derivatives increases

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funding Öexibility, allows us to better match asset and liability cash Öows and often reduces the overall funding

cost.

Hedge Foreign Currency Exposure. On a less frequent basis, we also use derivatives to hedge foreign

currency exposure associated with foreign currency denominated debt issuances, such as our 4Reference

Notes securities program. Through the use of derivatives, we are able to mitigate essentially all currency risk

at the time of issuance.

Adjust Funding Mix. We undertake frequent rebalancing actions in order to keep our interest-rate risk

exposure within management limits. As interest rates decline, mortgage prepayments tend to increase and the

expected life of mortgages tends to decrease. In this environment, we typically enter into receive-Ñxed swaps

or purchase Treasury-based derivatives to adjust the duration of our funding to oÅset the declining mortgage

duration. As interest rates increase, prepayments tend to decrease and lengthen the expected life of mortgages.

In this case, we typically enter into pay-Ñxed swaps or sell Treasury-based derivatives in order to adjust the

duration of our funding to oÅset increasing mortgage duration.

Derivative-Related Risks

Our use of derivatives exposes us to counterparty credit risk. Exchange-traded derivatives, such as futures

contracts, do not measurably increase our counterparty credit risk because changes in the value of open

exchange-traded contracts are settled daily through a Ñnancial clearinghouse established by each exchange.

Over-the-counter, or OTC, derivatives, however, expose us to counterparty credit risk because transactions are

executed and settled between two parties. When an OTC derivative has a market value above zero at a given

date (i.e., an asset reported as ""Derivative Assets'' on the consolidated balance sheets), then the counterparty

could potentially be obligated to deliver cash and/or securities having that market value to satisfy its

obligation to us under the derivative. Credit risk arises from the possibility that the counterparty will not be

able to deliver the amount owed. We are also subject to derivative market liquidity risk arising from possible

diÇculties in meeting our need for derivatives.

Derivative Counterparty Credit Risk. We actively manage our exposure to counterparty credit risk. We

use several tools to manage and minimize counterparty credit risk including:

‚ Review of external rating analyses;

‚ Strict standards for approving new derivative counterparties;

‚ Continuous monitoring of counterparties;

‚ DiversiÑcation of counterparties, which is discussed under ""Ì Derivative Market Liquidity Risk'';

‚ Master netting agreements and collateral agreements;

‚ Active credit rebalancing; 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 ensure

that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are assigned to

each counterparty based on quantitative and qualitative analysis, and are updated on a regular basis.

Additional reviews are completed when market conditions or events aÅecting an individual counterparty

occur.

Derivative Counterparties. Our standards for entering into derivative agreements include rigorous

internal credit and legal reviews. Our derivative counterparties carry external credit ratings among the highest

available from the major rating agencies. All of these counterparties are major Ñnancial institutions and are

experienced market-makers 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. Master netting agreements provide for

the netting of amounts receivable and payable from an individual counterparty, which reduces our exposure to

a single counterparty in the event of default. For example, if we have a gain position on one derivative and a

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loss position on another derivative with the same counterparty, then the loss can be netted with the gain to

determine the amount of our net exposure to the counterparty. On a daily basis, the market value of each

counterparty's derivatives outstanding is calculated to determine the amount of the current exposure. Our

collateral agreements require most counterparties to post collateral for the amount of our net exposure to

them, taking into consideration posting thresholds. Derivative exposures and collateral amounts are monitored

on a daily basis using both internal pricing models and dealer price quotes. Our derivative counterparties

typically transfer collateral within one to three business days based on their valuations. As described further

below, this time lag in posting collateral can aÅect our net uncollateralized exposure to derivative counterparties. All of our collateral is held by a third-party custodian.

The collateral posted by counterparties serves to protect us against the risk of counterparty credit losses.

Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities or

mortgage-related securities. In the event a counterparty defaults on its obligations under the derivatives

agreement and the default is not remedied in the manner prescribed in the agreement, we have the right under

the agreement to direct the custodian bank to transfer the collateral to us or, in the case of non-cash collateral,

to sell the collateral and transfer the proceeds to us.

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Table 38 summarizes our exposure to counterparty credit risk in our interest-rate derivatives. This table is

useful in understanding our credit risk related to our OTC derivative portfolio.

Table 38 Ì Derivative Counterparty Credit Exposure

December 31, 2002

Total Weighted Avg.

Exposure Exposure, Contractual

Number of at Fair Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Notional Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 2,438 $ 386 $ 386 4.4 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 609 299 13 25.5 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 97,229 1,161 104 4.3 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 205,769 3,764 307 4.9 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 214,833 2,922 183 4.6 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 83,776 1,559 48 3.7 $1 million or less

A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 1,655 21 3 1.8 $1 million or less

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 606,309 $10,112 $1,044 4.5

Other derivatives(6) ÏÏÏ 245,552

Prepayment

management

agreement(7) ÏÏÏÏÏÏÏ 117,219

Commitments ÏÏÏÏÏÏÏÏ 191,563

Credit derivatives(8) ÏÏÏ 17,301

Total derivatives ÏÏÏÏÏÏ $1,177,944

December 31, 2001

Weighted Avg.

Total Exposure, Contractual

Number of Exposure at Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Notional Fair Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 27,858 $ Ì $Ì 4.7 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 616 83 Ì 26.2 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 203,155 331 12 5.3 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 259,012 632 52 4.6 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 76,445 61 Ì 5.6 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 91,807 678 Ì 4.8 $1 million or less

BBB° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 88 2 1 7.5 Full posting required

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 658,981 $1,787 $65 5.0

Other derivatives(6)ÏÏÏÏÏ 379,225

Commitments ÏÏÏÏÏÏÏÏÏ 121,588

Credit derivatives(8) ÏÏÏÏ 10,984

Total derivatives ÏÏÏÏÏÏÏ $1,170,778

(1) We use the lower of S&P and Moody's ratings to manage collateral requirements. In this table, the rating of the legal entity (or the

guarantor of the legal entity) is stated in terms of the S&P equivalent.

(2) Based on legal entities. AÇliated legal entities are reported separately.

(3) For each counterparty, this amount includes derivatives with a net positive fair value (recorded as ""Derivative assets, at fair value''

and ""Derivative liabilities, at fair value'') including the related accrued interest receivable/payable (net) (recorded in ""Accounts

and other receivables, net'' and ""Accrued interest payable'').

(4) ""Total Exposure at Fair Value'' less collateral held as determined at the counterparty level.

(5) Counterparties are required to post collateral when their exposure exceeds agreed-upon collateral posting thresholds. These

thresholds are typically based on the counterparty's credit rating and are individually negotiated.

(6) Consists primarily of exchange-traded contracts. Exchange-traded derivatives do not measurably increase our exposure to

counterparty credit risk because changes in value of open exchange-traded contracts are settled daily through a Ñnancial

clearinghouse established by each exchange.

(7) See ""Ì Interest-Rate Risk Management and Use of Derivatives'' for additional information concerning the nature of the prepayment

management agreement.

(8) See ""Ì CREDIT RISK Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for additional information

about credit derivatives.

Our exposure to OTC derivative counterparties varies from period to period depending on changes in

interest rates, foreign currency exchange rates and the amount of derivatives held. Our uncollateralized

exposure to OTC derivative counterparties, after applying netting agreements and collateral, increased to

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$1,044 million as of December 31, 2002, from $65 million as of December 31, 2001. This increase in

uncollateralized exposure was due to the following four factors:

‚ A signiÑcant increase in uncollateralized exposure to AAA-rated counterparties, which typically

are not required to post collateral given their low risk proÑle;

‚ DiÅerences between fair value estimates used by our derivative counterparties in determining

collateral to be posted and our restated estimates of derivative fair values used in our Ñnancial

reporting. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì

NOTE 1: RESTATEMENT'' for a discussion of the corrections to our estimates of derivative fair

values; 

‚ Market movements during the time period between when a derivative is marked to fair value and

the date we receive the related collateral. Our derivative counterparties typically post collateral

one to three business days after we request collateral; and

‚ Exposure below the posting thresholds of our derivative counterparties.

As indicated in Table 38, approximately 90 percent of our counterparty credit exposure was collateralized

at December 31, 2002. In the extremely unlikely event that all of our OTC derivative counterparties were to

have defaulted simultaneously on December 31, 2002, the maximum loss to us would have been $1,044

million.

Derivative Portfolio Stress-Testing. Market values of derivatives can change signiÑcantly when market

conditions change. As a result, we monitor the risk that our uncollateralized exposure to each of our OTC

derivative counterparties will increase under certain adverse market conditions. We regularly perform severe

market stress tests to evaluate the potential additional uncollateralized exposure to each of our OTC derivative

counterparties. We use conservative assumptions about default and recovery rates for each counterparty to

estimate the potential increase in exposure.

To date, we have not incurred any credit losses on OTC derivative counterparties or set aside speciÑc

reserves for institutional credit risk exposure. We do not believe such reserves are necessary, given our

counterparty policies and collateral requirements.

Derivative Market Liquidity Risk. Derivative market liquidity risk refers to the risk that we may not be

able to enter into derivative transactions at a reasonable cost. A lack of suÇcient capacity or liquidity in the

derivatives market could limit our risk management activities, increasing our exposure to interest-rate risk.

Limited liquidity or capacity in the derivatives market could make derivatives that we need for risk

management purposes either unavailable or prohibitively expensive. To ensure 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

Reference Notes to rebalance our portfolio.

To ensure that derivative transactions can be replaced if a counterparty defaults, we limit our duration

and convexity exposure to each counterparty. As of December 31, 2002, the Ñve largest counterparties, based

on notional amount outstanding, each with an independent credit rating of ""A'' or better, represented

52 percent of our OTC derivatives.

Interest-Rate Derivative Tables

Table 39 shows the notional amount for each of our principal hedge accounting categories under

SFAS 133 and the corresponding impact of those positions on our Ñnancial statements. The application and

eÅectiveness of our hedging strategies can materially aÅect stockholders' equity and the timing of our

recognition of earnings.

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As Table 39 shows, a signiÑcant portion of our derivatives was not designated in hedge accounting

relationships at December 31, 2002 and 2001.

Table 39 Ì Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions

Consolidated Balance Sheet Consolidated Balance Sheet

Description December 31, 2002 December 31, 2001

Notional Fair Value AOCI(3) Notional Fair Value AOCI(3)

Amount(1) (Pre-Tax)(2) (Net of Tax) Amount(1) (Pre-Tax)(2) (Net of Tax)

(dollars in millions)

Fair value hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 144,665 $ 9,032 $ Ì $ 83,406 $ 914 $ Ì

Cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119,999 (8,421) (5,465) 332,939 (4,412) (2,737)

No hedge designation(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 913,280 8,815 Ì 754,433 2,850 Ì

Subtotal of open derivative positions(3) ÏÏÏÏÏÏ 1,177,944 9,426 (5,465) 1,170,778 (648) (2,737)

Balance related to closed derivatives(3) ÏÏÏÏÏÏ Ì Ì (4,412) Ì Ì (2,020)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,177,944 $ 9,426 $(9,877) $1,170,778 $ (648) $(4,757)

Consolidated Statements of Income

Description Year Ended December 31, 2002 Year Ended December 31, 2001

Hedge Accounting Derivative Gains Hedge Accounting Derivative Gains

Gains (Losses)(6) (Losses)(3)(7) Gains (Losses)(6) (Losses)(3)(7)

(dollars in millions)

Fair value hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $241 $ Ì $(280) $ Ì

Cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (54) 103 (14) 42

No hedge designation(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5,838 Ì (1,899)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $187 $5,941 $(294) $(1,857)

(1) Of the nine Linked Swap pairs, six remained outstanding at December 31, 2001 with a notional amount of $60 billion. These

remaining six Linked Swap pairs were terminated during 2002. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 1: RESTATEMENT'' for further information.

(2) 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.

(3) Derivatives that meet speciÑc criteria are accounted for as cash Öow hedges under SFAS 133. Changes in the eÅective portion of the

fair value of these open derivative contracts are recorded in AOCI, net of taxes. Net realized gains and losses on closed (i.e.,

terminated or redesignated) cash Öow hedges for which the related forecasted transaction has not been determined probable of not

occurring are also classiÑed in AOCI.

(4) A signiÑcant portion of our derivatives is not designated in hedge accounting relationships, and is reported as no hedge designation.

For most derivatives not qualifying as an accounting hedge, fair value gains and losses are reported as ""Derivative gains (losses)'' on

our consolidated statements of income. For purchase and sale commitments of securities classiÑed as trading under SFAS 115 (with

notional balances of approximately $147 billion and $85 billion at December 31, 2002 and 2001, respectively), fair value gains and

losses are reported as ""Gain (loss) in investment activity'' on our consolidated statements of income and therefore, those fair value

gains and losses are not included above.

(5) Includes credit derivatives. See ""Ì Credit Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for more

information.

(6) ""Hedge Accounting Gains (Losses)'' arise when the fair value change of a derivative does not exactly oÅset the fair value change of

the hedged item. For further information, See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 12:

DERIVATIVES''.

(7) Includes gains or losses reclassiÑed from AOCI as a result of the termination of cash Öow hedge designations.

EÅect on Financial Statements. The funding strategy of hedging the variability of cash Öows from

forecasted issuances of debt with pay-Ñxed swaps described above is deÑned as a cash Öow hedge under SFAS

133. At December 31, 2002, $120.0 billion notional amount of derivative contracts was designated in cash Öow

hedge relationships, including $91.2 billion notional amount of pay-Ñxed swaps and $27.4 billion notional

amount of commitments. The current fair value of the derivatives included in cash Öow hedging relationships

is recorded on the balance sheet as a derivative asset or derivative liability. For derivatives that receive cash

Öow hedge accounting treatment under SFAS 133, the eÅective portion of the change in fair value of the

derivative asset or derivative liability is recorded in the stockholders' equity section of our consolidated balance

sheets in AOCI. The eÅective portion of the derivative generally oÅsets, on a cumulative basis, the cumulative

change in the present value of the hedged forecasted item's cash Öows.

As of December 31, 2002, the cumulative change in the fair value of all derivatives designated in cash

Öow hedge relationships that were still open or for which the forecasted transactions had not occurred since

SFAS 133 was implemented on January 1, 2001 (net of amounts previously reclassiÑed to earnings through

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December 31, 2002) was a loss of approximately $9.9 billion on an after-tax basis. This amount was recorded

in AOCI as described above and in Table 39.

The $9.9 billion in hedging losses related to cash Öow hedges was composed of approximately $5.5 billion

in net unrealized derivatives losses on open hedges and approximately $4.4 billion in net realized derivatives

losses on closed hedges. The $5.5 billion in unrealized fair value losses on existing cash Öow hedges can change

substantially due to future changes in interest rates. For example, a decrease in LIBOR generally will increase

the amount of unrealized losses recorded in AOCI. An increase in LIBOR generally will decrease unrealized

losses or create an unrealized gain to be recorded in AOCI, depending on the magnitude of the rate

movement. The increase in unrealized fair value losses on open hedges recorded in AOCI generally should be

oÅset by a reduction in future borrowing costs on related forecasted debt issuances. Conversely, decreases in

unrealized losses on pay-Ñxed swaps generally should be oÅset by a comparable increase in future borrowing

costs.

The remaining portion of the $9.9 billion in hedging losses recorded in AOCI at December 31, 2002

related to $4.4 billion of realized losses on terminated cash Öow hedge relationships. Terminated cash Öow

hedges involve derivatives that have been closed or are no longer designated in cash Öow hedge relationships.

Fluctuations in prevailing market interest rates have no impact on the realized portion of AOCI relating to

losses on terminated cash Öow hedges. Therefore, the $4.4 billion in realized losses 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 loss associated with the forecasted transaction will be reclassiÑed into earnings

immediately.

Assuming no changes in interest rates or other factors aÅecting derivative valuations, we estimate that

approximately $3.9 billion (net of taxes) of the $9.9 billion of hedging losses (of which $4.4 billion is realized

and $5.5 billion is unrealized) in AOCI at December 31, 2002 will be reclassiÑed into earnings in the year

ended December 31, 2003. Even though changes in interest rates may cause signiÑcant Öuctuations in

unrealized losses recorded in AOCI and realized losses that are reported in income, these changes should not

have a signiÑcant eÅect on our eÅective funding costs subject to these hedges.

To qualify for cash Öow hedge accounting treatment, hedged forecasted issuances of debt must be

considered probable. In addition, SFAS 133 imposes a variety of operational requirements that must be met.

To the extent that a cash Öow hedge relationship fails to qualify for hedge accounting, recognition of related

losses included in AOCI would be accelerated.

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Table 40 summarizes the notional amounts for each type of derivative, including our new contracts,

maturities and terminations during the year. This information indicates the level and type of derivative activity

undertaken by us during the year and reÖects our use of diÅerent derivative products in the execution of our

risk management strategies. The notional amounts of our derivatives are a reference point for counterparties to

determine the payments owed between us and our counterparties under the contract. The notional amount of a

derivative is not an indication of the fair value of the position or of the cash Öows related to the position. In

most market environments, interest-rate swaps have fair values that are a small percentage of their notional

amount.

Table 40 Ì Changes in Derivative Notional Amounts

Year Ended December 31, 2002

Notional or Contractual Amount(1)

Beginning New Maturities/ Ending

Balance Contracts Terminations Balance

(dollars in millions)

Interest-rate swaps

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 250,461 $ 60,381 $ (175,084) $ 135,758

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,957 136,360 (173,920) 149,397

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,353 10,338 (10,750) 4,941

Option-basedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408,453 195,927 (314,713) 289,667

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,987 680,174 (614,750) 228,411

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,995 28,698 (9,006) 43,687

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,038,206 $1,111,878 $(1,298,223) 851,861

Prepayment management agreement(2) ÏÏÏÏÏÏÏ 117,219

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191,563

Credit derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,301

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,177,944

Year Ended December 31, 2001

Notional or Contractual Amount(1)

Beginning New Maturities/ Money Ending

Balance(4) Contracts Terminations Subtotal Managers(5) Balance(6)

(dollars in millions)

Interest-rate swaps

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $143,442 $ 222,723 $ (116,007) $ 250,158 $ 303 $ 250,461

Receive-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 126,473 273,638 (213,562) 186,549 408 186,957

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏ 7,082 4,491 (6,220) 5,353 Ì 5,353

Option-basedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 123,684 435,937 (151,527) 408,094 359 408,453

FuturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,517 911,223 (772,569) 161,171 1,816 162,987

Foreign-currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,865 13,852 (722) 23,995 Ì 23,995

Forward contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,250 4,150 (5,400) Ì Ì Ì

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $435,313 $1,866,014 $(1,266,007) $1,035,320 $2,886 1,038,206

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121,588

Credit derivatives(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,984

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,170,778

(1) Notional amounts are used to calculate the periodic amounts to be received and paid and generally do not represent actual amounts

to be exchanged or directly reÖect our exposure to institutional credit risk. Notional amounts are not recorded as assets or liabilities in

our consolidated balance sheets.

(2) See ""Ì Interest-Rate Risk Management and Use of Derivatives Ì Types of Derivatives'' for additional information concerning the

prepayment management agreement.

(3) See ""Ì Credit Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for additional information on credit

derivatives.

(4) As a result of our change from settlement date to trade date accounting for derivative instruments as of January 1, 2001, the

beginning balance as of January 1, 2001 decreased from the ending balance as of December 31, 2000 by $1.8 billion.

(5) Ending balances for interest-rate derivatives held by our money managers are shown separately in this table because the activity

related to these interest-rate derivatives is not available in 2001.

(6) Of the nine Linked Swap pairs, six remained outstanding at December 31, 2001 with a notional amount of $60 billion. These

remaining six Linked Swap pairs were terminated during 2002. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 1: RESTATEMENT'' for further information.

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The total notional amount of our interest-rate derivatives (excluding the prepayment management

agreement, commitments and credit derivatives) decreased by $186.3 billion from December 31, 2001 to

December 31, 2002. This decrease in notional amount was due primarily to the following three factors:

‚ A reduction in our use of pay-Ñxed swaps in response to declining interest rates;

‚ A reduction in our use of option-based derivatives; and

‚ Our eÅorts to close out oÅsetting derivative positions with various counterparties.

Table 41 summarizes the change in derivative fair values for the periods presented. See ""Ì CRITICAL

ACCOUNTING POLICIES Ì Fair Value'' for a discussion of how changes in fair values aÅect our reported

Ñnancial results. Further detail on derivative assets, which represent our exposure to our derivative

counterparties, is provided in Table 38.

Table 41 Ì Changes in Interest-Rate Derivative Fair Values(1)

Year Ended

December 31,

2002 2001

(dollars in millions)

Beginning balance Ì Net asset (liability)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (537) $ 630

Less: exchange-traded derivatives(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89 42

Adjusted beginning balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (626) 588

Changes in fair value(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,822 (3,242)

Fair value of new contracts when entered into during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,390 1,664

Contracts realized or otherwise settled during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,793 364

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,379 (626)

Plus: exchange-traded derivatives activity and fair value changes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 790 89

Ending balance Ì Net asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,169 $ (537)

(1) This table excludes commitments to purchase and sell mortgage loans, mortgage-related securities and various debt securities and

credit derivatives.

(2) The fair value changes for exchange-traded derivatives are excluded because their fair values are determined by the individual

exchanges and not by us.

(3) Activity related to interest-rate derivatives held by our money managers is not available in 2001. The change in fair value of

$2 million for these interest-rate derivatives between December 31, 2001 and 2002 is included herein.

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Table 42 shows the notional amount and fair value for each derivative type and the maturity proÑle of the

positions. The fair values of the derivative positions are presented on a product-by-product basis, without

netting by counterparty. This information is useful in understanding how the fair values have changed over

time. The fair value of a longer-term derivative generally will vary more over time than a comparable

derivative with a shorter maturity. A positive fair value in Table 42 for a derivative product category is the

estimated amount, prior to netting by counterparty, that we would be entitled to receive if we terminated those

transactions. A negative fair value is the estimated amount, prior to netting by counterparty, that we would

owe if we terminated the derivatives in that product category.

Table 42 Ì Derivative Fair Values and Maturities

As of December 31, 2002

Fair Value(2)

Greater than Greater

Notional Total Fair Less than 1 to 3 3 and up to than

Amount Value(1) 1 year Years 5 Years 5 years

(dollars in millions)

Interest-rate swaps

Pay-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 135,758 $(13,178) $ (167) $ (522) $(2,359) $(10,130)

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,397 7,097 222 910 1,339 4,626

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,941 (10) 1 (18) (1) 8

Option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 289,667 9,416 3,020 3,189 1,901 1,306

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,411 790 707 79 4 Ì

Foreign-currency swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,687 5,054 2,439 1,218 330 1,067

Prepayment management agreement(3) ÏÏÏÏÏÏÏ 117,219 Ì Ì Ì Ì Ì

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191,563 253 253 Ì Ì Ì

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,160,643 9,422 $6,475 $4,856 $ 1,214 $ (3,123)

Credit derivatives(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,301 4

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,177,944 $ 9,426

As of December 31, 2001

Fair Value(2)(5)

Greater than Greater

Notional Total Fair Less than 1 to 3 3 and up to than

Amount Value(1) 1 year Years 5 Years 5 years

(dollars in millions)

Interest-rate swaps

Pay-ÑxedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 250,461 $(10,113) $ (296) $(1,864) $(2,739) $(5,214)

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186,957 4,157 306 854 1,573 1,424

Basis (Öoating to Öoating) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,353 (89) Ì (1) (24) (64)

Option-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408,453 5,609 1,373 1,622 1,158 1,456

Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,987 (37) (13) (13) (11) Ì

Foreign-currency swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,995 (64) (83) 64 (33) (12)

Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121,588 (111) (111) Ì Ì Ì

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,159,794 (648) $1,176 $ 662 $ (76) $(2,410)

Credit derivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,984 Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,170,778 $ (648)

(1) The fair values for futures are directly derived from quoted market prices. Fair values of other derivatives are derived primarily from

valuation models.

(2) Fair value is categorized based on the years from the date presented until the contractual maturity of the derivative.

(3) See ""Ì Interest-Rate Risk Management and Use of Derivatives Ì Types of Derivatives'' for additional information concerning the

nature of the prepayment management agreement.

(4) See ""Ì Credit Risk Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies'' for more information about our

credit derivatives.

(5) Of the nine Linked Swap pairs, six remained outstanding at December 31, 2001 with a notional amount of $60 billion. These

remaining six Linked Swap pairs were terminated during 2002. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 1: RESTATEMENT'' for further information.

The total fair value of our derivatives increased by $10.1 billion from a net liability position of $0.6 billion

as of December 31, 2001 to a net asset position of $9.4 billion as of December 31, 2002. The increase was

primarily due to the increase in the fair value of our received-Ñxed swaps and foreign-currency swaps, partially

oÅset by a decrease in the fair value of our pay-Ñxed swap position. The increase in fair value of our receiveFreddie Mac

88
Ñxed swaps and foreign currency swaps was a result of a decline in interest rates and a signiÑcant appreciation

of the euro relative to the U.S. dollar in 2002.

Table 43 provides a summary of the contractual terms of our pay-Ñxed and receive-Ñxed swaps. This

table provides information that can be used to assess the eÅect of interest-rate swaps on net interest yield. It

shows how the cash Öows of our contractual debt have been eÅectively altered using swaps to better match

mortgage cash Öows and provide more stable funding costs.

Table 43 Ì Contractual Terms of Pay-Fixed and Receive-Fixed Swaps

December 31, 2002

Pay-Fixed/ Receive-Fixed/

Receive-Variable Pay-Variable

Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate

(dollars in millions)

Swaps

Maturity less than 1 year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ$ 19,950 4.95% 1.52% $ 18,116 1.45% 2.69%

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,566 6.21 1.52 29,104 2.10 4.08

Maturity greater than 3 and up to 5 years 27,075 5.22 1.58 20,278 2.38 4.81

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏ 38,153 6.40 1.50 41,680 2.04 5.51

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92,744 109,178

Forward-starting swaps(2)

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 2,646 Ì 2.65

Maturity greater than 3 and up to 5 years 54 4.15 Ì 2,533 Ì 5.69

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏ 42,960 6.63 Ì 35,040 Ì 5.43

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,014 40,219

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ$135,758 $149,397

December 31, 2001

Pay-Fixed/ Receive-Fixed/

Receive-Variable Pay-Variable

Notional Pay Rate Receive Rate(1) Notional Pay Rate(1) Receive Rate

(dollars in millions)

Swaps(3)

Maturity less than 1 year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ$ 17,352 6.12% 2.25% $ 21,029 2.03% 5.51%

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,524 5.40 2.15 24,462 2.47 5.38

Maturity greater than 3 and up to 5 years 82,816 5.76 2.13 35,767 2.41 6.01

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏ 70,641 6.57 2.13 52,331 2.36 6.24

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 222,333 133,589

Forward-starting swaps(2)

Maturity 1 to 3 years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 3.95 Ì 5,055 Ì 6.45

Maturity greater than 3 and up to 5 years Ì Ì Ì 24,645 Ì 5.32

Maturity in excess of 5 years ÏÏÏÏÏÏÏÏÏÏÏ 28,079 7.30 Ì 23,668 Ì 5.93

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,128 53,368

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ$250,461 $186,957

(1) The weighted-average rate payable and receivable is as of the date indicated. Because the rates of the swaps are Öoating, these rates may

change as prevailing interest rates change. The variable legs of these swaps are generally based on LIBOR or Euro Interbank OÅered Rate, or

EURIBOR.

(2) Interest-rate swap agreements scheduled to begin on a future date. Generally, the interest rate associated with the variable leg of the swap is

set when the Ñrst payment cycle begins and is periodically reset thereafter. These swaps are categorized based on the contractual maturity

from the date indicated.

(3) Of the nine Linked Swap pairs, six remained outstanding at December 31, 2001 with a notional amount of $60 billion. These remaining six

Linked Swap pairs were terminated during 2002. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1:

RESTATEMENT'' for further information.

As of December 31, 2002, the notional amount of our receive-Ñxed swaps was moderately higher than the

notional amount of pay-Ñxed swaps. The notional amount of our net receive-Ñxed swap position was

$13.6 billion, representing $149.4 billion of receive-Ñxed swaps less $135.8 billion of pay-Ñxed swaps. As

shown in Table 43, the net receive-Ñxed swap position eÅectively results in payments at rates similar to shortterm debt.

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Measurement of Interest-Rate Risk

PMVS and Duration Gap. Our interest-rate sensitivity disclosures provide a set of management

estimates that convey a useful assessment of the amount of our interest-rate risk at a given point in time. This

section describes our primary interest-rate risk measures: PMVS and duration gap. PMVS is measured in two

ways, one measuring the estimated sensitivity of our portfolio market value (as deÑned below) to parallel

moves in interest rates (PMVS-L) and the other to nonparallel movements (PMVS-YC). The LIBOR yield

curve is used to estimate PMVS. The eÅects on portfolio market value from changes in the LIBOR yield

curve are the same as those that would result from comparable changes in the Treasury yield curve.

‚ PMVS-L shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our

fair value of net assets attributable to common stockholders (measured as FVBS net assets less the fair

value of preferred stock) from an immediate adverse 50 basis point parallel shift in the level of LIBOR

rates (that is, when the yield at each point on the LIBOR curve increases or decreases by 50 basis

points). The periodic disclosure reÖects the average of the daily PMVS-L estimates for a given

reporting period (a month, quarter or year).

We believe the use of an immediate 50 basis point shift in interest rates is a conservative estimate of

interest-rate risk. This estimate does not take into account any rebalancing actions that we would

typically take to reduce risk exposure.

‚ PMVS-YC shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our

fair value of net assets attributable to common stockholders, from an immediate adverse 25 basis point

change in the slope of the LIBOR yield curve. The periodic disclosure reÖects the average of the daily

PMVS-YC estimates for a given reporting period (a month, quarter or year).

‚ Duration gap estimates the net sensitivity of the fair value of our Ñnancial instruments to movements in

interest rates. Duration gap is presented in units expressed as months. A duration gap of zero implies

that the change in value of assets from an instantaneous rate move will be accompanied by an equal

and oÅsetting move in the value of debt and derivatives thus leaving the net fair value of equity

unchanged. However, because duration does not capture convexity exposure (the amount by which

duration itself changes as rates move), actual changes in fair value from interest-rate changes may

diÅer from those implied by duration gap alone. For that reason, management believes duration gap is

most useful when used in conjunction with PMVS. The periodic duration gap disclosure reÖects the

average of the daily duration gap estimates for a given reporting period (a month, quarter or year).

In measuring the expected loss in portfolio market value (which is the numerator in the fraction used to

calculate the PMVS percentages), we estimate the sensitivity to changes in interest rates of the fair value of

all interest-bearing assets and liabilities (including short-term interest-bearing assets and liabilities) and all

derivatives on a pre-tax basis. When we calculate the expected loss in portfolio market value and duration gap,

we also take into account the cash Öows related to certain guarantee-related items, including net buy-ups

(upfront payments made by us which increase the guarantee fee that we will receive in connection with our

PC guarantee) and expected gains/losses due to net interest from security program cycles. In calculating the

expected loss in portfolio market value and duration gap, management does not consider the sensitivity to

interest-rate changes of the following assets and liabilities:

‚ Guarantee fee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups

and net interest from security program cycles), the sensitivity of the fair value of the guarantee fee

portfolio to changes in interest rates is not included in calculating the expected loss in portfolio market

value or duration gap because management believes 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.

Freddie Mac

90
However, the fair values of these two items are included in the estimate of the fair value of net assets

attributable to common stockholders, which is the denominator of the fraction used to calculate the PMVS-L

and PMVS-YC percentages.

While PMVS and duration gap estimate the exposure of the fair value of net assets attributable to

common stockholders to changes in interest rates, they do not capture the potential impact of certain other

market risks, such as changes in volatility, basis, prepayment model, mortgage-to-debt spread and foreign

currency risk. The impact of these other market risks can be signiÑcant. See ""Ì Sources of Interest-Rate

Risk and Other Market Risks'' for further information.

Our PMVS and duration gap measures provide useful estimates of key interest-rate risk exposures. These

estimates are determined using models that involve assumptions made by management in its best judgment.

In addition, in the case of PMVS, daily calculations are based on an estimate of FVBS net assets since a

complete FVBS is currently produced only on an annual basis. Accordingly, while we believe that PMVS and

duration gap are useful risk management tools, they should be understood as estimates rather than precise

measurements. Management's objective is to provide quarterly estimates of the FVBS net assets for quarterly

2004 Ñnancial results subject to meeting our objective to return to timely Ñnancial reporting. See ""EXPLANATORY NOTE'' for more information.

Calculation of PMVS Measures. We calculate PMVS-L and PMVS-YC every business day. The 25

basis point change in slope for the PMVS-YC measure is obtained by shifting the 2-year and 10-year LIBOR

rates by an equal amount (12.5 basis points), but in opposite directions. LIBOR rate shifts between the 2-year

and 10-year points are interpolated in a linear fashion. For each of PMVS-L and PMVS-YC, the more

adverse loss on a pre-tax basis under both scenarios is then expressed as a percentage of the after-tax fair value

of net assets attributable to common stockholders. These percentages represent the PMVS-L and PMVS-YC

data points for the day. The reported monthly PMVS-L and PMVS-YC Ñgures are an average of the daily

Ñgures. See Table 7 under ""Ì RESTATEMENT RESULTS Ì Restatement EÅect on Interest-Rate Risk

Measures'' for certain restated monthly PMVS Ñgures. Neither PMVS-L nor PMVS-YC includes the eÅect

on fair value of any rebalancing actions, despite the fact that we undertake frequent rebalancing actions that

would reduce our exposure to loss in fair value relative to potential losses the PMVS measure estimates.

Table 44 provides estimated PMVS-L and PMVS-YC as of December 31, 2002 and December 31, 2001

(PMVS-YC disclosure was initiated as of March 31, 2001). To supplement the PMVS-L results based on an

assumed 50 basis point shift in LIBOR rates, Table 44 also provides year-end PMVS-L estimates assuming an

immediate 100 basis point shift in LIBOR rates. 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 44, the PMVS-L results based on a 100 basis point shift in the LIBOR curve are

disproportionately higher than the PMVS-L results based on a 50 basis point shift in the LIBOR curve.

Table 44 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve on Stated Dates

Potential Dollar Loss in

Portfolio Market Value Sensitivity Portfolio Market Value (millions)

PMVS-YC PMVS-L PMVS-YC PMVS-L

25 bp 50 bp 100 bp 25 bp 50 bp 100 bp

As of:

December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9% 1.3% 4.2% $356 $236 $ 764

December 31, 2001 (as restated)ÏÏÏÏ 0.2% 2.3% 8.4% 23 323 1,161

December 31, 2001 (as reported) ÏÏÏ 0.3% 2.2% 8.8% 36 262 1,031

Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a widerange of interest-rate environments. By keeping PMVS-L and PMVS-YC low, we have been able to protect

the fair value of our stockholders' equity from large changes in interest rates.

Table 45 shows that the low PMVS-L average risk levels for the periods presented would generally have

been substantially higher if we had not used derivatives to manage our interest-rate risk exposure.

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91
As discussed above, PMVS-YC is determined by shifting the slope of the LIBOR yield curve between

the 2-year and 10-year points. We use derivatives across the entire yield curve in hedging our exposure to

interest-rate risk. As liquidity and market conditions change, particularly in the 10-year sector, our use of

derivatives may, from time to time, result in an increase in PMVS-YC. For example, our use of derivatives

resulted in a signiÑcant decrease in overall interest-rate risk as measured by PMVS-L but also caused a small

increase in PMVS-YC as of December 31, 2002.

Table 45 Ì Derivative Impact on PMVS

Before After EÅect of

Derivatives Derivatives Derivatives

As of December 31, 2002

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.2% 1.3% 17.9%

PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.9% 1.9% (1.0)%

As of December 31, 2001

PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.2% 2.3% 11.9%

PMVS-YC (25bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.2% 0.2% 0.0%

Calculation of Duration Gap Measure. On a daily basis, we estimate the fair value and eÅective

duration of our Ñnancial assets and liabilities, including derivatives. The fair value of each instrument is

multiplied by its duration to determine the instrument's duration dollars. Duration dollars are then aggregated

to estimate the portfolio's net duration dollar exposure. To calculate duration gap, the net duration dollar

exposure is divided by the fair value of total interest-bearing assets and expressed in months. Our duration gap

is publicly disclosed monthly and is the average of each day's calculated duration gap.

Table 46 Ì Duration Gap

Duration Gap

Monthly Average (in months)

December 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0

December 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1

Freddie Mac

92
Credit Risk

We are subject to two types of credit risk Ì mortgage credit risk and institutional credit risk. Mortgage

credit risk is the risk that a borrower will fail to make timely payments on a mortgage owned or guaranteed by

us. Institutional credit risk is the risk that a counterparty that has entered into a business contract or

arrangement with us will fail to meet its obligations. We are subject to credit risk on our total mortgage

portfolio, which is described in Table 47.

Table 47 Ì Composition of Total Mortgage Portfolio(1)(2)

Year Ended December 31,

2002 2001

% of Total % of Total

Dollars in Mortgage Dollars in Mortgage

Millions Portfolio Millions Portfolio

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63,886 5% $ 62,792 5%

Freddie Mac mortgage-related securities(3)

Outstanding PCs and Structured Securities(4) ÏÏÏÏÏÏÏÏÏÏÏÏ 729,225 55 631,150 55

PCs and Structured Securities in the retained portfolio ÏÏÏÏ 341,287 26 308,427 27

Other PCs and Structured Securities held by Freddie

Mac(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,112 2 21,934 2

Total PCs issued and Structured Securities backed by

non-Freddie Mac mortgage-related securities(7) ÏÏÏÏÏÏÏ 1,090,624 83 961,511 84

Non-Freddie Mac mortgage-related securities(6)

Agency mortgage securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,707 6 76,827 7

Non-agency mortgage securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78,392 6 49,593 4

Total non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏ 162,099 12 126,420 11

Total mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,316,609 100% $1,150,723 100%

(1) Based on the UPB. See Table 2 for a reconciliation of the retained portfolio based on UPB to ""Retained portfolio'' on the

consolidated balance sheets.

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

(3) Includes $8.6 billion and $13.1 billion of Structured Securities backed by Ginnie Mae CertiÑcates for December 31, 2002 and 2001,

respectively. Also includes approximately $5 billion and $3 billion at December 31, 2002 and 2001, respectively, of housing authority

bonds that were issued by third parties to fund the origination of multifamily mortgage loans and for which Freddie Mac provided a

credit guarantee.

(4) Reported UPB of Structured Securities relates only to that portion of issued Structured Securities that is backed by non-Freddie

Mac mortgage-related securities.

(5) Represents PCs held by Freddie Mac in connection with PC market-making and support activities, which are reÖected in the

""Investments'' caption on the consolidated balance sheets.

(6) See Table 63 for additional detail on our non-Freddie Mac mortgage-related securities.

Our total mortgage portfolio consists of mortgage loans, Freddie Mac mortgage-related securities

(including both PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities held

by third parties and PCs and Structured Securities backed by non-Freddie Mac mortgage-related securities

held by us) and non-Freddie Mac mortgage-related securities that are held by us.

Mortgage Credit Risk

Mortgage credit risk is the risk that we will not receive timely payments of principal and interest due from

mortgage borrowers because of borrower defaults. This could result in losses if we are unable to collect

amounts due through the sale of the underlying property, restructuring of the mortgage loan or the use of other

loss mitigation activities. The discussion below describes our mortgage credit risk management strategies and

summarizes our credit performance.

Freddie Mac

93
Mortgage Credit Risk Management Strategies. Our strategies for managing mortgage credit risk

consist of four primary activities:

‚ Establishing and enforcing sound underwriting and quality control standards to evaluate the credit

quality of the mortgage loans we securitize and purchase;

‚ Obtaining credit enhancements on higher-risk mortgages to secure partial protection against the

risk of credit losses;

‚ Monitoring and managing portfolio diversiÑcation; and

‚ Executing loss mitigation activities to resolve non-performing loans and reduce our overall

exposure to credit losses.

Underwriting and Quality Control Standards. We seek to ensure that the mortgages we securitize and

purchase are protected by the borrower's willingness and ability to repay the mortgage obligation and by

adequate equity in the underlying property. Automated underwriting software tools, such as Loan Prospector»,

and other quantitative credit risk management tools are used to evaluate and monitor mortgage credit risk for

single-family mortgages. Loan Prospector combines LTV ratios, credit scores and other mortgage and

borrower characteristics to generate credit risk classiÑcations. These statistically based risk assessments

increase our ability, and the ability of mortgage lenders, to distinguish among single-family loans based on

their likelihood of default.

From 2000 through 2002, Loan Prospector was used to evaluate approximately 60 percent of our singlefamily purchase volume prior to purchase. As part of our post-purchase quality control review process, we use

Loan Prospector to evaluate the credit quality of virtually all single-family mortgages that were not evaluated

by Loan Prospector prior to purchase. We also manage the quality of our single-family mortgage purchases by

monitoring mortgage seller/servicers' compliance with our underwriting standards through quality control

reviews, on-site audits and investigations of situations involving possible fraud. Particular focus is placed on

performing quality control reviews of mortgage loans identiÑed as high-risk. Mortgage seller/servicers

represent and warrant to us that mortgages are originated in compliance with our underwriting standards. We

may require the seller/servicer to repurchase or accept losses on certain loans that do not comply with our

underwriting standards.

For multifamily mortgages, we have an intensive underwriting process in which personnel from one of our

regional oÇces underwrite nearly every mortgage we purchase. Our underwriting process includes physical

inspections of properties as well as assessments of the local market, the borrower, the property manager, the

property's historical and projected Ñnancial performance and the property's physical condition. In addition to

our own inspections, we utilize third-party appraisals and environmental and engineering reports.

Credit Enhancements. For most of the mortgage loans in our total mortgage portfolio (other than nonFreddie Mac mortgage-related securities and that portion of issued Structured Securities that is backed by

Ginnie Mae CertiÑcates), we retain the primary risk of loss in the event of default by the borrower on the

underlying mortgage. Our charter requires that, to be eligible for purchase, single-family mortgages with LTV

ratios above 80 percent at the time of purchase be covered by (i) mortgage insurance or (ii) certain other

credit protections. In addition, for some mortgage loans, we elect to share the default risk by transferring a

portion of that risk to various third parties through a variety of other credit enhancement vehicles. Mortgages

covered by MI and these other credit protections are referred to as credit-enhanced mortgages. Proceeds

received from these credit enhancements are applied to oÅset credit losses related to individual mortgage loans

that default.

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94
Table 48 shows the credit-enhanced portion of our total mortgage portfolio (excluding non-Freddie Mac

mortgage-related securities and securities issued by us that are backed by Ginnie Mae CertiÑcates).

Table 48 Ì Credit-Enhanced Percentage of the Total Mortgage Portfolio(1)

December 31,

2002 2001

Credit-enhanced(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27% 35%

(1) Based on the total mortgage portfolio excluding non-Freddie Mac mortgage-related securities and that portion of issued Structured

Securities that is backed by Ginnie Mae CertiÑcates. Non-Freddie Mac mortgage-related securities are excluded from this table

because they expose us primarily to institutional credit risk or are rated by one or more rating agencies. That portion of Structured

Securities backed by Ginnie Mae CertiÑcates is excluded because the incremental credit risk to which it exposes us is considered de

minimus. See Table 63 for additional information about our non-Freddie Mac mortgage-related securities.

(2) Credit enhancements include loans for which the lender or a third party has retained primary default risk by pledging collateral or

agreeing to accept losses on loans that default. In many cases, the lender's or third party's risk is limited to a speciÑc level of losses at

the time the credit enhancement becomes eÅective.

The percentage of our total mortgage portfolio (excluding Structured Securities backed by Ginnie Mae

CertiÑcates and non-Freddie Mac mortgage-related securities held by us) that was credit-enhanced decreased

from 2001 to 2002. This decrease was primarily due to a high level of reÑnance loans acquired in 2002, which

tend to have lower LTV ratios and therefore do not require credit enhancements. Our ability and desire to

expand the credit-enhanced portion of our total mortgage portfolio will depend on our evaluation of the credit

quality of new business purchase opportunities and the future availability of eÅective credit enhancements at

prices that permit an attractive return on credit-enhanced business.

Primary loan-level mortgage insurance, or primary MI, is the most prevalent type of credit enhancement

protecting our total mortgage portfolio and is obtained and paid for by borrowers on a loan level basis for

single-family mortgages. Primary MI transfers a signiÑcant portion of the credit risk associated with the

mortgage to the insurer. Beginning in the second quarter of 2002, we revised our reporting for mortgages

covered by primary MI so that they are now included in our credit-enhanced portfolio. We believe this

presentation provides a more comprehensive depiction of the credit enhancement that we have on our total

mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that portion of issued

Structured Securities that is backed by Ginnie Mae CertiÑcates) than the previous measure, which excluded

mortgages covered by primary MI from the credit-enhanced category. This change has been retroactively

applied to previous periods for comparability purposes.

After primary MI, pool insurance is the next most prevalent type of credit enhancement protecting our

total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that portion of issued

Structured Securities that is backed by Ginnie Mae CertiÑcates). With pool insurance, a mortgage insurer

provides insurance on a pool of loans up to a stated aggregate loss limit. Our pool insurance contracts typically

cover losses ranging between about 0.70 percent and 1.60 percent of the aggregate original UPB of the pooled

loans at the time of purchase. In addition to a pool-level loss coverage limit, some pool insurance contracts

may have limits on coverage at the loan level. For pool insurance contracts that expire before the completion

of the contractual term of the mortgage loan, we seek to ensure that the contracts cover the period of time

during which we believe the mortgage loans are most likely to default.

Other forms of credit enhancements on single-family mortgage loans include reinsurance (an indemnity

arrangement in which we pass all or a portion of the mortgage credit risk to another insurer), collateral

(including cash or high-quality marketable securities) pledged by a lender, and recourse agreements (under

which we may require a lender to repurchase loans that default).

For multifamily mortgages, we occasionally utilize credit enhancements to mitigate risk. The types of

credit enhancements used for multifamily loans include recourse, third-party guarantees or letters of credit,

purchases of senior participations in mortgages or structured pools, and cross-default and cross-collateralization provisions. With a cross-default provision, if the loan on a property goes into default, we have the right to

foreclose on more than one property owned by the borrower to mitigate credit losses. With a crosscollateralization provision, borrowers are required to use cash Öows from more than one property to ensure the

timely payment of principal and interest for the mortgage on any property.

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95
While the use of credit enhancements reduces our exposure to mortgage credit risk, it increases our

exposure to institutional credit risk, which is the risk that the provider of the credit enhancement may not

meet its contractual obligations. See ""Ì Institutional Credit Risk'' for more information.

Portfolio DiversiÑcation. As part of our credit risk management practices, we monitor certain mortgage

loan characteristics such as product mix, LTV ratios and geographic concentration, which may aÅect the

default experience on our mortgage portfolio.

Product Mix. Table 49 presents the distribution of total PCs issued and Structured Securities backed by

non-Freddie Mac mortgage-related securities.

Table 49 Ì Product Distribution of Total PCs Issued and Structured Securities backed by non-Freddie

Mac Mortgage-Related Securities(1)(6)

December 31,

2002 2001

Dollars in Dollars in

Millions % of Total Millions % of Total

Total PCs issued and Structured Securities backed by

non-Freddie Mac mortgage-related securities

30-year Ñxed-rate(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 696,803 64% $ 676,283 71%

15-year Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262,606 24 185,971 19

ARMs/Öoating-rate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,627 6 47,977 5

Alternative collateral deals(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,454 2 17,113 2

Balloon/resets(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,501 2 13,589 1

Structured Securities backed by Ginnie Mae

CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,561 1 13,102 1

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,081,552 99 954,035 99

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,072 1 7,476 1

Total PCs issued and Structured Securities backed

by non-Freddie Mac mortgage-related

securities(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,090,624 100% $ 961,511 100%

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

(2) Also includes 20-year Ñxed-rate mortgages.

(3) Includes ARMs with 1-,3-, 5-, 7- and 10-year initial Ñxed-rate periods.

(4) Includes Structured Securities backed by non-agency mortgage-related securities, which are typically backed by subprime mortgage

loans.

(5) 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.

(6) Reported UPB of Structured Securities relates only to that portion of issued Structured Securities that is backed by non-Freddie

Mac mortgage-related securities.

Product mix aÅects the credit risk proÑle of our mortgage portfolio. In general, 15-year Ñxed-rate

mortgages exhibit the lowest default rate among the types of single-family mortgages 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.

Alternative collateral deals primarily include Structured Securities that we issue that are backed by nonagency mortgage-related securities whose underlying assets are subprime mortgages. The subprime segment of

the mortgage market primarily serves borrowers with a higher risk of default. Although default rates on

subprime mortgages are typically the highest among single-family mortgage loans, we participate in the

subprime market segment in order to help standardize lending practices, increase the availability of mortgage

credit and reduce the costs of homeownership for a broader spectrum of borrowers. Our charter does not limit

Freddie Mac

96
our participation in this market segment to any greater extent than it limits our other activities. However, as

part of our comprehensive risk management system we have established internal limits on our subprime

exposure. In addition, we mitigate our subprime credit exposure through signiÑcant credit enhancements.

We participate in the subprime market segment in two ways. First, we guarantee securities backed by

subprime mortgages. These securities have previously been signiÑcantly credit-enhanced, and we obtain

""shadow ratings'' on these securities, which assess the risks of the securities without regard to the beneÑt of

our guarantee. At the time of purchase these securities were rated at least ""BBB'' (based on the S&P rating

scale) by at least one nationally recognized credit rating agency. These securities are included in the

""Alternative collateral deals'' portion of our total mortgage portfolio shown in Table 49. We purchase some of

these guaranteed securities as investments for our retained portfolio. Second, 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.

These investments are included in the ""Single-family and other mortgage-related securities'' portion of our

non-Freddie Mac mortgage-related securities portfolio shown in Table 63.

LTV 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 LTV ratios (lower levels of borrower equity) at the time of purchase are also protected by credit

enhancements, since our charter requires that loans with LTV ratios above 80 percent at the time of purchase

be covered by MI 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 the LTV ratio at the date of mortgage

origination and the estimated current LTV ratio, which compares the current UPB of the mortgage to the

estimated current market value of the property underlying the mortgage. Historical experience has shown that

defaults are less likely to occur on mortgages with lower estimated current LTV ratios. Furthermore, in the

event of a default, higher levels of borrower equity in a property reduce the total amount of loss, thereby

mitigating credit losses.

The distribution of the single-family loans underlying our total mortgage portfolio (excluding nonFreddie Mac mortgage-related securities and that portion of Structured Securities that is backed by Ginnie

Mae CertiÑcates) by original and estimated current LTV ratio ranges is shown in Tables 50 and 51,

respectively.

Table 50 Ì Original LTV Ratio Range(1)

December 31,

2002 2001 2000

G• 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36% 33% 33%

Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 43 41

Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 13 14

Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 10 10

Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 1 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Average original LTV ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72% 74% 74%

(1) LTV ratios are shown for the single-family mortgage portfolio (excluding non-Freddie Mac mortgage-related securities, alternative

collateral deals and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates), which totaled $1,084 billion,

$964 billion and $847 billion at December 31, 2002, 2001 and 2000, respectively.

Freddie Mac

97
Table 51 Ì Estimated Current LTV Ratio Range(1)(2)(3)

December 31,

2002 2001 2000

G• 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64% 65% 68%

Above 70% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 21 18

Above 80% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 9 9

Above 90% to 95% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 3 3

Above 95%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 2 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Average estimated current LTV ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61% 61% 60%

(1) LTV ratios are shown for 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) 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.

(3) The methodology for adjusting property values was revised eÅective with 2002 reporting. Market value adjustments are applied to

new purchases after two quarters instead of after four quarters. Prior periods have been revised for comparability purposes.

Geographic Concentration. We seek to mitigate the potential adverse eÅect of changing local and

regional economic conditions on our credit results by maintaining a geographically diverse mortgage portfolio.

Table 52 shows the distribution of our total mortgage portfolio (excluding non-Freddie Mac mortgage related

securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic

region. Our portfolio's geographic distribution was relatively constant from 2001 to 2002, and remains broadly

diversiÑed across these Ñve regions.

Table 52 Ì Geographic Concentration of the Total Mortgage Portfolio(1)

December 31,

2002 2001

% of Total % of Total

Dollars in Mortgage Dollars in Mortgage

Millions Portfolio Millions Portfolio

By Region(2)

WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 294,681 26% $ 263,921 26%

NortheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264,843 23 238,605 24

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,509 21 207,313 21

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 200,476 18 176,846 17

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,440 12 124,516 12

$1,145,949 100% $1,011,201 100%

(1) Based on the total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of Structured

Securities that is backed by Ginnie Mae CertiÑcates.

(2) See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 18: CONCENTRATION OF CREDIT

RISK'' for a description of these regions.

Loss Mitigation Activities. Despite our rigorous underwriting standards, some mortgage loans will

become non-performing due to changes in general economic conditions, changes in the Ñnancial status of

individual borrowers or other factors.

Freddie Mac

98
Table 53 summarizes our non-performing assets. The increase in our non-performing assets from 2000

through 2002 was primarily driven by the softening economy and an increase in unemployment.

Table 53 Ì Non-Performing Assets

December 31,

2002 2001 2000

(dollars in millions)

Troubled debt restructurings, or TDRs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,164 $1,617 $1,389

Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,231 5,352 3,754

Non-accrual loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 44 9

Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,442 7,013 5,152

REO, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 594 447 358

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,036 $7,460 $5,510

(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the

modiÑed terms. TDRs are considered part of our impaired loan population. Figures presented are based on UPB of mortgage loans.

See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 6: LOAN LOSS RESERVES'' 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. Includes seriously delinquent loans in alternative collateral deals which totaled

$2,290 million, $1,052 million and $529 million for 2002, 2001 and 2000, respectively. See the discussion related to alternative

collateral deal delinquencies following Table 55.

(3) Non-accrual loans are loans for which interest income is recognized only on a cash basis. Only multifamily mortgage loans that are

90 days or more delinquent are classiÑed as non-accrual. No single-family mortgage loans are classiÑed as non-accrual. For singlefamily mortgages we recognize interest income on an accrual basis for all such loans, regardless of delinquency, except when

management believes the collection of principal and interest is doubtful. We establish reserves for uncollectible interest that are

estimated using statistical models, which quantify accrued but unpaid interest at the balance sheet date. Loans placed on non-accrual

status are considered part of our impaired loan population.

(4) For 2002, $483 million was included in net interest income and management and guarantee income related to these loans. Had these

loans been current, we would have recorded $45 million of additional net interest income and additional management and guarantee

income.

Loss mitigation activities are a key component of our strategy for managing and resolving troubled assets

and lowering credit losses. Our loss mitigation strategy emphasizes early intervention in delinquent mortgages

and alternatives to foreclosure. Foreclosure alternatives are intended to reduce the number of delinquent

mortgages proceeding to foreclosure and, ultimately, mitigate our total credit losses by eliminating a portion of

the costs related to foreclosed properties. Table 54 summarizes the diÅerent types of single-family foreclosure

alternatives.

Table 54 Ì Single-Family Foreclosure Alternatives(1)

December 31,

2002 2001 2000

(number of loans)

Foreclosure Alternatives

Repayment plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,672 28,956 16,295

Loan modiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,951 5,107 3,920

Forbearance agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,798 3,103 2,998

Pre-foreclosure sales(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,531 1,222 1,291

Foreclosure alternatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,952 38,388 24,504

(1) Based on the single-family total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities, alternative collateral

deals and that portion of Structured Securities that is backed by non-Freddie Mac mortgage-related securities.

(2) This amount includes third party sales and other foreclosure alternatives.

The increase in foreclosure alternatives from 2000 through 2002 was primarily driven by the increase in

single-family delinquencies. 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 during a declining mortgage rate

environment, such as we experienced during 2001 and 2002. In some cases, a mortgage may go through a

foreclosure alternative more than once or may go through more than one type of foreclosure alternative.

Freddie Mac

99
We continue to strengthen our single-family loss mitigation activities by developing default management

tools designed to help single-family servicers manage non-performing loans more eÅectively. These innovations include Early Indicator», a system that estimates the probability that delinquent loans will be resolved or

advance through to a loss-producing state. In addition, we use Servicer Performance ProÑle reports to evaluate

the performance of our mortgage servicers based on their management of performing and non-performing

loans.

We typically require multifamily servicers to closely manage mortgage loans they have sold us in order to

mitigate potential losses. Approximately once a year, servicers must submit an assessment of the mortgaged

property to us based on an inspection of the property and a review of the property's Ñnancial statements. We

also evaluate these assessments internally and may direct the servicer to take speciÑc actions to reduce the

likelihood of delinquency or default. If a loan defaults despite this intervention, we then determine whether it

is in our best interest to oÅer a reasonable foreclosure alternative to the borrower. For example, we may

modify the terms of a multifamily mortgage which gives the borrower an opportunity to bring the loan current

and allows the borrower to retain ownership of the property. Since mortgage 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 ensure compliance with our standards.

Other Credit Risk Management Activities. We also participate in other activities such as risk-based

pricing, 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, help us manage purchase quality, and/or otherwise ensure adequate returns.

In accordance with our Single-Family Seller/Servicer Guide or as otherwise agreed with seller/servicers,

certain mortgages are subject to delivery fees in addition to periodic management and guarantee fees (swap

transactions) or stated price (cash transactions). These fees represent up-front pricing terms based on credit

risk factors including the mortgage product type, loan purpose and/or other attributes.

In some cases, we also provide Ñnancial incentives in the form of lump sum payments to selected

seller/servicers if they deliver a speciÑed volume or share of mortgage loans meeting speciÑed credit risk

standards over a deÑned period of time.

We have also entered into risk-sharing agreements that are accounted for as derivatives in accordance

with SFAS 133. In part because the agreements contractually may result in payments by us to the

seller/servicer (depending upon actual default experience over the lives of the mortgages), they are considered

credit derivatives rather than Ñnancial guarantees under SFAS 133. 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. The total notional amount of mortgage

loans subject to these agreements was approximately $17.3 billion at December 31, 2002. These risk-sharing

agreements are classiÑed as no hedge designation for purposes of applying SFAS 133 with changes in fair

value recorded as ""Derivative gains (losses)'' on the consolidated statements of income. The fair value of

these risk-sharing agreements is recorded in the ""Derivative assets, at fair value'' line on the consolidated

balance sheets and totaled approximately $4 million in assets at December 31, 2002.

Although these arrangements are part of our overall credit risk management strategy, they are not

considered to be credit enhancements for purposes of describing our portfolio characteristics (see Table 48 Ì

Credit-Enhanced Percentage of the Total Mortgage Portfolio). This is because risk-based pricing fees are

determined at the time of delivery (rather than being received by us only if there is a credit event), and the

Ñnancial incentive and credit derivative agreements may result in payments by us to the seller/servicer.

Credit Performance. The eÅectiveness of our credit risk management activities is reÖected primarily in

the level of credit losses relative to our total mortgage portfolio (excluding non-Freddie Mac mortgage-related

securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates). We may incur

a credit loss when a borrower fails to make a mortgage payment, or is delinquent, and we either institute a

foreclosure alternative or foreclose on the property. See ""Ì Mortgage Credit Risk Management Strategies Ì

Freddie Mac

100
Loss Mitigation Activities'' for more information. Credit losses are oÅset in some cases by payments received

from credit enhancements. Several key statistics that aÅect our credit losses are detailed in the tables below.

Delinquencies. Table 55 summarizes the delinquency performance of our single-family and multifamily

mortgage portfolios. Table 56 and Table 57 provide a more detailed analysis of single-family delinquencies, by

geographic region and year of origination.

Table 55 Ì Delinquency Performance(1)

Year Ended December 31,

2002 2001 2000

Single-family(2)

Non-credit-enhanced portfolio

Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.29% 0.30% 0.29%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,426 20,133 17,294

Credit-enhanced portfolio(3)(4)

Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.06% 1.29% 0.84%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,288 41,449 28,005

Total portfolio(3)

Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.77% 0.62% 0.49%

Total number of delinquent loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,714 61,582 45,299

Multifamily(5)

Total portfolio

Delinquency rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.13% 0.15% 0.04%

Net carrying value of delinquent loans (in millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 49 $ 44 $ 9

(1) Based on the total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured

Securities that is backed by Ginnie Mae CertiÑcates.

(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(3) Includes alternative collateral deals.

(4) Subsequent to the announcement of our restatement results in our November 21, 2003 Information Statement Supplement, we

revised the results for the delinquency statistics for the credit-enhanced portfolio. The impact of this change on delinquency rate was

a decrease of 0.01% and 0.09% for the years ended December 31, 2002 and 2001, respectively. The impact of this change on total

number of delinquent loans was a decrease of 143 loans and 2,900 loans for the same periods, respectively.

(5) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.

The single-family total portfolio delinquency rate increased by 0.15 percent from year-end 2001 to

0.77 percent at December 31, 2002. This increase was driven by the single-family credit-enhanced delinquency rate, which increased by 0.77 percent from year-end 2001 to 2.06 percent at December 31, 2002. The

increase in the credit-enhanced delinquency rate was primarily due to rising delinquencies in alternative

collateral deals. Alternative collateral deals typically experience delinquency rates that are signiÑcantly higher

than prime conventional loans, but the securities that we guarantee in these deals are signiÑcantly credit

enhanced. The single-family total portfolio delinquency rate excluding these alternative collateral deals was

0.53 percent, 0.50 percent and 0.42 percent for the years ended December 31, 2002, 2001 and 2000,

respectively. The multifamily delinquency rate was 0.13 percent at December 31, 2002, down slightly from

0.15 percent at December 31, 2001.

Freddie Mac

101
Table 56 presents delinquency rates for the non-credit-enhanced portion of the single-family loans

underlying our total mortgage portfolio (excluding non-Freddie Mac mortgage-related securities and that

portion of Structured Securities that is backed by Ginnie Mae CertiÑcates) by geographic region.

Table 56 Ì Single-Family Ì Non-Credit-Enhanced Delinquencies Ì By Region(1)(2)

Year Ended December 31,

2002 2001 2000

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30% 0.37% 0.37%

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.35 0.31 0.28

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.28 0.26 0.22

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.28 0.25 0.22

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.23 0.29 0.30

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.29% 0.30% 0.29%

(1) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(2) See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 18: CONCENTRATION OF CREDIT

RISK'' for a description of these regions.

While total non-credit-enhanced delinquency rates were relatively unchanged, regional delinquency

trends varied, reÖecting the diÅerent regional impacts of the softening economy in 2002. The southeast,

southwest and north central regions had increasing delinquency rates, while the northeast and west had

declining delinquency rates.

Table 57 presents the distribution of the single-family loans underlying our total mortgage portfolio

(excluding non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is

backed by Ginnie Mae CertiÑcates) and non-credit-enhanced delinquency rates by year of origination.

Table 57 Ì Single-Family Ì Mortgage Portfolio and Non-Credit-Enhanced Delinquencies Ì By Year of

Origination

December 31,

2002 2001 2000

Percent of Non-Credit- Percent of Non-Credit- Percent of Non-CreditSingle- Enhanced Single- Enhanced Single- Enhanced

Family Delinquency Family Delinquency Family Delinquency

Balance(1) Rate Balance(1) Rate Balance(1) Rate

Year of Origination

Pre-1995 ÏÏÏÏÏÏÏÏÏÏÏÏ 8% 0.50% 14% 0.48% 21% 0.44%

1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 0.79 2 0.66 4 0.51

1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 0.70 4 0.61 6 0.47

1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 0.54 5 0.37 8 0.23

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 0.28 19 0.20 27 0.12

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 0.46 15 0.29 21 0.13

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 0.95 8 0.42 13 0.06

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26 0.19 33 0.04 Ì Ì

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 0.05 Ì Ì Ì Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 0.29% 100% 0.30% 100% 0.29%

(1) 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.

Our portfolio distribution by origination year was aÅected by heavy reÑnance volumes in recent years. As

of December 31, 2002, almost two-thirds of our single-family mortgage portfolio consisted of mortgage loans

originated in 2001 or 2002. Mortgage loans originated in 1999 and earlier, which represent only about onethird of our single-family mortgage portfolio, are in their peak default periods as evidenced by delinquency

rates which are generally higher than the overall portfolio delinquency rate. Mortgages in our single-family

portfolio that were originated in 2000, a year in which mortgage originations were largely purchase money

mortgages rather than reÑnancings, are generally of weaker credit quality and have experienced higher than

average early defaults and delinquency rates, but only represent 3 percent of the single-family total mortgage

Freddie Mac

102
portfolio (excluding non-Freddie Mac mortgage-related securities and that portion of Structured Securities

that is backed by Ginnie Mae CertiÑcates).

Credit Loss Performance. Some of the loans that are delinquent or in foreclosure result in credit losses.

Table 58 provides detail on our credit loss performance, including REO activity, charge-oÅs and credit losses.

Table 58 Ì Credit Loss Performance

Year Ended December 31,

2002 2001 2000

(dollars in millions)

REO

REO balances:

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 593 $ 446 $ 356

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 594 $ 447 $ 358

REO activity (number of units):(1)

Beginning property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,713 4,564 5,617

Properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,520 10,091 9,531

Properties disposed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,011) (8,942) (10,584)

Ending property inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,222 5,713 4,564

Average holding period (in days)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186 187 189

REO operations expense (income): Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (13) $ 6 $ (5)

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1 1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (13) $ 7 $ (4)

CHARGE-OFFS

Single-family:

Foreclosure alternatives, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 46 $ 33 $ 27

Recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) (12) (13)

Foreclosure alternatives, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 21 14

REO acquisitions, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124 95 96

Recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (65) (77) (39)

REO acquisitions, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 18 57

Single-family totals:

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170 128 123

Recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (82) (89) (52)

Single-family charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88 39 71

Multifamily:

Multifamily totals:

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 1

Recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (3) (5)

Multifamily charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (2) (4)

Total Charge-oÅs:

Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171 129 124

Recoveries(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (84) (92) (57)

Charge-oÅs, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 87 $ 37 $ 67

CREDIT LOSSES (GAINS)(4)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 75 $ 45 $ 66

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (1) (3)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 74 $ 44 $ 63

In basis points:(5)

Single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.7 0.5 0.8

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.7 0.5 0.8

(1) Includes single-family and multifamily REO properties.

(2) Represents weighted average holding period for single-family and multifamily REO properties, based on REO balances.

(3) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where the primary

default risk has been assumed by servicers, mortgage insurers, or third parties through credit enhancements. Recoveries of chargeoÅs through credit enhancements are limited in many instances to amounts less than the full amount of the loss.

(4) Equal to REO operations expense (income) plus Charge-oÅs, net.

(5) Calculated as credit losses (gains) 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.

Freddie Mac

103
Overall, we continued to demonstrate very strong credit performance during 2002, driven by eÅective risk

management and the sustained strength of the single-family housing market. The following discussion

provides additional detail on key credit loss-related statistics and results.

When we foreclose on a property, it becomes part of our REO inventory. REO operations income

(expense), a component of credit losses, includes the expenses incurred to foreclose, acquire, maintain and sell

a property. REO inventory levels increased in 2002, both in terms of dollar amount and number of properties

held. The single-family REO balance was $593 million at December 31, 2002, up from $446 million and

$356 million at December 31, 2001 and 2000, respectively. The increase in the single-family REO balance

during 2002 is consistent with rising delinquency rates and general softening in the economy. Although REO

inventories increased, single-family REO income (expense) improved from an expense of $6 million in 2001

to income of $13 million in 2002, largely due to strong house-price growth and credit enhancement recoveries.

REO income arises when the fair market value of the acquired asset exceeds the carrying value of the

mortgage loan or when we are able to sell the REO at amounts in excess of its carrying value.

Charge-oÅs, another component of credit losses, include losses and recoveries on mortgages that are

transferred to REO or involved in a foreclosure alternative. Single-family charge-oÅs, net of recoveries,

increased from $39 million in 2001 to $88 million in 2002, largely due to increased REO acquisitions as

described above. Charge-oÅs, net are reÖected on our consolidated balance sheets as a reduction in loan loss

reserves. (See Table 61 Ì Loan Loss Reserves Activity for more information.)

Credit losses remained relatively low in 2002 for both single-family and multifamily mortgage portfolios.

Single-family credit losses totaled $75 million, or 0.7 basis points of the average total mortgage portfolio, in

2002. This represents a slight increase from the historically low levels of single-family credit losses

experienced in 2001 ($45 million or 0.5 basis points) and is in line with credit losses experienced in 2000

($66 million or 0.8 basis points). Multifamily experienced a credit gain of $1 million in 2002, unchanged from

2001 and down slightly from a gain of $3 million in 2000.

Table 59 and Table 60 provide detail by region for two key credit performance statistics, REO activity

and charge-oÅs. Regional REO acquisition and charge-oÅ trends follow a pattern that is similar to that of

regional delinquency trends. The southeast, north central and southwest regions experienced the largest

increases in REO acquisitions in 2002 compared to 2001, while the northeast and west regions experienced

only modest increases or declined slightly.

Table 59 Ì REO Activity by Region(1)

Year Ended December 31,

2002 2001 2000

(number of units)

REO Inventory

Properties in inventory Ì beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,713 4,564 5,617

Properties acquired by region:

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,683 1,784 2,343

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,533 2,398 1,831

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,180 1,959 1,435

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,435 1,513 1,110

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,689 2,437 2,812

Total properties acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,520 10,091 9,531

Properties disposed by region:

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,798) (1,959) (2,627)

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,012) (1,895) (1,789)

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,420) (1,577) (1,414)

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,019) (1,150) (1,175)

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,762) (2,361) (3,579)

Total properties disposedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,011) (8,942) (10,584)

Properties in inventory Ì end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,222 5,713 4,564

(1) See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 18: CONCENTRATION OF CREDIT

RISK'' for a description of these regions.

Freddie Mac

104
Table 60 Ì Single-Family Charge-oÅs and Recoveries by Region(1)(2)

Year Ended December 31,

2002 2001 2000

(dollars in millions)

Northeast

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27 $ 25 $ 6

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) (6) (16)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 19 (10)

Southeast

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 20 35

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19) (16) (9)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 4 26

North central

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 12 32

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) (14) (8)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 (2) 24

Southwest

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 41 19

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14) (39) (5)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 2 14

West

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 30 31

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21) (14) (14)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 16 17

Total

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170 128 123

RecoveriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (82) (89) (52)

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 88 $ 39 $ 71

(1) See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 18: CONCENTRATION OF CREDIT

RISK'' for a description of these regions.

(2) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where the primary

default risk has been assumed by servicers, mortgage insurers, or third parties through credit enhancements. Recoveries of chargeoÅs through credit enhancements are limited in many instances to amounts less than the full amount of the loss.

Loan Loss Reserves. Table 61 summarizes our loan loss reserves activity.

Table 61 Ì Loan Loss Reserves Activity

Year Ended December 31,

2002 2001 2000

(dollars in millions)

Total loan loss reserves:

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $224 $229 $217

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 32 79

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171) (129) (124)

Recoveries(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 92 57

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (87) (37) (67)

Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $265 $224 $229

Charge-oÅs, net to total mortgage portfolio(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.8bp 0.4bp 0.8bp

Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.0 6.1 3.4

(1) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where the primary

default risk has been assumed by servicers, mortgage insurers, or third parties through credit enhancements. Recoveries of chargeoÅs through credit enhancements are limited in many instances to amounts less than the full amount of the loss.

(2) 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.

Freddie Mac

105
We maintain our 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 losses on ""Mortgages held for investment'' in the retained portfolio and mortgages underlying PCs

held by third parties that have never previously been accounted for as sales by us under SFAS 125/140 and

which, therefore, do not have a recognized guarantee obligation.

The fair value of expected credit losses relating to PCs that have been accounted for as sales by us under

SFAS 125/140 are reÖected in the ""Guarantee obligation for Participation CertiÑcates, at fair value'' caption

on our consolidated balance sheets.

Setting the level of loan loss reserves requires signiÑcant judgment and we evaluate loan loss reserve

levels regularly. (See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 2:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for further discussion on reserve model

assumptions).

Loan loss reserves are increased through periodic charges to the provision for credit losses and decreased

by charges-oÅs, net. We record charge-oÅs to the loan loss reserves when the loss is speciÑcally identiÑable

and virtually certain. For mortgages that are transferred to REO or involved in a pre-foreclosure sale, we

record losses at the time of transfer or sale. For loans that have been modiÑed, losses are recorded at the time

of modiÑcation if the modiÑcation is a troubled debt restructuring.

As shown in Table 61, the provision for credit losses and total loan loss reserves increased in 2002. This

increase was primarily due to an increase in expected losses on multifamily mortgage loans driven by higher

vacancy rates and a decrease in the net operating income of multifamily properties in certain areas.

Credit Risk Sensitivity. As a part of our voluntary disclosure commitments made in October 2000, we

provide public disclosure of credit risk sensitivity results on a quarterly basis. The model used to determine

credit loss sensitivity through December 31, 2002 was based on OFHEO's mortgage default and prepayment

model described in OFHEO's April 1999 risk-based capital proposal. The regulatory loss severity model was

utilized to generate expected loss exposure using certain house-price assumptions, given that varying house

prices can yield signiÑcantly diÅerent credit exposure. The credit risk sensitivity analysis assesses the increase

in the present value of expected single-family mortgage portfolio losses over 10 years to an instantaneous

5 percent decline in house prices nationwide, followed by a return to more normal growth in house prices

based on historical experience.

The amounts below represent calculations using the OFHEO-based model. The credit-risk sensitivity

results as of December 31, 2002 show an increase in credit losses of $278 million after receipt of credit

enhancements, a slight decrease from results as of December 31, 2001.

Table 62 Ì Credit Risk Sensitivity Ì Net Present Value of Increase in Credit Losses(1)

Before Receipt After Receipt

of Credit of Credit

Enhancements(2) Enhancements(3)

(dollars in millions)

As of:

December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 881 $ 278

December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 940 $ 301

(1) Based on single-family total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of

Structured Securities that is backed by Ginnie Mae CertiÑcates.

(2) Assumes that none of the credit enhancements currently covering our mortgages has any mitigating impact on our credit losses.

(3) Assumes we collect amounts due from credit enhancement providers after giving eÅect to certain assumptions about counterparty

default rates.

EÅective for the Ñrst quarter of 2003, we began using an internally developed Monte Carlo simulationbased model to generate our credit risk sensitivity analyses. However, we continued to utilize a credit risk

scenario assuming an instantaneous 5 percent decline in house prices nationwide, followed by a return to more

normal growth in house prices based on historical experience. The credit losses are once again measured over a

ten-year horizon. The model underlying the new process is used for internal evaluation of mortgage credit risk

and is the same as the model underlying the computation of fair value associated with retained interests in

Freddie Mac

106
guarantee assets and guarantee obligations in transfers of Ñnancial assets that qualify as sales under SFAS 140.

This model is also utilized to value the guarantee portfolio for purposes of the company's FVBS. There are

slight diÅerences between the implementation of the model for credit risk sensitivities and SFAS 140 / FVBS

valuation, driven primarily by the level of detail of key portfolio data. However, using the SFAS 140/FVBS

process to produce these results would have minimal impact on the credit sensitivity results. Credit risk

sensitivity results as of year-end 2002 and as of the end of each quarter in 2003 based on the new approach are

presented in ""Ì VOLUNTARY COMMITMENTS.''

Institutional Credit Risk

We are subject to credit risk from institutional counterparties to the extent they do not fulÑll their

obligations to us under the terms of speciÑc contracts or agreements. Our primary institutional credit risk

exposure, other than counterparty credit risk exposure relating to derivatives which is discussed in ""Ì

Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit

Risk,'' arises from agreements with the following entities:

‚ Mortgage seller/servicers;

‚ Mortgage insurers;

‚ Issuers or guarantors of, 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.

Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of

mortgage seller/servicers that remit to us monthly principal and interest payments on mortgages, provide

credit enhancements such as recourse or collateral and/or represent and warrant that mortgages were

originated in compliance with our standards (see ""Ì Mortgage Credit Risk Ì Mortgage Credit Risk

Management Strategies Ì Credit Enhancements'' for more information). This includes mortgage

seller/servicers who have agreed to repurchase or accept losses on certain loans that default or do not comply

with our standards. To protect us against this risk, we require servicers to meet minimum net worth, insurance

and other eligibility requirements, and we institute remedial actions against mortgage seller/servicers that fail

to comply with our standards. These actions include transferring mortgage servicing to other qualiÑed servicers

or terminating our relationship with the mortgage seller/servicer. Due to the large number of Ñrms competing

in the mortgage servicing market, we have not experienced diÇculty in Ñnding replacement servicers to accept

transfers of servicing on mortgages owned by us when servicers are unable or unwilling to meet our standards

of performance.

We manage the credit quality of our multifamily mortgage purchases by establishing strict institutional

eligibility requirements for mortgage seller/servicers that participate 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 ensure that they remain in

compliance with our standards.

Mortgage Insurers. We bear institutional credit risk relating to the non-performance of mortgage

insurers that insure purchased or guaranteed mortgages (see ""Ì Mortgage Credit Risk Ì Mortgage Credit

Risk Management Strategies Ì Credit Enhancements'' for more information). We manage this risk by

regularly monitoring our exposure to individual mortgage insurers. We monitor the mortgage insurers' credit

ratings, as provided by nationally recognized credit rating agencies. In addition, we periodically review the

methods used by the credit rating agencies. We also perform periodic on-site audits of mortgage insurers to

ensure 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 MI and pool insurance coverage on single-family mortgages purchased during 2002 were

rated ""AA'' or better by S&P. At December 31, 2002, there were 6 mortgage insurers, the largest being

Mortgage Guarantee Insurance Corporation, that each provided more than 5 percent of our total MI coverage

Freddie Mac

107
(including primary MI and pool insurance) and accounted for approximately 96 percent of our overall

coverage.

Non-Freddie Mac Mortgage-Related Securities. Investments for our retained portfolio expose us to

institutional credit risk on non-Freddie Mac mortgage-related securities to the extent that issuers or

guarantors, or third parties providing credit enhancements, become insolvent. Table 63 summarizes the credit

characteristics of our non-Freddie Mac mortgage-related securities.

Table 63 Ì Credit Characteristics of Non-Freddie Mac Mortgage-Related Securities(1)

December 31,

2002 2001

Dollars in % AAA Dollars in % AAA

Millions Rated(2) Millions Rated(2)

Agency mortgage securities:

Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 78,829 100% $ 71,128 100%

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,878 100 5,699 100

Total agency mortgage securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,707 100 76,827 100

Non-agency mortgage-related securities:

Single-family and other mortgage-related securities(3)ÏÏÏÏÏ 46,193 96 25,288 96

Commercial mortgage backed securities(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,559 99 17,048 98

Mortgage revenue bonds(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,640 81 7,257 81

Total non-agency mortgage securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78,392 96 49,593 94

Total non-Freddie Mac mortgage-related securities ÏÏÏÏÏÏÏÏÏ $162,099 98 $126,420 98

(1) See Table 47 Ì Composition of Total Mortgage Portfolio for more information.

(2) Includes percentage of non-Freddie Mac mortgage-related securities rated ""AAA'' or equivalent. Credit rating of non-agency

mortgage securities is designated by at least two nationally recognized credit rating agencies.

(3) Among other categories of securities, includes securities backed by subprime home equity loans, which are typically Ñrst-lien

mortgages made to borrowers with a higher risk of default, and securities backed by manufactured housing loans.

(4) Consists of commercial mortgage securities backed by pools of loans including signiÑcant amounts of multifamily mortgages.

(5) Consists of obligations of state and political subdivisions.

Our non-Freddie Mac mortgage-related securities portfolio consists of both agency and non-agency

mortgage securities. Agency mortgage securities, which are securities issued and/or guaranteed by Fannie

Mae and Ginnie Mae, present minimal institutional credit risk exposure to us due to the high credit quality of

the issuers and guarantors. Agency mortgage securities are generally not separately rated by credit rating

agencies, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage

securities rated AAA (based on the S&P rating scale or an equivalent rating from other nationally recognized

rating agencies). At December 31, 2002, we held approximately $84 billion of agency securities, representing

approximately 6 percent of our total mortgage portfolio (see Table 47 Ì Composition of Total Mortgage

Portfolio for more information about our total mortgage portfolio).

Non-agency mortgage securities expose us to some institutional credit risk, which is mitigated through

credit enhancements such as bond insurance. Substantially all of the bond insurers providing coverage for nonagency mortgage securities held by us were rated AAA or equivalent by at least one nationally recognized

credit rating agency. At December 31, 2002, we held approximately $78 billion of non-agency mortgage

securities, representing approximately 6 percent of our total mortgage portfolio. Of this amount, 96 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 stringent 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 non-agency securities, we may perform additional analysis, including on-site

visits, veriÑcation of loan documentation, review of underwriting or servicing processes and similar due

diligence measures. In addition, management regularly evaluates these investments to determine if any

impairment in fair value requires a write-down of the asset's carrying value and/or warrants divestiture.

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,

predominately in our SS&TG business unit. Pre-settlement risk is the risk that a counterparty will not perform

Freddie Mac

108
under the terms of a transaction due to adverse changes in market value between trade date and settlement

date. The probability of such a default is generally remote over the short time horizon between the trade and

settlement date. We manage this risk by underwriting our counterparties and monitoring and managing our

exposures. In some instances, we may also require these counterparties to post collateral.

Cash and Investments Portfolio. Institutional credit risk also arises from the insolvency of issuers or

guarantors of investments held in our cash and investments portfolio. This portfolio is used to meet both

anticipated and unanticipated liquidity and working capital requirements (see ""Ì LIQUIDITY AND

CAPITAL RESOURCES Ì Liquidity'' for more information). Instruments in this portfolio are investment

grade at the time of purchase and primarily short-term in nature, thereby signiÑcantly mitigating institutional

credit risk in this portfolio. We regularly evaluate these investments to determine if any impairment in fair

value requires a write-down of the asset's carrying value and/or warrants divestiture.

Freddie Mac

109
OTHER REGULATORY MATTERS

Housing Goals

The GSE Act requires the Secretary of HUD to establish three mortgage purchase goals for Freddie Mac

and Fannie Mae:

‚ The low- and moderate-income goal;

‚ The underserved areas goal; and

‚ The special aÅordable goal.

See ""BUSINESS Ì Regulation and Governmental Relationships Ì Regulation Ì HUD Ì Housing

Goals'' for deÑnitions of these goals.

In October 2000, the Secretary issued Ñnal regulations establishing new aÅordable mortgage purchase

goals for Freddie Mac and Fannie Mae for calendar years 2001 through 2003, which increased the aÅordable

mortgage purchase goals in place relative to calendar years 1997 through 2000. The Ñnal rule increased the

Low- and Moderate-Income Goal from the previous 42 percent to 50 percent; increased the Underserved

Areas Goal from the previous 24 percent to 31 percent; and increased the Special AÅordable Goal from the

previous 14 percent to 20 percent, including an increase in the target for qualifying multifamily mortgage

purchases from the previous $0.99 billion to $2.11 billion.

We met each of these goals in 2002 and 2001. Our purchases, as counted under HUD's regulations, are

set forth in Table 64 below. However, as discussed under ""SUBSEQUENT EVENTS Ì Regulatory

Developments,'' HUD has notiÑed Freddie Mac that it will not renew for 2004 certain incentives under the

housing goals that contributed signiÑcantly to our achievement of the goals since 2001. HUD's action

eÅectively raises each of the goals for 2004, and will require an increased level of eÅort on our part to meet

them.

Table 64 Ì Housing Goals

Year Ended December 31,

2002 2001

Goal Result Goal Result

(dollars in billions)

Low- and moderate-income goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% 51% 50% 53%

Underserved areas goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 32 31 32

Special aÅordable goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 21 20 23

Multifamily special aÅordable volume goal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2.11 $5.01 $2.11 $4.72

Management views the purchase of mortgage loans beneÑting low- and moderate-income families and

neighborhoods as an integral part of our mission and business, and remains committed to fulÑlling the needs of

underserved borrowers and markets. We expect that we will continue to purchase the majority of the singlefamily and multifamily mortgages counted toward our performance under the housing goals through our

standard purchase programs, in conformity with our customary mortgage underwriting standards. We will

continue to expand anti-predatory lending and consumer credit education programs and to pilot products that

reach creditworthy borrowers otherwise overlooked by traditional lending sources.

Freddie Mac

110
QUARTERLY SELECTED FINANCIAL DATA

Tables 65 and 66 reconcile previously reported to restated captions on the consolidated statement of

income on a quarterly and annual basis. Table 67 compares previously reported to restated consolidated

balance sheet data for selected periods. See ""FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA Ì NOTE 1: RESTATEMENT'' for more information.

Table 65 Ì 2002 Quarterly Reconciliation of Previously Reported to Restated/Revised Figures

1Q 2002 2Q 2002 3Q 2002 4Q 2002 Full-Year 2002

(dollars in millions, except share-related amounts)

Net interest income, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,723 $1,560 $ 1,811 $1,683 $ 6,777

Impact of accounting errors and corrections:

Security classiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 147 14 (228) (344) (411)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183 238 206 345 972

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361 311 290 281 1,243

Other accounting changes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 305 305

Net interest income, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,414 $2,123 $ 2,079 $2,270 $ 8,886

Non-interest income, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 623 $ 273 $ 390 $1,362 $ 2,648

Impact of accounting errors and corrections:

Security classiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (180) 723 416 (49) 910

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (902) 1,153 7,162 (294) 7,119

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (55) (500) (1,064) (204) (1,823)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89 (170) 31 (37) (87)

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (225) (267) (240) (253) (985)

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Non-interest income, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (650) $1,212 $ 6,695 $ 525 $ 7,782

Non-interest expense, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (294) $ (245) $ 40 $ (543) $(1,042)

Impact of accounting errors and corrections:

Security classiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49) (49) (47) (27) (172)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) (101) (322) (203) (629)

Other accounting changes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) (6) (4) (4) (22)

Non-interest expense, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (354) $ (401) $ (333) $ (777) $(1,865)

Income tax expense, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (639) $ (478) $ (703) $ (799) $(2,619)

Impact of accounting errors and corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176 (485) (2,076) 291 (2,094)

Income tax expense, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (463) $ (963) $(2,779) $ (508) $(4,713)

Income before cumulative eÅect of change in accounting principles,

net of taxes, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,413 $1,110 $ 1,538 $1,703 $ 5,764

Impact of accounting errors and corrections:

Security classiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (180) 723 416 (49) 910

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (804) 1,118 6,887 (665) 6,536

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 (262) (858) 141 (851)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89 (170) 31 (37) (87)

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 133 (57) (272) (175) (371)

Other accounting changes(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) (6) (4) 301 283

Tax impact of accounting corrections and changes ÏÏÏÏÏÏÏÏÏÏÏÏ 176 (485) (2,076) 291 (2,094)

Income before cumulative eÅect of change in accounting principles,

net of taxes, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 947 1,971 5,662 1,510 10,090

Cumulative eÅect of change in accounting principles, net of taxes Ì Ì Ì Ì Ì

Net income as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 947 $1,971 $ 5,662 $1,510 $10,090

Diluted earnings per common share after cumulative eÅect of change

in accounting principles, net of taxes, as previously reported(4) ÏÏÏÏ $ 1.94 $ 1.50 $ 2.13 $ 2.38 $ 7.95

EÅect of adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.67) 1.24 5.93 (0.28) 6.23

Diluted earnings per common share after cumulative eÅect of change

in accounting principles, net of taxes, as revised/restated(4) ÏÏÏÏÏÏÏ $ 1.27 $ 2.74 $ 8.06 $ 2.10 $ 14.18

(1) Represents the impact of enhancements to the methodology used to estimate the lives used in the amortization of certain premiums

and discounts.

(2) Represents the impact of accounting changes Freddie Mac made related to stock-based compensation.

(3) Represents the net impact of (i) accounting changes Freddie Mac made related to stock-based compensation and (ii) enhancements

to the methodology used to estimate the lives used in the amortization of certain premiums and discounts.

(4) Earnings per share is computed independently for each of the quarters presented. Due to the use of weighted-average common shares

outstanding when calculating earnings per share, the sum of the four quarters may not equal the full-year amount. Earnings per share

amounts may not recalculate due to rounding.

Freddie Mac

111
Table 66 Ì 2001 Quarterly Reconciliation of Previously Reported to Restated Figures

1Q 2001 2Q 2001 3Q 2001 4Q 2001 Full-Year 2001

(dollars in millions, except share-related amounts)

Net interest income, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 976 $1,190 $ 1,438 $ 1,876 $ 5,480

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (95) (41) 42 89 (5)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 296 159 236 34 725

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 118 210 442 22 792

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Net interest income, as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,295 $1,518 $ 2,158 $ 2,021 $ 6,992

Non-interest income, as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 445 $ 357 $ 299 $ 429 $ 1,530

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 284 (455) 1,420 (770) 479

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (765) (345) 854 (1,281) (1,537)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (449) 204 (52) (186) (483)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (555) 230 (440) 280 (485)

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171) (126) (393) 40 (650)

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Non-interest income, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,211) $ (135) $ 1,688 $(1,488) $(1,146)

Non-interest expense, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (246) $ (244) $ (253) $ (322) $(1,065)

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (68) (55) (57) (49) (229)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40) 7 (75) 41 (67)

Other accounting changes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (9) (10) (11) (31)

Non-interest expense, as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (355) $ (301) $ (395) $ (341) $(1,392)

Income tax expense, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (343) $ (389) $ (452) $ (619) $(1,803)

Impact of accounting errors and correctionsÏÏÏÏÏÏÏÏÏÏÏÏ 425 63 (585) 561 464

Income tax expense, as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 82 $ (326) $(1,037) $ (58) ($1,339)

Freddie Mac

112
Table 66 (continued)

1Q 2001 2Q 2001 3Q 2001 4Q 2001 Full-Year 2001

(dollars in millions, except share-related amounts)

Income before cumulative eÅect of change in accounting

principles, net of taxes, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 832 $ 914 $1,032 $1,364 $ 4,142

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 284 (455) 1,420 (770) 479

Accounting for derivative instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (928) (441) 839 (1,241) (1,771)

Asset transfers and securitizationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (153) 363 184 (152) 242

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (555) 230 (440) 280 (485)

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (93) 91 (26) 103 75

Other accounting changes(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (9) (10) (11) (31)

Tax impact of accounting corrections and changes(2) ÏÏÏÏÏÏÏ 425 63 (585) 561 464

Income (loss) before cumulative eÅect of change in accounting

principles, net of taxes, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (189) 756 2,414 134 3,115

Cumulative eÅect of change in accounting principle, net of

taxes, as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5ÌÌÌ 5

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 445 Ì Ì Ì 445

Accounting for derivative instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (486) Ì Ì Ì (486)

Asset transfers and securitizationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (53) Ì Ì (53)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 Ì Ì Ì 160

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) Ì Ì Ì (7)

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌ Ì

Tax impact of cumulative eÅect of change in accounting

principles(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (39) 18 Ì Ì (21)

Cumulative eÅect of change in accounting principles, net of

taxes, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 (35) Ì Ì 43

Net income (loss), as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (111) $ 721 $2,414 $ 134 $ 3,158

Diluted earnings per common share after cumulative eÅect of

change in accounting principles, net of taxes, as previously

reported(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.13 $ 1.24 $ 1.40 $ 1.87 $ 5.64

EÅect of adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.36) (0.28) 1.98 (1.76) (1.41)

Diluted earnings (loss) per common share after cumulative eÅect

of change in accounting principles, net of taxes, as restated(3) $(0.23) $ 0.96 $ 3.38 $ 0.11 $ 4.23

(1) Represents the impact of accounting changes Freddie Mac made related to stock-based compensation.

(2) Represents the net impact of (i) accounting changes Freddie Mac made related to stock-based compensation and (ii) enhancements

to the methodology used to estimate the lives used in the amortization of certain premiums and discounts.

(3) Earnings per share is computed independently for each quarter. Due to the use of weighted-average common shares outstanding

when calculating earnings per share, the sum of the four quarters may not equal the full-year amount. Earnings per share amounts

may not recalculate due to rounding.

Freddie Mac

113
Table 67 Ì Previously Reported and Restated Selected Balance Sheet Captions

1Q 2002 2Q 2002 3Q 2002 4Q 2002

As As As As

Previously As Previously As Previously As Previously

Reported Restated Reported Restated Reported Restated Reported As Revised

(dollars in millions)

Retained portfolioÏÏÏÏÏÏÏÏÏÏÏ $527,640 $539,993 $524,904 $541,368 $542,415 $555,910 $583,269 $589,722

Cash and investments ÏÏÏÏÏÏÏ 84,802 115,115 80,372 116,210 96,471 140,360 86,598 135,037

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 646,397 672,126 644,013 674,341 681,980 719,371 721,739 752,249

Total debt securities, net ÏÏÏÏÏ 603,446 620,145 601,363 619,112 623,267 640,315 648,894 665,696

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 630,532 650,222 626,079 647,807 659,414 685,662 697,110 718,610

Minority interest in

consolidated subsidiaries ÏÏÏ Ì 2,533 Ì 2,455 Ì 2,400 Ì 2,309

Total stockholders' equity ÏÏÏÏ 15,865 19,371 17,934 24,079 22,566 31,309 24,629 31,330

1Q 2001 2Q 2001 3Q 2001 4Q 2001

As As As As

Previously As Previously As Previously As Previously

Reported Restated Reported Restated Reported Restated Reported As Revised

(dollars in millions)

Retained portfolioÏÏÏÏÏÏÏÏÏÏÏ $421,754 $430,778 $442,549 $452,615 $474,886 $484,876 $494,259 $503,666

Cash and investments ÏÏÏÏÏÏÏ 50,055 65,345 64,296 83,981 66,547 92,497 82,933 120,527

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 497,839 508,549 537,590 550,673 571,907 592,859 617,340 641,100

Total debt securities, net ÏÏÏÏÏ 461,338 462,851 496,712 501,528 534,434 542,595 565,071 578,368

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 485,018 489,115 523,610 531,204 557,401 568,345 601,967 618,857

Minority interest in

consolidated subsidiaries ÏÏÏ Ì 2,865 Ì 2,784 Ì 2,702 Ì 2,619

Total stockholders' equity ÏÏÏÏ 12,821 16,569 13,980 16,685 14,506 21,812 15,373 19,624

Freddie Mac

114
SUBSEQUENT ACCOUNTING REVISIONS

Subsequent to the announcement of our restatement results in our November 21, 2003 Information

Statement Supplement, we made a revision to the classiÑcation of certain investments as of December 31,

2002 and December 31, 2001 as detailed below in Table 68. These reclassiÑcations relate to the composition of

the security holdings of our external money managers and had no eÅect on total cash and investments or total

assets as of December 31, 2002 and 2001.

Table 68 Ì Reconciliation of Certain Balance Sheet Captions

December 31, 2002

As Previously Subsequent

Revised(1) Revisions As Revised

(dollars in millions)

Cash and investments:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,792 $ Ì $ 10,792

Investments:

Mortgage-related securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,363 3 32,366

Participation CertiÑcate residuals, at fair value(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 8 8

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,419 Ì 66,419

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,556 (147) 2,409

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68,975 (147) 68,828

Securities purchased under agreements to resell and Federal funds

sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,907 136 23,043

Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $135,037 $ Ì $135,037

December 31, 2001

As Previously Subsequent

Revised(1) Revisions As Revised

(dollars in millions)

Cash and investments:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,464 $ Ì $ 3,464

Investments:

Mortgage-related securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,666 (472) 27,194

Participation CertiÑcate residuals, at fair value(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 20 20

Non-mortgage-related securities:

Available-for-sale, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,810 Ì 54,810

Trading, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,087 452 1,539

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,897 452 56,349

Securities purchased under agreements to resell and Federal funds

sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,500 Ì 33,500

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $120,527 $ Ì $120,527

(1) The ""As Previously Revised'' column reÖects the restatement results in Freddie Mac's Information Statement Supplement dated

November 21, 2003.

(2) The ""Participation CertiÑcate residuals, at fair value'' that related to mortgage-related investments in the cash and investments

portfolio had previously been combined with the ""Mortgage-related securities'' balances.

Freddie Mac

115
VOLUNTARY COMMITMENTS

The following provides updated information on the Voluntary Commitments we made in October 2000.

Additional information about our Voluntary Commitments is available on our website

(www.freddiemac.com).

Description Comments Status

1. Periodic Issuance of Subordinated

Debt:

‚ We will issue publicly traded and ‚ We did not issue any Freddie SUBS in

externally rated Freddie SUBS on a 2003. As a result of not having timely

semi-annual basis. consolidated Ñnancial statements, our

ability to issue subordinated debt may

be limited.

‚ Freddie SUBS will be issued in an ‚ At December 31, 2002, the ratio of ‚ As of December 31, 2002, we met this

amount such that ""Voluntary Voluntary Commitments' capital to commitment.

Commitments' capital'' will equal or total assets was 4.2 percent.

exceed 4 percent of on-balance sheet

assets and 0.45 percent of oÅ-balance

sheet mortgage securities by October

2003. Voluntary Commitments' capital

is deÑned as the sum of core capital

(eÅectively equal to Stockholders'

equity less AOCI), loan loss reserves

and Freddie SUBS outstanding.

‚ We cannot determine the ratio of ‚ We plan to update this commitment

Voluntary Commitments' capital to following the release of our 2003

total assets for any period in 2003 with consolidated Ñnancial statements.

speciÑcity until we release the

consolidated Ñnancial statements for

such periods.

2. Liquidity Management and

Contingency Planning:

‚ We will comply with principles of ‚ For purposes of this commitment, we ‚ As of December 31, 2002, we met this

sound liquidity management set forth will maintain liquidity needed to meet commitment.

by the Basel Committee on Banking our obligations to pay principal and

Supervision and will maintain more interest related to our outstanding debt

than three months' worth of liquidity maturities, to pay PC investors the

(based on internal forecasts) assuming amounts due to them, to purchase

we have no access to new issue public mortgage loans and mortgage-related

debt markets. securities that we have committed to

purchase as well as to fund operating

expenditures. To fund these obligations

in the event of market disruption, we

could sell some securities from our

retained portfolio, liquidate our nonmortgage investments as well as

mortgage-related investments held by

SS&TG, which are a component of

""Cash and Investments'' as reported

on our consolidated balance sheet. In

addition, we could borrow against

mortgage-related securities that are a

component of our retained portfolio by

executing transactions in the

repurchase agreement market. (Our

ability to execute these and other

strategies may be adversely aÅected by

market conditions, operational

constraints and other factors.)

Freddie Mac

116
VOLUNTARY COMMITMENTS (continued)

Description Comments Status

‚ In implementing this commitment, we ‚ Assets that meet this deÑnition include ‚ As of December 31, 2002, we met this

will maintain at least 5 percent of on- cash and cash equivalents (excluding commitment.

balance sheet assets in liquid, operating cash accounts, cash posted as

marketable, non-mortgage securities. collateral by derivative counterparties

We will also maintain additional, liquid and certain other balances), various

mortgage securities for use as collateral non-mortgage investments such as

in short-term borrowings from dealer municipal bonds, corporate bonds,

counterparties. asset-backed securities, commercial

paper and certain securities purchased

under agreements to resell (reverse

repos). This calculation does not

include investments or reverse repos

held by SS&TG or as part of our

external money manager program. This

calculation also excludes Treasury

securities and reverse repos held for

economic hedging purposes.

‚ We cannot determine the percentage ‚ We plan to update this commitment

of on-balance sheet assets in liquid, following the release of our 2003

marketable, non-mortgage securities consolidated Ñnancial statements.

for any period in 2003 with speciÑcity

until we release the consolidated

Ñnancial statements for such periods.

3. Interest-Rate Risk Disclosures

We will provide public disclosure of See ""MD&A Ì RESTATEMENT The monthly average PMVS-L for

interest-rate risk sensitivity results on a RESULTS Ì Restatement EÅect on December 2002 was 2.3 percent. 2003's

monthly basis. SpeciÑcally, we will Interest-Rate Risk Measures'' for more monthly average PMVS results and

disclose the PMVS-L, which shows the information concerning the impact of the related disclosures are provided in our

expected impact on our portfolio market restatement of our Ñnancial results on our Monthly Volume Summary, which is

value from an immediate, adverse 50 interest-rate risk sensitivity disclosures, available on our website,

basis point parallel shift in the yield including PMVS. www.freddiemac.com.

curve. We will also disclose the PMVSYC, which shows the same impact from

an immediate, adverse 25 basis point

change in the slope of the yield curve.

Freddie Mac

117
VOLUNTARY COMMITMENTS (continued)

Description Comments Status

4. Credit Risk Disclosures:

Freddie Mac will provide public EÅective with March 31, 2003 Freddie Mac's quarterly credit risk

disclosure of credit risk sensitivity results, Freddie Mac switched fromsensitivity results are as follows:

results on a quarterly basis. an OFHEO-based model to the

Compared to a base case in which model that is used for our internal

house prices on average rise at rates evaluation of mortgage credit risk.

consistent with long-term trends, The OFHEO-based model used a

these disclosures show the increase single economic scenario, while the

in the present value of expected internal model uses an average of

single-family credit losses to Freddie results from numerous economic

Mac over a 10-year period assuming scenarios, including some less

an immediate 5 percent decline in probable, but higher loss scenarios.

house prices followed by a As a result, the model change has

resumption of the same long-term increased the sensitivity of credit

trend in house-price appreciation as losses to the house price shock. Prior

in the base case. periods were not restated, but for

comparison purposes, results for

December 31, 2002 are provided

using both models. See ""RISK

MANAGEMENT Ì Credit Risk Ì

Credit Risk Sensitivity'' for more

information.

Before Receipt After Receipt

of Credit of Credit

Enhancements Enhancements

(dollars in millions)

As of:

12/31/03 $926 $533

09/30/03 $947 $537

06/30/03 $931 $493

03/31/03 $933 $493

12/31/02* $948 $449

* Results for December 31, 2002 using the old

model were $881 million before receipt of

credit enhancements and $278 million after

receipt of credit enhancements.

5. Public Disclosure of Annual

Rating:

Freddie Mac will obtain an annual Freddie Mac has a ""risk-to-the-gov- As of November 21, 2003, S&P afcredit rating assessing risk to the ernment'' credit rating of ""AA¿'' Ñrmed its rating of ""AA-'' for riskgovernment or independent Ñnancial from S&P. Moody's has assigned the to-the-government and Moody's

strength from a nationally recog- company a Bank Financial Strength conÑrmed its ""A-'' Bank Financial

nized statistical rating organization Rating of ""A¿''. Both of these rat- Strength Rating; however, Moody's

and will disclose this rating to the ings are maintained on a surveillance rating is under review for downgrade.

public. basis, which means that the rating A comparable rating from Fitch has

agencies are committed to notify the not yet been disclosed publicly.

public if the rating is ever aÅected by

a change in Freddie Mac's Ñnancial

condition.

Freddie Mac

118
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Freddie Mac

119
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 (the ""company''), and its subsidiaries at December 31, 2002 and 2001, and the results of their

operations and their cash Öows for each of the three years in the period ended December 31, 2002 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, which 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, 2002 and

2001. As described in Note 17, 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 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 17.

As discussed in Note 2, the company adopted the provisions of Statement of Financial Accounting

Standards No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' and 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,'' as of January 1, 2001 and April 1, 2001,

respectively. The company also retroactively adopted the provisions of Statement of Financial Accounting

Standards No. 123, ""Accounting for Stock-based Compensation'' as of January 1, 1995, pursuant to the

provisions of Statement of Financial Accounting Standards No. 148, ""Accounting for Stock-Based Compensation Ì Transition and Disclosure Ì an amendment of FASB Statement No. 123.''

As discussed in Note 1, the company has restated its consolidated Ñnancial statements as of December 31, 2001 and 2000 and for each of the two years in the period ended December 31, 2001, which Ñnancial

statements were previously audited by other independent auditors who have ceased operations.

PricewaterhouseCoopers LLP

McLean, Virginia

February 17, 2004

Freddie Mac

120
FREDDIE MAC

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

2002 2001 2000

(Revised) (Restated) (Restated)

(dollars in millions, except sharerelated amounts)

Interest income

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,290 $ 4,385 $ 4,177

Mortgage-related securities in the retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,039 26,847 20,536

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,147 4,136 4,469

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,476 35,368 29,182

Interest expense

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,303) (9,056) (10,492)

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21,025) (17,466) (14,639)

Total interest expense on debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25,328) (26,522) (25,131)

Due to Participation CertiÑcate investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,236) (1,027) (352)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,564) (27,549) (25,483)

Income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,026) (827) 59

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,886 6,992 3,758

Non-interest income

Management and guarantee income (includes interest on Guarantee asset of $242,

$252 and $234) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,516 1,392 1,252

Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair value''ÏÏÏÏÏÏÏ (2,176) (789) (1,197)

Gains (losses) on ""Guarantee obligation for Participation CertiÑcates, at fair value''ÏÏÏ 592 203 443

Derivative gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,941 (1,857) 1,483

Hedge accounting gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187 (294) Ì

Gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,812 191 492

Gains (losses) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (674) (356) 13

Resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276 135 15

Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 308 229 146

Non-interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,782 (1,146) 2,647

Non-interest expense

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (128) (32) (79)

REO operations income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 (7) 4

Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (593) (537) (433)

Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (42) (35) (35)

Housing tax credit partnerships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (160) (121) (104)

Minority interests in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (184) (208) (231)

Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) (452) (357)

Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,865) (1,392) (1,235)

Income before income tax expense and cumulative eÅect of change in accounting

principles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,803 4,454 5,170

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,713) (1,339) (1,504)

Income before cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏÏÏ 10,090 3,115 3,666

Cumulative eÅect of change in accounting principles, net of taxes of $24 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,090 $ 3,158 $ 3,666

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (234) (217) (179)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,856 $ 2,941 $ 3,487

Basic earnings per common share before cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.19 $ 5.04

Cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.06 Ì

Basic earnings per common share after cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.25 $ 5.04

Diluted earnings per common share before cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.17 $ 5.01

Cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.06 Ì

Diluted earnings per common share after cumulative eÅect of change in accounting

principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.23 $ 5.01

Weighted average common shares outstanding (thousands)

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 692,727 692,603 692,097

DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 695,116 695,973 695,307

Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.88 $ 0.80 $ 0.68

The accompanying notes are an integral part of these Ñnancial statements.

Freddie Mac

121
FREDDIE MAC

CONSOLIDATED BALANCE SHEETS

December 31, December 31,

2002 2001

(Revised) (Restated)

(dollars in millions)

Assets

Retained portfolio Mortgage loans:

Held for investment, at amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 57,483 $ 58,313

Reserve for losses on mortgage loans held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (177) (103)

Held for sale, at lower of cost or market value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,635 4,409

Mortgage loans, net of reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,941 62,619

Mortgage-related securities:

Available-for-sale, at fair value (includes $367 and $167 pledged as collateral that may be

repledged) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 496,265 398,921

Trading, at fair value (includes $89 and $136 pledged as collateral that may be repledged) ÏÏÏÏ 29,104 41,400

Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412 726

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 525,781 441,047

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 589,722 503,666

Cash and Investments

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,792 3,464

Investments:

Mortgage-related securities:

Trading, at fair value (includes $2 and $6 pledged as collateral that may be repledged) ÏÏÏÏÏÏÏ 32,366 27,194

Participation CertiÑcate residuals, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 20

Non-mortgage-related securities:

Available-for-sale, at fair value (includes $350 and $125 pledged as collateral that may be

repledged) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,419 54,810

Trading, at fair value (includes $62 and $25 pledged as collateral that may be repledged) ÏÏÏÏÏ 2,409 1,539

Total non-mortgage-related securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68,828 56,349

Total mortgage-related and non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101,202 83,563

Securities purchased under agreements to resell and Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,043 33,500

Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135,037 120,527

Accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,611 8,714

Derivative assets, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,393 1,996

Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,445 3,156

Real estate owned, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 594 447

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,447 2,594

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752,249 $641,100

Liabilities and stockholders' equity

Debt securities, net

Senior debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $244,429 $264,227

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,662 311,013

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,605 3,128

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 665,696 578,368

Due to Participation CertiÑcate investorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,080 27,375

Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,286 6,043

Guarantee obligation for Participation CertiÑcates, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,427 1,155

Derivative liabilities, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 967 2,644

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88 121

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,066 3,151

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 718,610 618,857

Commitments and contingencies (Notes 2, 13, 14 and 19)

Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,309 2,619

Stockholders' equity

Preferred stock, at redemption value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,609 4,596

Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and

687,375,999 shares and 695,303,770 shares outstanding, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 152

Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 744 671

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,955 15,710

Accumulated other comprehensive income (loss), net of taxes, related to:

Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,217 4,200

Cash Öow hedge relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,877) (4,757)

Total accumulated other comprehensive income (loss), net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,340 (557)

Treasury stock, at cost, 38,506,281 shares and 30,578,510 shares, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,470) (948)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,330 19,624

Total liabilities and stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752,249 $641,100

The accompanying notes are an integral part of these Ñnancial statements.

Freddie Mac

122
FREDDIE MAC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Year Ended December 31,

2002 2001 2000

(Revised) (Restated) (Restated)

Shares Amount Shares Amount Shares Amount

(dollars and shares in millions)

Preferred stock, at redemption value

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 $ 4,596 64 $ 3,195 64 $ 3,195

Preferred stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 300 28 1,401 Ì Ì

Preferred stock redemptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) (287) Ì Ì Ì Ì

Preferred stock, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 4,609 92 4,596 64 3,195

Common stock, par value

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Common stock, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 726 152 726 152 726 152

Additional paid-in capital

Balance, beginning of year Ì as previously reported ÏÏÏÏÏÏ 474

Beginning balance adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150

Balance, beginning of year Ì as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 671 624 624

Stock-based compensation, net of $35 million, $32 million

and $21 million tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65 60 39

Income tax beneÑt from employee stock option exercises ÏÏ 16 30 28

Preferred stock issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (13) Ì

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) (30) (67)

Additional paid-in capital, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 744 671 624

Retained earnings

Balance, beginning of year Ì as previously reported ÏÏÏÏÏÏ 9,736

Beginning balance adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 576

Balance, beginning of year Ì as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,710 13,326 10,312

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,090 3,158 3,666

Preferred stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (234) (217) (179)

Common stock dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (611) (557) (473)

Retained earnings, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,955 15,710 13,326

Accumulated other comprehensive income (loss), net of taxes

(AOCI)

Balance, beginning of year Ì as previously reported ÏÏÏÏÏÏ (1,166)

Beginning balance adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,356)

Balance, beginning of year Ì as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (557) 1,084 (6,522)

Changes in unrealized gains (losses) related to availablefor-sale securities, net of reclassiÑcation adjustment ÏÏÏÏ 8,017 3,116 7,606

Changes in unrealized gains (losses)related to cash Öow

hedge relationships, net of reclassiÑcation adjustment ÏÏÏ (5,120) (2,117) Ì

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏ Ì (2,640) Ì

AOCI, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,340 (557) 1,084

Treasury stock, at cost

Balance, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 (948) 33 (1,024) 31 (866)

Common stock issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) 33 (2) 76 (4) 100

Common stock repurchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 (555) Ì Ì 6 (258)

Treasury stock, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 (1,470) 31 (948) 33 (1,024)

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $31,330 $19,624 $17,357

Comprehensive income

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,090 $ 3,158 $ 3,666

Changes in AOCI, net of reclassiÑcation adjustment ÏÏÏÏÏ 2,897 (1,641) 7,606

Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,987 $ 1,517 $11,272

The accompanying notes are an integral part of these Ñnancial statements.

Freddie Mac

123
FREDDIE MAC

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2002 2001 2000

(Revised) (Restated) (Restated)

(dollars in millions)

Cash Öows from operating activities

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,090 $ 3,158 $ 3,666

Adjustments to reconcile net income to net cash provided by (used for)

operating activities:

Cumulative eÅect of change in accounting principles (pre-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (67) Ì

Hedge accounting (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (187) 294 Ì

Derivative (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,941) 1,857 (1,483)

Asset amortization Ì premiums, discounts and hedging basis adjustments ÏÏÏ (404) (645) (327)

Debt amortization Ì premiums and discounts on long-term debt and hedging

basis adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,272 547 766

Losses (gains) on debt retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 674 356 (13)

Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 32 79

(Gains) losses on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,735) (38) (306)

(Decrease) increase in deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,690 (245) 620

Purchases of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (136,845) (84,799) (25,030)

Sales of held-for-sale mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 130,605 80,324 24,899

Repayments of held-for-sale mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,097 262 79

Net (increase) decrease in trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,170 2,535 (4,512)

Change in accounts and other receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,286) (850) (3,412)

Change in amounts due to Participation CertiÑcate investors, net ÏÏÏÏÏÏÏÏÏÏÏ 7,705 20,879 289

Change in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 344 1,237 1,424

Change in Guarantee asset for Participation CertiÑcates, at fair value ÏÏÏÏÏÏÏ 711 (381) 698

Change in Guarantee obligation for Participation CertiÑcates, at fair value ÏÏÏ 272 378 (222)

Change in Participation CertiÑcate residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 326 (9) 76

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,309 (2,528) 1,791

Net cash provided by (used for) operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,995 22,297 (918)

Cash Öows from investing activities

Purchases of available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (451,613) (387,603) (191,796)

Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176,928 104,966 33,839

Proceeds from maturities of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 182,955 141,699 88,284

Purchases of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13,656) (13,735) (11,333)

Repayments of held-for-investment mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,372 13,197 7,767

Proceeds from sales of REOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 980 771 883

Net decrease (increase) in securities purchased under agreements to resell

and Federal funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,457 (24,084) 10,325

Derivative premiums and terminations, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,343) (2,202) (110)

Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (84,920) (166,991) (62,141)

Cash Öows from Ñnancing activities

Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,048,131 2,455,070 2,310,039

Repayments of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,100,103) (2,362,620) (2,326,370)

Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 269,386 205,213 93,653

Repayments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140,449) (150,240) (13,340)

Repayments of minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (350) (325) (302)

Proceeds from issuance of preferred stock, net of issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏ 298 1,388 Ì

Redemption of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (287) Ì Ì

Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 46 33

Repurchases of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (555) Ì (258)

Payment of cash dividends on preferred stock and common stockÏÏÏÏÏÏÏÏÏÏÏ (845) (774) (652)

Net cash provided by Ñnancing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,253 147,758 62,803

Net increase (decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,328 3,064 (256)

Cash and cash equivalents at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,464 400 656

Cash and cash equivalents at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,792 $ 3,464 $ 400

Supplemental cash Öow information

Cash paid for:

Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20,867 $ 18,324 $ 13,665

Derivative interest carry (U.S. dollar denominated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,366 244 1,202

Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,491 977 977

Non-cash investing and Ñnancing activities

Transfers from held-for-sale mortgages to available-for-sale securities ÏÏÏÏÏÏÏ 2,910 362 Ì

Transfers from mortgage loans to REOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,197 910 851

Transfers from available-for-sale securities to trading securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 36,336 Ì

The accompanying notes are an integral part of these Ñnancial statements.

Freddie Mac

124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: RESTATEMENT

On November 21, 2003, Freddie Mac (the ""company'') announced the results of its restatement of

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'').

Factors Contributing to the Need for the Restatement

The company announced the need to restate its Ñnancial results in January 2003. In connection with that

announcement, the outside directors of Freddie Mac's Board of Directors retained Baker Botts L.L.P. (""Baker

Botts'') as its independent investigative counsel to review the facts and circumstances relating to certain of the

accounting errors identiÑed during the restatement process. In June 2003, Freddie Mac reported on Baker

Botts' preliminary Ñndings presented to the Audit Committee and the Board of Directors as to the factors

contributing to the need for the restatement. In July 2003, Freddie Mac released the Baker Botts report and on

November 18, 2003 Freddie Mac released a supplemental Baker Botts report.

The factors contributing to the need for the restatement were lack of suÇcient accounting expertise and

internal control and management weaknesses as a consequence of which Freddie Mac personnel made

numerous errors in applying generally accepted accounting principles in the United States (""GAAP''). In

addition, certain capital market transactions were executed and certain accounting policies were implemented

with a view to their eÅect on earnings in the context of Freddie Mac's goal of achieving steady earnings

growth, and the disclosure processes and disclosures in connection with those transactions and policies did not

meet the standards that would have been required of Freddie Mac had it been a Securities and Exchange

Commission (""SEC'') registrant. Certain reserve account and other adjustments, which were known

departures from GAAP but were not considered to be material at the time, also were made with a view to their

eÅect on earnings. As noted in the Baker Botts report, in most cases Freddie Mac believed at the time that the

accounting for the transactions, policies and adjustments that Baker Botts reviewed were appropriate and

reached these conclusions after consultations with its previous independent auditor.

The net cumulative eÅect of the restatement through December 31, 2002 was an increase to the

company's net income of $5.0 billion, which includes a net cumulative increase of $4.4 billion for 2000, 2001

and 2002 and $0.6 billion related to periods prior to 2000. While the net cumulative eÅect of the restatement

provided a signiÑcant increase in net income, 2001's net income decreased by $1.0 billion compared to

previously reported results, primarily due to unrealized losses on derivatives not in qualifying hedge accounting

relationships.

Freddie Mac is subject to various legal proceedings, including regulatory and judicial investigations and

civil litigation, arising from the restatement. See ""NOTE 14: LEGAL CONTINGENCIES'' for further

information.

Remediation Activities

To ensure that the principal factors that contributed to the need for the restatement are properly

addressed, management is implementing a comprehensive remediation program, under the direction and

oversight of the Governance Committee of the Board of Directors. This program includes initiatives relating to

corporate culture, governance, accounting staÇng and expertise, accounting policies, processes and controls as

well as Ñnancial reporting and disclosure. In addition, on December 10, 2003, Freddie Mac announced that it

had entered into a consent order and settlement generally resolving certain matters with the OÇce of Federal

Housing Enterprise Oversight (""OFHEO'') relating to the restatement. Under the terms of the consent order,

Freddie Mac is undertaking additional remedial actions, relating to governance, corporate culture, internal

controls, accounting practices, disclosure and oversight.

Separately, on the same date, OFHEO released its staÅ report on its investigation of matters relating to

the restatement. The report included recommendations by the staÅ to the Director of OFHEO (""Director'')

to consider increasing OFHEO's regulation of Freddie Mac's activities, for example, by setting restrictions on

Freddie Mac

125
the growth of the company's retained portfolio, by requiring that Freddie Mac hold a capital surplus until it

produces timely and certiÑed Ñnancial statements, or by possibly implementing a mandatory disclosure regime

similar to that required for companies with securities registered under the Securities Act and Exchange Act.

Depending on the manner in which such recommendations were implemented, the adoption of one or more of

them could have an adverse eÅect on Freddie Mac's Ñnancial results.

On January 29, 2004, the Director acted upon the report's recommendation regarding a capital surplus by

creating a framework for monitoring Freddie Mac's capital due to the temporarily higher operational risk

arising from Freddie Mac's current inability to produce timely Ñnancial statements in accordance with GAAP.

The framework includes a target capital surplus of 30 percent of Freddie Mac's minimum capital requirement,

subject to certain conditions and variations; weekly monitoring; and prior approval of certain capital

transactions, to ensure that appropriate levels of capital are maintained. See ""NOTE 14: LEGAL CONTINGENCIES'' for further information concerning OFHEO's actions.

Summary of Accounting Corrections and Changes By Category

Table 1.1 summarizes the net cumulative impact of the changes to net income through December 31,

2002. Management has classiÑed the accounting errors and related corrections that have been addressed by

the restatement into the Ñve categories listed in Table 1.1 below. The Ñve error categories involve subjective

judgments by management regarding classiÑcation of amounts and particular accounting errors that may fall

within more than one category. While such classiÑcations are not required under GAAP, management

believes these classiÑcations may assist investors in understanding the nature and impact of the corrections

made in completing the restatement. The descriptions of the Ñve classiÑcations provide only a summary of

primary accounting issues and are not a comprehensive discussion of accounting errors and corrections. In

addition, management made changes in its accounting for two other matters as reported in the ""Other

Accounting Changes'' caption in Table 1.1.

Table 1.1: Net Cumulative Income (Expense) Impact Through December 31, 2002

Net Cumulative

Income (Expense)

Impact Through

12/31/02

(dollars in millions)

Security classiÑcation (pre-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,700

Accounting for derivative instruments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,980

Asset transfers and securitizations (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181

Valuation of financial instruments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214

All other corrections (pre-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 383

Subtotal of accounting corrections (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,458

Other accounting changes (pre-tax)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168

Total accounting corrections and changes (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,626

Tax impact of accounting corrections and changes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,591)

Total net income impact (including subsequent events) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,035

(1) Represents the net cumulative impact of (i) accounting changes Freddie Mac elected to make related to stock-based compensation

and (ii) enhancements to the methodology used to estimate the lives used in the amortization of certain premiums and discounts.

(2) Virtually all of the $2.6 billion tax impact represents an increase in deferred taxes not currently payable.

As shown in Table 1.1, the net cumulative eÅect of the restatement (including subsequent events and

other accounting changes) through December 31, 2002 was an increase to Freddie Mac's net income of

$5.0 billion. This includes net cumulative increases of $4.4 billion for 2000, 2001 and 2002 and $0.6 billion for

periods prior to 2000. In the detailed discussion below, Freddie Mac has separately quantiÑed the impact of

correcting various accounting errors on its 2002, 2001 and 2000 Ñnancial statements. The impact of corrections

to Freddie Mac's net income for periods prior to 2000 is shown in the aggregate in this section and reÖected in

the company's consolidated Ñnancial statements as an adjustment to the beginning balance of its retained

earnings as of January 1, 2000. The $0.6 billion net cumulative increase in net income for periods prior to 2000

was driven primarily by the impact of correcting the accounting for certain transfers of Mortgage Participation

Freddie Mac

126
CertiÑcates (""PCs'') and resecuritized PCs and non-Freddie Mac mortgage-related securities (""Structured

Securities'') (see ""Accounting Errors Ì Asset Transfers and Securitizations Ì Accounting for Transfers of

Mortgage Loans, PCs and Structured Securities'' below), partially oÅset by the impact of corrections related

to the accounting classiÑcation of certain investment securities (see ""Security ClassiÑcation'' below).

Accounting Corrections

Security ClassiÑcation. Freddie Mac is required to classify its investments in one of three categories Ì

held-to-maturity, available-for-sale or trading Ì primarily based on management's investment intention at the

time the company acquires a security. The company reports held-to-maturity securities at amortized cost on

the balance sheet, while marking available-for-sale securities to fair value through Stockholders' equity and

marking trading securities to fair value through the income statement. During the restatement period, Freddie

Mac engaged in transactions involving securities in the held-to-maturity category that management accounted

for as Ñnancings, but should have accounted for as sales. Because management has concluded that it should

account for such transactions as sales, GAAP requires management to reclassify all securities previously

classiÑed as held-to-maturity into the available-for-sale category and to discontinue use of the held-tomaturity accounting classiÑcation for all securities until at least 2004, approximately two years after the last

transaction giving rise to this error. As a result, for accounting purposes, Freddie Mac has reclassiÑed all of its

held-to-maturity securities to the available-for-sale category for each restated period and recorded all

unrealized gains and losses at each reporting period to the Stockholders' equity section of the balance sheet,

speciÑcally through Accumulated other comprehensive income (""AOCI'').

During the restatement period, management also transferred mortgage-related securities that it had

designated for accounting purposes as trading into both the held-to-maturity and available-for-sale classiÑcations when it should have retained the trading classiÑcation for these securities. To correct this error,

management has reversed the misclassiÑcation and recorded unrealized gains and losses on the securities in

earnings for the appropriate period.

Accounting for Derivative Instruments. As part of management's ongoing risk management activities,

Freddie Mac uses derivatives to manage the interest-rate risk associated with its Ñnancial assets and liabilities.

Management believes the accounting issues associated with derivatives identiÑed in the restatement have not

aÅected the performance of the company's derivative Ñnancial instruments, or derivatives, from a risk

management perspective. As part of the restatement, management has corrected several errors in the

company's accounting for derivatives. These corrections consisted of removing from earnings previously

reported gains and losses related to hedged items for a portion of the company's fair value hedges and

recording in earnings previously deferred gains and losses for a portion of the company's cash Öow hedges.

These errors were the result of the following factors:

‚ Management had accounted for some of the company's cash market instruments as derivatives

that did not meet the GAAP accounting deÑnition of a derivative, and as a result incorrectly

applied hedge accounting.

‚ Management did not adequately test and document a signiÑcant portion of the hedge accounting

relationships the company previously determined to be ""eÅective'' for hedge accounting purposes.

In addition, Freddie Mac incorrectly accounted for certain commitments to purchase and sell mortgagerelated securities, including those executed in conjunction with intracompany transactions. To correct these

errors, management has properly accounted for the commitments as derivatives and has either recorded the

change in fair value of commitments to earnings or to Stockholders' equity (to the extent the commitment was

eÅective as a cash Öow hedge). Furthermore, Freddie Mac has eliminated the Ñnancial statement eÅect of the

intracompany transactions.

Asset Transfers and Securitizations. Freddie Mac issues PCs to enhance the liquidity of the underlying

mortgages in the secondary mortgage market. Whenever the company sells such securities, GAAP requires

Freddie Mac to record the guarantee fee stream as a retained interest (i.e., the guarantee asset) and the

associated obligation, including its guarantee of payments of principal and interest to security holders, as a

liability (i.e., the guarantee obligation), which Freddie Mac failed to do. To correct this error, management

has recorded the guarantee asset and guarantee obligation for PCs and Structured Securities sold by the

company during the restatement period and included these amounts in the determination of gain or loss on

Freddie Mac

127
sale. Subsequent to the sale, the company has reported the guarantee asset and obligation at fair value with

changes included in earnings. In addition, as part of the restatement, management corrected its accounting for

securitization transactions involving IO securities, primarily to record previously unrecognized IOs and to

apply proper security classiÑcation and impairment accounting to those securities.

Valuation of Financial Instruments. During the restatement period, management made numerous

errors in estimating the fair value of the company's derivatives and securities. Management concluded that the

reported fair values of its option-based derivatives portfolio (e.g., call options on interest-rate swaps, put

options on interest-rate swaps, interest-rate caps and Öoors) for certain periods within the restatement did not

incorporate all relevant market pricing data. Therefore, management revised fair values for these options to

incorporate such data. In addition, management also corrected errors in estimating the fair value of the

company's securities, which principally occurred due to the use of models that failed to incorporate all relevant

market data and consider key contractual terms of securities as well as process errors involving model input

and application of pricing methodologies.

As part of the restatement, the company engaged in an extensive review of its valuation methodologies

and results. Based on this review, management corrected valuation and other errors identiÑed during its review

and enhanced the accuracy of the market pricing data it uses when determining fair values. In addition to the

corrections aÅecting the Ñnancial statements, management has incorporated the results of this re-valuation in

Freddie Mac's consolidated fair value balance sheets as of December 31, 2002 and 2001. See ""NOTE 17:

FAIR VALUE DISCLOSURES'' for more information.

All Other Corrections. During the course of the restatement process, management identiÑed numerous

other accounting policies and practices requiring correction. These changes touch on many aspects of Freddie

Mac's consolidated Ñnancial statements, and its restated results reÖect these corrections. In addition, Freddie

Mac previously reported several accounting corrections it had deemed immaterial through earnings in the

periods in which it discovered the errors. As part of the restatement process, the company is now recording

these corrections in the periods to which they relate. In addition, certain accruals and reserves recorded in the

fourth quarter of 2002 were revised for events occurring subsequent to December 31, 2002 that met the

requirements for adjustment under GAAP.

Other Accounting Changes

In addition to corrections made in connection with the restatement, management changed the company's

accounting related to stock-based compensation by selecting the retroactive restatement transition method for

stock awards granted on or after January 1, 1995 and, in the fourth quarter of 2002, enhanced its methodology

for estimating the underlying lives used in the amortization of certain premiums and discounts.

Freddie Mac

128
Table 1.2 Ì Annual Reconciliation of Previously Reported to Restated Figures

Year Ended

2002 2001 2000

(dollars in millions,

except share-related amounts)

Net interest income, as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,777 $ 5,480 $ 2,838

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (411) (5) 283

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 972 725 510

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

All other correctionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,243 792 127

Other accounting changes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 305 Ì Ì

Net interest income, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,886 $ 6,992 $ 3,758

Non-interest income, as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,648 $ 1,530 $ 1,631

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 910 479 640

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,119 (1,537) 817

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,823) (483) (1,002)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (87) (485) 626

All other correctionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (985) (650) (65)

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Non-interest income, as revised/restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,782 $(1,146) $ 2,647

Non-interest expense, as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,042) $(1,065) $ (923)

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (172) (229) (225)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 4

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

All other correctionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (629) (67) (73)

Other accounting changes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22) (31) (18)

Non-interest expense, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,865) $(1,392) $(1,235)

Income tax expense, as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(2,619) $(1,803) $ (999)

Impact of accounting errors and corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,094) 464 (505)

Income tax expense, as revised/restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,713) $(1,339) $(1,504)

Income before cumulative eÅect of change in accounting principles, net of taxes, as previously

reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,764 $ 4,142 $ 2,547

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 910 479 640

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,536 (1,771) 875

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (851) 242 (488)

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (87) (485) 626

All other correctionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (371) 75 (11)

Other accounting changes(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283 (31) (18)

Tax impact of accounting corrections and changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,094) 464 (505)

Income before cumulative eÅect of change in accounting principles, net of taxes, as revised/restated 10,090 3,115 3,666

Cumulative eÅect of change in accounting principle, net of taxes, as previously reported ÏÏÏÏÏÏÏÏ Ì 5 Ì

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 445 Ì

Accounting for derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (486) Ì

Asset transfers and securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (53) Ì

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 160 Ì

All other correctionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (7) Ì

Other accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Tax impact of cumulative eÅect of change in accounting principle(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (21) Ì

Cumulative eÅect of change in accounting principle, net of taxes, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 Ì

Net income (loss), as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,090 $ 3,158 $ 3,666

Diluted earnings per common share after cumulative eÅect of change in accounting principles, net

of taxes, as previously reported(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7.95 $ 5.64 $ 3.40

EÅect of adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.23 (1.41) 1.61

Diluted earnings per common share after cumulative eÅect of change in accounting principles, net

of taxes, as revised/restated(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.23 $ 5.01

(1) Represents the impact of enhancements to the methodology used to estimate the lives used in the amortization of certain premiums and discounts.

(2) Represents the impact of accounting changes Freddie Mac made related to stock-based compensation.

(3) Represents the net impact of (i)accounting changes Freddie Mac made related to stock-based compensation and (ii)enhancements to the methodology

used to estimate the lives used in the amortization of certain premiums and discounts.

(4) Earnings per share is computed independently for each quarter presented. Due to the use of weighted-average common shares outstanding when

calculating earnings per share, the sum of the four quarters may not equal the full-year amount. Earnings per share amounts may not recalculate due to

rounding.

Freddie Mac

129
Table 1.3 Ì EÅects of Restatement Adjustments on the Beginning Balance of Stockholders' Equity on

January 1, 2000(1)

Common Stock,

Accumulated Other Additional Paid-in Total

Retained Comprehensive Preferred Stock, at Capital and Stockholders'

Earnings Income (Loss) Redemption Value Treasury Stock Equity

(dollars in millions)

Impact of accounting errors and corrections:

Security classiÑcation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (774) $(8,403) $ Ì $ Ì $(9,177)

Accounting for derivative instrumentsÏÏÏÏÏ (174) (12) Ì Ì (186)

Asset transfers and securitizations ÏÏÏÏÏÏÏÏ 1,331 183 Ì Ì 1,514

Valuation of Ñnancial instruments ÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

All other corrections ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 694 (8) Ì 4 690

Total accounting errors(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,077 (8,240) Ì 4 (7,159)

Other accounting changes(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏ (66) Ì Ì 77 11

Total Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,011 (8,240) Ì 81 (7,148)

Tax impact of accounting corrections and

changes(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (435) 2,884 Ì 69 2,518

Subtotal: Beginning balance adjustment 576 (5,356) Ì 150 (4,630)

Stockholders' equity, beginning balance, net

of taxes, as previously reported ÏÏÏÏÏÏÏÏÏÏ 9,736 (1,166) 3,195 (240) 11,525

Stockholders' equity, beginning balance, net

of taxes, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,312 $(6,522) $3,195 $ (90) $ 6,895

(1) The restatement aÅects periods prior to 2000. The impact of the restatement on periods prior to 2000 is reÖected as an adjustment to

the opening balance of retained earnings as of January 1, 2000.

(2) Represents the cumulative impact of accounting changes Freddie Mac made related to stock-based compensation.

(3) The adjustment to Additional paid-in capital represents the income tax beneÑt from employee stock option exercises that

management previously recorded on a cumulative basis in 2001 because the company had determined that the impact on current and

prior periods to be immaterial. However, because the periods prior to 2001 are being restated, the cumulative adjustment has been

reversed and instead reÖected in the proper years. This correction has no impact on cumulative pre-tax income.

Detailed Discussion of Accounting and Disclosure Errors and Other Accounting Changes

The following discussion summarizes Freddie Mac's:

I. Accounting errors;

II. Other accounting changes;

III. Tax-related adjustments;

IV. Errors in computing Freddie Mac's 2001 Consolidated Fair Value Balance Sheet;

V. Other errors in the Consolidated Financial Statements.

Where applicable, each discussion addresses the eÅects of the accounting error or change on Income

(expense) before taxes and AOCI.

I. Accounting Errors

Security ClassiÑcation

Under Statement of Financial Accounting Standards (""SFAS'') 115, ""Accounting for Certain Investments in Debt and Equity Securities'' (""SFAS 115''), securities are required to be classiÑed as held-tomaturity, available-for-sale or trading primarily based on the company's intent. Held-to-maturity securities are

reported at amortized cost, available-for-sale securities are marked to fair value through stockholders' equity

and trading securities are marked to fair value through earnings. Freddie Mac has concluded that a majority of

its securities were erroneously classiÑed under SFAS 115. These errors primarily related to sales of securities

classiÑed as held-to-maturity and invalid transfers from the trading category. The sales of held-to-maturity

securities resulted from, among other reasons, certain transactions that were accounted for as Ñnancings but

should have been accounted for as sales under SFAS 140, ""Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities'' and, prior to April 1, 2001, SFAS 125, ""Accounting for

Freddie Mac

130
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' (collectively, ""SFAS 125 /

140'').

In certain transactions (referred to internally as Coupon Trade-Up Giant (""CTUG'') as well as J-6 and

J-7), Freddie Mac resecuritized trading securities and then inappropriately classiÑed the retained beneÑcial

interests from those trading securities as either held-to-maturity or available-for-sale. In addition, Freddie

Mac erroneously transferred securities from the trading category to either held-to-maturity or available-forsale. This adjustment also includes the eÅect of correcting the cost basis of certain securities as described

throughout this section and the impact on income for trading securities and AOCI for available-for-sale

securities resulting from carrying these securities at fair value.

To correct these errors, certain held-to-maturity and available-for-sale securities have been reclassiÑed as

trading and all remaining held-to-maturity securities have been reclassiÑed as available-for-sale, and recorded

at fair value which has resulted in cumulative increases of $1.7 billion and $2.7 billion in Freddie Mac's pretax income and pre-tax AOCI, respectively. Additional detail regarding the impact of correcting these errors is

set forth in Table 1.4.

Table 1.4 Ì Security ClassiÑcation Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (774) $ 640 $ 924 $ 910 $1,700

AOCI before taxes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(8,401) $8,950 $2,562 $(442) $2,669

(1) AOCI adjustment for periods prior to 2000 relates to the reclassiÑcation of securities from held-to-maturity to available-for-sale.

Accounting for Derivative Instruments

Embedded Options Hedging Strategy. Upon the adoption of SFAS 133, ""Accounting for Derivative

Investments and Hedging Activities'' on January 1, 2001, Freddie Mac implemented an accounting hedge

strategy in which a combination of interest-rate options, swaps and other derivatives were designated as hedges

of the changes in fair value of the options embedded in mortgage assets. Because of the security

reclassiÑcations discussed above and because securities classiÑed as trading are not eligible for hedge

accounting under SFAS 133, Freddie Mac was required to reverse part of the embedded options hedging

strategy. In addition, SFAS 133 requires contemporaneous documentation of hedge eÅectiveness and how it is

measured. In the context of the restatement, Freddie Mac concluded that there were errors in identifying and

measuring the accounting eÅectiveness of the hedges employed. As a result, Freddie Mac has concluded that

the documentation and testing performed to determine whether the embedded options hedging strategy

qualiÑed for hedge accounting under SFAS 133 were inadequate and therefore, the application of hedge

accounting in connection with the embedded options hedging strategy did not comply with GAAP. Freddie

Mac has corrected this error by reversing the hedge accounting entries recorded for this strategy, including

removing gains and losses on the hedged item previously recorded in earnings as part of hedge accounting.

The cumulative eÅect of correcting the errors described above on Freddie Mac's pre-tax income was an

increase of $6.5 billion. The cumulative decrease of $3.9 billion in pre-tax AOCI shown below represents the

eÅect of reversing the portion of the $6.5 billion that was originally recorded as an adjustment to the basis of

hedged available-for-sale securities. This AOCI reversal is necessary because the $3.9 billion had previously

been recorded in the carrying amount of available-for-sale securities, which were subsequently marked to fair

Freddie Mac

131
value under SFAS 115 in AOCI. Additional detail regarding the impact of correcting these errors is set forth

in Table 1.5.

Table 1.5 Ì Embedded Options Hedging Strategy Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(169) $ 6,671 $ 6,502

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(162) $(3,783) $(3,945)

Pay-Fixed Swaps Ó SFAS 133 Transition. EÅective December 1, 2000, Freddie Mac combined

$86 billion notional amount of pay-Ñxed swaps and $36 billion notional amount of receive-Ñxed swaps and

designated them in cash Öow hedges. This combination, which was undertaken as part of the company's SFAS

133 transition strategy, had the eÅect of reducing the SFAS 133 transition adjustment to AOCI on January 1,

2001 from $3.2 billion in unrealized losses to $2.5 billion in unrealized losses on an after-tax basis.

On January 1, 2001, in connection with Freddie Mac's implementation of SFAS 133, $75 billion of the

original $86 billion notional amount of pay-Ñxed swaps were redesignated in new cash Öow hedge relationships

and the majority of the $36 billion notional amount of receive-Ñxed swaps were redesignated in fair value

hedge relationships as part of the SFAS 133 transition. Freddie Mac has concluded that the cash Öow hedge

relationships for $66 billion of the $75 billion notional amount of pay-Ñxed swaps redesignated on January 1,

2001 were not valid under SFAS 133 because they failed to meet the requirements for documenting the

assessment of hedge accounting eÅectiveness. Freddie Mac has corrected this error by recognizing in earnings,

for each period after January 1, 2001, the change in fair value of the derivatives. In addition, Freddie Mac

should have amortized during 2001 and 2002 the deferred gains and losses on the $66 billion of pay-Ñxed

swaps recorded at the time of SFAS 133 implementation. Accordingly, Freddie Mac has corrected this aspect

of the error by amortizing the deferred losses previously recorded in AOCI at January 1, 2001 as additional

interest expense in 2001 and 2002.

The cumulative eÅect of correcting these errors was a decrease to pre-tax income and an increase to pretax AOCI of $3.8 billion. Additional detail regarding the impact of correcting these errors is set forth in

Table 1.6.

Table 1.6 Ì Pay-Fixed Swaps Ì SFAS 133 Transition Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(2,151) $(1,676) $(3,827)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ 2,151 $ 1,676 $ 3,827

Transactions Cleared Through the Government Securities Clearing Corporation, or GSCC. Prior to

the fourth quarter of 2000, Freddie Mac typically entered into synthetic forward contracts by purchasing (or

selling) Treasury or agency debt securities and simultaneously executing repurchase (or resale) agreements.

Freddie Mac executed these synthetic forward contracts using a single counterparty for both the purchase (or

sale) and repurchase (or resale) agreements, with settlement occurring directly between Freddie Mac and its

counterparty on a net basis. Freddie Mac properly viewed these transactions as derivatives that qualiÑed for

hedge accounting treatment. In the fourth quarter of 2000, Freddie Mac began to clear and settle these

agreements through the GSCC and continued to use the same accounting. The use of the GSCC facilitated

Freddie Mac's ability to enter into these two transactions with diÅerent counterparties, which reduced

transaction costs and provided the beneÑts of GSCC margining while still retaining the ability to net settle the

trades. However, the unintended eÅect of the changes to the transaction structuring was that the transactions

no longer qualiÑed as derivatives under GAAP. As a result of correcting these errors, Freddie Mac's balance

sheet reÖects the components of these transactions on a gross basis rather than reÖecting each pair as a single,

Freddie Mac

132
net transaction. In addition, because Freddie Mac had viewed these transactions as derivatives and applied

hedge accounting, previously deferred hedging gains (losses) have been reversed and recorded in income.

The cumulative eÅect of correcting this error was an increase to pre-tax income through December 31,

2002 of $768 million and an increase in pre-tax AOCI of $404 million. Additional detail regarding the impact

of correcting this error is set forth in Table 1.7.

Table 1.7 Ì Transactions Cleared Through the Government Securities Clearing Corporation Ì Summary of

Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $(3) $ 284 $487 $768

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $20 $(214) $598 $404

Real Estate Investment Trust (""REIT'') Hedges. In February 1997, Freddie Mac formed two majority-owned REIT subsidiaries funded through the issuance of common stock (99.9 percent of which is held by

Freddie Mac) and a total of $4 billion of perpetual, step-down preferred stock issued to outside investors. The

REITs used these funds to purchase real estate mortgage investment conduit (""REMIC'') securities from

Freddie Mac.

The REIT preferred stock was initially characterized as equity securities of the REIT subsidiaries and

reported as minority interest on Freddie Mac's consolidated balance sheets and minority interest in earnings of

consolidated subsidiaries on Freddie Mac's consolidated statements of income. In the fourth quarter of 1998,

Freddie Mac changed its reporting for the REIT preferred stock so that it was reported on the balance sheet as

part of debt securities, with dividends included in long-term debt expense. Because the preferred stock was

then reported as debt, it could be, and was, used as a hedged item for hedge accounting purposes.

Freddie Mac has concluded that the 1998 change to debt accounting was in error. Freddie Mac has

corrected this error by recording the REIT preferred stock on the consolidated balance sheet as minority

interest. As minority interest, the REIT preferred stock is not eligible for hedge accounting treatment.

Accordingly, Freddie Mac has corrected this error by reversing hedging gains and losses related to the REIT

preferred stock. The cumulative eÅect of correcting this error on Freddie Mac's pre-tax income was an

increase of $583 million. In addition to its eÅect on cumulative pre-tax income, correction of this error also

resulted in the reclassiÑcation of the related dividends from long-term debt expense to minority interest in

earnings of consolidated subsidiaries with no eÅect on net income. The cumulative eÅect of this reclassiÑcation was to remove $1.1 billion of expense from net interest income and to include this $1.1 billion of expense

in minority interest in earnings of consolidated subsidiaries.

Additional detail regarding the impact of correcting this error is set forth in Table 1.8.

Table 1.8 Ì REIT Hedges Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Net interest income (expense) before taxes ÏÏÏÏÏÏ $ 525 $ 231 $ 208 $ 184 $ 1,148

Minority interest in earnings of consolidated

subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(525) $(231) $(208) $(184) $(1,148)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ 144 $ 56 $ 383 $ 583

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Forward Purchase and Sale Commitments. Freddie Mac routinely enters into forward purchase and

sale commitments for mortgage securities and mortgage loans. As discussed below, Freddie Mac has

concluded that its accounting practices with respect to certain commitments, including transactions executed

between its business units, were not in accordance with GAAP.

Freddie Mac

133
Third Party Transactions. Freddie Mac did not recognize the eÅects of forward commitments in its

consolidated Ñnancial statements for certain trades. With respect to commitments executed prior to 2001,

Freddie Mac has concluded that it should have recorded changes in the fair values of commitments to acquire

available-for-sale securities to AOCI in accordance with Emerging Issues Task Force (""EITF'') 96-11,

""Accounting for Forward Contracts and Purchased Options to Acquire Securities Covered by FASB

Statement No. 115'' (""EITF 96-11'').

For commitments executed in 2001 and 2002, Freddie Mac concluded that substantially all mortgagerelated forward purchase and sale commitments were derivatives under SFAS 133. For these commitments,

Freddie Mac should have recorded the change in fair value of the forward purchase and sale commitments to

AOCI to the extent they qualiÑed for hedge accounting under SFAS 133. To the extent the trades did not

qualify for hedge accounting treatment, the change in fair value should have been recorded to current period

earnings.

For commitments to purchase or sell trading securities, Freddie Mac appropriately recognized the eÅects

of these trades in earnings. However, Freddie Mac did so by accounting for such trades as trading securities on

a trade date basis. Freddie Mac has concluded that these trades should have been accounted for as derivatives

in all periods. To correct this error, Freddie Mac has reversed the eÅects of trade date accounting and reported

the fair values of such trades as derivative assets or liabilities.

Intracompany Transactions. Freddie Mac recorded all activity related to its PC market-making and

support activities, including intracompany transactions with the retained portfolio, as trading positions.

However, Freddie Mac failed to properly account for transfers of these securities in accordance with SFAS

115 resulting in the following errors:

‚ Freddie Mac should have eliminated the Ñnancial statement eÅects of marking intracompany

trades to fair value.

‚ Securities acquired with the intent of holding them in the retained portfolio should not have been

marked to fair value through income as trading securities, but instead should have been marked to

fair value through AOCI as available-for-sale securities.

‚ Securities acquired in the trading portfolio but subsequently transferred to the retained portfolio

and classiÑed as available-for-sale or held-to-maturity securities were not valid transfers under

SFAS 115. The correction of this error is described and measured in ""Security ClassiÑcation.''

Other Purchase and Sale Commitments. Freddie Mac has concluded that it incorrectly accounted for

the forward commitments to sell and purchase PCs involved in a resecuritization transaction for approximately

$30 billion (referred to internally as CTUG) entered into as part of its SFAS 133 transition strategy, as

discussed under ""Security ClassiÑcation'' above. SpeciÑcally, Freddie Mac inappropriately executed and

erroneously accounted for the forward sale commitments in 2000 under SFAS 80, ""Accounting for Futures

Contracts'' (""SFAS 80''), as a hedge of held-to-maturity PCs in the retained portfolio and did not account for

the oÅsetting forward purchase commitment. Both the forward sale commitments and the forward purchase

commitments should have been marked to fair value through earnings because neither transaction met hedge

accounting requirements; the correction of this error had no net impact on 2000 net income. In addition,

Freddie Mac erroneously accounted for the forward purchase commitments in 2001 as hedged items in its

embedded options hedging strategy. These forward purchase commitments met the deÑnition of a derivative,

and therefore, did not qualify as hedged items under SFAS 133. The correction of the purchase commitment

is included in ""Embedded Options Hedging Strategy.''

Freddie Mac

134
The cumulative eÅect of correcting these errors was an increase of $495 million in pre-tax income and a

decrease in pre-tax AOCI of $732 million. Additional detail regarding the impact of correcting these errors is

set forth in Table 1.9.

Table 1.9 Ì Forward Purchase and Sale Commitments Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (2) $(228) $ (79) $ 804 $ 495

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12) $ 28 $(265) $(483) $(732)

Linked Swaps. In August and September of 2001, Freddie Mac entered into nine pairs of ""linked''

interest-rate swap transactions with an eÅective notional amount after considering leverage terms of

$180 billion (""Linked Swaps''). Each pair consisted of a pay-Ñxed swap and a receive-Ñxed swap entered into

contemporaneously with a single counterparty with terms that were largely oÅsetting. For Ñnancial accounting

purposes, Freddie Mac inappropriately separately accounted for each of the swap transactions within the pairs

of Linked Swaps. These transactions and the related, inappropriate accounting eÅected a reduction in

Operating Earnings, a non-GAAP supplemental performance measure Freddie Mac previously used. As a

result of these transactions and the related inappropriate accounting, previously reported Operating net

interest income, or Operating NII, was reduced by an estimated $400 million in the third and fourth quarters

of 2001. As of December 31, 2001, as a result of these transactions, Freddie Mac expected Operating NII to

increase by an estimated $400 million over the original remaining life of the swaps, which had maturity dates

ranging from August 2004 to September 2006. The eÅect of the transactions on GAAP net interest income

(""GAAP NII'') during 2001 was essentially the same as the eÅect on Operating NII, but the net eÅect on

GAAP net income was diÅerent than the Operating Earnings eÅect due to the impact of hedge accounting.

Freddie Mac has concluded that each pair of Linked Swap transactions should be viewed as a unit (i.e.,

combined derivative) and accounted for together under SFAS 133 due to a number of factors, including: that

the transactions were executed with the same counterparty and in contemplation of each other; the accounting

eÅect was disproportionate to the risk management eÅect; and after considering the eÅect of other hedge

accounting corrections related to the restatement (see ""Embedded Options Hedging Strategy'' above). This

error has been corrected by reversing the hedge accounting entries for the Linked Swaps. In addition, hedge

accounting was reversed for certain other derivatives that were designated in the same fair value hedges of

debt as several of the receive-Ñxed components of the Linked Swaps. The cumulative eÅect of correcting this

error on Freddie Mac's pre-tax income was an increase of $283 million. (This amount excludes the eÅect of

the portion of Linked Swaps that were designated in fair value hedges in connection with Freddie Mac's

embedded options hedging strategy, which are included in the amounts reported in connection with that error

described previously in this section.) In addition, correction of this error required Freddie Mac to reverse

hedge accounting adjustments originally recorded related to the pay-Ñxed swap components designated in cash

Öow hedges, resulting in a $283 million increase to pre-tax AOCI.

Two additional swaps with a notional amount of $4 billion were executed in November 2001 with largely

oÅsetting terms. However, these swaps were executed on diÅerent days with diÅerent counterparties. In

general, the facts and circumstances surrounding the additional swaps executed in November 2001 were

diÅerent than the Linked Swaps and therefore, hedge accounting was not reversed for these derivatives.

However, Freddie Mac did reclassify the interest accruals from net interest income to non-interest

income (i.e., for the Linked Swaps and the two additional swaps executed in November 2001). The amount of

recorded interest expense reclassiÑed to non-interest income totaled $405 million and $217 million in 2001 and

2002, respectively. These reclassiÑcations had no impact on cumulative net income for the restatement period.

Freddie Mac

135
Additional detail regarding the impact of correcting this error is set forth in Table 1.10.

Table 1.10 Ì Linked Swaps Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $422 $(139) $283

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $249 $ 34 $283

Mortgage Security Hedges. Beginning in 1999, Freddie Mac designated forward sales of to be

announced (""TBA'') securities as accounting hedges of the fair value of certain mortgage-related securities

held by the company. Freddie Mac has concluded that some of these hedges failed to qualify for hedge

accounting treatment under SFAS 80 and SFAS 133 because:

‚ The TBA forward sale commitment designated in the hedge relationship was not properly

identiÑed;

‚ The securities identiÑed as the hedged items were not eligible as hedged items because they were

classiÑed as trading under SFAS 115; or

‚ There was not proper documentation of hedge eÅectiveness testing.

Freddie Mac has corrected these errors by reversing the eÅects of hedge accounting treatment. The

cumulative eÅect of correcting these errors was an increase to pre-tax income of $91 million. Additional detail

regarding the impact of correcting these errors is set forth in Table 1.11.

Table 1.11 Ì Mortgage Security Hedges Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/99 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4 $(28) $70 $45 $91

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ (3) $ 3 Ì Ì

Agency Forward Agreements. Upon its adoption of SFAS 133, Freddie Mac implemented an accounting hedge strategy in which agency forward agreements were designated as hedges of existing long-term

Freddie Mac debt. Freddie Mac's agency forward agreements are essentially cash-settled forward contracts on

a speciÑed agency security. For agency forward agreements using Freddie Mac debt, Freddie Mac has

concluded that it failed to properly test for hedge accounting eÅectiveness. As a result, these agreements failed

to qualify for hedge accounting treatment.

Freddie Mac has corrected this error by reversing the hedge accounting treatment of these agreements

and related amortization. The cumulative eÅect of correcting this error was an increase to pre-tax income of

$57 million. Additional detail regarding the impact of correcting this error is set forth in Table 1.12.

Table 1.12 Ì Agency Forward Agreements Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $72 $(15) $57

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Government National Mortgage Association (""Ginnie Mae'') Asset Swap Hedge. From July 2001 to

June 2002, and from October 2002 through December 2002, Freddie Mac designated a pay-Ñxed, amortizing

swap of approximately $0.8 billion notional amount as a fair value hedge under SFAS 133 of certain Ginnie

Mae CertiÑcates. Freddie Mac has concluded that the documentation and testing required to ensure that these

Freddie Mac

136
hedges were eÅective for accounting purposes was inadequate. Therefore, the changes in fair value of the

Ginnie Mae CertiÑcates recorded due to hedge accounting were reversed from earnings. Freddie Mac also

concluded that some of the prices originally used to value the swap were incorrect. Freddie Mac has adjusted

each of the aÅected periods to reÖect the correct fair value of the swap.

The cumulative eÅect of correcting these errors on Freddie Mac's pre-tax income was an increase of

$16 million. Additional detail regarding the impact of correcting these errors is set forth in Table 1.13.

Table 1.13 Ì Ginnie Mae Asset Swap Hedge Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(1) $17 $16

AOCI before tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Call Swaptions. Prior to 2001, Freddie Mac designated a portion of its call swaptions as hedges of longterm debt. Premiums paid to enter into these call swaptions were deferred and amortized into earnings over

the term of the option in accordance with GAAP. As part of the restatement, Freddie Mac has concluded that

these were ineÅective hedges and therefore, deferral of changes in the option's intrinsic value and amortization

of option premiums paid was incorrect. Correction of this error required Freddie Mac to reverse the deferred

gains and losses related to the hedged debt, record the change in fair value of these instruments through

earnings each period, and adjust the cumulative SFAS 133 transition adjustment as of January 1, 2001.

The cumulative eÅect of correcting these errors was an increase in pre-tax income of $12 million.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.14.

Table 1.14 Ì Call Swaptions Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(253) $1,032 $(763) $(4) $12

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Cash Flow Hedges Ì 2002 Corrections. Freddie Mac made two adjustments as part of its previously

released fourth quarter 2002 Ñnancial results to correct for the cumulative eÅect of errors related to certain

cash Öow hedges. These adjustments were made on a cumulative basis because Freddie Mac determined the

impact on current and prior periods to be immaterial. However, because the periods prior to the fourth quarter

of 2002 are being restated, these cumulative adjustments have been reversed and recorded in the appropriate

prior quarters. These corrections have no impact on cumulative pre-tax income or pre-tax AOCI for the

restatement, but they do aÅect quarter-to-quarter results. The two adjustments are as follows:

‚ In the fourth quarter of 2002, Freddie Mac determined that certain cash Öow hedge relationships

were not valid under SFAS 133 because they failed to meet the requirements for hedge

accounting eÅectiveness. The impact of the fourth quarter 2002 adjustment, which has been

allocated to other aÅected quarters, was a decrease to income before taxes of $94 million.

‚ The second adjustment in the fourth quarter of 2002 was an increase in income before taxes of

$83 million related to the correction of the carrying amount of AOCI resulting from cash Öow

hedges under SFAS 133. This adjustment was needed to correct the amortization of deferred

gains/losses related to terminated or redesignated cash Öow hedges during 2001 and 2002.

Freddie Mac

137
The cumulative eÅect of correcting these errors on pre-tax income and pre-tax AOCI was zero.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.15.

Table 1.15 Ì Cash Flow Hedges Ì 2002 Corrections Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ 37 $(37) Ì

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(37) $ 37 Ì

Forward Settling and Written Swaption Trades. From November 1999 to January 2000, Freddie Mac

sold $10 billion notional amount of put swaptions held in its derivative portfolio with future settlement dates

longer than normal market conventions. More speciÑcally, the settlement dates for these speciÑc put swaptions

coincided with the beginning of each quarter starting with the Ñrst quarter of 2000 through the Ñrst quarter of

2001. Freddie Mac inappropriately accounted for the sale of these put swaptions on a settlement-date basis as

opposed to a trade-date basis. This resulted in the gains associated with these transactions, which were

measured as the diÅerence between the cash proceeds and the carrying value of the put swaption on

settlement date, being recorded to earnings on the date of settlement; the carrying value at settlement date was

net of amortization of the original option premium which continued to be amortized between trade date and

settlement date. As part of the restatement, Freddie Mac has concluded that the resulting gains should instead

be recorded on the trade date and have reversed the amortization expense taken between trade date and

settlement date.

In addition, during 2000, Freddie Mac wrote $20 billion notional amount of options (mainly swaptions)

and received premiums of $245 million. Certain of the premiums received were inappropriately amortized as

an increase to net interest income of $155 million in 2000. The remaining fair value change of the written

options was recorded to earnings as part of derivative gains (losses). As part of the restatement, Freddie Mac

has concluded that the amortization of the premiums received should have been recorded through derivative

gains (losses). Therefore, the increases to net interest income described above have been reclassiÑed as

increases to derivative gains (losses).

The cumulative eÅect of correcting these errors on pre-tax income and pre-tax AOCI was zero.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.16.

Table 1.16 Ì Forward Settling and Written Swaption Trades Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $77 $(42) $(35) Ì Ì

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Asset Transfers and Securitizations

Accounting for Transfers of Mortgage Loans, PCs and Structured Securities. Freddie Mac executes a

variety of transactions that involve the transfer of its PCs and Structured Securities. The company transfers

mortgage loans and PCs to third parties primarily through its Guarantor and Cash Window Programs. Freddie

Mac also purchases and sells PCs in the secondary market after the securities are originally formed.

Additionally, Freddie Mac issues Structured Securities backed by PCs and other mortgage-backed securities

held in portfolio or that are provided to the company by third parties.

Freddie Mac has concluded that it erroneously applied SFAS 125 (eÅective through March 31, 2001)

and SFAS 140 (eÅective from April 1, 2001 through December 31, 2002) and other GAAP guidance issued

before SFAS 125 in accounting for transfers of mortgage loans, PCs and Structured Securities that qualiÑed

as sales. SpeciÑcally, Freddie Mac did not record as retained interests the guarantee fee receivable under the

guarantee contract associated with its transferred assets as required by GAAP, except for upfront cash paid for

Freddie Mac

138
buy-up fees. (For information on buy-up fees, see ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'') Instead, the cash Öows received from its guarantee contracts were recognized

into earnings as received. Additionally, Freddie Mac did not value its obligation under the guarantee contract

when measuring the gain or loss on the asset sale. Instead, expense related to the obligation was accrued over

the life of the guarantee contract as incurred.

In order to correct these errors, Freddie Mac has recognized the fair value of its contractual right to

receive guarantee fees (referred to as a ""guarantee asset'') as a retained interest in the transfers of mortgage

loans, PCs and Structured Securities that qualify as sales. In addition, the company has recognized the fair

value of the corresponding guarantee obligation as a reduction of the sales proceeds. SpeciÑcally, the

diÅerence between cash received less the fair value of obligations incurred upon sale and the cost basis

allocated to the sold PC or Structured Security was recorded as the gain or loss at the date of sale. In order to

account for these components after the date of sale, Freddie Mac has elected to record the on-going change in

fair value of the guarantee asset and guarantee obligation as part of current period earnings.

During the restatement period, Freddie Mac has concluded that it accounted for repurchases of its

mortgage-related securities incorrectly in that:

‚ Cash Öows associated with the guarantee contract related to securities held by the company were

incorrectly classiÑed as management and guarantee income, and

‚ The company's previous accounting did not consider the eÅect of PC or Structured Securities

repurchases on the guarantee asset and guarantee obligation. To correct these errors, Freddie Mac

has reclassiÑed the management and guarantee income on securities it holds to net interest

income. In addition, for repurchased securities for which a guarantee asset and guarantee

obligation have been established, Freddie Mac has extinguished the guarantee obligation and

reclassiÑed the guarantee asset, after considering any related diminution in value attributable to

the guarantee obligation, to the PC or Structured Security balance as Participation CertiÑcate

residuals (""PCRs''). As with the guarantee asset and guarantee obligation, PCRs continue to be

marked to fair value through earnings.

During the restatement, Freddie Mac also determined that it incorrectly accounted for buy-up fees,

which represent upfront cash payments the company made to its counterparties in Guarantor program

transactions to increase the guarantee fee rate. Freddie Mac identiÑed that the accounting during the

restatement period was incorrect because it:

‚ Netted buy-ups and buy-downs (buy-down fees represent cash received from counterparties to

reduce the guarantee fee rate);

‚ Stopped reporting the change in fair value of buy-up fees as a component of AOCI as required

under SFAS 125 for Ñnancial assets with signiÑcant prepayment risk on April 1, 2001, the

eÅective date of EITF 99-20, ""Recognition of Interest Income and Impairment on Purchased and

Retained BeneÑcial Interest in Securitized Financial Assets,'' (""EITF 99-20''), thereby avoiding

recording impairments of these assets;

‚ Used an incorrect amortization method, including allocating buy-up and buy-down fee amortization between net interest income and management and guarantee fee income; and

‚ Failed to follow an acceptable impairment valuation method.

As a result of corrections made during the restatement, buy-ups and buy-downs are accounted for as

follows:

‚ Buy-ups and buy-downs are accounted for separately;

‚ All buy-ups are accounted for at fair value, with all changes thereto reÖected in earnings;

‚ Buy-ups that relate to PCs held by third parties are classiÑed as guarantee assets, while buy-ups

that relate to PCs and certain Structured Securities held in portfolio are classiÑed as PCRs;

Freddie Mac

139
‚ Cash Öows received on buy-ups that relate to PCs held by third parties are recognized in earnings

as management and guarantee fees, while cash Öows received on buy-ups that relate to PCs held

in portfolio are recognized in earnings as interest income;

‚ Buy-downs that relate to PCs held by third parties are amortized into earnings as management

and guarantee fees; and

‚ Buy-downs that relate to PCs held in portfolio are extinguished and recognized as basis

adjustments to the carrying value of purchased PCs (where such adjustments are amortized into

earnings as interest income).

The cumulative eÅect of correcting the referenced errors on Freddie Mac's pre-tax income was an

increase of $502 million and an increase in pre-tax AOCI of $476 million. Additional detail regarding the

impact of correcting these errors is set forth in Table 1.17.

Table 1.17 Ì Accounting for Transfers of Mortgage Loans, PCs and Structured Securities Ì Summary of

Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,452 $(477) $ 393 $(866) $502

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 183 $ 307 $(138) $ 124 $476

Accounting for IO Securities and Certain Asset Securitizations. Freddie Mac invests in IO securities,

which are held in its retained portfolio. IO securities represent only the interest portion of cash Öows of

mortgage-related securities that pay both principal and interest (i.e., excludes principal cash Öows). During

the restatement period, Freddie Mac classiÑed IO securities in both the available-for-sale and trading category

under SFAS 115. Although declines in market value for available-for-sale securities are typically recorded

through AOCI, decreases in IO fair value are often considered accounting impairments and must be measured

and recorded through earnings in accordance with EITF 93-18, ""Recognition of Impairment for an

Investment in a Collateralized Mortgage Obligation Instrument or in Mortgage-Backed Interest Only

CertiÑcate (""EITF 93-18'') (prior to March 31, 2001) and EITF 99-20 (after March 31, 2001). The

company has concluded it did not properly calculate and record fair value impairments on its IO portfolio. For

periods prior to and ended March 31, 2001, the error was due to not measuring impairments. To correct this

error, decreases in fair value that met the EITF 93-18 deÑnition of impairment were recorded as a reduction in

the cost basis of the security with a corresponding loss recorded through ""Gain (losses) on investment

activity.'' An adjustment was also made to interest income to adjust the amount of amortization income

recognized as a result of the change in the security cost basis.

For periods after March 31, 2001, impairments were measured and recorded under EITF 99-20.

However, the population of IO securities to which EITF 99-20 was applied was not complete or accurate due

to the following four issues:

Securitizations Executed in the First Quarter of 2001. In two securitization transactions executed in the

Ñrst quarter of 2001 (internally referred to as J-8 and J-9), Freddie Mac combined IOs and other collateral

into synthetic principal and interest securities through two securitization entities. In each case, Freddie Mac

held all or substantially all of the new securities issued by the new securitization entities and inappropriately

accounted for the securities issued by these entities. The transactions had the eÅect of reducing the losses on

the IOs that otherwise would have resulted in a decrease in earnings upon implementation of EITF 99-20,

which became eÅective on April 1, 2001. Freddie Mac has concluded that the entities created to eÅect the

securitization did not qualify as qualifying special purpose entities under SFAS 125 and must be consolidated.

Accordingly, to correct this error, the IO collateral together with other collateral held by the entities should

have been accounted for separately. The IO collateral associated with one of these transactions was later

erroneously reclassiÑed from available-for-sale to trading. Therefore, the correction presented below appropriately reÖects an available-for-sale classiÑcation throughout the restatement period and includes the eÅect of

Freddie Mac

140
recognizing the changes in fair value of the securities, absent any related impairments, through AOCI as

opposed to earnings.

Security Purchases in the Third and Fourth Quarters of 2002. In two additional transactions executed in

the third and fourth quarters of 2002, Freddie Mac purchased 100 percent of the securities issued by two

special purpose entities. However, because the company concluded that these entities must be consolidated

under the requirements of EITF Topic D-14, ""Transactions Involving Special-Purpose Entities'' (""EITF

Topic D-14''), the collateral held by these entities, which included IOs, should have been separately

accounted for and subject to impairment and other requirements of EITF 99-20.

REMIC Purchases in January 2002. In January 2002, Freddie Mac purchased from an unaÇliated

dealer 100 percent of two REMICs. In both cases, Freddie Mac participated in the design of the REMIC

structuring. Similar to the transaction described above, the company erroneously accounted for the REMIC

securities rather than the underlying collateral, which had the eÅect of reducing income since a portion of the

REMIC securities held were IO securities and other securities held had the impact of shifting earnings to

future periods. Freddie Mac has concluded that the accounting for these transactions should be applied to the

aggregate collateral supporting the REMICs as opposed to the securities issued by the REMIC structure. The

correction to account for the collateral primarily involved the reversal of IO accounting originally applied to

these REMIC securities under EITF 99-20 and the recognition of income based on the attributes of the

collateral underlying the REMIC structure.

Certain IO and PO Purchases. In addition to the speciÑc transactions described above, Freddie Mac has

concluded that in certain circumstances during the restatement period, individual IO and principal only

(""PO'') securities (i.e., securities excluding interest cash Öows) purchased simultaneously should have been

combined and treated as a whole security. This correction resulted in the reversal of IO impairment

accounting for these securities.

The cumulative eÅect of correcting the errors described above on Freddie Mac's pre-tax income was a

decrease of $235 million and an increase to pre-tax AOCI of $12 million. Additional detail regarding the

impact of correcting these errors is set forth in Table 1.18.

Table 1.18 Ì Accounting for IO Securities and Certain Asset Securitizations Ì Summary of Financial

Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(19) $(8) $(231) $23 $(235)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ 7 $ 5 $ 12

Accounting for Dollar Rolls and Similar Transactions. Dollar rolls are transfers of Ñnancial assets

Freddie Mac generally executes during periods of short-term imbalances in the liquidity of the MBS market.

These transactions typically consist of:

‚ A forward sale of a TBA security to a third party for delivery in the current month, and

‚ A concurrent forward purchase of a similar, but not identical, PC or MBS for delivery in a future

month. These transactions were also executed in reverse (i.e., forward purchase was executed for

delivery in the current month with a concurrent forward sale for delivery in a future month).

Dollar roll and other similar security transfer transactions executed by Freddie Mac's retained

portfolio were historically accounted for as Ñnancing transactions under SFAS 125/140. The

company has concluded that Ñnancing treatment for the majority of these transactions was

incorrect because the transactions were structured in ways that did not meet the requirements of

SFAS 125/140 to be considered Ñnancing transactions. This is because such transactions either

were inadequately collateralized or involved the delivery of a PC or MBS in the current month

that was not substantially the same as the PC or MBS delivered back to Freddie Mac in the future

month.

Freddie Mac

141
To correct the accounting for retained portfolio dollar rolls and other similar security transfer transactions, the following adjustments were made:

‚ The eÅects of Ñnancing treatment were reversed which resulted in the removal of short-term debt

and mortgage-related assets and associated interest income and expense.

‚ The transactions were recorded as purchases and sales, which involved the recognition of gains

and losses on sales activity and premiums and discounts on purchase activity in the appropriate

periods.

‚ The forward commitments associated with the security purchase or sale were recorded as a

derivative under SFAS 133. The eÅect of this correction is captured in the ""Accounting for

Derivative Instruments Ì Forward Purchase and Sale Commitments'' section.

‚ All securities were reclassiÑed from held-to-maturity to available-for-sale because dollar roll

transactions were executed with collateral classiÑed as held-to-maturity under SFAS 115. The

eÅect of this error is included in the ""Security ClassiÑcation'' section.

The cumulative eÅect on Freddie Mac's pre-tax income of reversing Ñnancing accounting and recording

these transactions as sales and purchases was a decrease of $86 million. Additional detail regarding the impact

of correcting the error described above is set forth in Table 1.19.

Table 1.19 Ì Accounting for Dollar Rolls and Similar Transactions Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(102) $(3) $27 $(8) $(86)

AOCI before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Special Purpose Entities. In May 1998, Freddie Mac transferred credit risk to a special purpose entity

(internally referred to as ""MODERNs'') in a reinsurance transaction. This entity issued to third parties

$243 million of credit-linked securities, which were not recorded in Freddie Mac's Ñnancial statements since

the entity was not consolidated. However, under the consolidation guidance of EITF Topic D-14, the company

has now concluded it must consolidate this entity which will have the eÅect of increasing both assets and

liabilities. Due to redemptions and pay downs of the securities, the eÅect on Freddie Mac's balance sheet as of

December 31, 2002 and 2001 was to increase total assets and liabilities to $41 million and $44 million,

respectively.

Cash Collateral on Derivative Contracts. In the ordinary course of business, Freddie Mac enters into

interest-rate swap transactions with highly rated counterparties. Under the swap and security agreements that

govern such transactions, most of the counterparties are required to post collateral. This collateral is often

posted in the form of cash. Under SFAS 125/140, cash collateral must be recorded as an asset on Freddie

Mac's balance sheet with an oÅsetting liability to return that collateral. For the years 1999, 2000, and 2001,

and through June 30, 2002, the company erroneously understated its balance sheets for cash collateral

provided by its derivative counterparties. As part of the restatement, Freddie Mac has corrected its quarterly

balance sheets for the respective periods through increases in cash and cash equivalents and other liabilities

ranging from $0.9 billion to $3.3 billion.

Valuation of Financial Instruments

Freddie Mac estimates the fair value of its derivatives and securities for risk management purposes as

well as Ñnancial accounting and reporting purposes. Under GAAP, fair value is deÑned as the amount at

which an asset (liability) could be bought and sold between willing parties, that is, other than in a forced or

liquidation sale. GAAP speciÑes that quoted market prices in active markets are the best evidence of fair

value. If a quoted market price is not available, the estimate of fair value should be based on the best

information available in the circumstances and should incorporate assumptions that market participants would

Freddie Mac

142
use in their estimates of values. The use of diÅerent pricing models and assumptions could produce materially

diÅerent estimates of fair value. See ""NOTE 17: FAIR VALUE DISCLOSURES'' for more information.

Option-Based Derivatives. In 2001 and 2002, Freddie Mac designated the entire fair value of its optionbased derivatives portfolio as hedges under SFAS 133. See ""Accounting for Derivative Instruments Ì

Embedded Options Hedging Strategy'' above for a description and quantiÑcation of the hedge accounting

corrections related to option-based derivatives during 2001 and 2002.

To estimate fair values for option-based derivatives, Freddie Mac used option-pricing models incorporating volatility assumptions. Freddie Mac's implementation of the models failed to incorporate all relevant

pricing information available in the market as required under GAAP. First, the fair value of option-based

derivatives was misstated at December 31, 2000 because the company inappropriately applied constant

volatility assumptions as of an earlier date (i.e., November 20, 2000) instead of available contemporaneous

market-implied volatilities in the option-pricing model. This had the eÅect of understating the original fair

value of the option-based derivatives by approximately $550 million, which was recorded on January 1, 2001

as part of adopting SFAS 133 in the previously reported Ñnancial statements. Second, the fair values of

option-based derivatives were misstated during 2001 and 2002 because Freddie Mac failed to incorporate

market information about changes in volatilities for out-of-the-money swaptions. The volatility estimates

historically used were generally designed to be consistent in methodology with the models used to value the

hedged prepayment option in mortgage-related securities.

Correction of these errors resulted in a cumulative net increase to pre-tax income of $361 million. The

restated fair values include market-implied volatility inputs to the extent these were available. Additional

detail regarding the impact of correcting these errors is set forth in Table 1.20.

Table 1.20 Ì Option-Based Derivatives Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $626 $(225) $(40) $361

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Securities. Under SFAS 115, securities are required to be classiÑed as held-to-maturity, available-forsale, or trading primarily based on the company's intent. Held-to-maturity securities are reported at amortized

cost, available-for-sale securities are marked to fair value through stockholders' equity, and trading securities

are marked to fair value through earnings. As discussed in ""Security ClassiÑcation'' above, all of Freddie

Mac's securities are recorded at fair value as a result of the restatement.

As part of the restatement, Freddie Mac identiÑed numerous errors in estimating the fair value of its

investments in securities. In certain instances, the company used models that failed to consider all relevant

facts including available market data. For example, the method used to value certain manufactured housing

bonds failed to acknowledge signiÑcant market price deterioration in 2002, resulting in an overstatement of fair

value which has been recognized as an impairment. Also, the method used to value mortgage revenue bonds

where prices were not readily available utilized price movements on proxy securities. However, because these

proxy securities had diÅerent call provisions and other contractual terms, their use in the fair value estimation

for Freddie Mac's mortgage revenue bonds led to an overstatement of fair value during the restatement period.

In other cases, process errors involving erroneous inputs into otherwise reasonable models resulted in

misstatements of fair value. The fair values of certain PCs and Structured Securities were misstated due to

model input errors, including the use of inaccurate price spreads for seasoned securities. In addition, the fair

values of other securities were misstated due to process errors, including the use of incorrect interest

calculations as well as the use of outdated prices or constant trade prices instead of period-end fair values.

Finally, Freddie Mac made errors in valuing certain investments in Treasury securities. Instead of using

observable market prices, the company estimated the value of these investments using models. These errors

resulted in the overstatement of fair value.

Freddie Mac

143
Correction of these errors resulted in increases or decreases to investments in securities, with oÅsetting

impacts to AOCI for available-for-sale securities and to current period earnings for trading securities. The

table below reÖects the results of the valuation error corrections after correction of the security classiÑcation

errors (as discussed in ""Security ClassiÑcation'' above).

The corrections resulted in a cumulative net decrease to pre-tax income of $147 million and a decrease to

pre-tax AOCI of $268 million. Additional detail regarding the impact of correcting these errors is set forth in

Table 1.21.

Table 1.21 Ì Securities Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $(100) $ (47) $(147)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $(105) $ 48 $(211) $(268)

All Other Accounting Corrections

Income ClassiÑcation of Spot-Forward DiÅerence on Certain Trading Securities. In conjunction with

Freddie Mac's PC market-making and support activities, the company often funds long-term mortgage

securities in its trading portfolio with short-term debt. This creates an asset/liability funding mismatch, which

is generally hedged by entering into forward sales of mortgage-related securities. Since the settlement of these

forward sale trades takes place weeks or months in the future, the sales price (""forward'' price) is discounted

from the current value (""spot'' price) of the security. This discount (spot-forward diÅerence) is generally

equal to the net interest income earned over the commitment period based on the diÅerence between the

security coupon and current short-term rates.

Because the spot-forward diÅerence between the trading security and forward sale commitment resulted

in a loss being recorded to other income while the recognition of interest income on the held position resulted

in an oÅsetting increase in net interest income, Freddie Mac historically reclassiÑed the implied eÅect of the

spot-forward diÅerence on trading securities from other income to net interest income. In the restatement

period, Freddie Mac has concluded that this reclassiÑcation was an error. Although this error had no eÅect on

net income, the reclassiÑcation adjustments to net interest income and other income are detailed in

Table 1.22.

Table 1.22 Ì Income ClassiÑcation of Spot-Forward DiÅerence on Certain Trading Securities Ì Summary

of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Net interest income (expense) before taxes ÏÏÏÏÏÏ $ 251 $ 103 $ 431 $ 938 $ 1,723

Other income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏ $(251) $(103) $(431) $(938) $(1,723)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Mortgage Loan Accounting Based on Lower of Cost or Market Value (""LOCOM''). Through Freddie

Mac's Cash Window Program, the company purchases mortgage loans under purchase commitments entered

into with lenders that are classiÑed as ""held-for-sale'' until sold to third parties or transferred to Freddie Mac's

retained portfolio in the form of mortgage loans or mortgage-related securities. SFAS 65, ""Accounting for

Certain Mortgage Banking Activities'' (""SFAS 65''), requires mortgage loans classiÑed as held-for-sale to be

reported at the lower of cost or market, with losses reported through earnings. In measuring the write-down to

fair value, the fair value change of open mortgage loan purchase commitments and all outstanding forward

sale commitments needs to be considered. Freddie Mac failed to perform a LOCOM test as required by SFAS

Freddie Mac

144
65. The cumulative eÅect of correcting this error was a decrease to pre-tax income of $180 million and a

cumulative decrease to pre-tax AOCI of $28 million.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.23.

Table 1.23 Ì Mortgage Loan Accounting Based on LOCOM Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(72) $(15) $(101) $ 8 $(180)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ 25 $(53) $ (28)

Asset Amortization. In accordance with SFAS 91, ""Accounting for Nonrefundable Fees and Costs

Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases'' (""SFAS 91''), premiums,

discounts and other deferred adjustments associated with mortgage loans and securities for which Freddie

Mac will recover substantially all of its aggregate recorded investment upon prepayment are generally

amortized into net interest income over the estimated lives of the mortgage loans and securities using the

eÅective interest method (see ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES''

for further details). Additionally, certain items related to the securitization process are deferred and amortized

into income using the eÅective interest method (e.g., prepaid guarantee fees such as buy-downs). During the

restatement, Freddie Mac corrected the income recognition related to these components primarily in the four

areas outlined below.

Secondary Impacts Resulting From Corrections in the Cost Basis of Certain Securities. Several

accounting corrections described in this section had the eÅect of changing the cost basis of certain securities.

The most signiÑcant eÅect was driven by intracompany transactions (see ""Accounting for Derivative

Instruments Ì Forward Purchase and Sales Commitments'' for further detail). As a result of these

corrections, the original deferred premiums and discounts to be amortized were corrected which resulted in a

cumulative increase to pre-tax income of $217 million. The other income statement eÅects resulting from

intracompany transactions are included in the section entitled ""Accounting for Derivative Instruments Ì

Forward Purchase and Sale Commitments'' above.

Amortization Reserve. As permitted under SFAS 91, Freddie Mac uses actual prepayment experience as well as estimates of expected future prepayments to determine the constant yield needed to

apply the eÅective yield method. As required by SFAS 91, when estimates change, the net investment

in the security should be adjusted to the amount that would have existed had the new eÅective yield

been applied since the acquisition of the security. The security's cost basis should be adjusted to the

new balance with a corresponding charge to net interest income for that reporting period. Historically,

when estimated prepayments changed, the company properly recorded the cumulative adjustment to

the cost basis of the security, but the oÅsetting entry was inappropriately deferred on the balance sheet

in a reserve account (referred to internally as the ""Amortization Reserve'') as opposed to being

correctly recorded in earnings, which was a known departure from GAAP but which was not deemed to

be material at the time, and which was made with a view toward its eÅect on earnings. The cumulative

eÅect on pre-tax income of correcting this error was an increase of $11 million. The annual eÅects on

pre-tax income for 2000, 2001 and 2002 were decreases of $74 million, $109 million and $22 million,

respectively.

First Quarter 2002 Adjustment. Freddie Mac also identiÑed that amortization results recorded in the

Ñrst quarter of 2002 were derived from prepayment expectations that inappropriately incorporated

interest-rate projections that were not supportable. As a result, interest income was understated by

$132 million in the Ñrst quarter of 2002. In the second quarter of 2002, Freddie Mac utilized

supportable interest-rate projections, which eÅectively reversed the impact of the $132 million related

to the Ñrst quarter of 2002. This had the eÅect of overstating interest income for second quarter 2002,

but had no cumulative eÅect. As part of the restatement, Freddie Mac has utilized appropriate

Freddie Mac

145
interest-rate projections, thereby correcting amortization results for both the Ñrst and second quarters

of 2002.

Other Corrections. As part of the restatement, Freddie Mac identiÑed and corrected certain other

data and process errors, including correcting security level assumptions used to project expected cash

Öows, which changed the timing of premium and discount amortization as well as deferred fee

recognition. Additionally, certain deferred fees were amortized using a straight-line methodology as

opposed to an eÅective yield process as required by SFAS 91. The cumulative eÅect on pre-tax income

of correcting these items was an increase of $159 million.

The cumulative eÅect of correcting these errors was an increase of $492 million in pre-tax income and a

decrease to pre-tax AOCI of $56 million. Additional detail regarding the impact of correcting these errors is

set forth in Table 1.24.

Table 1.24 Ì Asset Amortization Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $177 $(54) $187 $182 $492

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ 15 $(71) $(56)

Loan Loss Reserves and Credit-Related Accounting. Historically, Freddie Mac has maintained a

""Reserve for losses on mortgage loans held for investment'' to provide for credit losses on mortgage loans and

PCs held in its retained portfolio and a ""Reserve for losses on Participation CertiÑcates'' to provide for credit

losses on mortgage loans underlying all PCs either held by third parties or held by Freddie Mac. The ""Reserve

for losses on mortgage loans held for investment'' and the ""Reserve for losses on Participation CertiÑcates'' are

collectively referred to as ""Loan loss reserves.''

Beginning in the second quarter of 2002 and continuing as part of the restatement process in 2003,

Freddie Mac completed a detailed review of its loan loss reserve and credit loss accounting policies, methods

and processes. As a result of this work, the company has corrected both the population of loans and mortgagerelated securities against which Loan Loss Reserves are held as well as the level of Loan Loss Reserves needed

for the deÑned population of mortgage assets. The population of loans against which Loan Loss Reserves are

held was corrected in accordance with SFAS 115, SFAS 125/140 and other GAAP guidance due to the

nature of Freddie Mac's mortgage guarantee and investment portfolio management activities. The level of

Loan Loss Reserves held for the re-deÑned population was corrected to adjust for errors in the application of

SFAS 5, ""Accounting for Contingencies'' (""SFAS 5'') and SFAS 114, ""Accounting by Creditors for

Impairment of a Loan'' (""SFAS 114'') as well as the errors in the calculation or aggregation of divisional

Loan Loss Reserve estimates. More speciÑcally, the three primary areas that drove these corrections are

outlined below:

Reduction of SFAS 5 Loan Population due to the application of SFAS 125/140 and other GAAP

guidance. As discussed in ""Asset Transfers and Securitizations Ì Accounting for Transfers of Mortgage

Loans, PCs and Structured Securities'' above, Freddie Mac is now recognizing a guarantee obligation at fair

value on the date of sale for certain transactions involving its PCs and Structured Securities. Therefore, it is no

longer necessary to hold loan loss reserves against these PCs and Structured Securities given that the

guarantee obligation includes an estimate of expected future credit losses. As a result, during the restatement

period, the company has removed the Loan Loss Reserves estimated and held for all PCs and Structured

Securities for which there is a PCR or guarantee obligation recorded and outstanding.

Reduction of SFAS 5 Loan Population due to the application of SFAS 115. As described above, Freddie

Mac historically established loan loss reserves for the credit loss incurred on loans securing PCs it holds. In

connection with the correction of the accounting for credit guarantees more broadly as it relates to

SFAS 125/140 (see ""Asset Transfers and Securitizations Ì Accounting for Transfers of Mortgage Loans,

PCs and Structured Securities'' above) and other GAAP guidance, Freddie Mac concluded that the

establishment of loan loss reserves for the credit risk in PCs it holds would not be acceptable under SFAS 115.

Freddie Mac

146
Therefore, the portion of the Loan Loss Reserve balances related to PCs the company holds was removed.

Furthermore, as required by SFAS 115, any impairment in the security values determined to be other-thantemporary should be recorded as a reduction in the security's basis with a corresponding charge to earnings.

During the restatement, Freddie Mac concluded that no impairments under SFAS 115 needed to be recorded.

Errors in Estimating Loan Loss Reserves. As mentioned above, during second and third quarters 2002,

Freddie Mac performed a detailed review of its Loan Loss Reserve policies, methodologies and processes.

Based on this review, the company concluded its Loan Loss Reserves were inappropriately maintained in

excess of the amounts permitted by GAAP in the amount of $246 million. Freddie Mac determined at the

time that the overstatement of Loan Loss Reserves related primarily to periods prior to 1999. Initially, Freddie

Mac recorded the reduction in Loan Loss Reserves as an aggregate adjustment to current period earnings in

the third quarter of 2002, rather than allocating the adjustments among the relevant prior periods in which

they arose and restating the Ñnancial statements for those periods. However, as part of the restatement,

Freddie Mac reversed the one-time $246 million adjustment recorded to third quarter 2002 earnings and

restated prior period results to reÖect this adjustment in the correct periods, resulting in no impact to income

on a cumulative basis.

As part of the restatement process, Freddie Mac identiÑed and corrected additional accounting errors

related to Loan Loss Reserves and credit accounting, including errors in estimating losses on restructured

mortgages.

The cumulative eÅect of correcting these errors was an increase in pre-tax income of $158 million.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.25.

Table 1.25 Ì Loan Loss Reserves and Credit-Related Accounting Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $554 $3 $10 $(409) $158

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

Reserve Adjustments, Other Contributions and Accruals. As part of the restatement, Freddie Mac has

made pre-tax corrections for adjustments related to civil lawsuits (excluding potential litigation risk due to this

restatement process), other contingencies as well as other discretionary contributions and asset impairments.

Certain of these adjustments were not considered to be material at the time and were made with a view to

their eÅect on earnings. Based upon the review of contemporaneous documentation in place and other relevant

factors, Freddie Mac has now concluded that these adjustments were in error.

The cumulative eÅect of correcting these errors was a decrease to pre-tax income of $55 million.

Additional detail regarding the impact of correcting these errors is set forth in Table 1.26.

Table 1.26 Ì Reserve Adjustments, Other Contributions and Accruals Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $71 $(12) $(38) $(76) $(55)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌÌÌÌ

(1) Amounts exclude reclassiÑcations from interest expense to income tax expense of $71 million for the cumulative eÅect through 1999,

and $14 million, $37 million and $(30) million for the years ended December 31, 2000, 2001, and 2002, respectively, resulting in a

net cumulative reclassiÑcation of $92 million.

Miscellaneous. In addition to the adjustments individually described above in ""All Other Accounting

Corrections,'' Freddie Mac has identiÑed other accounting policies and practices that required correction.

These corrections touch on many aspects of the company's Ñnancial statements and have been reÖected in its

restated results. The cumulative eÅect of correcting all of these errors was a decrease to pre-tax income of

Freddie Mac

147
$124 million and a decrease to pre-tax AOCI of $2 million. Additional detail regarding the impact of

correcting these errors is set forth in Table 1.27.

Table 1.27 Ì Miscellaneous Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income (expense) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(104) $53 $(27) $(46) $(124)

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (7) $ 6 $ 28 $(29) $ (2)

II. Other Accounting Changes

Accounting for Certain Premiums and Discounts

Premiums and discounts related to mortgage-related assets arise when such investments are acquired at

prices above or below the outstanding contractual principal value of the assets. These amounts are amortized

into interest income over the estimated weighted average lives of the underlying mortgages using the eÅective

interest method as prescribed by SFAS 91. In the fourth quarter of 2002, Freddie Mac improved its estimate

of the expected weighted average lives of mortgage-related assets in the company's retained portfolio. This

change in estimate included enhancements to the prepayment model used in the determination of weighted

average lives and to other formulas used to calculate interest income under the eÅective interest method. In

addition, Freddie Mac reÑned its method for collecting the mortgage asset data that are inputs to its

amortization model for premiums and discounts.

These enhancements resulted in the recognition of an additional $305 million in income before taxes in

the fourth quarter of 2002 and a decrease in pre-tax AOCI of $333 million and were recorded as a change in

estimate in accordance with Accounting Principles Board (""APB'') Opinion No. 20, ""Accounting Changes''

(""APB 20''). The adjustment to AOCI is necessary because a substantial portion of the $305 million increase

to income was related to the amortization of basis adjustments associated with mortgage-related securities

classiÑed as available-for-sale. More speciÑcally, a substantial portion of this income adjustment resulted in an

increase in the carrying basis of available-for-sale securities, resulting in a corresponding decrease in

unrealized gains reported through AOCI.

Stock-Based Compensation

Prior to 2002, Freddie Mac accounted for the company's stock-based compensation plans under the

recognition and measurement provisions of APB 25, ""Accounting for Stock Issued to Employees,'' or APB 25,

and related interpretations. For option awards, no stock-based compensation cost was reÖected in previously

reported results because all options granted under those plans had an exercise price equal to the market value

of the underlying common stock on the date of the grant. In the second quarter of 2002, Freddie Mac elected

to prospectively adopt the fair value method of accounting for its stock awards granted, modiÑed or settled on

or after January 1, 2002 under the guidance of SFAS 123, ""Accounting for Stock-Based Compensation

(""SFAS 123'')''. Freddie Mac adopted SFAS 123 for all of the company's stock-based compensation awards,

including stock options, its employee stock purchase plan (""ESPP''), restricted stock and restricted stock

units (""RSUs''). After the issuance of SFAS 148, ""Accounting for Stock-Based Compensation Transition

and Disclosure (""SFAS 148'')'', in December 2002, Freddie Mac selected the retroactive restatement

transition method described in SFAS 148, which amended SFAS 123 to permit a retroactive restatement of

prior years' Ñnancial statements for stock awards granted on or after January 1, 1995.

As a result, Freddie Mac has restated all prior periods presented to reÖect the incremental impact of

adopting SFAS 123 for awards granted, modiÑed or settled on or after January 1, 1995 on compensation

expense, additional paid-in capital and the opening balance of retained earnings. The company will continue to

apply APB 25 to stock awards granted prior to January 1, 1995. In accordance with SFAS 123, Freddie Mac

measures the fair value of a stock-based compensation award at the grant date and recognizes this amount as

compensation expense over the vesting period on a straight-line basis.

Freddie Mac

148
Retroactive recognition of fair-value based stock compensation expense under SFAS 123/148 for grants

between January 1, 1995 and December 31, 2001 resulted in a cumulative reduction to income before taxes

through December 2002 of $137 million. This incremental expense from retroactively adopting SFAS 123

relates to stock options and the ESPP. Adoption of SFAS 123 resulted in no incremental expense related to

restricted stock and RSU awards, which are eÅectively measured at fair value under both APB 25 and

SFAS 123.

III. Tax-Related Adjustments

In addition to the accounting corrections and other accounting changes, Freddie Mac's restated results

also include tax-related adjustments. These adjustments were driven by the following factors as outlined

below:

Tax Adjustments

Tax adjustment due to accounting corrections and other accounting changes. As a result of the

restatement, the cumulative eÅect on pre-tax income is an increase of $7.6 billion. In light of this increase in

income, Freddie Mac's cumulative income tax expense is higher by approximately $2.6 billion based on its

statutory federal income tax rate of 35 percent. The $2.6 billion tax impact relates almost entirely to an

increase in deferred taxes payable, while approximately $15 million represents an increase in current taxes

payable.

Tax adjustment due to tax corrections. Similar to the adjustments discussed as part of the ""Accounting

Errors Ì All Other Accounting Corrections Ì Reserve Adjustments, Other Contributions and Accruals,''

Freddie Mac made adjustments for the level of tax reserves that were not considered material at the time and

were made with a view to their eÅect on earnings. Based upon review of contemporaneous documentation in

place and other relevant factors, the company has now concluded that these adjustments were in error. As a

result of the restatement, Freddie Mac has corrected certain accruals for tax contingencies, which had an

impact of reducing tax expense by $16 million. Freddie Mac also made additional tax-related corrections,

which had an impact of increasing tax expense by $31 million.

Tax Adjustments due to Subsequent Events

Tax adjustment due to recent U.S. Tax Court Rulings. As discussed in ""NOTE 15: INCOME

TAXES,'' on September 4, 2003 and September 29, 2003, the U.S. Tax Court (""Court'') ruled favorably for

Freddie Mac on two preliminary motions involving questions of law in the case. Based upon these rulings and

the company's assessment of its reduced tax exposure, Freddie Mac has recorded a reduction to its tax

reserves of $155 million in the fourth quarter of 2002; this reserve reduction decreased the company's income

tax expense by $155 million.

Additional detail regarding the impact of all tax-related adjustments is set forth in Table 1.28.

Table 1.28 Ì Tax-Related Adjustments Ì Summary of Financial Impacts

Cumulative EÅect

from Inception Ì

12/31/1999 2000 2001 2002 Total

(dollars in millions)

Income tax expense(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $364 $491 $(501) $2,124 $2,478

AOCI before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì

(1) In order to reconcile the total income tax expense of $2.478 billion, depicted above, to the income tax expense impact of

$2.591 billion on Table 1.1, $113 million of additional income tax expense must be added which is primarily attributable to a

reclassiÑcation from interest expense to income tax expense.

Freddie Mac

149
IV. Errors in Computing Freddie Mac's 2001 Consolidated Fair Value Balance Sheet (""FVBS'')

The following table summarizes the net impacts of the restatement and other corrections on Freddie

Mac's FVBS net assets at December 31, 2001. FVBS net assets at December 31, 2000 have not been restated

and therefore are not comparable to the amounts presented for December 31, 2001.

Table 1.29 Ì Impact of Restatement and Other Corrections on 2001 FVBS Net Assets

(dollars in billions)

FVBS net assets at December 31, 2001, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17.7

Net eÅect of 2001 errors (net of taxes)

Derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.2

Mortgage-related investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.1)

Minority interest in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1

Guarantee contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5

Other eÅects of restatement, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.1)

Total impactÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.6

FVBS net assets at December 31, 2001, as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18.3

In connection with the restatement of its Ñnancial statements, Freddie Mac reviewed the appropriateness

of its valuation techniques and accounting policies and practices. As a result of this review, the company

concluded that the fair values of certain components of its previously reported FVBS were incorrect. The

following discussion explains these errors, which are detailed in the table above. Correction of these errors,

together with certain balance sheet reclassiÑcations, explain the changes in FVBS line items from previously

reported to as-restated FVBS.

‚ Derivatives Ì Correction of various errors related to derivatives resulted in a change to FVBS net

assets at December 31, 2001. Freddie Mac used models that incorporated volatility assumptions in

order to establish fair values for option-based derivatives during the restatement period. Freddie

Mac's implementation of the models failed to incorporate all relevant pricing information

available in the market. The correction of these errors increased FVBS net assets at December 31,

2001, by $0.2 billion after taxes.

‚ Mortgage-related investments Ì Freddie Mac made the following types of errors in its accounting

for mortgage-related investments. In some cases the company used incorrect principal balances in

the calculation of fair value. In other instances, Freddie Mac made numerous errors in estimating

the fair value of its mortgage investments. These errors included the use of models or pricing

matrices that failed to consider certain relevant market data and inaccurate lockout provisions

related to prepayments. Finally, the company failed to account for certain mortgage purchase and

sale commitments at fair value. The correction of these errors decreased FVBS net assets at

December 31, 2001 by $0.1 billion after taxes.

‚ Minority interest in consolidated subsidiaries Ì Freddie Mac owns majority interests in two

REITs. This caption primarily represents minority interests that third parties hold in the

company's majority-owned REIT subsidiaries in the form of REIT preferred stock. The valuation

methodology used by Freddie Mac for pricing the REIT preferred stock was based on a potential

tax event redemption that valued the amount at redemption based on a spread to certain Treasury

rates and market implied volatilities. The Treasury rates used to calculate the estimated

redemption price, however, were incorrect, causing Freddie Mac to overvalue the estimated

redemption price. Correction of this error resulted in an increase to FVBS net assets of $0.1 billion

after taxes at December 31, 2001.

‚ Pricing methodology and other corrections related to guarantee contracts Ì As part of the

restatement, Freddie Mac revised the fair value of its guarantee contracts. The valuation process

employed in 2001 was changed to incorporate additional benchmark market data regarding

observed option-adjusted spreads on assets similar to the guarantee asset. Also, the company

failed to incorporate available market data in estimating the future credit losses associated with

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the guarantee obligation. Finally, additional errors were made in the aggregation of the unpaid

principal balance of mortgage securities and other contractual portfolio data against which prices

were applied. The correction of these errors resulted in a $0.5 billion after tax increase in FVBS

net assets at December 31, 2001.

‚ Other eÅects of restatement, net Ì Freddie Mac restated the carrying values of a number of

assets and liabilities that are presented at their recorded GAAP amounts in the 2001 FVBS. The

modiÑcation of these balances, together with the related tax eÅects, resulted in a decrease in

FVBS net assets of $0.1 billion at December 31, 2001.

As a result of the restatement, Freddie Mac made changes in the accounting classiÑcation and

presentation of certain items in the Ñnancial statements for GAAP accounting purposes. In certain cases,

these classiÑcation changes have a material impact on GAAP presentation. These classiÑcations, however,

have no impact on the FVBS net assets because they do not aÅect the way management measures fair value.

For presentation purposes, all changes in GAAP classiÑcations have been reÖected in the presentation of fair

values and comparable GAAP carrying amounts for items presented in the FVBS.

V. Other Errors in the Consolidated Financial Statements

Freddie Mac made numerous errors in the application of GAAP that impacted previously issued

consolidated statements of income and the consolidated balance sheets as discussed throughout this note.

These errors also impacted previously issued consolidated statements of cash Öows. For instance, the

consolidated statements of cash Öows previously reÖected numerous misclassiÑcations between cash Öow

categories, primarily related to the treatment of cash Öows associated with derivatives. Furthermore, Freddie

Mac also did not meet the criteria for reporting business segments that are prescribed in SFAS 131,

""Disclosures About Segments of an Enterprise and Related Information (""SFAS 131''). For example,

Freddie Mac did not maintain, as required by SFAS 131, discretely available and reliable Ñnancial information

that management used to allocate internal resources among business units. As a result, management has

determined that the company has only one business segment for Ñnancial reporting purposes, rather than two

as previously reported prior to the restatement. In addition, all notes related to the consolidated Ñnancial

statements included in the Information Statement dated March 29, 2002 (""2001 Information Statement'')

were aÅected by the numerous errors noted above and should not be relied upon.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Freddie Mac is a stockholder-owned, government-sponsored enterprise (""GSE'') established by Congress in 1970 to provide a continuous Öow of funds for residential mortgages. Freddie Mac's obligations are not

insured or guaranteed by the United States (""U.S.'') or any agency or instrumentality of the U.S. other than

Freddie Mac.

Freddie Mac plays a fundamental role in the American housing Ñnance system, linking the domestic

mortgage market and the global capital markets. Freddie Mac's participation in the secondary mortgage

market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and

investing in mortgage loans and mortgage-related securities held in Freddie Mac's retained portfolio. Through

credit guarantee activities, Freddie Mac securitizes mortgage loans by issuing PCs to third party investors.

Freddie Mac also resecuritizes mortgage-related securities that are issued by Ginnie Mae as well as nonagency entities. Securities issued through Freddie Mac's resecuritization activities are referred to as

""Structured Securities.'' In each case, securitized mortgage-related assets that back PCs and Structured

Securities that are held by third parties are not reÖected as assets of Freddie Mac under GAAP. However,

Freddie Mac does retain an obligation to provide the payment of principal and interest on issued PCs and

Structured Securities, which may result in the recognition of an asset and obligation on the company's

consolidated balance sheets.

Freddie Mac's Ñnancial reporting and accounting policies conform to GAAP.

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151
Estimates

The preparation of Ñnancial statements in conformity with GAAP requires management to make

estimates and assumptions that aÅect (i) the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the Ñnancial statements and (ii) the reported amounts of

revenues and expenses during the reporting period. Actual results could diÅer from those estimates. The use of

certain estimates in preparation of the Ñnancial statements is described below.

A signiÑcant estimate that is pervasive in the company's Ñnancial statements is the determination of fair

value for Ñnancial instruments required to be recorded at fair value under GAAP. The measurement of fair

value is fundamental to the presentation of Freddie Mac's Ñnancial condition and results of operations and, in

many instances, requires management to make complex judgments. In general, Freddie Mac records Ñnancial

instruments at the amount at which the instrument could be bought and sold between willing parties, in an

active market and not in a forced or liquidation sale. Fair value is generally based on price quotations, where

available. If prices are not readily available, fair value is based on internal valuation models using market data

inputs or internally developed assumptions, where appropriate. The use of diÅerent pricing models and

assumptions could produce materially diÅerent estimates of fair value.

Estimates are also used to determine the expected weighted average lives of mortgage-related assets in

the retained portfolio, to assess the reserves for credit losses on mortgage loans and guarantee losses on PCs, to

assess Freddie Mac's legal and tax contingencies, and to determine other matters that aÅect the reported

amounts and disclosure of contingencies in the Ñnancial statements. In accordance with SFAS 5, contingencies that might result in gains are not recorded prior to realization; whereas, contingencies that result in losses

must be accrued currently if the loss is both probable of occurring and the amount is reasonably estimable.

Loss contingencies that are considered reasonably possible are not accrued, but are required to be disclosed.

Loss contingencies that are considered to have a remote probability of occurrence are not required to be

accrued or disclosed in accordance with SFAS 5.

Consolidation

The consolidated financial statements include the accounts of the company and its subsidiaries. All

material intercompany transactions have been eliminated in consolidation. For each entity with which Freddie

Mac is involved, the company makes a determination as to whether the entity should be considered a

subsidiary of the company and included in the company's consolidated financial statements. Freddie Mac

consolidates all subsidiaries in which it holds more than 50 percent of the voting rights and has the ability to

exercise control over the entity. The company uses the equity method of accounting for companies over which

it has the ability to exercise signiÑcant inÖuence but not control. Under the equity method of accounting,

Freddie Mac reports its recorded investment as an asset on the consolidated balance sheets and recognizes its

share of the entity's net income or losses in the consolidated statements of income with an oÅset to the

recorded investment on the consolidated balance sheets up to the amount of investment recorded.

The company consolidates its two majority-owned REITs, Home Ownership Funding Corporation and

Home Ownership Funding Corporation II, and certain other special purpose entity structures. Generally, the

company does not use special purpose entities in its credit enhancement and resecuritization transactions. The

company also consolidates the accounts of majority-owned West*Mac Associates Limited Partnership, the

owner and developer of Freddie Mac's company headquarters, and wholly-owned Ignition Mortgage Technology Solutions, Inc. The equity and net earnings attributable to the minority shareholder interests which relate

to the company's subsidiaries are reported separately in the consolidated balance sheets as ""Minority interest

in consolidated subsidiaries'' and in the consolidated statements of income as ""Minority interest in earnings of

consolidated subsidiaries,'' respectively.

The company regularly invests as a limited partner in qualiÑed low-income housing tax credit partnerships that are eligible for federal tax credits. These tax credits are reported as reductions in the company's

provision for income taxes pursuant to EITF Issue 94-1, ""Accounting for Tax BeneÑts Resulting from

Investments in AÅordable Housing Projects'' (""EITF 94-1''). Freddie Mac consolidates those investments

over which it has the ability to exercise control and accounts for the non-consolidated investments using the

equity method of accounting, in accordance with Statement of Position (""SOP'') 78-9, ""Accounting for

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152
Investments in Real Estate Ventures'' (""SOP 78-9''). For partnerships accounted for under the equity

method, Freddie Mac's recorded investment is reported as part of ""Other assets'' and its share of partnership

income or losses is reported in the consolidated statements of income as ""Non-interest expense Ì Housing tax

credit partnerships.'' Freddie Mac periodically reviews these investments for impairment and adjusts them to

fair value when a decline in market value below the recorded investment is deemed to be ""other than

temporary'' under GAAP. Impairment losses are included as part of ""Non-interest expense Ì Housing tax

credit partnerships.''

Cash and Cash Equivalents and Statements of Cash Flows

Freddie Mac accounts for highly liquid investment securities with an original maturity of three months or

less and used for cash management purposes as cash equivalents. Cash collateral obtained from counterparties

to derivative contracts in an unrealized gain position is recorded as ""Cash and cash equivalents.''

In the statement of cash Öows, cash Öows related to the acquisition and termination of derivatives are

generally classiÑed in investing activities, without regard to whether they are intended as a hedge of another

item. Cash Öows from commitments (accounted for as derivatives under SFAS 133) that result in the

acquisition or sale of mortgage loans or mortgage securities are classiÑed in investing activities for availablefor-sale securities or mortgage loans held for investment and operating activities for trading securities or

mortgage loans held for sale. The periodic cash Öows on derivatives, which are recorded on an accrual basis in

""Income (expense) related to derivatives,'' are reported in operating activities. Cash Öows related to guarantee

fees, buy-up fees and buy-down fees are classiÑed as operating activities, along with the cash Öows related to

the collection and distribution of payments on the mortgage loans underlying PCs. Cash Öows related to

mortgage loans classiÑed as held-for-sale are classiÑed in operating activities unless the loans have been

securitized and retained as available-for-sale PCs in which case they are classiÑed as investing activities. Cash

Öows related to the repayment of the original issue discount on short-term, zero-coupon debt are reported as

operating activities.

Cash-Based Transfers of Financial Assets

Freddie Mac accounts for transfers of Ñnancial assets pursuant to the requirements of SFAS 140, and,

prior to April 1, 2001, SFAS 125. If Freddie Mac determines that it surrenders control over assets that it

transfers to a third party, Freddie Mac accounts for the transfers as sales to the extent its counterparty

provides consideration other than beneÑcial interests in the transferred assets. Likewise, if Freddie Mac

determines that it obtains control over assets that were transferred to it, it accounts for the transfers as

purchases to the extent Freddie Mac provides consideration other than beneÑcial interests in exchange for the

transferred assets.

If a transfer of Ñnancial assets qualiÑes as a sale, Freddie Mac continues to carry on its consolidated

balance sheets any retained interests in Ñnancial assets that were securitized and/or resecuritized. Such

retained interests generally take one of two forms. First, in connection with its right to receive guarantee

payments (as further discussed below), Freddie Mac recognizes a retained interest that is classiÑed on its

consolidated balance sheets as ""Guarantee asset for Participation CertiÑcates, at fair value.'' (This retained

interest is referred to below as guarantee asset, or ""GA.'') Second, Freddie Mac recognizes PCs (or

Structured Securities issued by the company using PCs held in its portfolio) that are not transferred to third

parties upon the completion of a securitization of mortgage loans (or, in the case of Structured Securities,

upon the resecuritization of PCs held in portfolio). These securities are accounted for pursuant to the

requirements of SFAS 115. The carrying amounts of retained interests are determined by allocating the

previous carrying amount of the transferred assets between assets sold and the retained interests based on their

relative fair values at the date of transfer. Freddie Mac's accounting policy for recognized GAs is further

described below.

Upon completion of a transfer of Ñnancial assets that qualiÑes as a sale, Freddie Mac also de-recognizes

all assets sold and recognizes all assets obtained and liabilities incurred in consideration as proceeds of the

sale. Accordingly, Freddie Mac recognizes the fair value of its recourse obligation to guarantee the timely

payment of principal and interest of PCs and Structured Securities transferred in sale transactions. This

recourse obligation, which is classiÑed in Freddie Mac's consolidated balance sheets as ""Guarantee obligation

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153
for Participation CertiÑcates, at fair value,'' is recorded as a reduction of proceeds in the calculation of the

corresponding gain (loss) on the sale of transferred PCs and Structured Securities. (The referenced guarantee

obligation is referred to below as a ""GO.'') The resulting gain (loss) on sale of transferred PCs and Structured

Securities is reÖected in Freddie Mac's consolidated statements of income as a component of ""Gains

(losses) on investment activity.''

Freddie Mac accounts for cash-based transfers of Ñnancial assets that do not qualify as sales as secured

borrowings.

Other Transfers of Financial Assets

Freddie Mac executes several types of non-cash-based exchanges of Ñnancial assets that receive diÅerent

accounting treatment under GAAP. Transfers of PCs that are issued through the Freddie Mac Guarantor

Program do not trigger sale accounting recognition under SFAS 125 / 140. In Guarantor Program

transactions, Freddie Mac issues PCs that are backed by mortgage loans delivered to it by third parties, and

these third parties receive the PCs in exchange for the mortgage loans they delivered. Because Freddie Mac

does not have the ability to freely pledge or exchange the transferred mortgage loans, it has not acquired

control over the loans. Therefore, the company is considered neither a transferee of the mortgages nor a

transferor of the PCs for GAAP purposes and the exchange of PCs for mortgages does not trigger sale

accounting recognition under SFAS 125 / 140. The accounting for guarantee fees that relate to Guarantor

transfers is discussed further below.

Freddie Mac also issues and transfers Structured Securities to third parties in exchange for PCs and other

non-Freddie Mac mortgage-related securities. As with the Guarantor Program, Freddie Mac cannot freely

pledge or exchange the securities that are delivered to it by third parties in these exchanges. As a result,

Freddie Mac does not view such exchanges as triggering sale accounting recognition under SFAS 125 / 140.

Freddie Mac receives a fee for issuing Structured Securities that is paid at the time of resecuritization. That

portion of the transaction fee that relates to the estimated fair value of the company's future administrative

responsibilities of issued Structured Securities is deferred and amortized into income on a straight-line basis.

Further, and in cases where Freddie Mac retains portions of the Structured Securities, a portion of this fee is

deferred under the requirements of SFAS 91. The balance of transaction fees received, which relates to

compensation earned in connection with structuring-related services rendered by Freddie Mac to third parties,

is recognized immediately into ""Resecuritization fees.''

In addition to PCs issued under its Guarantor Program and PCs issued from mortgage loans acquired in

exchange for cash consideration (""Cash Window Purchases''), Freddie Mac issues PCs through its

MultiLender Program that are backed by mortgage loans delivered to Freddie Mac by more than one third

party. Freddie Mac may itself contribute mortgage loans to Multilender pools from which PCs are then issued

and delivered to third parties (and to Freddie Mac, to the extent that it contributed mortgage loans to a

Multilender pool). Freddie Mac accounts for its contributions of mortgage loans to a Multilender pool as

partial sales of those assets, the sold portion of which is dependent upon the contribution of collateral made by

Freddie Mac relative to third parties. The portion of a Multilender transaction that qualiÑes as a sale is

accounted for in the same manner as the cash-based transfers described above. The PC issuances and related

transfers for the remaining portion are accounted for in a manner consistent with the accounting for PCs

issued through the Guarantor Program.

Guarantee Fees, Buy-Up Fees and Buy-Down Fees

In return for providing its guarantee, Freddie Mac earns a management and guarantee fee (""Required GFee'') that is paid to Freddie Mac over the life of an issued PC. Additionally, Freddie Mac occasionally

receives upfront payments as additional compensation for its guarantee of loans with certain credit risk related

characteristics. For PC transfers made in connection with Freddie Mac's Guarantor Program, it is also

common for buy-up or buy-down fees (""Buy-Ups'' or ""Buy-Downs,'' respectively) to be exchanged between

Freddie Mac and its counterparties upon issuance of the PC. Buy-Ups represent upfront payments that are

made by Freddie Mac, which increase the Required G-Fee that Freddie Mac will receive over the life of the

PC in connection with its guarantee. Buy-Downs represent upfront payments that are made to Freddie Mac,

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154
which decrease (i.e., partially prepay) the Required G-Fee that Freddie Mac will receive over the life of the

PC in connection with its guarantee.

For PC transfers that qualify as sales under SFAS 125 / 140, Freddie Mac recognizes a GA, which

reÖects the retained interests in mortgages sold. The GA that is recognized in connection with Cash Window

sales represents the fair value of the diÅerence between (i) the aggregate coupon cash Öows of securitized

mortgage loans less servicing cash Öows due to third party mortgage servicers and (ii) the coupon cash Öows

on the related PC, plus the fair value of certain credit enhancements other than primary mortgage insurance.

Freddie Mac views GAs as Ñnancial assets that can be prepaid or otherwise settled in a manner that may

prevent Freddie Mac from recovering substantially all of its recorded investment. Freddie Mac accounts for

GAs like investments in debt securities classiÑed as trading under SFAS 115. All changes in the fair value of

GAs, which are reported on Freddie Mac's consolidated balance sheets as a component of ""Guarantee asset

for Participation CertiÑcates, at fair value,'' are reÖected in earnings as a component of ""Gains (losses) on

"Guarantee asset for Participation CertiÑcates, at fair value.' '' The GA consists of a variety of cash Öows that

are primarily recorded through ""Management and guarantee income.'' See ""NOTE 3: SECURITIZATION

OF MORTGAGE-RELATED ASSETS'' for a discussion of the attribution of GA-related cash Öows.

Required G-Fees, as decreased in connection with upfront Buy-Down payments, that relate to PCs issued

through the Guarantor Program (and that have not been previously transferred in a SFAS 125 / 140 sale

transaction) are realized as income on an accrual basis in accordance with the guidance in EITF 85-20,

""Recognition of Fees for Guaranteeing a Loan'' (""EITF 85-20''). The Required G-Fees in these transactions

are recognized over the corresponding guarantee period. Additionally, Freddie Mac recognizes a guarantee

liability for estimated, guarantee-related credit losses in accordance with SFAS 5. The accounting for Buy-Up

or Buy-Down payments made or received at PC issuance follows:

‚ Buy-Up amounts paid at PC issuance are recognized on the consolidated balance sheets as a GA

if the corresponding PCs are held by third parties, and are accounted for like a debt security that is

classiÑed as trading under SFAS 115. If a Buy-Up was paid in connection with PCs that Freddie

Mac holds, the Buy-Up is recognized as a component of PCR (discussed further below).

‚ Buy-Down and credit fee amounts received at PC issuance are deferred on Freddie Mac's

consolidated balance sheets as an adjustment of ""Other liabilities.'' These amounts are amortized

into ""Management and guarantee income'' pursuant to the requirements of SFAS 91.

If a PC is purchased by Freddie Mac, all recognized GAs are reclassiÑed on Freddie Mac's consolidated

balance sheets as a component of ""Participation CertiÑcate residuals, at fair value.'' (For details concerning

the impact on the GO of a PC purchase, see ""Guarantee Obligations'' below). Additionally, the unamortized

balance of Buy-Downs and credit fees received in connection with the original issuance of purchased PCs is

extinguished and treated as a basis adjustment to the recognized value of purchased PCs. Such basis

adjustments are then amortized into earnings pursuant to the requirements of SFAS 91.

Guarantee Obligations

When a transfer of PCs or Structured Securities qualiÑes as a sale, Freddie Mac recognizes a GO.

Freddie Mac accounts for recognized GOs at fair value, with all changes in fair value reÖected in Freddie

Mac's consolidated statements of income as a component of ""Gains (losses) on "Guarantee obligation for

Participation CertiÑcates, at fair value.' ''

The fair value of the GO is intended to reÖect the estimated amount that Freddie Mac would be required

to pay to a third party to be relieved of Freddie Mac's obligations under the guarantee contract. The

components of this calculation include: (i) estimates of expected future credit losses using statistically based

models that evaluate a variety of factors (such as default experience, loss severity trends, expected proceeds

from primary mortgage insurance, etc.) as well as an estimated risk premium for the uncertainty in expected

credit losses that would be required to be paid to a third party with a credit standing, capital structure and

regulatory oversight similar to those of Freddie Mac; (ii) estimates of the costs to administer the collection

and distribution of payments on the mortgages underlying the PC; and (iii) expected net cash Öows due to

security program cycles.

Freddie Mac

155
The purchase of a PC by Freddie Mac prompts the extinguishment of a recognized GO pursuant to the

requirements of SFAS 125 / 140. The de-recognition of a GO is reÖected in earnings as ""Gains (losses) on

investment activity.'' The purchase of a PC that was previously included as part of a SFAS 125 / 140 sale also

triggers a reduction in the fair value of the corresponding GA. This is because prior to the repurchase of a PC,

the fair value of a GA does not consider the expected future cash outÖows of the GO that a third party would

otherwise have to assume if it purchased the GA from Freddie Mac. Therefore, after PC repurchase, a

revaluation of the GA for impairment is necessary. Like the extinguishment of the GO, such a diminution in

the value is reÖected in earnings as ""Gains (losses) on investment activity.''

Participation CertiÑcate Residuals

PCRs relate to certain PCs or Structured Securities held by Freddie Mac and represent the fair value of

the expected future cash Öows associated with the guarantee contracts that are inherent within such securities.

A PCR is recognized by Freddie Mac in connection with PCs or Structured Securities held by Freddie

Mac that (i) previously went through a SFAS 125 / 140 sale (in which case, a GA and GO were previously

established for the held PC or Structured Securities), (ii) were formed from Cash Window Purchases and

that were never transferred to third parties or (iii) were purchased by Freddie Mac from third parties on the

corresponding issue date of such PCs through the Guarantor Program.

Like a recognized GA, a PCR is accounted for like a debt security and is classiÑed as either available-forsale or trading under SFAS 115. PCRs relating to PCs or Structured Securities that previously went through a

SFAS 125 / 140 sale are accounted for as trading under SFAS 115. PCRs relating to PCs held in portfolio

that were formed from Cash Window Purchases and that were never transferred to third parties are accounted

for like debt investments and generally are classiÑed as available-for-sale under SFAS 115. The same

treatment applies to PCRs that correspond to PCs purchased by Freddie Mac from third parties on the

corresponding issue date of such PCs, except that any portions of these PCRs that relate to Buy-Ups paid by

Freddie Mac are accounted for as trading investments.

All changes in the fair value of PCRs 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 PCRs that are

accounted for as available-for-sale are reÖected as a component of ""Accumulated other comprehensive

income (loss), net of taxes.''

Recognized PCRs consist of a variety of cash Öows that are primarily recorded through interest income.

See ""NOTE 3: SECURITIZATION OF MORTGAGE-RELATED ASSETS'' for a discussion of the

attribution of GA-related cash Öows.

Due to Participation CertiÑcate Investors

Timing diÅerences between Freddie Mac's receipt of scheduled and unscheduled principal and interest

payments from seller/servicers on mortgages underlying PCs and the subsequent passthrough of those

payments on PCs owned by third party investors results in the liability ""Due to Participation CertiÑcate

investors.'' In those cases, payments from seller/servicers are generally received in a given month, yet the PC

balance is not reduced for payments of principal until the Ñrst day of the next month, and Freddie Mac

releases the cash (principal and interest) to the PC investor on the Ñfteenth day of that next month. The

company generally invests these principal and interest amounts received in short-term investments from the

time Freddie Mac receives the amounts until the time Freddie Mac pays the PC investor. Interest income

resulting from investment of principal and interest payments from seller/servicers is reported in interest

income over the period earned.

For unscheduled principal prepayment amounts, these timing diÅerences result in an expense accrual

upon prepayment of the mortgage as the related PCs continue to bear interest to the PC investor at the PC

coupon rate from the date of prepayment until the date the PC security balance is reduced, while no interest is

received from the mortgage on that prepayment amount during that same time period. The expense

recognized upon prepayment is reported in ""Interest Expense Ì Due to Participation CertiÑcate investors.''

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156
Freddie Mac reports PC coupon interest amounts relating to its investment in PCs consistent with the

accounting practices generally applied by third party investors in PCs. Accordingly, the PC coupon interest on

prepayments of a mortgage pending remittance on PCs held by Freddie Mac is reported as both ""Interest

Income Ì Mortgage-related securities in the retained portfolio'' and ""Interest Expense Ì Due to Participation CertiÑcate investors.'' Scheduled and unscheduled principal payments received by Freddie Mac that

relate to its investment in PCs are reported as a reduction to its investment in PCs on the consolidated balance

sheets.

Mortgage Loans

Mortgage loans that management may sell are classiÑed as ""held-for-sale.'' When the decision is made to

retain the loan, the loans are transferred to the ""held-for-investment'' portfolio or they are securitized and

classiÑed as available-for-sale securities. Held for sale mortgages are included in the retained portfolio and

reported at the lower of cost or market value, on a portfolio basis, with losses reported in ""Gains (losses) on

investment activity.'' The determination of any lower of cost or market value losses is done in the aggregate by

considering all open loan purchase commitment positions and outstanding forward sales commitments to

investors. If held for sale loans are transferred to the held for investment category, any related lower of cost or

market value adjustment is made on an individual loan basis.

Freddie Mac determines the fair value of held for sale mortgage loans based on comparisons to actively

traded mortgage-backed securities with similar characteristics, with an adjustment for credit and liquidity, as

discussed below, related to an implied guarantee fee. SpeciÑcally, Freddie Mac aggregates mortgage loans into

pools by product type, coupon and maturity and then converts the pools into notional mortgage-backed

securities based on their speciÑc characteristics. Freddie Mac then calculates fair values for these notional

mortgage-based securities using the process that is described in ""Securities'' below. The fair value of the

whole loans also includes an adjustment representing the additional cash Öows on the mortgage coupon of the

whole loan in excess of the coupon expected on the notional mortgage-backed securities. This adjustment is

net of the related credit and other guarantee obligation components.

Mortgage loans that management intends to hold for the foreseeable future or to maturity are classiÑed as

""held for investment.'' These mortgage loans are reported at their outstanding principal balances, net of

deferred fees and costs (including premiums and discounts). These deferred items are amortized into interest

income over the estimated lives of the mortgages using the eÅective interest method under SFAS 91. The

company uses actual prepayment experience and estimates of future prepayments to determine the constant

yield needed to apply the eÅective interest method. For purposes of estimating future prepayments, the

mortgages are aggregated by similar characteristics such as origination date, coupon and maturity.

The company recognizes interest income on mortgage loans on an accrual basis, except when management believes the collection of principal or interest is doubtful. For single-family mortgages, reserves for

uncollectible interest are estimated using statistical models, which quantify accrued but unpaid interest at the

balance sheet date. Freddie Mac reports this reserve as a reduction to the accrued loan interest balance in

""Accounts and other receivables, net.'' For multifamily mortgages, the accrual of interest is generally

discontinued and any existing accruals are reversed against interest income on loans that become 90 days past

due as to principal or interest unless collection of both principal and interest is assured.

Freddie Mac has the option to purchase mortgage loans out of PC pools under certain circumstances,

such as to resolve an existing or impending delinquency or default. Freddie Mac's general practice is to

purchase the mortgage loans out of pools when the loans are 120 days delinquent. These repurchased loans are

recorded on Freddie Mac's consolidated balance sheets at their purchase price (i.e., the mortgage loan's

unpaid principal balance). Consequently, the loan's eÅect on ""Guarantee obligation for Participation

CertiÑcates, at fair value,'' or the ""Reserve for guarantee losses on Participation CertiÑcates'' is removed as

applicable and a new credit reserve is established, which is recorded in ""Reserve for losses on mortgage loans

held for investment.''

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Reserves for Losses on Mortgage Loans Held for Investment and Losses on PCs

Freddie Mac maintains its ""Reserve for losses on mortgage loans held for investment'' to provide for

credit losses on mortgages included in its Retained Portfolio (excluding mortgage loans held for sale) and it

maintains its ""Reserve for guarantee losses on Participation CertiÑcates'' to provide for credit losses on

mortgages underlying PCs held by third parties that have not previously been accounted for as sales by Freddie

Mac under SFAS 125 / 140 (and which, therefore, have no recognized GO). The ""Reserve for losses on

mortgage loans held for investment'' and ""Reserve for guarantee losses on Participation CertiÑcates'' are

referred to collectively as ""Loan Loss Reserves.''

The fair value of expected credit losses relating to PCs and Structured Securities included in transfers

that were accounted for as sales by Freddie Mac under SFAS 125/140 are reÖected in the ""Guarantee

obligation for Participation CertiÑcates, at fair value.''

The reserve for credit losses associated with the single-family held for investment loan portfolio

(comprising loans backed by one-to-four family properties) and PC guarantees for which a GO has not been

recognized is evaluated using the criteria of SFAS 5, which provides that large groups of homogenous loans

should be evaluated for impairment on a collective basis. To establish a reserve under SFAS 5, impairments

must be both (i) probable and (ii) reasonably estimable. The reserve for credit losses associated with the

multifamily held-for-investment loan portfolio and issued PCs that were not transferred as part of a GAAPbased sale are evaluated pursuant to the requirements of SFAS 114 for those loans determined to be impaired

based on the criteria described below. The remainder of the multifamily loan portfolio is evaluated for

impairment using SFAS 5. The ""Reserve for losses on mortgage loans held for investment'' and the ""Reserve

for guarantee losses on Participation CertiÑcates'' are increased through charges to the ""Provision for credit

losses'' and decreased by charge-oÅs, net of recoveries. Setting the level of reserves requires signiÑcant

judgment and the resulting reserve levels are regularly evaluated by management.

Management estimates incurred credit losses on homogenous pools of single-family loans using

statistically-based models that evaluate a variety of factors, resulting in a range of probable losses related to

impaired single-family loans at the consolidated balance sheet date. The factors used to estimate incurred

losses as of period-end include actual and estimated loss severity trends for similar loans; actual and estimated

default experience; actual and estimated proceeds from primary mortgage insurance and other credit

enhancements; actual and estimated pre-foreclosure real estate taxes and insurance; the year of the loan

origination; geographic location; and estimated selling costs should the loan ultimately be foreclosed upon and

sold. Management reviews the range of probable losses to determine the point within the range that represents

the best estimate of incurred losses. Management also considers macroeconomic factors, including regional

housing trends, applicable home-price indices, unemployment and employment dislocation trends, consumer

credit statistics, recent changes in credit underwriting practices, extent of third party insurance, and other

measurable factors that inÖuence the quality of the portfolio at the balance sheet date. Favorable trends in

these factors produce a reserve requirement toward the lower end of the range; adverse trends in these factors

produce a reserve requirement toward the higher end of the range.

Management estimates a range of incurred credit losses on the multifamily portfolio based on an

individual review of each loan as well as an evaluation of loan-level and market-level risk characteristics of the

portfolio in the aggregate to determine reserve needs. Management reviews the range of probable losses to

determine the point within the range that represents the best estimate of incurred losses. The level of reserves

is then adjusted to management's best estimate of incurred losses. Loans individually evaluated for

impairment include loans that become 60 days past due for principal and interest, loans with observable

collateral deÑciencies, and loans whose contractual terms were modiÑed due to credit concerns.

For both single-family and multifamily mortgages where the original terms of the agreement are modiÑed

for economic or legal reasons related to the borrower's Ñnancial diÇculties, losses are recorded at the time of

modiÑcation in accordance with SFAS 114 and these are accounted for as troubled debt restructurings

(""TDRs''). For mortgages that are foreclosed upon and thus transferred to Real estate owned, net or involved

in a pre-foreclosure sale, losses at the time of transfer or pre-foreclosure sale are charged-oÅ against Loan loss

reserves. In the case of real estate owned (""REO'') transfers, losses arise when the carrying basis of the loan

(including accrued interest) exceeds the fair value of the foreclosed property (after deduction for estimated

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158
selling costs and consideration of third party insurance or other credit enhancements). REO gains arise when

the fair market value of the acquired asset (after deduction for estimated disposition costs and consideration of

third party insurance or other credit enhancements) exceeds the carrying value of the mortgage (including

accrued interest). REO gains are included in ""REO operations income (expense).''

Securities

The company classiÑes mortgage-related securities and non-mortgage securities as available-for-sale or

trading, as deÑned in SFAS 115. The company is not permitted to classify securities as held-to-maturity

(""HTM''), as deÑned in SFAS 115, until at least January 1, 2004, due to invalid sales out of that portfolio in

prior years. Securities classiÑed as available-for-sale and trading are reported at fair value with changes in fair

value included in ""Accumulated other comprehensive income (loss), net of taxes'' and ""Gains (losses) on

investment activity,'' respectively. Mortgage-related securities are recorded as part of the ""Retained portfolio''

except when they are purchased to support Freddie Mac's PC market-making and support activities, in which

case they are recorded as part of ""Investments''.

The fair value of securities with readily available third-party market prices is based on market prices

obtained from brokers and dealers, reliable third-party pricing service providers or direct market observations.

For other securities, a market option-adjusted spread (""OAS'') approach is used to estimate fair value. This

OAS approach uses a model developed from market data and management judgment to estimate the OAS

risk premium an investor would require as compensation for a given product's prepayment uncertainty and

interest-rate volatility. Once an OAS has been determined, fair value is calculated by using the OAS as an

input to Freddie Mac's interest-rate and prepayment models in order to determine the estimated net present

value of projected cash Öows. The remaining instruments are priced using other modeling techniques or by

using other securities as proxies.

EÅective January 1, 2002, Freddie Mac began recognizing the Ñnancial statement eÅects of nonderivative forward purchases and sales of securities on a trade date basis. Such accounting is required under

SOP 01-6, ""Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or

Finance the Activities of Others'' (""SOP 01-6''), when the purchase and sale commitments are not accounted

for as derivative Ñnancial instruments (""derivatives''). Under trade date accounting, forward purchases and

sales are recorded as an increase or decrease to the security account on the trade date, with a corresponding

increase to ""Other liabilities'' or ""Accounts and other receivables, net'', respectively. In the case of sales, the

gain or loss is also recognized on the trade date. Prior to January 1, 2002, Freddie Mac recorded all security

transactions on the settlement date. For non-derivative forward purchase commitments, accounting between

trade date and settlement date was recorded pursuant to EITF 96-11. EITF 96-11 requires that changes in the

fair value of commitments to acquire available-for-sale securities be recorded through ""Accumulated other

comprehensive income (loss), net of taxes'' and changes in the fair value of commitments to acquire trading

securities be recorded through earnings. The cumulative eÅect of transitioning from settlement date to trade

date accounting was not material to the Ñnancial statements.

For most of the company's investments in securities, interest income is recognized using the eÅective

interest method in accordance with SFAS 91. Deferred items, including premiums, discounts and other basis

adjustments, are amortized into interest income over the estimated lives of the securities using the eÅective

interest method in accordance with SFAS 91. The company uses actual prepayment experience and estimates

of future prepayments to determine the constant yield needed to apply the eÅective interest method. In

estimating future prepayments and cash Öows, the company aggregates securities by similar characteristics of

their underlying collateral such as origination date, coupon and maturity. For Structured Securities, estimates

of future prepayments and cash Öows also consider the characteristics of other security classes within the same

structure. The company recalculates the constant eÅective yield based on changes in estimated prepayments

as a result of changes in interest rates and actual prepayments versus anticipated prepayments. When the

constant eÅective yield changes, an adjustment to interest income is made for the amount of premiums and

discounts that would have been recorded if the new eÅective yield had been applied since the mortgage assets

were acquired.

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159
For certain of the company's investments in securities, interest income is recognized using the prospective

eÅective interest method in accordance with EITF 99-20. The company speciÑcally applies such guidance to

beneÑcial interests (including undivided interests similar to beneÑcial interests) in securitized Ñnancial assets

that (i) can contractually be prepaid or otherwise settled in such a way that the company may not recover

substantially all of its recorded investment (such as interest-only strips) or (ii) are not of high credit quality at

the eÅective date of EITF 99-20 (April 1, 2001) or at the company's acquisition date, if later. EITF 99-20

requires that the company recognize as interest income (throughout the life of a retained interest) the excess

of all estimated cash Öows attributable to retained interests over its initial investment using the eÅective yield

method. The company updates its estimates of expected cash Öows periodically and recognizes changes in

calculated eÅective yield on a prospective basis. Prior to the company's implementation of EITF 99-20, the

company recognized interest income for interest-only strips on the prospective eÅective interest method in

accordance with EITF 89-4, ""Accounting for a Purchased Investment in a Collateralized Mortgage Obligation

Instrument or in a Mortgage-Backed Interest-Only CertiÑcate'' (""EITF 89-4'').

Declines in fair value below the amortized cost basis of a security are recognized as impairment losses

when such losses are considered to be ""other-than-temporary'' under SFAS 115. When a security is deemed

to be impaired, the cost basis of the security is written down to fair value, with the loss recorded to ""Gains

(losses) on investment activity.'' The security cost basis is not changed for subsequent recoveries in fair value.

For securities within the scope of EITF 99-20, as described above, other-than-temporary impairments are

deÑned as occurring whenever there is an adverse change in estimated cash Öows coupled with a decline in fair

value below the amortized cost basis. Prior to the company's implementation of EITF 99-20, other-thantemporary impairment for such securities was deÑned under SFAS 115 or EITF 93-18, as applicable. Freddie

Mac's adoption of EITF 99-20 on April 1, 2001, resulted in a cumulative $35 million after-tax decrease to net

income.

Gains and losses on the sale of securities are included in ""Gains (losses) on investment activity.'' The

company uses the speciÑc identiÑcation method for determining the cost of a security in computing the gain or

loss.

Repurchase and Resale Agreements

Freddie Mac enters into repurchase and resale agreements primarily as an investor or to Ñnance its

security positions. Freddie Mac also enters into (i) ""dollar roll'' transactions, which consist of simultaneous

agreements with the same counterparty to sell a security and purchase similar securities at a future date at an

agreed-upon price and (ii) ""reverse dollar roll'' transactions, which consist of simultaneous agreements with

the same counterparty to purchase a security held by Freddie Mac and sell similar securities at a future date at

an agreed-upon price. These transactions are accounted for as Ñnancings when the sale criteria of SFAS 125 /

140 are not satisÑed. Freddie Mac's policy is to take possession of securities purchased under agreements to

resell and reverse dollar roll transactions. Freddie Mac presents mortgage-related and non-mortgage-related

securities pledged (that may be repledged) under repurchase agreements and dollar roll transactions

parenthetically in the relevant securities captions in the consolidated balance sheets.

Debt Securities

Debt securities are classiÑed as either ""Due within one year'' or ""Due after one year'' based on their

remaining contractual maturity. The classiÑcation of interest expense on debt securities as either short-term or

long-term is based on the original contractual maturity of the debt security. Deferred items, including

premiums, discounts, issuance costs and hedging-related basis adjustments, are amortized and reported

through interest expense using the eÅective interest method over the period during which the related

indebtedness is outstanding or, for callable debt, over the period during which the related indebtedness is

expected to be outstanding. Amortization of hedging-related basis adjustments is initiated upon the

termination of the related hedge relationship whereas amortization of premiums, discounts and issuance costs

begin at the time of debt issuance. Deferred items, including premiums, discounts and hedging-related basis

adjustments are reported as a component of ""Debt securities, net'' whereas issuance costs are reported as a

component of ""Other assets.'' Debt securities denominated in a foreign currency are translated into U.S.

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dollars using foreign exchange spot rates as of the balance sheet date. The company uses foreign currency

swaps to hedge against the risk of changes in foreign currency exchange rates.

Freddie Mac adopted SFAS 145, ""Rescission of FASB Statements No. 4, 44 and 64, Amendment of

FASB Statement No. 13, and Technical Corrections'' (""SFAS 145''), in the second quarter of 2002. SFAS

145 eliminates the extraordinary treatment of gains and losses on debt extinguishments. Those gains and losses

are now reported as ""Non-interest income Ì Gains (losses) on debt retirement.'' Prior periods have been

reclassiÑed to conform to the new classiÑcation.

Derivatives

Generally, derivatives are Ñnancial instruments with little or no initial net investment and whose value is

based upon an underlying asset, index, reference rate or other variable. Over-the-counter derivatives are

privately negotiated contractual agreements that can be customized to meet speciÑc needs. Exchange-traded

derivatives are standardized contracts executed through organized exchanges. The fair value of derivatives is

generally reported net by counterparty, provided that a legally enforceable master netting agreement exists.

Derivatives in a net asset position are reported as ""Derivative assets, at fair value.'' Similarly, derivatives in a

net liability position are reported as ""Derivative liabilities, at fair value.''

Accounting for Derivatives Under SFAS 133 Ì On January 1, 2001, Freddie Mac adopted SFAS 133,

which required Freddie Mac to recognize all derivatives as either assets or liabilities on the consolidated

balance sheets at fair value on a trade date basis.

A signiÑcant portion of the company's derivative portfolio is not designated in hedge accounting

relationships. For most derivatives not qualifying as an accounting hedge, fair value gains and losses are

reported as ""Derivative gains (losses)'' on the consolidated statements of income. For purchase and sale

commitments of securities classiÑed as trading under SFAS 115, fair value gains and losses are reported as

""Gains (losses) on investment activity'' on the consolidated statements of income.

Subject to certain qualifying conditions, Freddie Mac may designate a derivative as either a hedge of the

cash Öows of a variable-rate instrument or forecasted transaction (""cash Öow hedge''), a hedge of the fair

value of a Ñxed-rate instrument (""fair value hedge''), or a foreign-currency fair value or cash Öow hedge

(""foreign currency hedge''). For a derivative qualifying as a cash Öow hedge, Freddie Mac reports changes in

the fair value of these instruments in a separate component of ""Accumulated other comprehensive income

(loss), net of taxes'' to the extent the hedge is eÅective. The remaining ineÅective portion, representing the

cumulative change in fair value of the derivative from inception of the hedge to the extent it is greater than the

cumulative change in the fair value of the expected future cash Öows on the hedged item, is reported as

""Hedge accounting gains (losses).'' Freddie Mac recognizes the eÅective portion of the cumulative changes in

fair value as ""Income (expense) related to derivatives'' during the period(s) in which the hedged item aÅects

earnings, unless occurrence of the forecasted transaction is probable of not occurring, in which case the

amount in ""Accumulated other comprehensive income (loss), net of taxes'' is reclassiÑed to earnings

immediately. The eÅective portion of the cumulative changes in fair value associated with purchase and sale

commitments accounted for as derivatives in cash Öow hedges is recognized as interest income for assets held

and ""Gains (losses) on investment activity'' for assets sold. For a derivative qualifying as a fair value hedge,

Freddie Mac reports changes in the fair value of the derivative as ""Hedge accounting gains (losses)'' along

with the changes in the fair value of the hedged item attributable to the risk being hedged. When the hedge is

terminated or redesignated, the fair value adjustment to the carrying amount of the hedged asset or liability is

amortized to earnings as a component of the hedged item's interest income or expense over the remaining life

of the hedged item using the eÅective yield method.

If a derivative no longer qualiÑes as a cash Öow or fair value hedge, the company discontinues hedge

accounting prospectively. Freddie Mac continues to carry the derivative on the consolidated balance sheets at

fair value and records further fair value gains and losses in the consolidated statements of income as

""Derivative gains (losses)'' until the derivative is terminated or redesignated.

For any component of a derivative that is excluded from hedge eÅectiveness assessment, Freddie Mac

reports fair value gains and losses as ""Income (expense) related to derivatives.'' The net income/expense

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related to derivatives contracts currently accrued, which is derived primarily from interest rate swap contracts,

is classiÑed as ""Income (expense) related to derivatives'' (including derivatives not in hedge accounting

relationships).

Freddie Mac's adoption of SFAS 133 on January 1, 2001, resulted in a cumulative $78 million after-tax

increase to net income and a $2.6 billion after-tax reduction to ""Accumulated other comprehensive income

(loss), net of taxes.''

Accounting for Derivatives Prior to 2001 Ì Prior to the adoption of SFAS 133, accrual accounting was

applied when derivatives exhibited high correlation with the hedged item's eÅect on interest income or

expense. In all other cases, hedge accounting, generally under the requirements of SFAS 80, was applied.

When these Ñnancial instruments failed to meet such criteria, they were reported at fair value, with related

gains or losses reported in ""Other income.''

When derivatives were accounted for under accrual accounting, generally applicable to interest-rate

contracts, the net diÅerential received or paid was recognized on an accrual basis and recorded in ""Income

(expense) related to derivatives.'' Net premiums paid to enter into derivatives as well as gains and losses on

terminated derivatives, were deferred and amortized to interest income or expense. Unrealized changes in fair

value were not recognized in the Ñnancial statements.

When non-option-based derivatives qualiÑed for hedge accounting treatment, related fair value gains or

losses were deferred as an adjustment to the carrying value of the hedged asset or liability. Upon termination

of a hedge relationship, the deferred gain or loss was amortized over the remaining eÅective life of the asset or

liability. Interest payments received or paid under derivatives qualifying as hedges were recognized on an

accrual basis and recorded in ""Income (expense) related to derivatives.''

When option-based derivatives qualiÑed for hedge accounting treatment, related intrinsic gains were

deferred as an adjustment to the carrying value of the hedged asset or liability. Upon termination of a hedge

relationship, any deferred intrinsic gain was amortized over the remaining eÅective life of the asset or liability.

Premiums paid to enter into these option-based contracts were deferred and amortized to earnings over the

term of the option period as ""Income (expense) related to derivatives.''

Upon termination of the option-based derivative, the diÅerence between the remaining unamortized

premium and the time value component of the option-based derivative's fair value was recorded in earnings as

""Gains (losses) on investment activity.''

For foreign-currency swaps, amounts received or paid, together with the hedged assets and liabilities that

were also denominated in a foreign currency, were translated into U.S. dollars using foreign exchange spot

rates as of the date of the balance sheet. Transaction gains and losses for both foreign-currency swaps and

foreign-currency denominated assets and liabilities were reported in ""Other income.''

Real Estate Owned

Real estate owned is carried at the lower of cost or fair value (after deduction for estimated disposition

costs). Amounts expected to be received from third party insurance or other credit enhancements are reported

when the claim is Ñled and are recorded as a component of ""Accounts and other receivables, net'' in the

consolidated balance sheets. Material development and improvement costs relating to the REO are capitalized. Operating expenses on the properties, net of any rental or other income, are included in ""REO operations

income (expense).'' 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, and are treated as a lower

of cost or fair value adjustment to the basis of the property. The resulting REO allowance is included in the

property's cost basis when the property is sold. Any gains and losses on REO dispositions are included in

""REO operations income (expense).''

Income Taxes

Freddie Mac uses the asset and liability method of accounting for income taxes pursuant to SFAS 109,

""Accounting for Income Taxes'' (""SFAS 109''). Under the asset and liability method, deferred tax assets and

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162
liabilities are recognized based upon the expected future tax consequences of existing temporary diÅerences

between the Ñnancial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax

rates. To the extent tax laws change, deferred tax assets and liabilities are adjusted, when necessary, in the

period that the tax change is enacted. Valuation allowances are recorded to reduce deferred tax assets when it

is more likely than not that a tax beneÑt will not be realized. For all periods presented, no such valuation

allowance was deemed necessary by management. Reserves are recorded for income tax and contingent

interest where the potential for loss is probable and reasonably estimable in accordance with SFAS 5.

""Income tax expense'' includes (i) 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 (ii) 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).

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (""FASB'') issued SFAS 148, which

amends SFAS 123. This statement provides alternative methods of transition for a voluntary change to the fair

value expense recognition method of accounting for stock-based employee compensation. The annual

disclosure provisions of SFAS 148 are eÅective for Ñscal years ending after December 15, 2002, and the

interim disclosure provisions are eÅective for interim periods beginning after December 15, 2002.

Freddie Mac initially adopted the fair value compensation expense provisions of SFAS 123 prospectively

for awards granted, modiÑed, or settled eÅective January 1, 2002, in accordance with SFAS 123's original

transition provision. However, Freddie Mac has elected to adopt SFAS 123 retroactively to January 1, 1995 as

permitted by SFAS 148. Accordingly, Freddie Mac records compensation expense equal to the estimated fair

value of the stock-based compensation on the grant date, amortized on a straight-line basis over the vesting

period, which is generally three to Ñve years for options, restricted stock and restricted stock units and one year

for the Employee Stock Purchase Plan. The oÅset to the recorded compensation expense is an adjustment to

""Additional paid-in capital'' in Freddie Mac's consolidated balance sheets.

The fair value of stock-based options to purchase shares of Freddie Mac common stock, including options

issued pursuant to the Employee Stock Purchase Plan (""ESPP''), is estimated using a Black-Scholes optionpricing model, taking into account the exercise price and expected life of the option, the current price of the

underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for

the expected term of the option. The fair value of restricted stock and restricted stock unit awards is based on

the grant-date fair value of Freddie Mac's common stock.

For stock-based compensation granted prior to 1995, Freddie Mac continues to apply the provisions of

APB 25. Under APB 25, typically no compensation expense is recorded if the option exercise price is equal to

the market price of the stock on the date of grant. Freddie Mac recognized compensation expense for

restricted stock grants and dividend rights associated with stock options. No compensation expense was

recognized for the Employee Stock Purchase Plan since it is a qualifying plan under tax regulations.

Earnings Per Common Share

Basic earnings per common share is computed as net income available to common stockholders divided

by the weighted average common shares outstanding for the period. Diluted earnings per common share is

determined using the weighted average number of common shares during the period, adjusted for the dilutive

eÅect of common stock equivalents. Dilutive common stock equivalents reÖect the assumed issuance of

additional common shares pursuant to certain of the company's stock-based compensation plans that could

potentially reduce or ""dilute'' earnings per share, based on the treasury stock method as deÑned in SFAS 128,

""Earnings per Share'' (""SFAS 128'').

Comprehensive Income

Comprehensive income, as deÑned in SFAS 130, ""Reporting Comprehensive Income'' (""SFAS 130''), is

the change in equity, on a net of tax basis, resulting from transactions and other events and circumstances

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from non-owner sources during a period. It includes all changes in equity during a period, except those

resulting from investments by owners and distributions to owners. For Freddie Mac, comprehensive income is

comprised of net income plus changes in the unrealized gains and losses on available-for-sale securities and on

the eÅective portion of derivatives accounted for as cash Öow hedges.

New Accounting Pronouncements

Accounting and Disclosure Requirements by Guarantors Ì In November 2002, the FASB published

FASB Interpretation (""FIN'') 45, ""Guarantor's Accounting and Disclosure Requirements for Guarantees,

Including Indirect Guarantees of Indebtedness of Others'' (""FIN 45''). FIN 45 requires additional disclosures

about guarantee obligations and requires companies to recognize a liability at the inception of a guarantee

representing the fair value of the obligation undertaken in issuing the guarantee.

On December 10, 2003, FASB published FASB StaÅ Position 45-2, ""Whether FASB Interpretation

No. 45, ""Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' Provides Support for Subsequently Accounting for a Guarantor's Liability at

Fair Value'' (FSP 45-2). FSP 45-2 will aÅect the way Freddie Mac accounts for its guarantee obligations

beginning on January 1, 2003. SpeciÑcally, the fair value of guarantee obligations recorded at initial sale or

securitization of mortgage-related assets under SFAS 140 or FIN 45 will subsequently be amortized into

earnings and changes in fair value will no longer be recorded in earnings. Freddie Mac will apply the above

guidance on a prospective basis to guarantees issued or modiÑed after December 31, 2002 as well as to existing

guarantees recognized under SFAS 125/140 as of December 31, 2002 as described below.

These requirements will apply primarily to PCs issued under Freddie Mac's Guarantor Program and will

require the company to recognize the fair value of the guarantee fee income stream as an asset and the fair

value of the guarantee obligation as a liability on the execution date. Freddie Mac will subsequently measure

the recognized GO to an amount that represents the greater of (i) a contingent liability amount required to be

recognized by SFAS 5, or (ii) an unamortized GO balance as determined on a systematic and rational basis.

FIN 45 is applicable to guaranteed mortgage-related securities issued on or after January 1, 2003.

Additionally, the fair value of the GO for all guarantees recognized under SFAS 125/140 at December 31,

2002 will be the carrying value for purposes of applying thereafter the new subsequent measurement method

of the GO.

Although the company has not completed its analysis of the impact, management believes that FIN 45

will have a material impact on Freddie Mac's future Ñnancial condition and results of operations.

See ""NOTE 13: FINANCIAL GUARANTEES'' for more information.

Consolidation of Variable Interest Entities Ì In January 2003, the FASB issued FASB Interpretation 46, ""Consolidation of Variable Interest Entities'' (""FIN 46''). FIN 46 provides guidance for determining

when a company must consolidate the assets, liabilities and activities of a variable interest entity (""VIE''). A

VIE is deÑned as an entity (i) that has a total equity investment at risk that is not suÇcient to Ñnance its

activities without additional subordinated Ñnancial support from other parties, or (ii) 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. If

an entity is a VIE, each variable interest holder must determine if its variable interest is signiÑcant and

whether the company is the ""primary beneÑciary.'' Under FIN 46, an entity is considered the ""primary

beneÑciary'' and must consolidate a VIE when it absorbs a majority of expected losses or expected residual

returns, or both. In addition, various disclosures are required about VIEs when an entity holds a ""signiÑcant

variable interest'' in a VIE. In this case, signiÑcant variable interests are those in which Freddie Mac may be

exposed to a signiÑcant portion of a VIE's expected losses / expected residual returns, which FIN 46 deÑnes

as a variability around the entity's expected returns or cash Öows.

The provisions of FIN 46 are eÅective December 31, 2003, except for certain ""non-special purpose

entities (non-SPEs),'' where FIN 46 is eÅective March 31, 2004.

The issuance of PCs and Structured Securities is not aÅected by the issuance of FIN 46, because a trust

or other separate legal entity as deÑned by FIN 46 is not used to issue such securities. Management believes it

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164
is reasonably possible that Freddie Mac will disclose or consolidate VIEs upon the adoption of FIN 46, which

could have a material impact on the company's consolidated Ñnancial statements. See ""NOTE 19:

VARIABLE INTEREST ENTITIES'' for further information.

SFAS 133 Amendment Ì In April 2003, the FASB issued SFAS 149, ""Amendment of Statement 133

on Derivative Instruments and Hedging Activities'' (""SFAS 149''). SFAS 149 amends and clariÑes the

Ñnancial accounting and reporting for derivative instruments to incorporate decisions made by the FASB and

the FASB's Derivatives Implementation Group subsequent to the original issuance of SFAS 133 and in

connection with other FASB projects. In particular, SFAS 149 provides additional guidance on how to

determine when a Ñnancial guarantee contract is not subject to SFAS 133, when a contract with an initial net

investment qualiÑes as a derivative, when a contract qualiÑes for the regular-way securities trade exemption,

when a mortgage loan commitment is scoped out of SFAS 133, and when a derivative contains a Ñnancing

component that requires special reporting in the statement of cash Öows. SFAS 149 is generally eÅective

prospectively for contracts entered into or modiÑed, and hedging relationships designated after June 30, 2003.

Management does not expect the adoption of SFAS 149 to have a material eÅect on its Ñnancial condition or

results of operations.

Financial Instruments with Characteristics of both Liabilities and Equity Ì In May 2003, the FASB

issued SFAS 150, ""Accounting for Certain Financial Instruments with Characteristics of both Liabilities and

Equity'' (""SFAS 150''). SFAS 150 establishes standards for how an issuer classiÑes and measures certain

Ñnancial instruments with characteristics of both liabilities and equity, and imposes certain additional

disclosure requirements. The provisions of SFAS 150 are generally eÅective for Ñnancial instruments entered

into or modiÑed after May 31, 2003. Freddie Mac must apply the provisions of SFAS 150 to applicable

Ñnancial instruments beginning October 1, 2003. Freddie Mac does not expect the adoption of SFAS 150 to

have a material eÅect on its Ñnancial condition or results of operations.

Freddie Mac

165
NOTE 3: SECURITIZATION OF MORTGAGE-RELATED ASSETS

Types of Securitization Transactions Executed By Freddie Mac

Freddie Mac purchases residential mortgage loans originated by mortgage lenders, as well as mortgagerelated securities. One of the means by which Freddie Mac funds purchases of mortgage loans is through the

use of securitization-based Ñnancing. That is, Freddie Mac funds the purchases of such loans by issuing

undivided interests in the purchased loans and transferring such interests to investors in exchange for cash

consideration. Such undivided interests are commonly referred to as mortgage PCs.

Freddie Mac speciÑcally issues and transfers PCs to third parties through one of three programs:

‚ Cash Window Program Ì Freddie Mac purchases mortgage loans from third parties for cash

consideration. Freddie Mac then pools some of these mortgage loans, issues PCs backed by such

pools and either sells the PCs for cash consideration (through an auction) or retains such

securities in portfolio.

‚ Guarantor Program Ì Third parties transfer mortgage loans to Freddie Mac in exchange for PCs

that Freddie Mac issues that are backed by such mortgage loans. PCs issued through the

Guarantor Program are backed by either mortgage loans that relate to single-family properties or

mortgage loans that relate to multifamily properties.

‚ MultiLender Program Ì Third parties transfer mortgage loans to Freddie Mac in exchange for

PCs that are backed by such mortgage loans, as well as by mortgage loans that are delivered to

Freddie Mac by other parties. Freddie Mac may itself contribute mortgage loans to pools backing

these PCs.

Freddie Mac also sells PCs that are held in portfolio in resecuritized form. More speciÑcally, Freddie

Mac issues Structured Securities backed by investments in PCs and other mortgage-related securities and

transfers such interests to investors in exchange for cash consideration. Freddie Mac also commonly issues

Structured Securities in exchange for PCs and other mortgage-related securities that are delivered to it by

third party dealers, who sell such interests to retail and institutional investors.

Freddie Mac guarantees the payment of principal and interest on all issued PCs and Structured

Securities.

Retained Interests Created Through The Securitization Process

Freddie Mac's retained interests in securitized and resecuritized mortgage-related assets include the

following:

‚ PCs retained by Freddie Mac that are backed by conforming mortgage loans for which Freddie

Mac paid cash consideration.

‚ Structured Securities retained by Freddie Mac in connection with the resecuritization of

mortgage-related securities.

‚ Freddie Mac's contractual right to receive a negotiated fraction of the interest-related cash Öows

of securitized mortgage loans, which relates to Freddie Mac's guarantee and administration of

payments of principal and interest on issued PCs. This retained, undivided interest is hereinafter

referred to as a GA.

‚ PCRs, which relate to certain PCs and Structured Securities held by Freddie Mac and represent

the fair value of the expected future cash Öows of guarantee and bond administration cash Öows

that are contractually distinct from that of such corresponding securities.

Freddie Mac

166
Unpaid Principal Balances (""UPB'') of PCs Issued and Structured Securities Backed by Non-Freddie

Mac Mortgage-Related Securities

Table 3.1 below presents the UPB of PCs issued and Structured Securities backed by non-Freddie Mac

mortgage-related securities as of December 31, 2002 and December 31, 2001.

Table 3.1 Ì PCs Issued and Structured Securities backed by non-Freddie Mac Mortgage-Related

Securities(1)

December 31,

2002 2001

(dollars in billions)

PCs and Structured Securities backed by non-Freddie Mac mortgage-related

securities that are held by Freddie Mac(2):

Original issuance PCs(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 350 $ 323

Structured Securities backed by(5):

Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 2

Non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 6

PCs and Structured Securities backed by non-Freddie Mac mortgage-related

securities that are held by Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 362 331

PCs and Structured Securities backed by non-Freddie Mac mortgage-related

securities that are held by third parties:

Original issuance PCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 704 605

Structured Securities backed by(5):

Ginnie Mae CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 11

Non-agency mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 15

PCs and Structured Securities backed by non-Freddie Mac mortgage-related

securities that are held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 729 631

Total PCs issued and Structured Securities backed by non-Freddie Mac mortgagerelated securities(4)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,091 $ 962

(1) Based on UPB.

(2) Includes both PCs held by Freddie Mac's retained portfolio and PCs held by Freddie Mac in connection with its PC market-making

and support activities.

(3) Includes approximately $133 billion and $119 billion, at December 31, 2002 and 2001, respectively, of PCs for which corresponding

PCRs were recognized.

(4) Includes approximately $5 billion and $3 billion at December 31, 2002 and 2001, respectively, of housing authority bonds that were

issued by third parties to fund the origination of multifamily mortgage loans and for which Freddie Mac provided a credit guarantee

on such issued securities.

(5) Reported UPB of Structured Securities relates only to that portion of issued Structured Securities that is backed by non-Freddie

Mac mortgage-related securities.

(6) This amount excludes approximately $800 billion in UPB of Structured Securities backed by Freddie Mac mortgage-related

securities as of December 31, 2002. These securities are excluded because this resecuritization activity does not increase Freddie

Mac's guarantee-related exposure.

At December 31, 2002 and 2001, respectively, approximately 49 percent of total PCs and Structured

Securities issued (excluding securities issued by Freddie Mac and backed by Ginnie Mae CertiÑcates or nonagency mortgage-related securities as well as other securities guaranteed by Freddie Mac) had corresponding

GAs, GOs or PCRs recognized on Freddie Mac's consolidated balance sheets.

Gains and Losses on Transfers of Freddie Mac PCs and Structured Securities That Are Accounted For As

Sales

Freddie Mac recognized pre-tax gains of approximately $1.1 billion and $468 million for the years ended

December 31, 2002 and 2001, respectively, on transfers of PCs and Structured Securities that were accounted

Freddie Mac

167
for as sales under SFAS 125 / 140 where retained interests related to guarantee activities are initially

recognized or resulted from a resecuritization transaction.

Key Valuation Assumptions and Corresponding Sensitivity Analyses of Recognized GAs, GOs and PCRs

Recognized GAs

Fair values of recognized GAs were calculated using an expected cash Öow approach that is consistent

with Statement of Financial Accounting Concepts No. 7, ""Using Cash Flow Information and Present Value in

Accounting Measurements'' (""CON 7''). More speciÑcally, Monte Carlo simulations were used to project

monthly prepayment, default and loss severity rates across 300 housing price and interest rate scenarios. Such

inputs were, in turn, used to determine GA-related future cash Öows associated with approximately 200,000

groups of mortgage loans that are distinguished based upon diÅering combinations of various loan attributes

(these groups of loans are referred to as ""Loan Groups''). Freddie Mac then discounted such cash Öows using

factors (i) that were derived from modeled forward interest rates (for each scenario path) and (ii) to which

Freddie Mac applied an OAS that was implied from comparable agency IO securities. For periods prior to

March 31, 2001, Freddie Mac applied an OAS of 150 basis points (""bps'') in deriving appropriate discount

rates, an adjustment management concluded was an appropriate premium based upon available IO price

information from the referenced periods (to which the OAS was applied). For periods subsequent to

March 31, 2001, as additional OAS data became available, Freddie Mac improved this estimate by beginning

to apply an eight quarter trailing average OAS that was derived from spot IO prices (the trailing average

OASs ranged from 250 to 500 bps between March 31, 2001 and December 31, 2002).

Based upon the foregoing, Freddie Mac recognized as GAs the average of the present value of the GArelated cash Öows generated for each Loan Group for each of the referenced scenarios. The derived fair value

of recognized GAs also reÖects estimated pool insurance beneÑts and other credit enhancements (except for

proceeds received from primary mortgage insurance that are considered in the valuation of recognized GOs)

less associated premiums to be paid by Freddie Mac on related credit enhancement policies executed at PC

issuance.

The fair value of recognized GAs also reÖects Buy Ups paid in connection with PCs issued through the

Guarantor Program. At December 31, 2002 and 2001, the fair value of recognized GAs that is attributable to

Buy Ups on Guarantor Swaps was approximately $389 million and $545 million, respectively.

Recognized GOs

While a recognized GO does not constitute a retained interest, Freddie Mac believes it is appropriate to

disclose key assumptions used in deriving the fair value of such a liability, particularly given (i) a recognized

GO's link to a corresponding GA and (ii) that the fair value of a GO constitutes a component part of the

valuation of a PCR (where recognized PCR can be observed to equal the net fair value of a GA and GO). In

this regard, and like that of recognized GAs, GO-related future cash Öows associated with each referenced

Loan Group were estimated using Monte Carlo simulation (see ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for further discussion of cash Öow components of recognized GOs).

Additionally, and in deriving the present value of GO-related cash Öows for each scenario for each Loan

Group, Freddie Mac used a similar convention to that utilized to discount GA-related future cash Öows.

However, Freddie Mac did not apply an OAS to those discount factors that were used to derive the present

value of GO-related future cash Öows. This is because inclusion of an OAS would have produced discount

rates higher than those utilized, which approximate a risk-free rate.

Like recognized GAs, Freddie Mac recognized as GOs the average of the present value of the GOrelated cash Öows generated for each Loan Group for each of the scenarios.

Recognized PCRs

PCRs relate to certain PCs and Structured Securities held in portfolio by Freddie Mac and represent the

fair value of the future cash Öows of guarantee contracts that speciÑcally correspond to such PCs. Since the

future cash Öows associated with such guarantee contracts are represented by those that deÑne a PC's

Freddie Mac

168
corresponding GA and GO, the fair value of a recognized PCR is determined to be equal to the fair value of a

GA less that of a corresponding GO. Accordingly, the fair value of recognized PCRs is determined in a

manner that is reÖective of the methodologies described above for recognized GAs and GOs.

The recognized fair value of PCRs also reÖects Buy Ups that are paid in connection with PCs issued

through the Guarantor Program to third parties and for PCs which Freddie Mac committed to purchase

concurrently and in contemplation of the associated Guarantor Swap transaction. At December 31, 2002 and

2001, the fair value of recognized PCRs that is attributable to such Buy Ups was approximately $271 million

and $428 million, respectively.

At December 31, 2002 and 2001, approximately $55 million and approximately $80 million of recognized

PCRs, respectively, was attributable to PCRs classiÑed as available-for-sale.

Table 3.2 summarizes the key assumptions that were used by Freddie Mac in fair value measurements of

recognized GAs, GOs and PCRs.

Table 3.2 Ì Key Assumptions Utilized in Fair Value Measurements

December 31,

2002 2001

GA, GO and PCR GA, GO and PCR

Assumptions Range(5) Mean(6) Range(5) Mean(6)

Internal rates of return(1)

GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.9% - 15.7% 9.4% 5.3% - 17.5% 9.6%

GO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.8% - 8.2% 6.0% 4.8% - 8.1% 6.6%

PCR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1% - 11.8% 7.4% 5.1% - 12.5% 7.9%

Prepayment rates(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.8% - 54.6% 22.5% 9.7% - 53.7% 21.3%

Default rates(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1% - 8.1% 1.2% 0.0% - 8.1% 1.2%

Loss severity rates(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.6% - 48.4% 22.9% 3.7% - 48.4% 22.6%

(1) With respect to GAs and GOs, the internal rates of return (""IRR'') reported above represent a duration weighted average of the

discount rates used to value recognized GAs and GOs. Such rates were derived by determining a single rate that equated (i) the

simple average of future cash Öows (for all 300 scenario paths described above) of the GA and GO for each Loan Group with that of

(ii) the calculated fair value of the GA and GO for each loan group. With respect to PCRs, IRRs reported above represent the

weighted average of the derived IRR values for corresponding GAs and GOs (where weightings are based upon the fair values of

corresponding GAs and GOs).

(2) Scenario average Prepayment rates are simulated on a monthly frequency, although rates reported above represent a UPB weighted

average of annualized values of such Prepayment rates.

(3) Default rates are simulated on a monthly frequency, although Default rates reported above represent simple averages of cumulative

default rates determined for each of the 300 scenarios for each Loan Group.

(4) Loss severity rates reported above represent the ratio of (i) the simple average of cumulative credit losses generated for each scenario

to (ii) defaulted UPB for each Loan Group.

(5) The lowest value in each presented range represents the smallest Ñrst percentile IRRs, prepayment rates, default rates, and loss

severity rates throughout 2002 and 2001. Likewise, the highest value in each range represents the highest of the 99th percentile

IRRs, prepayment rates, default rates, and loss severity rates throughout 2002 and 2001.

(6) Reported values represent the weighted average value of all IRRs, prepayment rates, default rates, and loss severity rates throughout

the 2002 and 2001 periods.

Weighted average lives (""WALs'') of GAs and PCRs during 2001 and 2002 ranged between 1.52 Ó 8.07

years and 1.53 Ó 7.81 years, respectively, while the average, derived WAL of GAs and PCRs for the same

periods was 4.88 and 4.95 years, respectively. Such derived WALs are reÖective of prepayment speed

assumptions cited in Table 3.2 above.

A sensitivity analysis is provided in Table 3.3 below that illustrates estimated changes in the fair value as

of December 31, 2002 of recognized GAs, GOs, PCRs and other retained interests (which are further

described below) based upon:

‚ 100 basis point and 200 basis point increases and decreases in discount rate assumptions.

‚ 10% and 20% increases and decreases in prepayment rate assumptions.

‚ 10% and 20% increases in default rate assumptions.

‚ 10% and 20% increases in loss severity rate assumptions.

Freddie Mac

169
Other Retained Interests that are included in the referenced sensitivity analysis are valued based upon

observed market or matrix-based prices (where, in the case of the latter, prices for comparable securities, as

adjusted for product-speciÑc attributes, are used as basis to value such interests). As these interests are not

model-valued, corresponding valuation assumptions are not provided in Table 3.2 above.

Table 3.3 Ì Sensitivity Analysis

As of December 31, 2002

Other

Retained

PCR GA GOInterests(1)

(dollars in millions)

Fair value Ì asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 420 $2,445 ($1,427) $ 1,226

Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.7% 9.8% 4.5% $ 5.1%

Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏ $ (19) $ (82) $ 31 $ (34)

Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏ $ (36) $ (159) $ 60 $ (61)

Impact on fair value of 100 bps downward change ÏÏÏÏÏÏÏÏ $ 19 $ 85 $ (32) $ 26

Impact on fair value of 200 bps downward change ÏÏÏÏÏÏÏÏ $ 36 $ 162 $ (62) $ 60

Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏ 24.7% 26.0% 26.0% 28.2%

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (22) $ (141) $ 82 $ (83)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (43) $ (266) $ 152 $ (149)

Impact on fair value of 10% downward change ÏÏÏÏÏÏÏÏÏÏÏ $ 23 $ 158 $ (96) $ 91

Impact on fair value of 20% downward change ÏÏÏÏÏÏÏÏÏÏÏ $ 49 $ 339 $ (211) $ 221

Weighted average default rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.1% 1.2% 1.2% N/A(2)

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (25) $ 11 $ (79) N/A(2)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (49) $ 21 $ (157) N/A(2)

Weighted average loss severity rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏ 25.6% 22.2% 22.2% N/A(2)

Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (31) $ 20 $ (106) N/A(2)

Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (62) $ 40 $ (214) N/A(2)

(1) Includes (a) IO securities that were issued by Freddie Mac as part of a resecuritization transaction for which sale accounting

treatment was applied, (b) Freddie Mac securities that were (i) purchased at a premium (to par) of 10% or greater and

(ii) associated with either a securitization or resecuritization transaction for which sale accounting treatment was applied and

(c) Freddie Mac securities held in portfolio (i) for which securitized / resecuritized mortgage-related assets were not of high credit

quality and (ii) associated with either a securitization or resecuritization transaction for which sale accounting treatment was applied.

(2) Sensitivities of reported fair value to changes in default and loss severity rates associated with Other Retained Interests for which a

recognized PCR exists are captured in the corresponding column entitled ""PCR.'' Otherwise, with respect to Other Retained

Interests for which a PCR was not recognized, such securities are valued for Ñnancial statement purposes at the observed market

price for such securities, prices of which reÖect inherent credit protection provided by Freddie Mac. In this case, changes in the

reported fair value of such securities would not be aÅected by variations in default and loss severity assumptions and, as a result, a

corresponding sensitivity analysis was not prepared.

The sensitivity analysis in the preceding table is hypothetical. Each of the calculated eÅects summarized

above was determined by adjusting only one assumption at a time, as opposed to having determined a

hypothetical eÅect on fair value based upon assumed, correlating changes in more than one assumption

(where, in reality, a change in one assumption would generally result in changes to one or more of the other

speciÑed assumptions). Additionally, corresponding hedge transactions that were executed by Freddie Mac

were not considered in determining the hypothetical eÅects summarized above. Results provided above should

not be extrapolated to either (i) other sensitivity analyses in which changes in other assumptions are made or

(ii) to other securities held by Freddie Mac.

Freddie Mac

170
Periodic Cash Flows On Executed Securitizations & Corresponding Retained Interests

Table 3.4 below summarizes:

‚ Cash Öows received by Freddie Mac in connection with transfers of PCs and Structured Securities

to third parties that were accounted for as sales (where retained interests related to guarantee

activities are initially recognized or resulted from a resecuritization transaction);

‚ Contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized

GAs (as further discussed below);

‚ Contractual guarantee-related cash Öows received by Freddie Mac in connection with recognized

PCRs (as further discussed below);

‚ Receipts of payments of principal and interest on Other Retained Interests (as deÑned in

Table 3.3 above); and

‚ Amounts paid by Freddie Mac in connection with the process to repurchase delinquent mortgage

loans that back PCs and Structured Securities.

Table 3.4 Ì Details of Cash Flows

Year Ended

December 31,

2002 2001

(dollars in millions)

Cash flows from:

Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏÏÏÏÏÏÏÏ $241,214 $158,166

Cash Öows received on retained interests:

GAs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 771 751

PCRs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 288 263

Other retained interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 678 367

Purchases of delinquent or foreclosed loans(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,126) (3,745)

(1) Such amounts speciÑcally correspond to guarantee fee-related cash Öows of recognized GAs and PCRs, as opposed to also reÖecting

cash Öows received in connection with certain credit enhancements whose fair value is also reported as GAs or PCRs and certain

GO-related cash Öows whose value is reported as a component of recognized PCRs. Total cash Öows received on recognized GAs

during 2002 and 2001 were $820 million and $803 million, respectively. Total net cash Öows received on recognized PCRs during

2002 and 2001 were $44 million and $155 million, respectively.

(2) Represents delinquent mortgage loans purchased out of securitized pools that back issued Freddie Mac securities.

Attribution of GA- and PCR-Related Cash Flows

As previously discussed, GAs and PCRs are Ñnancial assets accounted for on a fair value basis. Similar to

other Ñnancial assets, cash Öows received in connection with GAs and PCRs represent both a return on such

assets (i.e.,imputed interest) as well as a return of such assets (i.e., return of principal). Freddie Mac receives

cash Öows on these assets related to contractual guarantee fees as well as credit enhancements. In addition,

Freddie Mac receives or pays other cash Öows associated with PCRs that relate to the PC guarantee contract,

such as credit-related expenses and administrative expenses.

Rather than recording a portion of the cash Öows associated with GAs and PCRs as a reduction of their

respective recorded amounts, similar to a return of principal, the related income and expense amounts are

recorded directly to the consolidated statements of income based on the nature of such cash Öows. For

example, guarantee-related cash inÖows are recorded as ""Management and guarantee income.'' Therefore, the

collection of these cash Öows will reduce the period-end valuation of the GA even without consideration of

changes in external market factors.

Recognized GAs Ì Guarantee Fee Related Cash Flows

Freddie Mac recorded $771 million, $751 million and $719 million of income associated with guaranteerelated cash Öows received during 2002, 2001 and 2000, respectively. These amounts were recorded to

""Management and guarantee income.'' Of such amounts, approximately $242 million, $252 million and

Freddie Mac

171
$234 million, respectively, related to imputed interest. The remaining portion related to return of principal,

which totaled $529 million, $499 million and $485 million for 2002, 2001 and 2000, respectively.

Recognized GAs Ì All Cash Flows

Freddie Mac recorded $820 million, $803 million and $777 million of income associated with the entire

recognized GA during 2002, 2001 and 2000, respectively. These amounts primarily included cash related to

contractual guarantee fees and thus most of this income was recorded to ""Management and guarantee

income'' as discussed above. However, certain cash Öows were related to proceeds from credit enhancements,

which were recorded to credit-related income statement components. Of the total amounts, approximately

$259 million, $273 million and $257 million, respectively, related to imputed interest while the remaining

portions, which totaled $561 million, $530 million and $520 million, related to return of principal for 2002,

2001 and 2000, respectively.

Recognized PCRs

Freddie Mac recorded $288 million, $263 million and $236 million of income associated with guaranteerelated cash Öows received during 2002, 2001 and 2000, respectively. These amounts were recorded to interest

income. Of these amounts, approximately $96 million, $93 million and $76 million during 2002, 2001 and

2000, respectively, related to imputed interest. The remaining portion related to return of principal, which

totaled $192 million, $170 million and $160 million during 2002, 2001 and 2000, respectively.

Considering all cash Öows related to recognized PCRs, such as guarantee-related cash Öows as well as

cash Öows related to credit enhancements, credit-related expenses, the company's security program cycle and

administrative expenses, the amount of imputed interest on PCRs was approximately $73 million, $76 million

and $69 million during 2002, 2001 and 2000, respectively.

Freddie Mac

172
NOTE 4: EARNINGS PER COMMON SHARE

""Basic earnings per common share'' are computed as net income available to common stockholders

divided by the weighted average common shares outstanding (""Weighted average common shares outstanding-basic'') for the period. Diluted earnings per common share are computed as net income available to

common stockholders divided by the weighted average common shares outstanding considering the eÅect of

dilutive common equivalent shares outstanding (""Weighted average common shares outstanding-diluted'') for

the period. Dilutive common equivalent shares reÖect the assumed issuance of additional common shares

pursuant to certain of the company's stock-based compensation plans (see ""NOTE 11: STOCK-BASED

COMPENSATION'') that could potentially reduce or ""dilute'' earnings per share, based on the treasury

stock method.

Table 4.1 provides computations of Freddie Mac's basic and diluted earnings per common share.

Table 4.1 Ì Earnings Per Common Share Ì Basic and Diluted

Year Ended December 31,

2002 2001 2000

(dollars in millions

and shares in thousands)

Income before cumulative eÅect of change in accounting principles, net

of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,090 $ 3,115 $ 3,666

Cumulative eÅect of change in accounting principles, net

of taxes of $24 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 Ì

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (234) (217) (179)

Net income available to common stockholders(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,856 $ 2,941 $ 3,487

Weighted average common shares outstanding Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 692,727 692,603 692,097

Dilutive potential common shares(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,389 3,370 3,210

Weighted average common shares outstanding Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 695,116 695,973 695,307

Basic earnings per common share before cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.19 $ 5.04

Cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏ Ì 0.06 Ì

Basic earnings per common share after cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.23 $ 4.25 $ 5.04

Diluted earnings per common share before cumulative eÅect of change

in accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.17 $ 5.01

Cumulative eÅect of change in accounting principles, net of taxes ÏÏÏÏÏÏ Ì 0.06 Ì

Diluted earnings per common share after cumulative eÅect of change in

accounting principles, net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.18 $ 4.23 $ 5.01

(1) There is no earnings eÅect for dilutive potential common shares for years ended December 2002, 2001 and 2000.

(2) EÅect of dilutive common equivalent shares outstanding equals incremental dilutive shares plus the weighted average of non-vested

restricted shares and all restricted stock units, which are excluded from weighted average common shares outstanding Ì basic.

Options to purchase 2,513 thousand, 974 thousand and 876 thousand shares of common stock were

excluded from the computation of diluted earnings per common share at December 31, 2002, 2001 and 2000,

respectively, because the options' exercise price exceeded the average market price of the common shares for

the years ended December 31, 2002, 2001 and 2000, respectively.

Freddie Mac

173
NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO

Table 5.1 summarizes amortized cost, estimated fair values and corresponding gross unrealized gains and

losses by major security type for available-for-sale mortgage-related securities held in the retained portfolio

and available-for-sale non-mortgage-related securities held in the investments portfolio at December 31, 2002

and 2001, respectively.

Table 5.1 Ì Available-for-sale Securities

December 31, 2002

Gross Gross

Amortized Unrealized Unrealized

Cost Gains Losses Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,464 $11,985 $ (454) $327,995

Federal National Mortgage Association (""Fannie

Mae'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,203 2,770 (43) 81,930

Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,886 293 (4) 5,175

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,104 2,755 (361) 73,498

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 7,424 337 (94) 7,667

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 479,081 18,140 (956) 496,265

Investments

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,988 727 (21) 34,694

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,742 385 (25) 10,102

Debt securities issued by the U.S. Treasury and other

U.S. government corporations and agencies ÏÏÏÏÏÏÏÏÏ 12,153 344 (4) 12,493

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 6,639 2 Ì 6,641

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,484 5 Ì 2,489

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ 65,006 1,463 (50) 66,419

Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $544,087 $19,603 $(1,006) $562,684

December 31, 2001

Gross Gross

Amortized Unrealized Unrealized

Cost Gains Losses Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $267,848 $ 5,030 $ (897) $271,981

Fannie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,048 1,311 (264) 71,095

Ginnie MaeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,619 226 (4) 5,841

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,447 777 (153) 43,071

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 6,993 96 (156) 6,933

Total mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 392,955 7,440 (1,474) 398,921

Investments

Non-mortgage-related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,016 288 (29) 26,275

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,542 160 (53) 9,649

Debt securities issued by the U.S. Treasury and other

U.S. government corporations and agencies ÏÏÏÏÏÏÏÏÏ 1,783 22 (55) 1,750

Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏ 4,284 3 (1) 4,286

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,847 3 Ì 12,850

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏ 54,472 476 (138) 54,810

Total available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $447,427 $ 7,916 $(1,612) $453,731

Freddie Mac

174
In 2002, Freddie Mac received proceeds of $176.9 billion from the sale of securities from its availablefor-sale portfolio, resulting in gross realized gains of $1,575 million and gross realized losses of $257 million.

This information regarding gains and losses was not available prior to 2002 and therefore is presented on a net

basis for 2001 and 2000. In 2001 and 2000, Freddie Mac received proceeds of $105.0 billion and $33.8 billion,

respectively from the sale of securities from its available-for-sale portfolio, resulting in net realized gains of

$176 million and net realized losses of $12 million. The cost basis of the available-for-sale securities sold was

determined using the speciÑc identiÑcation method.

On January 1, 2001, Freddie Mac transferred $36.3 billion of securities from available-for-sale to trading

in conjunction with the implementation of SFAS 133, resulting in gross unrealized gains of $105 million and

gross unrealized losses of $384 million being recorded to earnings.

Freddie Mac

175
Table 5.2 summarizes the estimated fair values by major security type for trading securities at

December 31, 2002 and 2001, respectively.

Table 5.2 Ì Trading Securities

December 31,

2002 2001

Fair Value Fair Value

(dollars in millions)

Retained portfolio

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,535 $40,592

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 519 722

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 86

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,104 41,400

Investments

Mortgage-related securities issued by:

Freddie Mac ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,244 $20,220

Fannie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,029 6,099

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,062 875

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,366 27,194

Non-mortgage related securities:

Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 96 $ 22

Debt securities issued by the U.S. Treasury and other U.S. government

corporations and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,004 165

Mutual fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 540 1,194

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 479 158

Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 Ì

Debt securities issued by foreign governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 Ì

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,409 1,539

Total trading securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $63,879 $70,133

The portion of Gains (losses) on investment activity that relates to trading securities still held in the

trading portfolio at December 31, 2002, 2001 and 2000 is $1,293 million, $359 million and $939 million,

respectively.

At December 31, 2002, Freddie Mac held securities in its retained portfolio and investments portfolio

issued by two highly-rated entities that individually exceed 10 percent of Freddie Mac's Stockholders' equity.

Table 5.3 details the name of these issuers, the aggregate fair value of the securities from each issuer and the

aggregate fair value's percent of stockholders' equity.

Table 5.3 Ì Issuers greater than 10% Stockholders' Equity

December 31, 2002

Fair Value % Equity

(dollars in millions)

Fannie Mae(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 93,828 299%

Ginnie Mae ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,287 20

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $100,115 320%

(1) Includes mortgage-related securities of $93,478 million and agency debt securities of $350 million.

Freddie Mac

176
Table 5.4 summarizes, by major security type, the remaining contractual maturities of available-for-sale

and trading non-mortgage-related securities, other than asset-backed securities at December 31, 2002.

Table 5.4 Ì Maturities

Greater

than 5 and Greater Total Total

Less than 1 to 5 up to 10 than Amortized Fair

December 31, 2002 1 year years years 10 years Cost Value

(dollars in millions)

AVAILABLE-FOR-SALE

Retained portfolio

Total mortgage-related securities(1)

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì $479,081 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $496,265

Investments

Non-mortgage-related securities

Asset-backed securities(1):

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì $ 33,988 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 34,694

Corporate debt securities:

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,714 $7,455 $464 $ 109 $ 9,742 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,715 7,767 498 122 Ì $ 10,102

Debt securities issued by the U.S. Treasury

and other U.S. government corporations

and agencies:

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $7,966 $508 $3,679 $ 12,153 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 8,060 513 3,920 Ì $ 12,493

Obligations of states and political

subdivisions:

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 334 $ 246 $168 $5,891 $ 6,639 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 335 246 168 5,892 Ì $ 6,641

Others:

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,240 Ì $ 20 $ 224 $ 2,484 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,240 Ì 25 224 Ì $ 2,489

Total non-mortgage-related securities

Amortized cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì $ 65,006 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 66,419

TRADING

Retained portfolio

Total mortgage-related securities(1) ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 29,104

Investments

Total mortgage-related securities(1) ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 32,366

Non-mortgage-related securities

Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 96

Debt securities issued by the U.S. Treasury

and other U.S. government agencies ÏÏÏÏÏ $ 16 $ 815 $ 98 $ 75 Ì 1,004

Mutual funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 200 340 Ì Ì Ì 540

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 479 Ì Ì Ì Ì 479

Corporate debt securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 179 Ì 35 Ì 229

Debt securities issued by foreign

governments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 Ì Ì Ì Ì 4

Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 Ì Ì Ì Ì 57

Total non-mortgage-related securities ÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì $ 2,409

(1) Maturity information for mortgage-related securities and other asset-backed securities is not provided because their contractual

maturity may not represent their expected lives. Obligations underlying these securities may be prepaid at any time without penalty.

Freddie Mac

177
Table 5.5 presents the changes in AOCI related to available-for-sale securities.

Table 5.5 Ì Accumulated Other Comprehensive Income (Loss) Related to Available-for-Sale Securities

Year Ended December 31,

2002 2001 2000

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,200 $1,084 $(6,522)

Net unrealized investment gains during the period:

Unrealized holding gains, net of tax expense of $4,583, $1,723 and

$4,074, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,512 3,200 7,566

ReclassiÑcation adjustment for realized (gains) losses included in net

income, net of tax (expense) beneÑt of $(267), $(45), and $22,

respectively(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (495) (84) 40

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,217 $4,200 $ 1,084

(1) Includes impairment losses on securities where the decline in fair value is considered to be other than temporary of $422 million,

$228 million and $54 million, net of tax at December 31, 2002, 2001 and 2000, respectively.

Secured Financing Transactions

Freddie Mac enters into several types of secured Ñnancing transactions, including interest-rate swap

agreements, secured borrowings and secured lendings. Repurchase transactions are treated as secured

borrowings, because Freddie Mac sells securities to a counterparty for cash and will purchase the same

collateral back at a future date. Securities purchased under agreements to resell (reverse repurchase

agreements) are eÅectively collateralized lending transactions in which Freddie Mac purchases a security with

an agreement to sell back the same security at a speciÑed time.

Freddie Mac's counterparties are required to post collateral for reverse repurchase transactions even

though it is Freddie Mac's practice not to repledge assets held under a reverse repurchase agreement. Based

on master agreements, the collateral can be repledged. At December 31, 2002 and 2001, the fair value amount

of collateral held by Freddie Mac under secured lending transactions and available for repledging was

$5,776 million and $2,754 million, respectively.

Freddie Mac is also required to post collateral for margin requirements with some custodians, in

connection with secured Ñnancing and daily trade activities. Based on agreements between Freddie Mac and

the custodians, as illustrated in Table 5.6, some collateral may be permitted by contract to be repledged by the

custodian. Freddie Mac has parenthetically disclosed on the consolidated balance sheets the fair value of

assets pledged as collateral with the right to repledge. Table 5.6 summarizes all assets pledged as collateral by

the company including pledged assets that the secured party can repledge and those that cannot be repledged.

Table 5.6 Ì Collateral Pledged

December 31, 2002 December 31, 2001

(dollars in millions)

Assets pledged with ability for secured party to repledge

(parenthetically disclosed on consolidated balance sheets)

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 717 $292

Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153 167

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 870 459

Assets pledged without ability for secured party to repledge

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 627 255

Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 11

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 635 266

Total assets pledgedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,505 $725

Freddie Mac

178
Cash and Cash Equivalents

Table 5.7 summarizes the components of cash and cash equivalents for the years ended December 31,

2002 and 2001, respectively.

Table 5.7 Ì Cash and Cash Equivalents

December 31,

2002 2001

(dollars in millions)

Interest-bearing(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,729 $3,387

Non-interest bearing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 77

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,792 $3,464

(1) Includes collateral that Freddie Mac holds when its exposure to its derivative counterparties exceeds mutually agreed upon limits.

Interest earned on the collateral at the contractual rate is paid to the counterparties, while Freddie Mac retains any interest earned

above the contractual rate.

Mortgage Loans

Table 5.8 presents a detailed summary of mortgage loans in the retained portfolio.

Table 5.8 Ì Mortgage Loans Detail(1)

December 31,

2002 2001

(dollars in millions)

Single-family:

Conventional

Fixed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,816 $38,267

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,321 1,073

Seconds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 5

Total conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,140 39,345

Federal Housing Administration (""FHA'')/Department of Veteran AÅairs

(""VA'') Ì Ñxed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 710 964

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,850 40,309

Total multifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,036 22,483

Total mortgages loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $63,886 $62,792

(1) Based on UPB.

Freddie Mac

179
NOTE 6: LOAN LOSS RESERVES

Freddie Mac maintains separate loan loss reserves for mortgage loans in the retained portfolio that it

classiÑes as held for investment and for credit-related losses associated with certain mortgage loans that

underlie PCs held by third parties, speciÑcally, mortgage loans that have not been securitized and sold in

accordance with SFAS 125 / 140. See ""NOTE 3: SECURITIZATION OF MORTGAGE-RELATED

ASSETS'' for more information concerning Freddie Mac's GO.

Table 6.1 summarizes loan loss reserve activity during 2002 and 2001.

Table 6.1 Ì Detail of Loan Loss Reserves Balance

December 31,

2002 2001

Reserves related to: Reserves related to:

Total Loan Total Loan

Retained PCs Loss Retained PCs Loss

Mortgages Outstanding Reserves Mortgages Outstanding Reserves

(dollars in millions)

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 103 $ 121 $ 224 $ 100 $ 129 $ 229

Provision for credit losses(1) ÏÏÏÏ 161 (33) 128 40 (8) 32

Charge-oÅs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171) Ì (171) (129) Ì (129)

Recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 Ì 84 92 Ì 92

Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 177 $ 88 $ 265 $ 103 $ 121 $ 224

(1) It is Freddie Mac's practice to purchase mortgage loans from the pools that underlie PCs at the point the mortgage loan is identiÑed

as being 120 days past due. Upon repurchase, the unpaid principal balance associated with the loan is recorded on-balance sheet and

the associated reserve balance is reclassiÑed from Reserve for guarantee losses on PCs to Reserve for losses on mortgage loans held

for investment. As a result, a transfer is reÖected as a reduction of the provision associated with the oÅ-balance sheet PCs with a

corresponding increase to the provision associated with the retained mortgages. Given that all credit losses on oÅ-balance sheet PCs

are preceded by the purchase of a delinquent mortgage loan from the PC pool, all charge-oÅs or recoveries are found in the

""Retained Mortgages'' column above.

Freddie Mac

180
Impaired Loans

Total loan loss reserves, as presented in Table 6.1, consists of a speciÑc valuation allowance related to

impaired loans, which are presented in Table 6.2 and an additional reserve for other probable losses, which

equaled $240 million and $218 million as of December 31, 2002 and 2001, respectively. The population of

impaired loans includes multifamily loans for which it is probable that the company will not receive all

amounts contractually due, as well as all troubled debt restructurings (both single-family and multifamily).

The company's 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,

2002 2001

Recorded SpeciÑc Net Recorded SpeciÑc Net

Investment(2) Reserve Investment Investment(2) Reserve Investment

(dollars in millions)

Impaired loans having:

Related valuation allowance ÏÏÏÏÏ $ 169 $ (25) $ 144 $ 77 $(6) $ 71

No related valuation allowance ÏÏ 2,077 Ì 2,077 1,612 Ì 1,612

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,246 $ (25) $2,221 $1,689 $(6) $1,683

(1) Single-family impaired loans include performing and non-performing troubled debt restructured loans. Multifamily impaired loans

are deÑned as performing and non-performing TDR loans, loans 60 days or more delinquent and mortgage loans with real estate

collateral values less than the outstanding UPB.

(2) ""Recorded Investment'' includes the unpaid principal balance of mortgage loans plus other basis adjustments, which are

modiÑcations to their carrying value. See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more

information.

For the years ended December 31, 2002, 2001 and 2000, the average recorded investment in impaired

loans was $2,029 million, $1,577 million and $1,316 million, respectively.

Interest income on multifamily impaired loans is recognized on an accrual basis for loans performing

under the original or restructured terms and on a cash basis for non-performing loans, which collectively

totaled approximately $22 million, $20 million and $17 million for the years ended December 31, 2002, 2001

and 2000, respectively. For single-family performing and non-performing loans, Freddie Mac recognizes

interest income on an accrual basis and establishes reserves for estimated accrued, but uncollectible, interest

for these loans as of the consolidated balance sheet dates (see ""NOTE 2: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES'' for more information). Gross interest income on impaired single-family loans

totaled $129 million, $104 million and $86 million for the years ended December 31, 2002, 2001 and 2000,

respectively.

Freddie Mac

181
Delinquency Rates

Table 6.3 summarizes the delinquency rates for Freddie Mac's total mortgage portfolio, excluding

non-Freddie Mac mortgage-related securities and that portion of Structured Securities that is backed by

Ginnie Mae CertiÑcates at December 31, 2002, 2001 and 2000.

Table 6.3 Ì Delinquency Performance(1)

December 31,

2002 2001 2000

Delinquencies, end of period

Single-family:(2)

Credit-enhanced portfolio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.06% 1.29% 0.84%

Non-credit enhanced portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.29% 0.30% 0.29%

Total portfolio(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.77% 0.62% 0.49%

Multifamily(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.13% 0.15% 0.04%

(1) Based on the total mortgage portfolio, excluding both non-Freddie Mac mortgage-related securities and that portion of Structured

Securities that is backed by Ginnie Mae CertiÑcates.

(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure.

(3) Includes alternative collateral deals.

(4) Based on net carrying value of mortgages 60 days or more delinquent or in foreclosure.

NOTE 7: REAL ESTATE OWNED

Table 7.1 provides a summary of Freddie Mac's REO activity.

Freddie Mac obtains REO properties when it is the highest bidder at foreclosure sales of properties that

collateralize non-performing single-family and multifamily mortgage loans owned by the company. Upon

acquiring single-family properties, Freddie Mac establishes a marketing plan to sell the property as soon as

practicable by either listing it with a sales broker or by other means, such as arranging a real estate auction.

Upon acquiring multifamily properties, Freddie Mac may operate them with third-party property-management Ñrms for a period to stabilize value and then sell the properties through commercial real estate brokers.

The average holding period of REO properties was less than one year for each of the three years ended

December 31, 2002.

Table 7.1 Ì Real Estate Owned

REO, Valuation REO,

Gross Allowance Net

(dollars in millions)

Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 490 $(47) $ 443

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 851 (53) 798

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (948) 65 (883)

Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 393 (35) 358

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 910 (50) 860

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (798) 27 (771)

Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 505 (58) 447

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,197 (70) 1,127

Dispositions and write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,032) 52 (980)

Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 670 $(76) $ 594

Freddie Mac recognized gains of $22 million, $12 million and $2 million on REO dispositions for the

years ended December 31, 2002, 2001 and 2000, respectively, which are included in ""REO operations income

(expense).'' See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' for more

information.

Freddie Mac

182
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, 2002 and 2001 for debt securities, as well as subordinated borrowings.

Table 8.1 Ì Total Debt Securities, Net(1)

December 31,

2002 2001

Balance, EÅective Balance, EÅective

Net Rate(2) Net Rate(2)

(dollars in millions)

Senior debt, due within one year:

Discount notes, medium-term notes, securities sold under

agreements to repurchase, Federal funds purchased and

other short-term debt securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $194,044 1.58% $245,722 2.51%

Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,385 4.74 18,505 5.73

Senior debt, due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,429 2.23 264,227 2.74

Senior debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,662 4.87 311,013 5.69

Subordinated debt, due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,605 6.03 3,128 6.37

Senior and subordinated debt, due after one yearÏÏÏÏÏÏÏÏÏÏÏÏ 421,267 4.89% 314,141 5.70%

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $665,696 $578,368

(1) Includes discounts, premiums 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 hedging-related basis adjustments. See ""NOTE 2: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for more information.

Freddie Mac Ñnances the purchase of mortgage loans and mortgage-related securities primarily through

the issuance of Senior debt and Subordinated debt.

As indicated in Table 8.2, a majority of Senior debt, due within one year (excluding current portion of

long-term debt) consisted of discount notes and medium-term notes as of December 31, 2002 and 2001,

respectively. Approximately 99 percent and 97 percent of the UPB of these discount notes and medium-term

notes outstanding as of December 31, 2002 and 2001, respectively, have been issued on a discounted basis,

paying only principal at maturity. Discount notes and medium-term notes are unsecured general obligations.

Securities sold under agreements to repurchase are eÅectively collateralized borrowing transactions where

Freddie Mac sells securities with an agreement to repurchase such securities. These agreements require the

underlying securities to be delivered to the dealers who arranged the transactions. See ""NOTE 5: RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' for more information.

Federal funds purchased are unsecuritized borrowings from commercial banks that are members of the

Federal Reserve System.

Senior debt, due after one year (including current portion of long-term debt) primarily consisted of

callable and non-callable Ñxed-rate securities, zero-coupon securities and variable-rate securities. As of

December 31, 2002 and 2001, approximately 95 percent and 97 percent of the UPB of Senior debt, due after

one year (including current portion of long-term debt) outstanding carried a Ñxed-rate or zero coupon, while

the remaining UPB carried a variable-rate coupon.

Subordinated borrowings, which are reported on the consolidated balance sheets net of their unamortized

discount, consist of Ñxed-rate capital debentures, zero-coupon capital debentures and Freddie SUBS», which

are subordinate to all of Freddie Mac's existing and future senior debt.

Freddie Mac

183
Table 8.2 provides additional information related to Freddie Mac's debt securities due within one year.

Table 8.2 Ì Total Debt Securities, Due Within One Year

2002

Average Outstanding

As of December 31, During the Year

Weighted Weighted Maximum Balance

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance EÅective Rate(2) Month End

(dollars in millions)

Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $163,202 1.61% $180,889 2.02% $211,388

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,015 2.07 5,528 2.39 8,161

Securities sold under agreements to

repurchase and Federal funds purchased 15,262 1.08 13,882 1.39 21,472

Other short-term debt securities ÏÏÏÏÏÏÏÏÏ 14,565

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,044

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 50,385

Total debt securities, due within one year $244,429

2001

Average Outstanding

As of December 31, During the Year

Weighted Weighted Maximum Balance

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance EÅective Rate(2) Month End

(dollars in millions)

Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $219,656 2.44% $191,478 4.26% $219,656

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,730 2.91 9,150 4.98 13,638

Securities sold under agreements to

repurchase and Federal funds purchased 4,548 1.52 5,029 3.15 8,096

Other short-term debt securities ÏÏÏÏÏÏÏÏÏ 14,788

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245,722

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 18,505

Total debt securities, due within one year $264,227

2000

Average Outstanding

As of December 31, During the Year

Weighted Weighted Maximum Balance

Average Average Outstanding at Any

Balance, Net EÅective Rate(1) Balance EÅective Rate(2) Month End

(dollars in millions)

Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $132,456 6.39% $145,044 6.16% $155,300

Medium-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,980 6.56 18,286 6.39 23,201

Securities sold under agreements to

repurchase and Federal funds purchased 756 6.31 1,361 5.15 1,950

Other short-term debt securities ÏÏÏÏÏÏÏÏÏ 2,291

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153,483

Current portion of long-term debt ÏÏÏÏÏÏÏÏ 29,891

Total debt securities, due within one year $183,374

(1) Represents the weighted average eÅective rate at the end of the period, which includes the amortization of discounts or premiums

and issuance costs, but excludes the amortization of hedging-related basis adjustments. See ""NOTE 2: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for more information.

(2) 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 hedging-related basis adjustments. See ""NOTE 2: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for more information.

Freddie Mac

184
A portion of Freddie Mac's long-term debt is callable. Callable debt gives Freddie Mac the option to

redeem the debt security in whole or in part at either a speciÑed call date or at any time on or after a speciÑed

call date. Table 8.3 summarizes the maturities, balances and eÅective interest rates at December 31, 2002 for

contractually callable debt by call period.

Table 8.3 Ì Callable Debt

Balance EÅective

First-Available Call Period Date Maturity Outstanding(1) Rate(2)

(dollars in millions)

2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 Ì 2022 $ 52,456 4.61%

2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 Ì 2017 22,923 3.30

2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 Ì 2017 19,817 3.06

2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 Ì 2016 9,461 3.63

2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 Ì 2012 12,591 4.05

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 Ì 2032 58,020 5.59

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $175,268 4.49%

(1) Represents unpaid principal balance of callable long-term debt securities and subordinated borrowings. However, callable zerocoupon debt is reÖected on a net basis (i.e., net of associated discounts of $42,428 million).

(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 hedging-related basis adjustments. See ""NOTE 2 Ì SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for more information.

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, 2002, assuming callable debt is

(i) paid at scheduled maturity or (ii) redeemed at the Ñrst-available call date.

Table 8.4 Ì Senior and Subordinated Debt, Due After One Year (including current portion of long-term

debt)

Assuming Callable

Debt is Redeemed at

Scheduled First-Available Call

Maturity(1) Date(1)

(dollars in millions)

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50,381 $ 95,667

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,807 82,975

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78,352 60,378

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,612 34,477

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,933 35,160

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,659 13,783

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,538 19,218

2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,025 18,771

2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,324 19,808

2012 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,329 36,526

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92,754 89,951

Total(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 506,714 506,714

Net premiums, discounts, and hedging-related basis adjustments(2) ÏÏÏÏÏÏÏ (35,062) (35,062)

Senior and subordinated debt, due after one year, including current portion

of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $471,652 $471,652

(1) Represents unpaid principal balance of long-term debt securities and subordinated borrowings. 

(2) Represents unamortized premiums, discounts, and hedging-related basis adjustments. It includes discounts of $46,345 million

associated with callable and non-callable zero-coupon debt.

During 2002, Freddie Mac recognized a $674 million before-tax loss on the retirement of $20.3 billion

principal amount of debt outstanding. During 2001, the company recognized a $356 million before-tax loss on

the retirement of $4.7 billion principal amount of debt outstanding.

Freddie Mac

185
NOTE 9: STOCKHOLDERS' EQUITY

Preferred Stock

During 2002, Freddie Mac completed one preferred stock oÅering, raising approximately $300 million

(see Table 9.1 for more information). All 17 classes of preferred stock outstanding at December 31, 2002 have

a par value of $1 per share, and are redeemable, on speciÑed dates, at the company's option at their

redemption price (or redemption value) plus dividends accrued through the redemption date. In addition, all

17 classes of preferred stock are perpetual and non-cumulative, and carry no signiÑcant voting rights or rights

to purchase additional Freddie Mac stock or securities. Costs incurred in connection with the issuance of

preferred stock are charged to ""Additional paid-in capital.''

Table 9.1 provides a summary of Freddie Mac's preferred stock outstanding at December 31, 2002.

Table 9.1 Ì Preferred Stock

Total Redemption Total

Shares Shares Par Price per Outstanding Redeemable NYSE

Issue Date Authorized Outstanding Value Share Balance(1) On or After Symbol(2)

(shares and dollars in millions, except redemption price per share)

1996 Variable-rate(3) April 26, 1996 5.00 5.00 5.00 $50.00 $ 250 June 30, 2001 FRE.prB

6.14% ÏÏÏÏÏÏÏÏÏÏÏÏÏ June 3, 1997 12.00 12.00 12.00 50.00 600 June 30, 2002 FRE.prD

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏ October 27, 1997 3.00 3.00 3.00 50.00 150 October 27, 1998 (9)

5%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 23, 1998 8.00 8.00 8.00 50.00 400 March 31, 2003 FRE.prF

5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 23, 1998 8.00 8.00 8.00 50.00 400 September 30, 2003 FRE.prH

1998 Variable-rate(4) September 23 and 29, 1998 4.40 4.40 4.40 50.00 220 September 30, 2003 FRE.prG

5.3% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 28, 1998 4.00 4.00 4.00 50.00 200 October 30, 2000 (9)

5.1% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 19, 1999 3.00 3.00 3.00 50.00 150 March 31, 2004 (9)

5.79% ÏÏÏÏÏÏÏÏÏÏÏÏÏ July 21, 1999 5.00 5.00 5.00 50.00 250 June 30, 2009 FRE.prK

1999 Variable-rate(5) November 5, 1999 5.75 5.75 5.75 50.00 288 December 31, 2004 FRE.prL

2001 Variable-rate(6) January 26, 2001 6.50 6.50 6.50 50.00 325 March 31, 2003 FRE.prM

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏ March 23, 2001 3.45 3.45 3.45 50.00 172 March 31, 2011 FRE.prO

2001 Variable-rate(7) March 23, 2001 4.60 4.60 4.60 50.00 230 March 31, 2003 FRE.prN

2001 Variable-rate(8) May 30, 2001 4.02 4.02 4.02 50.00 201 June 30, 2003 FRE.prQ

6.0% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 30, 2001 3.45 3.45 3.45 50.00 173 June 30, 2006 FRE.prP

5.7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 30, 2001 6.00 6.00 6.00 50.00 300 December 31, 2006 FRE.prR

5.81% ÏÏÏÏÏÏÏÏÏÏÏÏÏ January 29, 2002 6.00 6.00 6.00 50.00 300 March 31, 2007 (9)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92.17 92.17 92.17 $4,609

(1) Amounts stated at redemption value.

(2) Preferred Stock is listed on the New York Stock Exchange, unless otherwise noted.

(3) The dividend rate resets quarterly and is equal to the sum of the three-month London Interbank OÅered Rate (""LIBOR'') plus one

percent divided by 1.377, and is capped at 9.00 percent.

(4) The dividend rate resets quarterly and is equal to the sum of the three-month LIBOR rate plus one percent divided by 1.377, and is

capped at 7.50 percent.

(5) Initial dividend rate is 5.97 percent per annum through December 31, 2004. Dividend rate resets on January 1, 2005 and on January 1

every Ñve years thereafter based on a Ñve-year constant maturity Treasury (""CMT'') rate which is capped at 11.00 percent. Optional

redemption on December 31, 2004 and on December 31 every Ñve years thereafter.

(6) Dividend rate resets on April 1 every two years after April 1, 2003 based on the 2-year CMT rate plus .10 percent and is capped at

11.00 percent. Optional redemption on March 31, 2003 and on March 31 every two years thereafter.

(7) Dividend rate resets on April 1 every year based on the 12-month LIBOR rate minus .20 percent and is capped at 11.00 percent.

Optional redemption on March 31, 2003 and on March 31 every year thereafter.

(8) Dividend rate resets on July 1 every two years after July 1, 2003 based on the 2-year CMT rate plus .20 percent and is capped at

11.00 percent. Optional redemption on June 30, 2003 and on June 30 every two years thereafter.

(9) Not listed on any exchange.

Freddie Mac

186
Dividends Declared

Table 9.2 summarizes the cash dividends declared per share on Freddie Mac's common and preferred

stock.

Table 9.2 Ì Cash Dividends Declared

Year Ended December 31,

2002 2001 2000

Common: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.88 $0.80 $0.68

Preferred:

1996 Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.07 1.98 2.76

6.125%(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.46 3.06 3.06

6.14% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.07 3.07 3.07

5.81% (1997 issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.91 2.91 2.91

5% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.50 2.50 2.50

5.1% (1998 issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.55 2.55 2.55

1998 Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.07 1.98 2.76

5.3% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.65 2.65 2.65

5.1% (1999 issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.55 2.55 2.55

5.79% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.90 2.90 2.90

1999 Variable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.99 2.99 2.99

January 2001 Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.41 2.23 Ì

5.81% (2001 issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.91 2.24 Ì

March 2001 Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.64 1.77 Ì

6% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.00 1.75 Ì

May 2001 Variable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.24 1.31 Ì

5.7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.85 0.48 Ì

5.81% (2002 issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.67 Ì Ì

(1) The 6.125% preferred stock was redeemed at a price of $50.46 per share, which includes the face amount of $50.00 per share plus

$0.46 of dividends that were accrued through February 24, 2002, the redemption date.

Common Stock Repurchase Program

In September 1997, Freddie Mac's Board of Directors authorized the company to repurchase up to Ñve

percent, or approximately 34 million shares, of its common stock outstanding as of September 5, 1997. Under

this authorization, Freddie Mac repurchased 9.1 million outstanding shares in 2002, no outstanding shares in

2001 and 5.9 million outstanding shares in 2000. Common stock repurchases are done with the purpose of

returning capital to the company's stockholders in the form of capital gains rather than dividends. As discussed

in ""NOTE 1: RESTATEMENT,'' Freddie Mac is currently required to obtain prior written approval from the

Director of OFHEO before engaging in certain capital transactions, including the repurchase of any shares of

common stock or the redemption of any preferred stock.

NOTE 10: REGULATORY CAPITAL

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (""GSE Act'') established

risk-based, minimum and critical capital standards for Freddie Mac and Fannie Mae.

The risk-based capital standard determines the amount of capital that Freddie Mac must hold to absorb

projected losses Öowing from future adverse interest-rate and credit-risk conditions speciÑed by the GSE Act,

plus 30 percent mandated by the GSE Act to cover management and operations risk. The risk-based capital

standard is based on stress test results calculated under two interest-rate scenarios prescribed by the GSE Act,

one in which 10-year Treasury yields rise 75 percent (up-rate scenario) and one in which they fall 50 percent

(down-rate scenario). Changes in both scenarios are capped generally at 600 basis points. The risk-based

capital requirement for Freddie Mac is the amount of ""total capital'' that would enable it to absorb the stress

test losses in whichever scenario is more adverse, plus 30 percent of that amount to cover management and

operations risk. Total capital includes ""core capital'' and general reserves for mortgage and foreclosure losses

Freddie Mac

187
and any other amounts available to absorb losses that OFHEO includes by regulation. Core capital consists of

the par value of outstanding common stock (common stock issued less common stock held in treasury), the

par value of outstanding perpetual preferred stock, additional paid-in capital and retained earnings as

measured under GAAP.

The minimum capital standard requires Freddie Mac to hold an amount of core capital that generally

equals or exceeds the sum of 2.50 percent of aggregate on-balance sheet assets, as measured under GAAP and

0.45 percent of other aggregate oÅ-balance sheet obligations.

The critical capital standard requires Freddie Mac to hold an amount of core capital that generally equals

or exceeds the sum of 1.25 percent of aggregate on-balance sheet assets, as measured under GAAP, and

0.25 percent of other aggregate oÅ-balance sheet obligations.

OFHEO is required to classify Freddie Mac's capital adequacy not less than quarterly. Prior to the third

quarter of 2002, the company was classiÑed using the minimum and critical capital standards only. In the third

quarter of 2002, OFHEO commenced quarterly classiÑcations using the risk-based, minimum and critical

capital standards.

To be classiÑed as ""adequately capitalized,'' Freddie Mac must meet both the risk-based and minimum

capital standard. If Freddie Mac fails to meet the risk-based capital standard, it cannot be classiÑed higher

than ""undercapitalized.'' If Freddie Mac fails to meet the minimum capital standard, it cannot be classiÑed

higher than ""signiÑcantly undercapitalized.'' If Freddie Mac fails to meet the critical capital standard, it must

be classiÑed as ""critically undercapitalized.'' OFHEO retains discretion to reduce Freddie Mac's capital

classiÑcation by one level if OFHEO determines that Freddie Mac is engaging in conduct not approved by

OFHEO that could result in a rapid depletion of core capital or that the value of property subject to mortgages

held or secured by Freddie Mac has decreased signiÑcantly.

When Freddie Mac is classiÑed as adequately capitalized, the company can pay a dividend on its

common or preferred stock without prior OFHEO approval so long as the payment would not decrease total

capital to an amount less than its risk-based capital level and would not decrease the company's core capital to

an amount less than the minimum capital level.

If Freddie Mac were classiÑed as undercapitalized, the company would be prohibited from making a

capital distribution (which includes common and preferred dividend payments, common stock repurchases

and preferred stock redemptions) that would decrease its core capital to an amount less than the minimum

capital level. Freddie Mac also would be required to submit a capital restoration plan for OFHEO approval,

which could aÅect adversely its ability to make capital distributions.

If Freddie Mac were classiÑed as signiÑcantly undercapitalized, the company would be able to make a

capital distribution only if OFHEO determined that the distribution satisÑed certain statutory standards.

Under these circumstances, Freddie Mac would be prohibited from making any capital distribution that would

decrease its core capital to less than the critical capital level, and OFHEO also could take action to limit

Freddie Mac's growth, require it to acquire new capital or restrict it from activities that create excessive risk.

Freddie Mac also would be required to submit a capital restoration plan for OFHEO approval, which could

aÅect adversely its ability to make capital distributions.

If Freddie Mac were classiÑed as critically undercapitalized, OFHEO would be required to appoint a

conservator for the company unless OFHEO made a written Ñnding that it should not do so and the Secretary

of the Treasury concurred in that determination.

OFHEO has never classiÑed Freddie Mac as other than ""adequately capitalized,'' the highest possible

classiÑcation.

Factors that may signiÑcantly aÅect the adequacy of Freddie Mac's capital include changes in the

economic environment, such as large interest-rate moves or house price declines. In particular, interest rate

changes can aÅect the amount of Freddie Mac's core capital, even if Freddie Mac is economically well hedged

against interest rate changes, because certain gains or losses are recognized through GAAP earnings while

other oÅsetting gains or losses are not.

Freddie Mac

188
Table 10.1 summarizes the company's regulatory capital requirements and surpluses at December 31,

2002 and 2001.

Freddie Mac's core capital and minimum and critical capital surpluses as presented in Table 10.1 are

based on restated net income for 2002 and 2001. However, Freddie Mac's total capital and risk-based capital

surpluses as presented in Table 10.1 do not reÖect the eÅect of the restatement. OFHEO determined not to

recalculate the risk-based capital amounts given that the minimum capital requirement remained the

determining requirement for Freddie Mac's classiÑcation as adequately capitalized.

Table 10.1 Ì Regulatory Capital Requirements

December 31, 2002 December 31, 2001

(dollars in millions)

As restated

Minimum capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22,339 $19,014

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,990 $20,181

Minimum capital surplus(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,651 $ 1,167

Critical capital requirement(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,369 $ 9,677

Core capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,990 $20,181

Critical capital surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17,621 $10,504

As reported

Risk-based capital requirement(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,743 N/A

Total capital(3)(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,222 N/A

Risk-based capital surplus(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,479 N/A

(1) Minimum and critical capital requirements are based on amended reports to OFHEO that correct results included in Freddie Mac's

November 21, 2003 Information Statement Supplement. The impact of this change on the restated regulatory minimum capital

surplus was a decrease of $1 million and $7 million as of December 31, 2002 and 2001, respectively, as compared to those results

presented in Freddie Mac's November 21, 2003 Information Statement Supplement.

(2) Core capital consists of the par value of outstanding common stock (common stock issued less common stock held in treasury), par

value of outstanding perpetual preferred stock, additional paid in capital and retained earnings, as determined in accordance with

GAAP.

(3) Risk-based and total capital amounts are those calculated by OFHEO prior to the restatement of Freddie Mac's 2002 Ñnancial

results.

(4) Total capital includes ""core capital'' and general reserves for mortgage and foreclosure losses.

NOTE 11: STOCK-BASED COMPENSATION

Freddie Mac has three stock-based compensation plans under which grants are being made: the ESPP,

the 1995 Stock Compensation Plan (""Employee Plan'') and the 1995 Directors' Stock Compensation Plan

(""Directors' Plan'').

Common stock delivered under these plans may be shares currently held by Freddie Mac as treasury

stock or shares purchased by Freddie Mac in the open market.

1995 ESPP: Freddie Mac has established a stockholder approved ESPP that is qualiÑed under Internal

Revenue Code (""IRC'') Section 423. Under the ESPP, substantially all full-time and part-time employees

may purchase shares of common stock. During 2002, 2001 and 2000, the maximum market value of stock

available for annual purchase was $20,000 per employee as determined on the subscription date. The purchase

price is equal to 85% of the average price of the stock on the subscription (grant) date or the purchase

(exercise) date, whichever is lower.

Table 11.1 provides a summary of activity related to the ESPP.

Table 11.1 Ì Summary of ESPP Activity

Year Ended December 31,

2002 2001 2000

Shares pledged(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,000,370 799,654 1,020,850

Fair value on grant date ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13.53 $ 18.15 $ 12.19

Shares purchased(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 351,629 914,167 177,678

Purchase price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 51.74 $ 33.20 $ 33.87

(1) During each of the three years ended December 31, employees pledged to purchase shares on August 1 with the purchase occurring

on July 31 of the following year.

Freddie Mac

189
The maximum number of shares of common stock that may be granted to employees under the ESPP is

12 million shares. At December 31, 2002, 8.2 million shares had been issued under the ESPP and 3.8 million

shares remained available for grant. Grants under the ESPP will cease upon the earlier of exhausting the

authorized share pool or December 31, 2004.

1995 Employee Plan: Under the stockholder-approved Employee Plan, Freddie Mac is permitted to grant

to employees stock-based awards, including stock options with dividend rights, RSUs with dividend rights,

restricted stock and stock appreciation rights (""SARs''). Such awards are generally forfeitable for at least one

year after the date of grant, and Freddie Mac has the right to impose performance conditions with respect to

any awards under the Employee Plan. To date, no SARs have been granted under the Employee Plan.

‚ Stock options granted under the Employee Plan allow for the purchase of Freddie Mac's common

stock at an exercise price equal to the fair value of the common stock on the grant date. Options

generally may be exercised for a period of 10 years from the grant date, subject to a vesting schedule

commencing on the grant date.

‚ Dividend rights provide participants with the right to receive, at the time stock options are exercised or

upon expiration, an amount equal to the accumulated dividends paid on the stock from the date the

options were granted.

‚ A RSU entitles participants to receive one share of common stock at a speciÑed future date. RSUs do

not have voting rights, but do have dividend rights, which are paid to RSU holders as dividends on

common stock are declared.

‚ Restricted stock entitles participants to all the rights of a stockholder including dividends, except that

the shares awarded are subject to a risk of forfeiture and may not be disposed of by the participant until

the end of the restriction period established by Freddie Mac. The grant-date fair value of restricted

stock and RSUs awarded is recognized as compensation expense on a straight-line basis over the

restriction period.

The maximum number of shares of common stock that may be granted to employees under the

Employee Plan is 33.6 million shares. At December 31, 2002, a total of 27.6 million shares had been issued

and 6.0 million shares remained available for grant. Grants under the Employee Plan will cease upon the

earlier of exhausting the authorized share pool or December 31, 2004.

1995 Directors' Plan: Under the Directors' Plan, Freddie Mac is permitted to grant stock options with

dividend rights, restricted stock and RSUs with dividend rights to non-employee members of the Board of

Directors (""Directors''). The accounting for stock options with dividend rights, restricted stock, and RSUs

granted under the Directors' Plan is identical to that of the Employee Plan.

In 2002, newly elected or appointed Directors are granted stock options valued at $300,000 and zero

dollars in their Ñrst and second year of service, respectively. For the third year of service and thereafter,

Directors are granted stock options annually valued at $150,000 on the date of grant. These options have an

exercise price equal to the fair value of the common stock at the date of grant, and may be exercised for a

period of 10 years from the grant date. Also, new Directors are granted RSUs valued on the date of grant at

$130,000 and zero dollars in their Ñrst and second year of service, respectively. For the third year of service

and thereafter, Directors are granted RSUs annually valued at $65,000 on the date of grant. The vesting period

for stock options and the restriction period for restricted stock and RSUs is generally 20% for each of Ñve years

following the grant date.

The maximum number of shares of common stock that may be granted to Directors under the Directors'

Plan is 2.4 million shares. At December 31, 2002, a total of 0.7 million shares had been issued and 1.7 million

shares remained available for grant. Grants under the Directors' Plan will cease upon the earlier of exhausting

the authorized share pool or Freddie Mac's Annual Meeting of Stockholders in 2008.

Freddie Mac

190
Table 11.2 provides a summary of activity related to stock options under the Employee Plan and the

Directors' Plan.

Table 11.2 Ì Employee Plan Stock Options Activity

Year Ended December 31,

2002 2001 2000

Stock Weighted Average Stock Weighted Average Stock Weighted Average

Options Exercise Price Options Exercise Price Options Exercise Price

Outstanding, beginning of

year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,721,962 $37.56 9,035,859 $29.23 9,841,126 $23.11

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,686,285 64.12 1,444,846 67.18 2,016,305 42.75

ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (997,127) 18.44 (1,588,118) 16.18 (2,338,494) 12.53

Forfeited or expired ÏÏÏÏÏ (180,015) 51.52 (170,625) 46.31 (483,078) 41.92

Outstanding, end of year 9,231,105 $44.21 8,721,962 $37.56 9,035,859 $29.23

Options exercisable at

year-endÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,508,095 $29.60 4,532,265 $23.29 5,212,961 $18.38

Weighted-average fair

value of options

granted during year ÏÏÏ $28.13 $30.29 $19.76

Table 11.3 provides a summary of activity related to restricted stock and RSUs under the Employee Plan

and the Directors' Plan.

Table 11.3 Ì Employee Plan Restricted Stock and RSU Activity

Year Ended December 31,

2002 2001 2000

Restricted Restricted Restricted Restricted Restricted Restricted

Stock Stock Units Stock Stock Units Stock Stock Units

Outstanding,

beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,478,779 51,632 1,563,943 48,871 796,642 28,235

Granted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 325,902 367,902 28,289 1,101,050 23,733

Lapse of restrictionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (383,199) (10,457) (433,023) (18,556) (191,700) (3,097)

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,253) (7,850) (20,043) (6,972) (142,049) Ì

Outstanding,

end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,089,327 359,227 1,478,779 51,632 1,563,943 48,871

Weighted-average fair value of awards

granted during year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A $ 64.22 $ 67.06 $ 65.02 $ 43.97 $44.28

(1) Prior to 2002, RSUs were granted under the Directors' Plan only. During 2002, 313,740 RSUs were granted under the Employee

Plan and 12,162 RSUs were granted under the Directors' Plan.

Table 11.4 provides additional information for stock options outstanding under the Employee Plan and

the Directors' Plan at December 31, 2002 by range of exercise prices.

Table 11.4 Ì Employee Plan 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, 2002 Life in Years Exercise Price December 31, 2002 Exercise Price

$9.00 to 14.99 ÏÏÏÏÏÏÏÏÏÏ 396,352 0.8 $12.98 396,352 $12.98

15.00 to 24.99 ÏÏÏÏÏÏÏÏÏÏ 2,116,849 2.6 18.21 2,116,849 18.21

25.00 to 34.99 ÏÏÏÏÏÏÏÏÏÏ 622,989 4.4 34.15 622,989 34.15

35.00 to 44.99 ÏÏÏÏÏÏÏÏÏÏ 1,482,569 7.1 41.54 415,021 41.75

45.00 to 54.99 ÏÏÏÏÏÏÏÏÏÏ 976,368 6.2 47.30 543,092 47.35

55.00 to 64.99 ÏÏÏÏÏÏÏÏÏÏ 2,370,654 8.4 63.12 384,951 61.02

65.00 to 67.99 ÏÏÏÏÏÏÏÏÏÏ 1,265,324 8.2 67.73 28,841 67.17

9,231,105 6.0 $44.21 4,508,095 $29.60

Freddie Mac

191
Compensation Expense: Compensation expense related to stock-based compensation plans charged to

""Salaries and employee beneÑts'' was $65.7 million, $61.2 million and $41.3 million for the years ended

December 31, 2002, 2001 and 2000, respectively. Compensation expense is recognized for the ESPP, stock

options, restricted stock, RSUs and dividend rights associated with both stock options and RSUs.

Table 11.5 summarizes the weighted-average assumptions used in determining the fair value of options

granted under Freddie Mac's stock-based compensation plans.

Table 11.5 Ì Assumptions Used to Determine the Fair Value of Options

Employee Stock Employee and Directors' Stock

Purchase Plan Compensation Plans

2002 2001 2000 2002 2001 2000

Dividend yield(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.56% 1.21% 1.89% Ì Ì Ì

Expected life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 year 1 year 1 year 7 years 7 years 7 years

Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.0% 32.0% 46.0% 32.0% 32.0% 28.5%

Risk-free interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.75% 3.57% 6.09% 4.75% 5.00% 6.54%

(1) The dividend yield assumption is zero percent for the Employee Plan and Directors' Plan since options granted under these plans

include dividend rights.

NOTE 12: DERIVATIVES

Freddie Mac principally uses the following types of derivatives:

‚ LIBOR-Based Interest-Rate Swaps: Interest-rate swaps are contractual agreements between two

parties for the exchange of periodic payments based on a pre-determined amount (""notional'') and

agreed-upon Ñxed and Öoating interest rates.

‚ LIBOR and Treasury-Based, Exchange-Traded Futures Contracts: Futures contracts are exchangetraded agreements that obligate one party to sell and another party to purchase a speciÑed amount of a

designated Ñnancial instrument at a speciÑed price and date.

‚ LIBOR and Treasury-Based Options and Swaptions: Options are exchange-traded or over-thecounter agreements that give the holder the right, but not the obligation, to buy or sell a speciÑed asset

or enter into a contract at a speciÑed price during a speciÑed period of time. Option holders will

generally exercise their options only if there is an economic advantage in doing so. Swaptions are

options to execute an interest-rate swap at a speciÑc date and speciÑc rates.

‚ LIBOR and Treasury-Based Interest-Rate Caps and Floors: Interest-rate caps and Öoors are

agreements in which the holder pays a one-time up-front premium to another party in exchange for the

right to receive interest payments based on a particular notional amount and the amount, if any, by

which the agreed-upon index rate exceeds a speciÑed maximum (""cap'') or by which the agreed-upon

index is below a speciÑed minimum (""Öoor'') rate.

‚ Foreign Currency Swaps: Currency swaps are contractual agreements between two parties for the

exchange of a speciÑed amount of a designated foreign currency for a speciÑed amount of U.S. dollars

at the inception and termination of the contract. Each party will also make periodic interest payments

on the currency it receives in the swap at agreed-upon Ñxed or Öoating interest rates.

‚ Forward Purchase and Sale Commitments: Forward purchase and sale commitments are over-thecounter agreements that obligate one party to purchase (sell) and another party to sell (purchase) a

speciÑed amount of a designated Ñnancial instrument at a speciÑed price and date.

‚ Other: Other derivatives used by Freddie Mac include a prepayment management agreement and

certain credit risk-sharing agreements that are subject to the requirements of SFAS 133.

Freddie Mac

192
Hedging Activity

No hedge designation

A signiÑcant portion of the company's derivative portfolio is not designated in hedge accounting

relationships. These derivatives are reported at their fair value as either ""Derivative assets, at fair value'' or

""Derivative liabilities, at fair value'' on the consolidated balance sheets with changes in fair value reported in

""Derivative gains (losses)'' on the consolidated statements of income. For the majority of interest-rate swaps

that are not designated in hedge accounting relationships, their associated interest received or paid is

recognized on an accrual basis and recorded in ""Income (expense) related to derivatives,'' within ""Net

interest income.'' However, for certain transactions described in ""NOTE 1: Restatement,'' the interest

accruals related to these derivatives were recorded to ""Non-interest income.'' For purchase and sale

commitments of securities classiÑed as trading under SFAS 115, fair value gains and losses are reported as

""Gains (losses) on investment activity'' on the consolidated statements of income.

Fair value hedges

Fair value hedges represent hedges of exposure to changes in the fair value of a recognized Ñxed-rate

asset, liability or Ñrm commitment. Freddie Mac uses interest-rate swaps, futures, and forward contracts to

hedge against the changes in fair value of Ñxed rate debt due to changes in benchmark interest rates, either the

rate on U.S. Treasury obligations or LIBOR, and/or foreign currency Öuctuations. These derivatives are often

executed to manage interest-rate risk at an aggregate portfolio level. However, for accounting purposes,

Freddie Mac links its fair value hedges to speciÑc debt positions. Therefore, to maintain highly eÅective

accounting hedges in this strategy, Freddie Mac frequently resets the amount of Ñxed-rate debt being hedged.

To accomplish this, typically the accounting hedges are terminated at the time of the reset and the derivatives

are contemporaneously redesignated in new hedge accounting relationships of Ñxed-rate debt.

Derivatives designated as fair value hedges are reported at their fair value as either ""Derivative assets, at

fair value'' or ""Derivative liabilities, at fair value'' on the consolidated balance sheets. For a derivative

qualifying as a fair value hedge, Freddie Mac reports changes in the fair value of the derivative as ""Hedge

accounting gains (losses)'' on the consolidated statements of income along with the changes in the fair value

of the hedged item attributable to the risk being hedged. Hedge ineÅectiveness arises when the fair value

change of a derivative is not equal to the fair value change of the hedged item. For 2002 and 2001, hedge

ineÅectiveness related to fair value hedges was a net $241 million gain and $280 million loss, respectively, and

was reported in ""Hedge accounting gains (losses).'' For 2002 and 2001, $103 million loss and $7 million loss,

respectively have been excluded from the assessment of eÅectiveness for derivatives designated as fair value

hedges. The excluded component represents the change in fair value related to the diÅerence between the spot

price and the forward price on certain sale commitments used as hedges of existing mortgage-related

securities.

Cash Öow hedges

Cash Öow hedges represent hedges of exposure to the variability in the cash Öows of a recognized Öoatingrate asset or liability or a forecasted transaction. Freddie Mac uses interest-rate swaps, futures, options on

futures, foreign-currency swaps and forward contracts 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.

The maximum length of time over which Freddie Mac hedges the exposure related to the variability in

future cash Öows on forecasted debt issuances is thirty years. However, over 90 percent of the AOCI balance

at December 31, 2002, is attributable to cash Öow hedges of the exposure related to the variability in future

cash Öows on forecasted debt issuances of 15 years or less.

Derivatives designated as cash Öow hedges are reported at their fair value as either ""Derivative assets, at

fair value'' or ""Derivative liabilities, at fair value'' with changes in fair value generally reported in AOCI on

the consolidated balance sheets to the extent the hedge is eÅective. The remaining ineÅective portion,

representing the cumulative change in fair value of the derivative from inception of the hedge to the extent it is

Freddie Mac

193
greater than the cumulative change in the fair value of the expected future cash Öows on the hedge item, is

reported as ""Hedge accounting gains (losses)'' on the consolidated statements of income. For 2002 and 2001,

hedge ineÅectiveness related to cash Öow hedges was a net $54 million loss and $14 million loss. No amounts

have been excluded from the assessment of eÅectiveness for derivatives designated as cash Öow hedges.

Under SFAS 133, AOCI amounts are reclassiÑed to earnings as the associated hedged forecasted

mortgage purchase transaction aÅects earnings. During 2002 and 2001, amounts reclassiÑed into earnings also

include after-tax gains of $103 million and $42 million, respectively, resulting from the determination that it

was probable that forecasted transactions related to certain mortgage purchases and sales would not occur. As

of December 31, 2002, the AOCI of $9.9 billion consisted of net unrealized losses of $5.5 billion and net

realized losses from terminated cash Öow hedges of $4.4 billion. The $5.5 billion related to open cash Öow

hedges of forecasted debt can change substantially due to future changes in interest rates and other market

factors. Assuming no changes in interest rates or other factors aÅecting derivatives valuation, the company

estimates that an after-tax loss (including net unrealized and realized losses) of approximately $3.9 billion of

the $9.9 billion recorded in AOCI as of December 31, 2002 will be reclassiÑed into earnings during 2003.

Table 12.1 presents the changes in AOCI related to derivative Ñnancial instruments designated as cash

Öow hedges.

Table 12.1 Ì Accumulated Other Comprehensive Income (Loss) Related to Cash Flow Hedge

Relationships

Year Ended

December 31,

2002 2001

(dollars in millions)

Beginning balance(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,757) $ Ì

Cumulative eÅect of change in accounting principle, net of taxes of $1,422 for the

year ended December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,640)

Net change in fair value related to cash Öow hedging activities, net of taxes of $3,307

and $1,194 for the years ended December 31, 2002 and 2001, respectively(2) ÏÏÏÏÏÏ (6,141) (2,218)

Net reclassiÑcations to earnings, net of taxes of $(551) and $(55) for the years ended

December 31, 2002 and 2001, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,021 101

Ending balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(9,877) $(4,757)

(1) Represents the eÅective portion of the fair value of open derivatives in cash Öow hedge relationships (i.e., net unrealized gains and

losses) and net realized gains and losses on closed (i.e., terminated or redesignated) cash Öow hedges.

(2) Includes periodic interest payments on open swaps designated as cash Öow hedges.

NOTE 13: FINANCIAL GUARANTEES

Principal and Interest Guarantees of Mortgage-related Securities

As guarantor of PCs and Structured Securities, Freddie Mac guarantees (i) the scheduled principal

payments on the outstanding underlying mortgages; (ii) the payment of interest calculated at the certiÑcate

rate times the beginning of month unpaid principal balance, regardless of unscheduled payments received

during the month; and (iii) the unpaid principal balance of any foreclosed mortgage to PC and Structured

Securities investors. To a much more limited extent, Freddie Mac provides similar guarantees on mortgagerelated securities issued by other entities. Freddie Mac generally is paid a guarantee fee for assuming these

credit risks. At December 31, 2002, the maximum potential amount of future principal payments Freddie Mac

could be required to make under the company's guarantees of principal on mortgage-related securities owned

by third parties was $720.5 billion for single-family properties and $8.7 billion for multifamily properties,

respectively. Generally, the contractual terms of Freddie Mac's guarantees are 15 to 30 years; however, the

actual term, may be signiÑcantly less than the contractual terms due to the prepayment characteristics of the

mortgage loans underlying the guaranteed securities. Maximum potential interest payments Freddie Mac

could be required to make associated with these guarantees are not expected to signiÑcantly exceed 120 days

Freddie Mac

194
of interest at the certiÑcate rate given that Freddie Mac generally begins a process to purchase the defaulted

mortgages when they have been delinquent for 120 consecutive days.

The Freddie Mac Act prohibits Freddie Mac from purchasing Ñrst-lien conventional single-family

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

property securing the mortgage unless Freddie Mac is provided one or more of the following credit protections:

mortgage insurance from an approved mortgage insurer; a seller's agreement to repurchase or replace (for

such periods and under such conditions as Freddie Mac may determine) any mortgage that has defaulted; or

retention by the seller of at least a 10 percent participation interest in the mortgages. This requirement does

not apply to multifamily mortgages or to mortgages insured by the FHA or partially guaranteed by the VA.

In the event Freddie Mac is required to make future payments under its guarantees, Freddie Mac will

Ñrst pursue recovering these payments by proceeding against the underlying collateral of the loans. In the

event that the principal amount of single-family loans exceeds the value of the underlying properties, then

Freddie Mac has credit enhancements with maximum coverage totaling $33.0 billion in primary mortgage

insurance, $4.1 billion in pool insurance and other credit enhancements, and $5.9 billion in recourse to lenders

on single-family loans. In addition, $7.5 billion of the single-family loan principal guarantees relate to

resecuritizations that involve Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the U.S.

government. In the event that the principal amount of multifamily loans exceeds the value of the underlying

properties, then Freddie Mac has maximum combined credit enhancements totaling $2.3 billion.

At December 31, 2002, Freddie Mac has recognized a liability of $1.4 billion in ""Guarantee obligation for

Participation CertiÑcates, at fair value'' for a portion of the guarantees (refer to ""NOTE 2: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for further discussion). The remaining exposure has a

$0.1 billion ""Reserve for guarantee losses on Participation CertiÑcates'' for incurred credit losses at

December 31, 2002.

For $3.7 billion of the $8.7 billion of guarantees on mortgage-related securities backed by multifamily

properties, Freddie Mac also provides a guarantee of Ñnancing to the issuer of certain multifamily-related

securities. See ""NOTE 19 Ì VARIABLE INTEREST ENTITIES Ì Multifamily Credit-Enhanced Bond

Trusts'' for more information about these securities. In the event that the remarketing agent for the issuer is

unable to immediately remarket securities that are put back to the issuer, Freddie Mac agrees to advance

funds to the issuer to secure payment to the holders of the securities. The securities repurchased are then

pledged to Freddie Mac as collateral for this Ñnancing until such time as the securities can be remarketed and

the issuer can repay Freddie Mac. There have been no payments made to date by Freddie Mac under this

guarantee.

Market Value Guarantees

Under its guaranteed maturity securities oÅerings, Freddie Mac issues Structured Securities with stated

Ñnal maturities that are shorter than the stated maturity of the underlying mortgage loans. As part of the

issuance of these securities, Freddie Mac eÅectively writes a cash-settled put option to the investor that allows

the investor to be paid any outstanding principal on the stated Ñnal date primarily from the proceeds of an

auction of those securities on the stated Ñnal date. To the extent that the auction proceeds are less than the

outstanding principal on the stated Ñnal date, Freddie Mac is obligated to pay the diÅerence. Such guarantees

expose Freddie Mac to interest rate risk in addition to the credit risk described above. At December 31, 2002,

the maximum potential amount of payments Freddie Mac could be required to make under these written put

options was $13.3 billion. These guarantees are accounted for as derivatives at fair value pursuant to the

provisions of SFAS 133. At December 31, 2002, the notional balance of these written put options was

$13.3 billion and the fair value was a liability of $5.8 million. The longest remaining contractual maturity of

any outstanding written put option, as of December 31, 2002, was 28 years.

Freddie Mac

195
Other Obligations Under Guarantees

Table 13.1 represents information about other guarantees extended by Freddie Mac at December 31,

2002.

Table 13.1 Ì Guarantees Extended by Freddie Mac

Year Ended December 31, 2002

Maximum potential

amount of future

payments Carrying Value

(dollars in millions)

Written put options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 564 $ 1

Swap payment guaranteesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 360 Ì

Servicing released premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137 Ì

Minimum revenue guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 35

Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,148 $ 36

Freddie Mac enters into written put options that require the company to purchase certain Öoating-rate

mortgage-related securities at a speciÑed date and at a speciÑed interest rate spread over an interest rate index.

These written put options are accounted for as derivative Ñnancial instruments in accordance with SFAS 133

and are recorded at fair value in the consolidated balance sheets. The longest remaining contractual maturity

of any outstanding written put option, as of December 31, 2002, was less than 12 months.

Freddie Mac guarantees the performance of interest rate swap contracts in two circumstances. As part of

a resecuritization transaction Freddie Mac transferred certain swaps and related assets to a third party. As part

of this transfer, Freddie Mac guaranteed that interest income generated from the assets would be suÇcient to

cover the required payments under the interest-rate swap contracts. In the other circumstance, Freddie Mac

guaranteed that a customer would perform under an interest-rate swap contract linked to the customer's

variable rate mortgage. The remaining terms of these guarantees at December 31, 2002 are 30 years; however,

the actual terms may be signiÑcantly less than the contractual terms as the amortizing notional balance of the

swaps is linked to prepayable mortgage loans.

Freddie Mac provides guarantees to reimburse servicers for premiums paid to acquire servicing in

situations where Freddie Mac requires the original seller to repurchase the loan and the original seller is

unable to perform under a separate agreement to reimburse the servicer for those servicing premiums. Freddie

Mac's guarantees run through 2007.

Minimum revenue guarantees relate to business transactions whereby Freddie Mac sold assets to

unrelated entities and simultaneously guaranteed that the unrelated entity would generate certain minimum

revenue thresholds related to those assets. To the extent that these minimum revenue amounts are not

achieved, Freddie Mac agreed to pay any shortfall. These guarantees run through 2006.

IndemniÑcations

In connection with various business transactions, Freddie Mac provides standard representations and

warranties to counterparties in contracts entered into in the normal course of business based on an assessment

that the risk of loss would be remote. It is diÇcult to estimate Freddie Mac's maximum exposure under these

indemniÑcation agreements since in many cases there are no stated or notional amounts included in the

indemniÑcation clauses. However, the contingencies triggering the obligation to indemnify have not occurred

and are not expected to occur. 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. There are no amounts reÖected in the Ñnancial statements as of

December 31, 2002 related to these indemniÑcations.

Freddie Mac

196
NOTE 14: LEGAL CONTINGENCIES

Freddie Mac is involved as a party to a variety of legal proceedings arising from time to time in the

ordinary course of business including, among other things, contractual disputes, personal injury claims,

employment-related litigation and other legal proceedings incidental to the company's business. Freddie Mac

is frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. Freddie Mac is also

involved in proceedings arising from its termination of a seller/servicer's eligibility to sell mortgages to, and

service mortgages for, the company. In these cases, the former seller/servicer sometimes seeks damages

against Freddie Mac for wrongful termination under a variety of legal theories. In addition, Freddie Mac is

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

claims alleging wrongful actions of seller/servicers. Freddie Mac's contracts with its seller/servicers generally

provide for them to indemnify the company against liability arising from their wrongful actions.

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

prediction. Freddie Mac is now subject to various legal proceedings, including regulatory and judicial

investigations and civil litigation, arising from the restatement.

Class Action Lawsuits. On June 9, 2003, Freddie Mac and certain former executive oÇcers were

named as defendants in a securities class action lawsuit alleging violations of federal securities laws and

regulations. The plaintiÅs claimed that the defendants disseminated materially false and misleading statements to the market and failed to disclose material information concerning, among others, the following

matters:

‚ the lack of adequate internal accounting controls and personnel expertise;

‚ the failure to follow accounting rules that require derivative securities to be marked to market;

‚ the use of accounting techniques to lower earnings results in good times and lift results when

business conditions deteriorated; and

‚ providing investigators with altered records to conceal improper accounting techniques.

These allegations covered the period from January 27, 2003 through June 9, 2003. The plaintiÅs sought

unspeciÑed compensatory damages, costs and expenses.

Subsequent to the Ñling of that initial lawsuit, additional class action lawsuits relating to the same matters

were Ñled against Freddie Mac and certain former executive oÇcers. These lawsuits included slightly diÅerent

allegations, covered diÅerent class periods (which begin on dates ranging from January 1, 2000 to January 27,

2003, and end on dates ranging from June 6, 2003 to August 22, 2003), and sought unspeciÑed compensatory

damages, costs and expenses. Among these later lawsuits was one Ñled by the Ohio Public Employees

Retirement System and the State Teachers Retirement System of Ohio, and another by the West Virginia

Investment Management Board and the Central States, Southeast and Southwest Areas Pension Fund. The

latter suit also named Gregory Parseghian, Freddie Mac's former Chief Executive OÇcer and President, as a

defendant and included allegations that he, as well as Leland Brendsel, David Glenn and Vaughn Clarke,

engaged in insider trading. Two of these class action lawsuits were Ñled by separate participants in Freddie

Mac's Thrift/401(k) Savings Plan against the company, certain individuals, and the company's Retirement

Committee alleging ERISA violations. In particular, the plaintiÅs claimed that the defendants breached their

Ñduciary duty because Freddie Mac stock was an imprudent investment for the Thrift/401(k) Savings Plan.

The two Employee Retirement Income Security Act (""ERISA'') lawsuits have now been consolidated as a

single suit.

Many of the lawsuits described above have been voluntarily dismissed by the plaintiÅs. The dismissal of

those suits and the consolidation of the ERISA suits reduces the number of pending lawsuits to Ñve.

On January 15, 2004, the plaintiÅs in one of the pending lawsuits Ñled an amended complaint,

incorporating information disclosed in Freddie Mac's restatement. The basis of the claims remains the same,

although the class period alleged now ranges from July 15, 1999 to June 6, 2003.

Shareholder Derivative Lawsuits. On July 1, 2003, certain former and current members of the Board of

Directors of Freddie Mac were named as defendants in a shareholder derivative action alleging breach of

Freddie Mac

197
Ñduciary duty. The current members of the Board of Directors were subsequently dismissed as defendants

from this lawsuit with the consent of the plaintiÅ. The remaining individual defendants in this suit are Messrs.

Brendsel and Glenn, Vaughn Clarke and John Gibbons (both former Chief Financial OÇcers) and Gregory

Parseghian. Freddie Mac is named as a nominal defendant in that action. A similar lawsuit was Ñled against

Messrs. Brendsel, Glenn, Clarke, Gibbons and Parseghian and Freddie Mac on December 11, 2003.

Freddie Mac anticipates that additional lawsuits relating to the matters described above may be Ñled.

SEC Formal Investigation. On June 11, 2003, Freddie Mac announced that it had been informed by

the staÅ of the SEC that the SEC had commenced a formal investigation. Freddie Mac received a subpoena

from the SEC on June 11, 2003 requesting document production and testimony. In addition, Gregory

Parseghian, PricewaterhouseCoopers LLP, Freddie Mac's current independent auditors, and a former member

of the Board of Directors also received subpoenas for documents and testimony. Beginning in August 2003,

the SEC subpoenaed documents and began to take witness testimony from certain present and former Freddie

Mac employees and directors, as well as third parties. Freddie Mac is fully cooperating with the SEC and will

continue to do so.

OFHEO Investigation. On June 7, 2003, OFHEO directed Freddie Mac and its Board of Directors to

take certain actions to address the issues surrounding the restatement. OFHEO also announced that it had

deployed a special investigative team to review accounting practices and controls relevant to the restatement

process at Freddie Mac and to investigate employee misconduct. As part of this investigation, OFHEO

submitted to Freddie Mac multiple requests for documents, and it also subpoenaed certain current Freddie

Mac employees and directors, as well as former employees, requesting testimony and documents. In July

2003, OFHEO began to conduct interviews in which it took sworn testimony from certain Freddie Mac

employees and directors, external third parties and former employees.

On October 23, 2003, OFHEO announced that it had entered into a consent order with David Glenn, in

which Mr. Glenn agreed to cooperate fully with OFHEO's special examination and also with any supervisory

and/or enforcement proceeding initiated by OFHEO, to pay a civil money penalty of $125,000, and not to

participate in any manner in the conduct of the aÅairs of Freddie Mac or Fannie Mae without prior OFHEO

approval.

On December 10, 2003, Freddie Mac announced that it had entered into a consent order and settlement

generally resolving certain matters with OFHEO relating to the restatement. Under the terms of the consent

order, Freddie Mac is undertaking remedial actions relating to many of the same areas as its remediation

program, including governance, corporate culture, internal controls, accounting practices, disclosure and

oversight. In addition, the company has paid a civil money penalty in the amount of $125 million.

Separately on the same date, OFHEO released its staÅ report on its investigation of matters relating to

the restatement. The report included recommendations by the staÅ to the Director to consider increasing

OFHEO's regulation of Freddie Mac's activities, for example, by setting restrictions on the growth of the

company's retained portfolio, by requiring that Freddie Mac hold a capital surplus until it produces timely and

certiÑed Ñnancial statements, or by possibly implementing a mandatory disclosure regime similar to that

required for companies with securities registered under the Securities Act and Exchange Act. Depending on

the manner in which such recommendations are implemented, the adoption of one or more of them could have

an adverse eÅect on Freddie Mac's Ñnancial results. As discussed below, the Director has acted upon the

report's recommendation regarding a capital surplus.

On December 17, 2003, OFHEO Ñled administrative Notices of Charges against Messrs. Brendsel and

Clarke seeking to have them pay civil money penalties, to have them make restitution to the company in the

amount of the bonuses paid to them in 2000 and 2001, to prohibit Mr. Brendsel from pursuing or accepting

any payments from the company that exceed the payments to which he would be entitled if he had been

terminated for cause under his employment agreement, and to prohibit Mr. Clarke from pursuing or accepting

any payments from the company that exceed the payments to which he would be entitled if he had been

terminated for loss of conÑdence by the company. OFHEO also issued an administrative Notice of Charges

against Freddie Mac to require the company to convert Mr. Brendsel's termination to a termination for cause

under his employment contract, to convert Mr. Clarke's termination to a termination for loss of conÑdence, to

Freddie Mac

198
prohibit the company from making any payments to Mr. Brendsel that would exceed the payments to which

he would be entitled if he had been terminated for cause under his employment contract, and to prohibit the

company from making any payments to Mr. Clarke that would exceed the payments to which he would be

entitled if he had been terminated for loss of conÑdence by the company. Prior to the issuance of these

administrative Notices of Charges, the Board of Directors had advised OFHEO that Freddie Mac has existing

contractual obligations to both former executives, which it is required to perform unless those obligations are

superseded by valid authority, and that the company intends to comply fully with any valid and eÅective order

that OFHEO may issue.

On January 29, 2004, OFHEO announced the creation of a framework for monitoring Freddie Mac's

capital due to the temporarily higher operational risk arising from the company's current inability to produce

timely Ñnancial statements in accordance with GAAP.

The framework includes a target capital surplus of 30 percent of Freddie Mac's minimum capital

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

transactions, to ensure that appropriate levels of capital are maintained.

While OFHEO's framework includes stringent monitoring and imposes restrictions on share repurchases,

Freddie Mac does not expect it to adversely aÅect its disciplined growth strategy or require the company to

raise additional capital.

OFHEO's oversight of Freddie Mac's actions is intended to ensure that any growth is reasonable given

market conditions and the company's capital position. OFHEO will monitor Freddie Mac's estimated capital

position on a weekly basis. A failure by Freddie Mac to meet the target capital surplus would result in

discussions between Freddie Mac and OFHEO concerning the reason for such failure. If OFHEO were to

determine, based on these discussions and weekly monitoring, that Freddie Mac had unreasonably deviated

from the framework, OFHEO would require the company to submit a remedial plan or to take other remedial

steps.

In addition, Freddie Mac is required to obtain prior written approval from the Director of OFHEO before

engaging in certain capital transactions, including the repurchase of any shares of common stock or

redemption of any preferred stock. Freddie Mac also must submit a written report to the Director of OFHEO

after the declaration, but before the payment, of any dividend on its common stock. The report must contain

certain information on the amount of the dividend, the rationale for the payment and the impact on Freddie

Mac's capital surplus.

OFHEO indicated that this framework is temporary and will be lifted when the Director of OFHEO

determines that it should expire based on Freddie Mac's resumption of timely Ñnancial reporting that complies

with GAAP and certain other factors.

Management believes that this framework will provide OFHEO with a mechanism to ensure that the

company manages its business with continued prudence and appropriate levels of capital, taking into account

that the company is not currently able to produce timely Ñnancial statements.

U.S. Attorney's Criminal Investigation. On June 11, 2003, Freddie Mac was informed that the U.S.

Attorney's OÇce in Alexandria, Virginia had opened a criminal investigation involving the company. As part

of its investigation, the U.S. Attorney's OÇce has made requests for documents and information, interviewed

certain Freddie Mac employees and possibly other parties, and taken testimony before the grand jury. Freddie

Mac is cooperating in all respects with this investigation.

At present, it is not possible for Freddie Mac to predict the outcome of the civil litigation, the

administrative proceedings or the investigations described above or reasonably to estimate the amount of loss

(or range of possible loss) that might result from adverse results or settlements of these matters, or their eÅect

on the company's Ñnancial condition and results of operations.

Freddie Mac

199
NOTE 15: INCOME TAXES

Freddie Mac is exempt from state and local income taxes. Table 15.1 presents the components of the

company's ""Provision for income taxes.''

Table 15.1 Ì Provision for income taxes

Year Ended December 31,

2002 2001 2000

(dollars in millions)

Current tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,023 $1,584 $ 884

Deferred tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,690 (245) 620

Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,713 $1,339 $1,504

Freddie Mac uses the asset and liability method of accounting for income taxes pursuant to SFAS 109,

""Accounting for Income Taxes.'' Under the asset and liability method, deferred tax assets and liabilities are

recognized based upon the expected future tax consequences of existing temporary diÅerences between the

Ñnancial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax rates.

Table 15.2 summarizes Freddie Mac's deferred tax asset and liability.

Table 15.2 Ì Deferred tax asset/(liability)

December 31,

2002 2001

(dollars in millions)

Deferred tax assets:

Deferred fees related to securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,308 $ 709

Basis diÅerences related to assets held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139 353

Employee compensation and beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 136 97

Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Ì

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61 103

Cash Öow hedge deferrals and unrealized (gains) losses related to available-forsale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 300

Total deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,655 1,562

Deferred tax liabilities:

Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,826) (1,165)

Basis diÅerences related to derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,639) (115)

Credit related items and reserve for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (102)

Cash Öow hedge deferrals and unrealized (gains) losses related to available-forsale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,260) Ì

Total deferred tax (liability)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,725) (1,382)

Net deferred tax (liability)/assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,070) $ 180

Included in deferred taxes is the tax eÅect on the (i) net unrealized (gain) loss on available-for-sale

securities and (ii) net (gain) loss related to derivatives designated in cash Öow hedge relationships, which are

both reported in AOCI.

A valuation allowance has not been established against Freddie Mac's deferred tax assets as of

December 31, 2002 or 2001, as Freddie Mac has determined that it is more likely than not that all such tax

assets will be realized in the future.

Freddie Mac

200
Table 15.3 reconciles the statutory federal tax rate to the eÅective tax rate before the cumulative eÅects

of changes in accounting principles.

Table 15.3 Ì Reconciliation of Statutory to EÅective Tax Rate

Year Ended December 31,

2002 2001 2000

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%

Tax-exempt interest and dividends-received deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.2) (3.6) (2.9)

Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) (2.9) (2.0)

Provision (beneÑt) related to tax contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.0) 1.4 (1.2)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 0.2 0.2

EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.8% 30.1% 29.1%

Impact of tax issues. The Internal Revenue Service (""IRS'') has a policy to examine the income tax

returns of large corporate taxpayers, including Freddie Mac, generally every year. Management believes that

an adequate provision in accordance with SFAS 5 has been made for contingencies related to all income taxes

and related interest. However, the ultimate outcome of these tax contingencies, including those related to the

REITs, could result in a tax beneÑt or tax provision that could be material to Freddie Mac's quarterly or

annual results of operations. Based on current knowledge and after consultation with outside counsel,

management does not believe that liabilities arising from these tax matters, if any, will have a material adverse

eÅect on Freddie Mac's consolidated Ñnancial condition.

Tax Years 1985 to 1990. In 1998, the IRS issued Freddie Mac a Statutory Notice, which asserts

income tax deÑciencies, for the company's Ñrst two tax years, 1985 and 1986. In the Ñrst quarter of 1999,

Freddie Mac Ñled a petition in the Court to contest the deÑciencies. In the third quarter of 1999, the IRS

issued a Statutory Notice for Freddie Mac's tax years 1987 to 1990, and Freddie Mac Ñled a petition in the

Court. Subsequently, the Court combined the 1985 to 1990 tax years into one case. The principal matters in

controversy in the case involve questions of tax law as applied to Freddie Mac's transition from non-taxable to

taxable status in 1985 and primarily involve the amortization of certain intangible assets, the two most

signiÑcant of which are:

‚ Favorable Financing. A number of Ñnancing arrangements where the contract rates of interest

were less than the market rates of interest as of January 1, 1985 due to an increase in interest rates

since the date on which Freddie Mac had entered into the respective arrangements; and

‚ Customer Relationships. Freddie Mac's business relationships with a substantial number of

mortgage originating institutions that sold mortgages to Freddie Mac on a regular basis.

Recent Tax Court Rulings. On September 4, 2003, and September 29, 2003, the Court decided

favorably for Freddie Mac on two preliminary motions involving questions of law in the case. On September 4,

the Court ruled favorably for Freddie Mac on the question whether Freddie Mac's intangibles are amortizable

using, as the adjusted basis, the higher of (i) the regular adjusted cost basis or (ii) the fair market value on

January 1, 1985. On September 29, 2003, the Court ruled favorably for Freddie Mac on the question whether,

as a matter of law, ""favorable Ñnancing'' (as deÑned above) was amortizable for tax purposes. As part of this

case, Freddie Mac claimed, and the Court agreed, that the economic beneÑt of this below-market Ñnancing as

of January 1, 1985 is an intangible asset subject to amortization. In October 2003, the Court ruled unfavorably

on two other less signiÑcant issues in the case.

While signiÑcant, the Court's rulings do not dispose of all of the matters in controversy in the case, which,

upon Ñnal resolution by the Court of all such matters, are subject to appeal by the parties. In addition, Freddie

Mac still must demonstrate that the intangible assets in question have an ascertainable value and have a

limited useful life, the duration of which can be ascertained with reasonable accuracy.

In view of the favorable rulings described above and in accordance with GAAP, Freddie Mac recorded in

the fourth quarter of 2002 a reduction in its tax reserves in the amount of $155 million. In addition, if the IRS

Freddie Mac

201
were to appeal the Court decisions and an adverse ruling resulted, Freddie Mac may reconsider its reserves

related to this matter.

If Freddie Mac's tax position on the customer relationship amortization issue described above is upheld

through the administrative and legal process, Freddie Mac will be able to recognize additional tax beneÑts that

could be material in the quarter during which they are recognized. However, Freddie Mac is unable to provide

assurances that any such tax beneÑts will be realized.

Tax Years 1991 to 1993. The IRS examination of Freddie Mac's federal income tax returns for the

years 1991 through 1993 has been completed. In December 2001, the IRS issued a Statutory Notice for these

years. In the Ñrst quarter of 2002, Freddie Mac Ñled a petition in the Court to contest the deÑciencies. The

principal matters in controversy in this case are the same questions at issue in the 1985 to 1990 case as applied

to years 1991 to 1993, plus an additional question of tax law regarding the timing of taxation of Freddie Mac's

management and guarantee fee income.

Tax Years 1994 to 1997. In the second quarter of 2002, the IRS completed its examination of Freddie

Mac's federal income tax returns for the years 1994 through 1997. Freddie Mac is involved in discussions with

the IRS Appeals Division regarding the company's disagreement with certain aspects of the examination

report. The principal matters in controversy, other than the same questions at issue in the 1985 to 1993 cases,

involve the character of losses on dispositions of mortgage securities and certain issues relating to Freddie

Mac's REIT subsidiaries.

Tax Treatment of REITs. In February 1997, Freddie Mac formed two REIT subsidiaries that issued a

total of $4 billion in step-down preferred stock to investors. Under the IRS regulations in eÅect when the

REITs were formed, the company believes that the dividend payments by the REITs to holders of the REITs'

step-down preferred stock are fully tax deductible. In 1997, subsequent to the formation of Freddie Mac's

REIT subsidiaries, the Department of the Treasury announced its intention to propose regulations that would

eÅectively eliminate the potential tax advantages of REITs that issued step-down preferred stock. On

January 7, 2000, the Treasury issued Ñnal regulations that retroactively deny certain tax beneÑts attributable

to Freddie Mac's REIT preferred stock for tax years ending on or after February 27, 1997. Based upon this

guidance, the IRS has challenged Freddie Mac's position that the REIT dividends are fully deductible. Given

the uncertainty related to the tax treatment of the dividends, Freddie Mac has not recorded a tax beneÑt for a

portion of the REIT dividends in its consolidated financial statements. This tax treatment is subject to change

once uncertainties related to the tax treatment of such dividends are adequately clariÑed. The preferred stock

is redeemable by the REITs under certain circumstances where the REITs obtain a legal opinion to the eÅect

that changes in applicable tax law could adversely aÅect the tax treatment of the REITs or the preferred stock.

Tax Years 1998 to 2002. The IRS is currently examining Freddie Mac's tax returns for the years 1998

through 2002. This examination includes the years for which Freddie Mac has restated its Ñnancial reporting.

Tax Treatment of Linked Swaps. In August and September of 2001, Freddie Mac entered into a series

of nine sets of paired trade transactions known as ""Linked Swaps.'' Freddie Mac has reported and paid tax

treating each pair of Linked Swaps as a single integrated transaction for federal income tax purposes. There is

a risk, however, that the IRS could challenge Freddie Mac's tax treatment of the Linked Swaps and make an

adverse determination relating to this tax treatment. If this should occur, the potential aggregate additional tax

liability could be as much as approximately $750 million plus interest.

In addition, two additional swaps were executed in November 2001. Although the facts and circumstances surrounding these swaps were diÅerent from the Linked Swaps, Freddie Mac also reported and paid

tax treating these swaps as a single integrated transaction for federal income tax purposes. Management

believes there are no signiÑcant tax exposures related to these swaps for the periods covered by the

restatement.

Freddie Mac has not provided reserves for any tax issues related to these transactions because

management has determined that the potential for loss does not meet the criteria for recognition under

SFAS 5. Since the IRS is currently examining Freddie Mac's 2001 and 2002 tax returns, the company does

not know whether the IRS will raise any issues related to these transactions as part of that examination and if

so, what the Ñnal resolution of those issues will be. If the IRS were to propose the maximum potential

Freddie Mac

202
aggregate assessment and that additional tax liability was upheld through the administrative and legal process,

the recognition of such additional liability could have a material adverse impact on Freddie Mac's results of

operations in the quarter in which it was recognized. Based on current knowledge and after consultation with

counsel, management does not currently believe that the Ñnal resolution of any issues that may arise from the

Linked Swaps transactions will result in IRS adjustments that would have a material adverse eÅect on Freddie

Mac's consolidated Ñnancial condition.

NOTE 16: EMPLOYEE BENEFITS

DeÑned BeneÑt Plans

Freddie Mac maintains a tax-qualiÑed deÑned beneÑt pension plan (""Pension Plan'') covering substantially all of its employees. Pension Plan beneÑts are based on years of service and the employee's highest

average compensation (up to legal plan limits) over any three consecutive years of employment. It is Freddie

Mac's general practice to contribute to the Pension Plan an amount up to the maximum amount deductible for

federal income tax purposes each year. Pension Plan assets are held in trust and consist primarily of corporate

bonds and listed stocks. In addition to the Pension Plan, Freddie Mac maintains nonqualiÑed, unfunded

deÑned beneÑt pension plans for oÇcers of the company. The related retirement beneÑts for the nonqualiÑed

plans are paid from Freddie Mac's general assets.

Freddie Mac maintains a deÑned beneÑt post-retirement health care plan that provides post-retirement

health care beneÑts on a contributory basis to retired employees age 55 or older who rendered at least ten years

of service (Ñve years of service prior to 2002) after age 35 and who, upon separation or termination,

immediately elected to commence beneÑts under the Pension Plan in the form of an annuity. The company's

post-retirement health care plan currently is not funded and therefore has no plan assets.

The company is required to accrue the estimated cost of retiree beneÑts as employees render the services

necessary to earn their post-retirement beneÑts. Freddie Mac's pension and post-retirement health care costs

and the funded status of these plans for 2002, 2001 and 2000 presented in the following tables were calculated

using assumptions as of September 30, 2002, 2001 and 2000, respectively. Table 16.1 summarizes the

components of consolidated net periodic beneÑt costs related to Freddie Mac's deÑned beneÑt pension plans

and post-retirement health care plan. Net periodic beneÑt costs are included in the line ""Salaries and

employee beneÑts'' on the company's consolidated statements of income.

Table 16.1 Ì Net Periodic BeneÑt Cost Detail

Pension BeneÑts Post-Retirement BeneÑts

Year Ended December 31, Year Ended December 31,

2002 2001 2000 2002 2001 2000

(dollars in millions)

Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12 $ 12 $ 10 $ 4 $2 $3

Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏ 14 12 10 3 2 1

Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13) (13) (12) Ì Ì Ì

Recognized net actuarial (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1) (1) 1 Ì Ì

Recognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (1) Ì Ì

Net periodic beneÑt costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13 $ 10 $ 7 $ 7 $4 $4

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203
Table 16.2 summarizes the changes in the projected beneÑt obligation and the fair value of plan assets for

the deÑned beneÑt pension plans, and the change in the accumulated beneÑt obligation for the post-retirement

health care plan. The Amendment referred to below for Pension BeneÑts for 2002 relates to the increase in the

maximum annual deÑned beneÑt limit as deÑned by IRC Section 415(b) and the maximum compensation

limit as deÑned by IRC Section 401(a)(17). The Amendment referred to for Post-Retirement BeneÑts for

2002 includes changes in eligibility and Medicare coordination. The Amendment referred to for Pension

BeneÑts for 2001 relates to the company's change in the death beneÑt eÅective January 1, 2001 to provide preretirement death beneÑts for all participants.

Table 16.2 Ì Projected BeneÑt Obligations and Fair Value of Plan Assets

PostPension Retirement

BeneÑts BeneÑts

December 31, December 31,

2002 2001 2002 2001

(dollars in millions)

PROJECTED BENEFIT OBLIGATION:

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $179 $162 $28 $22

Amendment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 (8) Ì

Service cost of current period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 12 4 2

Interest cost on beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 12 3 2

Net actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 (5) 27 2

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) (3) Ì Ì

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $230 $179 $54 $28

THE FAIR VALUE OF PLAN ASSETS:

Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $139 $152

Actual loss return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13) (20)

Employer contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 10

BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) (3)

Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $160 $139

Table 16.3 sets forth the funded status of the deÑned beneÑt pension plans and post-retirement health

care plan, the assumptions used to calculate the funded status and amounts recognized in the Consolidated

Balance Sheets.

Table 16.3 Ì Funded Status of Plans and by Assumptions

PostRetirement

Pension BeneÑts BeneÑts

December 31, December 31,

2002 2001 2002 2001

(dollars in millions)

BeneÑt obligation in excess of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 70 $ 40 $ 54 $ 28

Unrecognized net actuarial (loss) gainÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (57) (4) (23) 3

Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (1) 7 Ì

Initial unrecognized net asset being recognized over 17 years ÏÏÏÏÏ (1) (1) Ì Ì

Net liability included in Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10 $ 34 $ 38 $ 31

Prepaid beneÑt costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (2) $ Ì

Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 34

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10 $ 34

MAJOR ASSUMPTIONS:

Assumed discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.00% 7.50% 7.00% 7.50%

Rate of increase in compensation levels ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.50 4.50 Ì Ì

Consumer price index ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.50 3.50 Ì Ì

Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.00 9.00 Ì Ì

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204
The assumed health care cost trend rate used in measuring the accumulated post-retirement beneÑt

obligation is 15.0 percent in 2003, gradually declining to 5.0 percent in 2007 and remaining at that level

thereafter.

Table 16.4 sets forth the eÅect on the accumulated post-retirement beneÑt obligation and the sum of the

service cost and interest cost components of the net periodic post-retirement beneÑt costs that would result

from a 1 percent increase or decrease in the assumed health care cost trend rate.

Table 16.4 Ì Selected Data Regarding the Post-Retirement Plan

One-Percent One-Percent

Increase Decrease

EÅect on the accumulated post-retirement beneÑt obligation for health care

beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22% (17)%

EÅect on the net periodic post-retirement beneÑt cost components ÏÏÏÏÏÏÏÏÏÏÏÏ 25% (19)%

DeÑned Contribution Plans

Freddie Mac also oÅers a tax-qualiÑed deÑned contribution pension plan (the ""Savings Plan'') to all

eligible employees. Employees were permitted to contribute from 1 percent to 15 percent of their annual

salaries to the Savings Plan, up to $14,500 in 2002, 2001 and 2000 ($11,000 pre-tax and $3,500 after tax in

2002 and $10,500 pre-tax and $4,000 after tax in 2001 and 2000). Freddie Mac matches employees'

contributions up to 6 percent of their salaries per pay period; the percentage matched depends upon the length

of service. In addition, Freddie Mac is authorized to make discretionary contributions to the Savings Plan on

behalf of each eligible employee, based on salary level. Employees become vested in Freddie Mac's

discretionary contributions after 5 years. Freddie Mac made contributions to the Savings Plan totaling

$21.4 million, $21.1 million, and $16.0 million for 2002, 2001 and 2000, respectively.

See ""NOTE 14 Ì LEGAL CONTINGENCIES'' for information regarding two class action lawsuits

Ñled by separate participants in Freddie Mac's Thrift/401(k) Savings Plan.

Executive Deferred Compensation Plan

The 2002 Executive Deferred Compensation Plan is an unfunded, non-qualiÑed plan that allows certain

key employees to elect to defer their annual salary and cash bonus, and certain key management employees to

defer the settlement of restricted stock units received from Freddie Mac, for any number of years speciÑed by

the employee, but under no circumstances may the period elected exceed their life expectancy. Deferred

salary, cash bonus and stock units are credited to an employee's account as of the date such amounts or units

would have otherwise been paid or settled by delivery of shares to the employee, including interest accruals.

Subject to provisions for hardship withdrawals and certain terminations of employment, deferred distributions

are payable at the end of the deferral period in lump sums or reasonably equal installments over Ñve, ten or

15 years. Distributions are paid from Freddie Mac's general assets.

Freddie Mac

205
NOTE 17: FAIR VALUE DISCLOSURES

The FVBS in Table 17.1 present Freddie Mac's estimates of the fair value of the company's recorded

assets and liabilities and oÅ-balance-sheet Ñnancial instruments as of December 31, 2002 and 2001. The

FVBS includes all items recorded in the consolidated balance sheets prepared in accordance with GAAP, as

well as all oÅ-balance-sheet Ñnancial instruments that are not recorded in the GAAP consolidated balance

sheets. The valuation of Ñnancial instruments on the FVBS is in accordance with GAAP fair value guidelines

prescribed by SFAS 107, ""Disclosures about Fair Value of Financial Instruments'' (""SFAS 107'').

For information regarding the impact of the restatement and other corrections on Freddie Mac's FVBS

net assets at December 31, 2001, see ""NOTE 1: RESTATEMENT.''

Table 17.1 Ì Consolidated Fair Value Balance Sheets(1)

December 31,

2002 2001

Carrying Fair Carrying Fair

Amount(2) Value Amount(2) Value

(dollars in billions)

Assets

Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63.9 $ 67.6 $ 62.6 $ 63.6

Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 525.8 526.3 441.1 441.5

Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 589.7 593.9 503.7 505.1

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.8 10.8 3.5 3.5

Investments(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101.2 101.2 83.6 83.5

Securities purchased under agreements to resell and Federal

funds soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23.0 23.0 33.5 33.5

Derivative assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.4 10.4 2.0 2.0

Guarantee asset for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.4 3.8 3.1 4.7

Other assets(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.7 14.2 11.7 11.9

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752.2 $757.3 $641.1 $644.2

Liabilities and minority interest

Total debt securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $665.7 $683.6 $578.4 $583.0

Guarantee obligation for Participation CertiÑcates ÏÏÏÏÏÏÏÏÏÏ 1.4 2.1 1.2 1.8

Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.0 1.0 2.6 2.6

Reserve for guarantee losses on Participation CertiÑcates ÏÏÏÏ 0.1 Ì 0.1 Ì

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50.4 45.1 36.6 35.7

Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.3 2.6 2.6 2.8

Total liabilities and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 720.9 734.4 621.5 625.9

Net assets attributable to stockholders

Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6 4.6 4.6 4.5

Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.7 18.3 15.0 13.8

Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.3 22.9 19.6 18.3

Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $752.2 $757.3 $641.1 $644.2

(1) The consolidated fair value balance sheets do not purport to present the net realizable, liquidation or market value of the company as

a whole.

(2) Carrying amount is derived from the company's GAAP consolidated balance sheets.

(3) Includes mortgage-related securities held in connection with PC market-making and support activities.

(4) Fair values at December 31, 2002 and 2001 include estimated income taxes on the diÅerence between fair value balance sheets and

the GAAP balance sheets.

Limitations

The FVBS does not capture all elements of value that are implicit in Freddie Mac's operations as a going

concern since the FVBS only captures the values of the current investment and securitization portfolios. For

example, the FVBS does not capture the value of new investment and securitization business that would likely

Freddie Mac

206
replace prepayments as they occur. In addition, the FVBS also does not capture the value associated with

future growth opportunities in Freddie Mac's investment and securitization portfolios. Thus, the fair value of

net assets attributable to stockholders presented in the FVBS does not represent an estimate of the net

realizable, liquidation or market value of Freddie Mac as a whole.

Freddie Mac reports assets and liabilities that are not Ñnancial instruments (such as Freddie Mac's Ñxed

assets and deferred taxes), as well as certain Ñnancial instruments that are not covered by the SFAS 107

disclosure requirements (such as pension liabilities) at their GAAP carrying amounts in the FVBS.

Management believes these items do not have a signiÑcant impact on Freddie Mac's overall Ñnancial

prospects or fair value results.

Valuation Methods and Assumptions

The following methods and assumptions were used to estimate the fair value of assets and liabilities at

December 31, 2002 and 2001.

Mortgage loans

""Mortgage loans'' represent single-family and multifamily whole loans held in Freddie Mac's retained

portfolio. For GAAP purposes, management must determine the fair value of these mortgage loans to

calculate LOCOM adjustments for mortgages classiÑed as held for sale. Management uses this same

approach when determining the fair value of all whole loans, including those held for investment, for FVBS

purposes.

Freddie Mac determines the fair value of mortgage loans based on comparisons to actively traded

mortgage-related securities with similar characteristics, with an adjustment for yield, credit and liquidity

diÅerences. SpeciÑcally, for value estimation purposes, Freddie Mac aggregates mortgage loans into pools by

product type, coupon and maturity and then converts the pools into notional mortgage-related securities based

on their speciÑc characteristics. Freddie Mac then calculates fair values for these notional mortgage-related

securities using the process that is described in the ""Mortgage-Related Securities'' section, below.

As described above, the fair value of these mortgage loans also includes an adjustment for yield, credit

and liquidity diÅerences. To accomplish this, the fair value of the single-family whole loans includes an

adjustment representing the additional cash Öows on the mortgage coupon of the whole loan in excess of the

coupon expected on the notional mortgage-related securities. For multifamily whole loans, the implied

guarantee fee is estimated by calculating the net present value of guarantee fees expected to be retained by

Freddie Mac. This retained guarantee fee is estimated by subtracting the expected cost of funding and

securitizing a multifamily whole loan of a comparable maturity and credit rating from the coupon on the whole

loan at the time of purchase.

The implied guarantee fee is also net of the related credit and other components inherent in the

company's guarantee obligation. For single-family whole loans, the process for estimating the related credit

and other guarantee obligation components is described in the ""Ì Guarantee Obligation for Participation

CertiÑcates'' section. For multifamily whole loans, the process for estimating the related credit and other

guarantee obligation components employs a market-based approach to estimate the potential credit obligation.

This obligation is estimated by extracting the credit risk premium that multifamily whole loan investors

require from market prices on similar securities. This credit risk premium is net of expected funding, liquidity,

and other risk premiums that are embedded in the market price of the reference securities.

Mortgage-related securities

""Mortgage-related securities'' represent passthroughs and other mortgage-related securities classiÑed as

available-for-sale and trading, which are already reÖected at fair value on the GAAP consolidated balance

sheets. (Freddie Mac had no mortgage-related securities classiÑed as held-to-maturity in 2002 and 2001.)

Mortgage-related securities largely consist of PCs and Structured Securities issued by Freddie Mac, Fannie

Mae and Ginnie Mae. They also include other mortgage-related securities such as home equity, commercial

mortgage-backed, and manufactured housing securities.

Freddie Mac

207
The fair value of securities with readily available third-party market prices is based on market prices

obtained from brokers and dealers or reliable third-party pricing service providers. For other securities, an

OAS approach is used to estimate fair value. This OAS approach uses a model developed from market data

and management judgment to estimate the OAS risk premium an investor would require as compensation for

a given product's prepayment uncertainty and interest-rate volatility. Once an OAS has been determined, fair

value is calculated by using the OAS as an input to Freddie Mac's interest-rate and prepayment models in

order to determine the estimated net present value of projected cash Öows. Other securities that are not priced

using the OAS approach are priced using other modeling techniques or by using other securities as proxies.

For FVBS purposes, ""mortgage-related securities'' also includes the expected market value of Ñnancial

guarantee contracts that Freddie Mac purchased to obtain additional credit protection on certain manufactured housing asset-backed securities. These Ñnancial guarantee contracts, which had a fair value of

approximately $148 million and zero as of December 31, 2002 and December 31, 2001, respectively, are

excluded from the fair values used for GAAP consolidated balance sheet purposes. The fair value of these

contracts is based on the diÅerence between the market price of non-credit impaired manufactured housing

securities and credit-impaired manufactured housing securities that are likely to produce future credit losses,

as adjusted for management's estimate of a risk premium attributable to the Ñnancial guarantee contracts. The

value of the contracts, over time, will be determined by the actual credit-related losses incurred and, therefore,

may have a value that is higher or lower than management's market-based estimate.

Mortgage-related securities also include Participation CertiÑcate residuals related to PCs held by Freddie

Mac and reported in the mortgage-related securities line item. PC residuals are reported at fair value on

Freddie Mac's consolidated balance sheets. Fair value for PC residuals is estimated in the same manner as

described for guarantee assets and guarantee obligations for PCs, below. See ""NOTE 2: SUMMARY OF

SIGNIFICANT ACCOUNTING POLICIES'' for more information about accounting policies related to

PC residuals.

Cash and cash equivalents

""Cash and cash equivalents'' largely consist of highly liquid investment securities with an original

maturity of three months or less and securities used for cash management purposes, as well as cash collateral

posted by Freddie Mac's derivative counterparties. Given that these assets are short-term in nature with

limited market value volatility, the carrying amount on the GAAP consolidated balance sheets is assumed to

be a reasonable approximation of fair value.

Investments

""Investments'' principally consists of mortgage-related and non-mortgage-related securities classiÑed as

either available-for-sale or trading, which are reported at fair value on Freddie Mac's consolidated balance

sheets. ""Investments'' also includes PC residuals related to Freddie Mac PCs reported in the Investments line

item.

Securities purchased under agreements to resell and Federal funds sold

""Securities purchased under agreements to resell and Federal funds sold'' principally consists of shortterm contractual agreements such as repurchase agreements involving Treasury and agency securities, Federal

funds sold and Eurodollar time deposits. Given that these assets are short-term in nature, the carrying amount

on the GAAP consolidated balance sheets is assumed to be a reasonable approximation of fair value.

Guarantee assets for Participation CertiÑcates

Under GAAP, in certain cases Freddie Mac records the fair value of management and guarantee fees on

PCs as guarantee assets in its consolidated balance sheets. In other cases, management and guarantee fees are

recognized on an accrual basis. See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES'' for more information about accounting policies related to management and guarantee fees.

For FVBS purposes, guarantee assets reÖect the fair value of guarantees on all outstanding PCs held by

third parties, including those accounted for at fair value under GAAP and those accounted for using the

accrual basis under GAAP. For FVBS purposes, guarantee fee assets are valued using the same method as

Freddie Mac

208
that used for GAAP fair value purposes. For information concerning the company's valuation methodologies

See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' and ""NOTE 3: SECURITIZATION OF MORTGAGE-RELATED ASSETS.''

Derivative assets

""Derivative assets, at fair value'' largely consists of interest-rate swaps, option-based derivatives, futures,

and forward commitments to purchase or sell securities, which are already reÖected at fair value on the GAAP

consolidated balance sheets. The fair values of interest-rate swaps are determined by using LIBOR-based

yield curves to calculate the expected cash Öows for both the Ñxed-rate and Öoating-rate components of the

swap contracts. Option-based derivatives, which principally represent call and put swaptions, are valued using

an option-pricing model. This model uses market interest rates and market-implied option volatilities, where

available, to calculate the option's fair value. Market-implied option volatilities are based on information

obtained from broker-dealers. The fair value of exchange-traded futures is based on end-of-day closing prices

obtained from third-party pricing sources. Forward commitments to purchase or sell securities are valued

using the methods described for mortgage-related securities valuation, above.

The fair value of derivative assets includes an estimate of the impact of institutional credit risk in the

event that the counterparty does not honor its payment obligation. Freddie Mac's fair value of derivatives is

not signiÑcantly aÅected by expected credit losses because management obtains collateral from most

counterparties typically within two business days of the daily market value calculation and substantially all of

Freddie Mac's credit risk arises from counterparties with investment-grade credit ratings of A or above.

Other assets

""Other assets'' consists of accrued interest and other receivables, investments in qualiÑed low-income

housing tax credit (""LIHTC'') limited partnerships that are eligible for federal tax credits, real estate owned

(e.g., properties acquired primarily through foreclosure), Ñxed assets (such as property, plant and equipment),

and other miscellaneous assets.

The receivables are Ñnancial instruments under SFAS 107 and are required to be measured at fair value.

Because these receivables are short-term in nature, management believes the carrying amount on the GAAP

balance sheets is a reasonable approximation of their fair value. For the LIHTC partnerships, fair value of

expected tax beneÑts is estimated using expected cash Öows discounted at a market-based yield.

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 deferred taxes. The net deferred tax asset includes GAAP-based

deferred taxes, adjusted for estimated income taxes on the diÅerence between the FVBS and the GAAP

balance sheets, using the statutory federal tax rate of 35 percent. This adjustment represents the undiscounted,

incremental tax asset related to the excess of GAAP-based stockholders' equity over FVBS net assets. Other

non-Ñnancial assets included in ""other assets'' represent an insigniÑcant portion of the GAAP consolidated

balance sheets. Because any change in their fair value would not be a meaningful part of Freddie Mac's FVBS

business results, Freddie Mac has not adjusted the carrying amount on the GAAP consolidated balance sheets

for estimates of the fair value of these non-Ñnancial assets.

Total debt securities, net

""Total debt securities, net'' represents short-term and long-term debt used to Ñnance Freddie Mac's

assets and 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 sales of Treasury securities used for risk

management purposes.

Short-term debt is valued using third-party market prices, where available, or using an OAS approach as

described below. For long-term non-callable and callable debt with readily available third-party market prices,

fair value is based on bid-side market prices obtained from brokers and dealers and reliable third-party pricing

service providers. For all other long-term non-callable and callable debt, an OAS approach is used to estimate

fair value. This OAS approach involves using a model based on market observations, with adjustments based

on management judgment, to estimate the risk premium an investor would require as compensation to accept

liquidity, credit and interest-rate volatility risk. Once an OAS has been determined, fair value is calculated by

Freddie Mac

209
using the OAS as an input to Freddie Mac's models to determine the estimated fair value of expected cash

Öows.

Guarantee obligation for Participation CertiÑcates

Under GAAP, in certain cases Freddie Mac records the fair value of estimated guarantee-related credit

losses on PCs as guarantee obligations in its consolidated balance sheets. In other cases, guarantee-related

credit losses are recognized as incurred. See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES'' for more information about accounting policies related to guarantee-related credit losses.

For FVBS purposes, guarantee obligations reÖect the fair value of estimated guarantee-related credit

losses on all outstanding PCs held by third parties. For FVBS purposes, guarantee obligations are valued using

the same method as that used for GAAP fair value purposes. For information concerning the company's

valuation methodologies See ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,''

and ""NOTE 3: SECURITIZATION OF MORTGAGE-RELATED ASSETS.''

Reserve for guarantee losses on Participation CertiÑcates

The carrying amount of the ""Reserve for guarantee losses on Participation CertiÑcates'' on the GAAP

balance sheets represents GAAP loan loss reserves for oÅ-balance sheet PCs that are not already accounted

for under SFAS 140. This line item has no basis in the FVBS, because the estimated fair value of all expected

default losses is included in the guarantee obligation reported on the FVBS, as discussed above.

Derivative liabilities

See discussion under ""Derivative assets,'' above.

Other liabilities

""Other liabilities'' principally consists of amounts due to PC investors (i.e., principal and interest),

funding liabilities associated with investments in LIHTC partnerships, accrued interest payable on debt

securities and other miscellaneous obligations of less than one year. Management believes the carrying amount

of these liabilities is a reasonable approximation of their fair value, except for funding liabilities associated

with investments in LIHTC partnerships, for which fair value is estimated using expected cash Öows

discounted at a market-based yield.

Minority interests in consolidated subsidiaries

""Minority interest in consolidated subsidiaries'' represents interests that third parties hold in Freddie

Mac's two majority-owned REIT subsidiaries that issued certain preferred stock to outside investors. In

accordance with GAAP, Freddie Mac consolidates the REITs. The fair value of the third party minority

interests in these REITs is based on the estimated value of the underlying REIT preferred stock determined

by management based on a valuation model adjusted to consider the impact of embedded call options, using

market-based information to the extent available.

Net assets attributable to preferred stockholders

To determine the preferred stock fair value, Freddie Mac uses a market-based approach incorporating

quoted dealer prices.

Net assets attributable to common stockholders

Net assets attributable to common stockholders is equal to FVBS net assets (the diÅerence between the

fair value of Freddie Mac's assets and the fair value of liabilities and minority interest), less the fair value of

net assets attributable to preferred stockholders.

Freddie Mac

210
NOTE: 18: CONCENTRATION OF CREDIT RISK

Mortgage Portfolio

Table 18.1 summarizes the total mortgage portfolio by geographical concentration. Excluded from the

total mortgage portfolio at December 31, 2002 and 2001 are $170,660 million and $139,523 million,

respectively, of non-Freddie Mac mortgage securities held in the retained portfolio and securities issued by

Freddie Mac that are backed by Ginnie Mae CertiÑcates. See ""NOTE 5: RETAINED PORTFOLIO AND

CASH AND INVESTMENTS PORTFOLIO'' for more information about the securities Freddie Mac

holds.

Table 18.1 Ì Concentration of Credit Risk

December 31,

2002 2001

Amount Percentage Amount Percentage

(dollars in millions)

By Region(1)

WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 294,681 26% $ 263,921 26%

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264,843 23 238,605 24

North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,509 21 207,313 21

SoutheastÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 200,476 18 176,846 17

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,440 12 124,516 12

$1,145,949 100% $1,011,201 100%

By State

CaliforniaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 183,174 16% $ 161,370 16%

Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,753 6 58,312 6

Illinois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,076 5 51,405 5

Texas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,596 5 48,033 5

All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 779,350 68 692,081 68

$1,145,949 100% $1,011,201 100%

(1) 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).

A signiÑcant portion of Freddie Mac's single-family mortgage purchase volume is generated from several

key mortgage lenders that have entered into special business arrangements with Freddie Mac. These

individually negotiated arrangements characteristically involve a lender's commitment to sell a high proportion

of its conforming mortgage origination volume to Freddie Mac. During 2002 and 2001, the four most

signiÑcant of these arrangements accounted for almost 61 percent and 55 percent, respectively, of Freddie

Mac's volume; the largest of which is with Wells Fargo Home Mortgage, Inc. In 2002, Wells Fargo Home

Mortgage, Inc. alone accounted for approximately 32 percent of the company's mortgage volume while ABN

Amro Mortgage Group, Inc. alone accounted for approximately 16 percent of the company's mortgage

volume. Freddie Mac is exposed to the risk that it could lose purchase volume to the extent these agreements

are terminated or modiÑed without replacement from other lenders.

Derivative Portfolio

On an ongoing basis, Freddie Mac reviews the credit fundamentals of all of its derivative counterparties to

ensure that they continue to meet internal standards. Internal ratings, credit, capital and trading limits are

assigned to each counterparty based on quantitative and qualitative analysis, and are updated on a regular

basis. Additional reviews are completed when market conditions or events aÅecting an individual counterparty

occur.

Derivative Counterparties. Freddie Mac's standards for entering into derivative agreements include

rigorous internal credit and legal reviews. All of these counterparties are major Ñnancial institutions and are

experienced market-makers in the over-the-counter (""OTC'') derivatives market.

Freddie Mac

211
Master Netting and Collateral Agreements. Freddie Mac uses master netting and collateral agreements

to reduce its credit risk exposure to its active OTC derivative counterparties. Master netting agreements

provide for the netting of amounts receivable and payable from an individual counterparty, which reduces

Freddie Mac's exposure to a single counterparty in the event of default. For example, if Freddie Mac has a

gain position on one derivative and a loss position on another derivative with the same counterparty, then the

loss can be netted with the gain to determine the amount of the company's net exposure to the counterparty.

On a daily basis, the market value of each counterparty's derivatives outstanding is calculated to determine the

amount of the current exposure. Freddie Mac's collateral agreements require most counterparties to post

collateral for the amount of the company's net exposure to them, taking into consideration posting thresholds.

Derivative exposures and collateral amounts are monitored on a daily basis using both internal pricing models

and dealer price quotes. Freddie Mac's derivative counterparties typically transfer collateral within one to

three business days based on their valuations. As described further below, this time lag in posting collateral

can aÅect Freddie Mac's net uncollateralized exposure to derivative counterparties. All of Freddie Mac's

collateral is held by a third-party custodian.

The collateral posted by counterparties serves to protect Freddie Mac against the risk of counterparty

credit losses. Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury

securities or mortgage-related securities. In the event a counterparty defaults on its obligations under the

derivatives agreement and the default is not remedied in the manner prescribed in the agreement, Freddie

Mac has the right under the agreement to direct the custodian bank to transfer the collateral to the company

or, in the case of non-cash collateral, to sell the collateral and transfer the proceeds to the company.

Freddie Mac

212
Table 18.2 summarizes Freddie Mac's exposure to counterparty credit risk in its derivatives. This table is

useful in understanding Freddie Mac's credit risk related to its OTC derivative portfolio.

Table 18.2 Ì Derivative Counterparty Credit Exposure

December 31, 2002

Total Weighted Avg.

Exposure Exposure, Contractual

Number of at Fair Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Notional Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 2,438 $ 386 $ 386 4.4 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 609 299 13 25.5 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 97,229 1,161 104 4.3 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 205,769 3,764 307 4.9 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 214,833 2,922 183 4.6 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 83,776 1,559 48 3.7 $1 million or less

A¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 1,655 21 3 1.8 $1 million or less

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 606,309 $10,112 $1,044 4.5

Other derivatives(6) ÏÏÏ 245,552

Prepayment

management

agreement ÏÏÏÏÏÏÏÏÏ 117,219

Commitments ÏÏÏÏÏÏÏÏ 191,563

Credit derivatives ÏÏÏÏÏ 17,301

Total derivatives ÏÏÏÏÏÏ $1,177,944

December 31, 2001

Weighted Avg.

Total Exposure, Contractual

Number of Exposure at Net of Maturity Collateral Posting

Rating(1) Counterparties(2) Notional Fair Value(3) Collateral(4) (in years) Threshold(5)

(dollars in millions)

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 $ 27,858 $ Ì $Ì 4.7 Mutually agreed upon

AA° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 616 83 Ì 26.2 $10 million or less

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 203,155 331 12 5.3 $10 million or less

AA¿ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 259,012 632 52 4.6 $10 million or less

A° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 76,445 61 Ì 5.6 $1 million or less

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 91,807 678 Ì 4.8 $1 million or less

BBB° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 88 2 1 7.5 Full posting required

Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 658,981 $1,787 $65 5.0

Other derivatives(6)ÏÏÏÏÏ 379,225

Commitments ÏÏÏÏÏÏÏÏÏ 121,588

Credit derivatives ÏÏÏÏÏÏ 10,984

Total derivatives ÏÏÏÏÏÏÏ $1,170,778

(1) Freddie Mac uses the lower of Standard and Poor's (""S&P'') and Moody's ratings to manage collateral requirements. In this table,

the rating of the legal entity (or the guarantor of the legal entity) is stated in terms of the S&P equivalent.

(2) Based on legal entities. AÇliated legal entities are reported separately.

(3) For each counterparty, this amount includes derivatives with a net positive fair value (recorded as ""Derivative assets, at fair value''

and ""Derivative liabilities, at fair value'') including the related accrued interest receivable/payable (net) (recorded in ""Accounts

and other receivables, net'' and ""Accrued interest payable'').

(4) ""Total Exposure at Fair Value'' less collateral held as determined at the counterparty level.

(5) Counterparties are required to post collateral when their exposure exceeds agreed-upon collateral posting thresholds. These

thresholds are typically based on the counterparty's credit rating and are individually negotiated.

(6) Consists primarily of exchange-traded contracts. Exchange-traded derivatives do not measurably increase Freddie Mac's exposure to

counterparty credit risk because changes in value of open exchange-traded contracts are settled daily through a Ñnancial

clearinghouse established by each exchange.

Freddie Mac's uncollateralized exposure to OTC derivative counterparties, after applying netting

agreements and collateral, was $1,044 million and $65 million as of December 31, 2002 and 2001, respectively.

In the extremely unlikely event that all of Freddie Mac's OTC derivative counterparties were to have

defaulted simultaneously on December 31, 2002, the maximum loss to Freddie Mac would have been $1,044

million.

Freddie Mac

213
NOTE 19: VARIABLE INTEREST ENTITIES

The company is a party to numerous entities that may be considered to be VIEs under FIN 46. See

Consolidation of Variable Interest Entities in ""NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES'' for discussion of FIN 46. These VIEs include low-income multifamily housing tax credit

partnerships, certain Structured Securities Ì T-Series trusts, certain mortgage and asset-backed investment

entities and multifamily credit enhanced-bond trusts. The disclosure below discusses where it is reasonably

possible that Freddie Mac will consolidate or disclose information about its VIEs when FIN 46 becomes

eÅective. Further, the disclosures below are based on qualitative determinations of whether it is reasonably

possible that Freddie Mac has at least a signiÑcant variable interest in a VIE. As Freddie Mac continues to

evaluate the impact of applying FIN 46, additional VIEs may be identiÑed or certain entities identiÑed here

may be excluded from future disclosure.

Low Income Housing Tax Credit Partnerships

Freddie Mac invests as a limited partner in partnerships (low-income housing tax credit partnerships)

formed for the purpose of providing funding for aÅordable multifamily rental properties. These low-income

housing tax credit partnerships invest directly in limited partnerships that develop or rehabilitate multifamily

rental properties. Completed properties are rented to qualiÑed low-income tenants, allowing the properties to

be eligible for federal tax credits. A general partner operates the partnership, identifying investments and

obtaining debt Ñnancing as needed to Ñnance partnership activities. Although these partnerships generate

operating losses, Freddie Mac realizes a return on its investment through reductions in ""income tax expense''

that result from tax credits and the deductibility of the operating losses. The partnership agreements are

typically structured to meet a required 15-year period of occupancy by qualiÑed low-income tenants. These

investments were made between 1988 and 2002. Freddie Mac does not guarantee any obligations of these

partnerships, and Freddie Mac's exposure is limited to the amount of its investments.

As of December 31, 2002, the company had unconsolidated investments in 156 housing tax credit

partnerships in which it is reasonably possible that Freddie Mac has at least a signiÑcant variable interest. The

size of these partnerships at December 31, 2002, as measured in total assets, was approximately $5.4 billion, of

which it is reasonably possible that Freddie Mac will consolidate approximately $800 million when FIN 46

becomes eÅective. These partnerships are accounted for using the equity method, as described in ""NOTE 2:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.''

As a limited partner, Freddie Mac's maximum exposure to loss equals the book value of its equity

investment. As of December 31, 2002, Freddie Mac's maximum exposure to loss on unconsolidated housing

tax credit partnerships, in which it is reasonably possible that Freddie Mac has at least a signiÑcant variable

interest, was approximately $1.8 billion.

Structured Securities Ì T-Series Trusts

In T-Series transactions, 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. The trust issues various

senior and subordinated interests. Freddie Mac guarantees and purchases certain senior interests issued by the

trust. The subordinated interests not guaranteed and purchased by Freddie Mac are either held by the seller or

other party or sold in the capital markets. Simultaneous with the guarantee and purchase of certain senior

interests issued by the trust, Freddie Mac issues Structured Securities which Freddie Mac guarantees. These

Structured Securities represent an interest in the senior interests issued by the trust.

At December 31, 2002, the company had investments or guarantees related to 44 T-Series trusts in which

it is reasonably possible that Freddie Mac is the primary beneÑciary or has a signiÑcant variable interest. The

size of these trusts at December 31, 2002, as measured in total assets, was approximately $22.4 billion. Some

of these T-Series trusts may be qualifying special-purposes entities (QSPEs) as deÑned by SFAS 140, which

are exempted from the scope of FIN 46. Freddie Mac is currently evaluating these entities to identify any

T-Series trusts that are QSPEs.

Freddie Mac

214
Freddie Mac's maximum exposure to loss consists primarily of any outstanding guarantees. As of

December 31, 2002, Freddie Mac's maximum exposure to loss on T-Series transactions, in which it is

reasonably possible that Freddie Mac is the primary beneÑciary or has a signiÑcant variable interest, was

approximately $21.7 billion.

Mortgage and Asset-backed Investment Trusts

Freddie Mac invests in a variety of mortgage and asset backed investment trusts. Included among these

are Manufactured Housing Contract Senior/Subordinate Pass-Through CertiÑcates. These represent interests

in trusts consisting of a pool of manufactured housing installment sale contracts, installment loan agreements

or mortgage loans secured by Ñrst liens on real estate. The trusts act as vehicles to allow loan originators to

reduce their balance sheet exposure to whole loans, convert assets into cash, and provide new funding

opportunities. The issuers, who may either be the originators of the loans or the underwriters of the deal,

create the trusts. The issuers typically own the residual interest in the trust assets.

Securities are structured from the underlying pool of assets to provide for varying degrees of risk. Primary

risks include potential loss from the credit risk of the underlying pool, and cash Öow deÑciencies due to timing

from the scheduled and unscheduled payment of principal and interest from the underlying pool.

Freddie Mac invests in these securities to meet aÅordable housing goals and to achieve proÑtable

investment returns. In addition, Freddie Mac has investments in similar trusts containing multifamily

mortgage loans and FHA loans.

At December 31, 2002, the company had investments in 22 trusts related to manufactured housing loans,

multifamily mortgages and FHA loans in which it is reasonably possible that Freddie Mac has at least a

signiÑcant variable interest. The size of these mortgage and asset-backed trusts at December 31, 2002, as

measured in total assets, was approximately $5.8 billion, primarily related to the manufactured housing trusts.

As an investor, Freddie Mac's maximum exposure to loss consists primarily of the book value of its

investment. As of December 31, 2002, Freddie Mac's maximum exposure to loss on mortgage and assetbacked trusts in which it is reasonably possible that Freddie Mac has at least a signiÑcant variable interest was

approximately $1.3 billion, primarily related to manufactured housing trusts. The majority of this exposure is

covered by secondary guarantees from third parties.

Multifamily Credit-Enhanced Bond Trusts

Freddie Mac assists investors in tax-exempt multifamily housing revenue bonds to reÑnance their

investments in those bonds through a two-trust securitization structure. These bonds are secured by mortgage

loans on low- and moderate-income multifamily housing projects.

The structure of the securitization begins with the establishment of an ""aggregation trust'' by the investor,

into which the investor deposits a pool of bonds. Freddie Mac issues a standby credit enhancement agreement,

under which it promises to pay to the trustee any amounts due and payable on the bonds which are not paid.

The aggregation trust trustee then issues trust receipts to the investor, which represent the beneÑcial

ownership in the bonds as credit enhanced by Freddie Mac. The investor then deposits those trust receipts into

a second ""securitization trust.'' The securitization trust issues both senior certiÑcates and subordinate

certiÑcates, representing the beneÑcial ownership in the trust receipts. The senior certiÑcates are sold to

qualiÑed institutional buyers, the proceeds of which are paid to the investor. Freddie Mac also provides a

liquidity facility to the securitization trust to fund the purchase of any senior certiÑcates that may be ""put''

back to the trust. Any such certiÑcates that are repurchased by the trust are pledged to Freddie Mac as

security for its advance under the liquidity facility. The subordinate certiÑcates are owned by the investor, but

are pledged to Freddie Mac as security for any funds drawn under either the credit enhancement agreement or

the liquidity facility. In consideration of Freddie Mac's issuance of the credit enhancement agreement and the

liquidity facility, the investor pays a monthly fee to Freddie Mac.

This reÑnancing structure provides liquidity to the market for tax-exempt multifamily housing bonds,

since the investors are provided with funds that can be used to Ñnance additional multifamily housing projects.

In addition, Freddie Mac receives credit toward its aÅordable housing goals.

Freddie Mac

215
As of December 31, 2002, the company had issued credit enhancement agreements related to six

multifamily housing bond securitizations, with respect to which it is reasonably possible that Freddie Mac has

a signiÑcant variable interest in the aggregation trusts. The size of these aggregation trusts at December 31,

2002, as measured in total assets, was approximately $1.5 billion. This amount represents Freddie Mac's

maximum exposure to loss on the aggregation trusts and consists primarily of outstanding guarantees. It is

reasonably possible that Freddie Mac will be the primary beneÑciary and consolidate these multifamily creditenhanced bond trusts when FIN 46 becomes eÅective.

NOTE 20: MINORITY INTERESTS

The equity and net earnings attributable to the minority shareholder interests in consolidated subsidiaries

are reported in the consolidated balance sheets as ""Minority interests in consolidated subsidiaries'' and in the

consolidated statements of income as ""Minority interests in earnings of consolidated subsidiaries,'' respectively. The majority of the balances in these accounts relate to the company's two majority-owned REITs.

In February 1997, Freddie Mac formed two majority-owned REIT subsidiaries funded through the

issuance of common stock (99.9 percent of which is held by Freddie Mac) and a total of $4 billion of

perpetual, step-down preferred stock issued to outside investors. The dividend rate on the step-down preferred

stock is 13.3% from initial issuance through 2006 (the ""initial term''). Beginning in 2007, the dividend rate

will step-down to 1.0%. Dividends on this preferred stock accrue in arrears. The amortized balance of the two

step-down preferred stock issuances as recorded within ""Minority interests in consolidated subsidiaries'' on the

consolidated balance sheets totaled $2.3 billion and $2.6 billion at December 31, 2002 and 2001, respectively.

The preferred stock is redeemable by the REITs under certain circumstances where the REITs obtain a legal

opinion to the eÅect that changes in applicable tax law could adversely aÅect the tax treatment of the REITs

or the preferred stock.

Freddie Mac

216
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

The following discussion, together with additional information in our Proxy Statement for our March 31,

2004 annual meeting of stockholders, is presented in accordance with Item 304 of SEC Regulation S-K.

Among other things, this item requires a company that has changed its independent public accountant to

disclose certain information pertaining to those events if they occurred within the company's two most recent

Ñscal years or any subsequent interim period. Since Freddie Mac changed its independent accountant in

March 2002, which was within its two most recent Ñscal years, Item 304 disclosures are provided below and in

our Proxy Statement for our March 31, 2004 annual meeting of stockholders.

On March 6, 2002, we announced that our Board of Directors had appointed PwC to serve as our

independent public accountants for the year ending December 31, 2002, replacing Arthur Andersen LLP. The

Board's appointment of PwC was made upon the recommendation of the Audit Committee after our

solicitation of proposals to audit our Ñnancial statements for the year ending December 31, 2002.

The audit reports of Arthur Andersen on our consolidated Ñnancial statements for the Ñscal years ended

December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they

qualiÑed or modiÑed as to uncertainty, audit scope or accounting principles.

During the years ended December 31, 2001 and 2000 and through March 6, 2002, the date of PwC's

appointment, we had no disagreements with Arthur Andersen on any matter of accounting principles or

practices, Ñnancial statement disclosure, or auditing scope or procedure, which disagreements if not resolved

to Arthur Andersen's satisfaction would have caused them to make reference to the subject matter of the

disagreement in connection with their reports. As discussed elsewhere (see ""EXPLANATORY NOTE'' and

""FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ì NOTE 1: RESTATEMENT''),

subsequent to PwC's appointment, we undertook a restatement of our consolidated Ñnancial statements for the

years 2000, 2001 and 2002 which resulted in signiÑcant changes in our accounting principles and practices and

our Ñnancial statement disclosure.

None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within

our two Ñscal years ended December 31, 2001 and the interim period through the date of PwC's appointment.

During our two Ñscal years ended December 31, 2001 and the interim period through PwC's appointment, we did not consult with PwC regarding any of the matters or events set forth in Item 304(a)(2)(i) and

(ii) of Regulation S-K.

Freddie Mac

217
DIRECTORS AND EXECUTIVE OFFICERS

Directors

Information on Directors of Freddie Mac is set forth under ""Proposal 1: Election of Directors Ì

Nominees for Election'' of our Proxy Statement for our March 31, 2004 annual meeting and is incorporated

herein by reference.

Executive OÇcers

As of January 31, 2004, the executive oÇcers of Freddie Mac are as follows:

Year of

Name Age AÇliation Position

Richard F. Syron ÏÏÏÏÏÏÏÏÏÏÏ 60 2003 Chairman and Chief Executive OÇcer

Paul T. PetersonÏÏÏÏÏÏÏÏÏÏÏÏ 54 1989 Executive Vice President and Chief Operating OÇcer

Martin F. Baumann ÏÏÏÏÏÏÏÏÏ 56 2003 Executive Vice President and Chief Financial OÇcer

David A. AndrukonisÏÏÏÏÏÏÏÏ 46 1980 Senior Vice President and Chief Enterprise Risk OÇcer

Margaret A. ColonÏÏÏÏÏÏÏÏÏÏ 45 1983 Senior Vice President and Chief Administrative OÇcer

Adrian B. CorbiereÏÏÏÏÏÏÏÏÏÏ 59 1999 Senior Vice President of Multifamily

R. Mitchell Delk ÏÏÏÏÏÏÏÏÏÏÏ 50 1991 Senior Vice President of Government Relations and Public

Policy

Nazir G. Dossani ÏÏÏÏÏÏÏÏÏÏÏ 61 1993 Senior Vice President of Investments and Capital Markets

Melvin M. Kann*ÏÏÏÏÏÏÏÏÏÏÏ 63 1993 Senior Vice President and General Auditor

William I. Ledman ÏÏÏÏÏÏÏÏÏ 55 1994 Senior Vice President of Information Systems and Services

Michael C. May ÏÏÏÏÏÏÏÏÏÏÏÏ 45 1983 Senior Vice President of Mortgage Sourcing, Operations and

Funding

Dwight P. Robinson ÏÏÏÏÏÏÏÏÏ 50 1998 Senior Vice President of Corporate Relations

Jerry Weiss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45 2003 Senior Vice President and Chief Compliance OÇcer

John F. Woods ÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 2002 Senior Vice President and Principal Accounting OÇcer

* Mr. Kann announced his retirement from Freddie Mac eÅective April 1, 2004.

The following is a brief biographical description of each executive oÇcer of Freddie Mac.

Richard F. Syron was appointed Chairman and Chief Executive OÇcer in December 2003. Prior to

joining Freddie Mac, Mr. Syron was Executive Chairman of Thermo Electron Corporation, a position he

assumed in November 2002. He joined Thermo Electron in June 1999 as its Chief Executive OÇcer and

became its Chairman of the Board in January 2000. Prior to that, he was Chairman and Chief Executive

OÇcer of the American Stock Exchange for Ñve years, President of the Federal Reserve Bank of Boston for

Ñve years and President of the Federal Home Loan Bank of Boston for three years.

Paul T. Peterson was appointed Executive Vice President and Chief Operating OÇcer in June 2003.

Previously, he served as Executive Vice President of Single-Family Business from December 1999 through

June 2003. Mr. Peterson also served as Senior Vice President Ì Servicer Division from 1995 to 1999. Prior to

that, he served as Senior Vice President of Corporate Finance from January 1992 to January 1995, as Vice

President of Corporate Finance from March 1990 to January 1992 and as Director of Portfolio Management

from April 1989 to March 1990.

Martin F. Baumann was appointed Executive Vice President of Finance in April 2003 and Chief

Financial OÇcer in June 2003. Prior to joining Freddie Mac, Mr. Baumann worked at PwC since 1969, where

he was a partner from 1980. At PwC, he performed a variety of functions, including serving as the Deputy

Chairman Ì World Financial Services Practice and as the Global Banking Leader. He also served on PwC's

U.S. and World Financial Services Executive Committees.

David A. Andrukonis was appointed Senior Vice President and Chief Enterprise Risk OÇcer in

October 2003. Prior to that he served as Senior Vice President of Single Family Capital Deployment from

September 2001 through October 2003. He also served as Senior Vice President and Chief Credit OÇcer from

Freddie Mac

218
August 1998 through September 2001. Prior to that, he held various positions at Freddie Mac since joining the

company in 1980, including Senior Vice President and General Manager of the Seller Division, Vice President

of Mortgage Finance, Manager of Product Development and Pricing and Senior Economist.

Margaret A. Colon was named Senior Vice President and Chief Administrative OÇcer in October 2003.

Prior to that, Ms. Colon served as Senior Vice President of Infrastructure Initiatives Program Management

from July 2002 to October 2003 and as Senior Vice President and Single Family Chief Operating OÇcer from

June 2000 through June 2002. Prior to June 2000, she also has served in various other positions at Freddie

Mac, including Senior Vice President Ì Servicer, Vice President of Corporate Finance Operations, Vice

President and Assistant to the President, Vice President and Multifamily Controller. Prior to joining Freddie

Mac in 1983, Ms. Colon was a senior auditor with Deloitte Haskins and Sells.

Adrian B. Corbiere was appointed Senior Vice President of Multifamily in August 1999. Before joining

Freddie Mac, Mr. Corbiere served as Managing Director, Real Estate Investments at Allstate Insurance

Company from 1996 to 1999. Prior to that, Mr. Corbiere held various positions from 1986 to 1996 at New

England Financial, a subsidiary of Metropolitan Life Insurance Company, including Senior Vice President,

Private Lending and Senior Vice President of the Commercial Mortgage Department.

R. Mitchell Delk was appointed Senior Vice President of Government Relations and Public Policy in

October 2003. Mr. Delk was previously Senior Vice President of Government Relations from March 1999

through October 2003 and Vice President of Government Relations from 1991 to 1999. Before joining Freddie

Mac, he served as Counselor to the Chairman and as Director of Legislative AÅairs at the SEC from 1989 to

1991. Prior to that, Mr. Delk spent four years as an investment banker at The First Boston Corporation and

seven years on Capitol Hill as a counselor to the Senate Banking Committee and several members of

Congress.

Nazir G. Dossani was named to the position of Senior Vice President of Investments and Capital

Markets in October 2003. Prior to that, he was Senior Vice President of Investments from December 1998.

Mr. Dossani joined Freddie Mac in February 1993 as Vice President of Asset and Liability Management.

Prior to joining Freddie Mac, he served as Vice President of Pricing and Portfolio Analysis at Fannie Mae.

Melvin M. Kann was appointed Senior Vice President and General Auditor in August 1993. Prior to

joining Freddie Mac, Mr. Kann served as Senior Vice President of Bank United of Texas, FSB from 1991 to

1993 and as Senior Vice President of Southeast Banking Corporation in Miami, Florida from 1983 to 1991.

William I. Ledman was appointed Senior Vice President of Information Systems and Services in January

1995. He had been Vice President of Computer and Network Operations since he joined Freddie Mac in

February 1994. Prior to joining Freddie Mac, Mr. Ledman held a variety of information systems-related

positions with GEICO, a property-casualty insurance company, between 1974 and 1994, the most recent being

Vice President of Systems and Data Processing.

Michael C. May was appointed Senior Vice President of Mortgage Sourcing, Operations & Funding in

October 2003. Prior to that, Mr. May served as Senior Vice President and Chief Operating OÇcer of Single

Family Operations from July 2002 to October 2003. He served as Senior Vice President of Project Enterprise

Execution from June 2000 to June 2002, Senior Vice President of Customer Services and Control from

August 1998 to June 2002. Prior to that, since joining Freddie Mac in 1983, Mr. May served in various

positions, including Vice President of Loan Prospector, Vice President of Structured Finance, and Vice

President of Freddie Mac's Securities Sales & Trading Group. Prior to joining Freddie Mac in 1983, he

worked at the Student Loan Marketing Association where he served as an internal auditor.

Dwight P. Robinson was appointed Senior Vice President of Corporate Relations in September 1999.

Mr. Robinson previously served as Vice President of Industry Relations. Prior to that, Mr. Robinson served as

Deputy Secretary of HUD and as President of Ginnie Mae.

Jerry Weiss was appointed Senior Vice President and Chief Compliance OÇcer in October 2003. Prior to

joining Freddie Mac, Mr. Weiss worked for more than 10 years at Merrill Lynch Investment Managers, most

recently as First Vice President and Global Head of Compliance. Prior to that, Mr. Weiss was in a national

law practice in Washington, D.C., where he specialized in securities regulation and corporate Ñnance matters.

Freddie Mac

219
John F. Woods was named Senior Vice President and Principal Accounting OÇcer in October 2003.

Prior to that, Mr. Woods served as Senior Vice President of Control and Accounting in Funding &

Investments from April 2002 to October 2003. Prior to joining Freddie Mac, Mr. Woods was a consulting

partner at Arthur Andersen.

EXECUTIVE COMPENSATION

Information on Freddie Mac's Executive Compensation is set forth under the section entitled ""Executive

Compensation'' of our Proxy Statement for our March 31, 2004 annual meeting of stockholders and is

incorporated herein by reference.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Management

Information on the beneÑcial ownership of Freddie Mac common stock by each Freddie Mac director,

certain executive oÇcers and by all directors and executive oÇcers as a group is set forth under the section

entitled ""Corporate Governance Stock Ownership'' of our Proxy Statement for our March 31, 2004 annual

meeting of stockholders and is incorporated herein by reference.

Security Ownership of Certain BeneÑcial Owners

Information on the beneÑcial ownership of Freddie Mac common stock by certain beneÑcial owners is set

forth under the section entitled ""Corporate Governance Stock Ownership'' of our Proxy Statement for our

March 31, 2004 annual meeting of stockholders and is incorporated herein by reference.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information on certain relationships and related transactions is set forth under the section entitled

""Proposal 1: Election of Directors Ì Transactions with Institutions Related to Directors'' of our Proxy

Statement for our March 31, 2004 annual meeting of stockholders and is incorporated herein by reference.

INDEMNIFICATION AND OTHER REIMBURSEMENTS OF DIRECTORS, OFFICERS AND

EMPLOYEES

Information concerning indemniÑcation and reimbursement arrangements is set forth under the section

entitled ""Proposal 1: Election of Directors Ì IndemniÑcation and Other Reimbursements of Directors,

OÇcers and Employees'' of our Proxy Statement for our March 31, 2004 annual meeting of stockholders and

is incorporated herein by reference.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information on principal accountant fees and services is set forth under the section entitled ""Proposal 2:

RatiÑcation of Independent Auditors'' of our Proxy Statement for our March 31, 2004 annual meeting of

stockholders and is incorporated herein by reference.

Freddie Mac

220
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 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: February 27, 2004

/s/ RICHARD F. SYRON

Richard F. Syron

Chairman and Chief Executive OÇcer

CERTIFICATION*

I, Martin F. Baumann, certify that:

1. I have reviewed this Information Statement of Freddie Mac;

2. Based on my knowledge, this Information Statement does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect to the period covered

by this Information Statement; and

3. Based on my knowledge, the 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: February 27, 2004

/s/ MARTIN F. BAUMANN

Martin F. Baumann

Executive Vice President and Chief Financial OÇcer

* These certiÑcations do not address disclosure controls and procedures and internal controls over Ñnancial reporting as of December 31,

2002. This is because the required evaluation and assessment of these controls and procedures was not adequately performed as of that

date.

Freddie Mac

221
RATIO OF EARNINGS TO FIXED CHARGES

Year

2002 2001 2000

(dollars in millions)

Income before cumulative eÅect of change in accounting principles, net of

taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,090 $ 3,115 $ 3,666

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,713 1,339 1,504

Minority interest in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏ 184 208 231

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,564 27,549 25,483

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41,551 $32,211 $30,884

Fixed charges(1)

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,564 $27,549 $25,483

Total Fixed charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,564 $27,549 $25,483

Earnings to Ñxed charges(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.56 1.17 1.21

(1) Fixed charges exclude capitalized interest and the estimated interest factor of rental expenses related to operating leases as these

costs are insigniÑcant to the computation of the ratio of earnings to Ñxed charges.

(2) Ratio of earnings to Ñxed charges is computed by dividing ""Earnings, as adjusted'' by ""Fixed charges.''

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND

PREFERRED STOCK DIVIDENDS

Year

2002 2001 2000

(dollars in millions)

Income before cumulative eÅect of change in accounting principles, net of

taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,090 $ 3,115 $ 3,666

Add:

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,713 1,339 1,504

Minority interest in earnings of consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏ 184 208 231

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,564 27,549 25,483

Earnings, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41,551 $32,211 $30,884

Fixed charges(1)

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,564 $27,549 $25,483

Preferred stock dividends(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343 310 252

Total Fixed charges including preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,907 $27,859 $25,735

Earnings to combined Ñxed charges and preferred stock dividends(3)ÏÏÏÏÏÏ 1.54 1.16 1.20

(1) Fixed charges exclude capitalized interest and the estimated interest factor of rental expenses related to operating leases as these

costs are insigniÑcant to the computation of the ratio of earnings to combined Ñxed charges and preferred stock dividends.

(2) Preferred stock dividends represent pre-tax earnings required to cover any preferred stock dividend requirements using our eÅective

tax rate for the relevant periods.

(3) Ratio of earnings to combined Ñxed charges and preferred stock dividends is computed by dividing ""Earnings, as adjusted'' by ""Fixed

charges including preferred stock dividends.''

Freddie Mac

222
ADDITIONAL FINANCIAL INFORMATION CORPORATE HEADQUARTERS

8200 Jones Branch Drive For more information about Freddie Mac stock or to obtain McLean, VA 22102-3110 a copy of the latest Information Statement (prepared in (703) 903-2000 lieu of a Form 10-K), contact:

NEW YORK CITY OFFICE Freddie Mac 575 Lexington Avenue, Suite 1800 Mailstop D4O New York, NY 10022-6102 1551 Park Run Drive (212) 418-8900 McLean, Virginia 22102-3110

Toll Free: (800) FREDDIE NORTH CENTRAL REGION

On the Internet: http://www.freddiemac.com 333 West Wacker Drive, Suite 2500

Chicago, IL 60606-1287

ANNUAL MEETING (312) 407-7400

The annual meeting of Freddie Mac's shareholders will be NORTHEAST REGION

held: 1410 Spring Hill Road, Suite 600

March 31, 2004 PO Box 50122

McLean, VA 22102-8922 9:00 a.m. Eastern Time

(703) 902-7700 Hilton McLean Tysons Corner,

7920 Jones Branch Dr., McLean, VA SOUTHEAST REGION

North Tower, Suite 200 Proxy material will be mailed to stockholders of record by 2300 Windy Ridge Parkway SE the company's transfer agent in accordance with Freddie

Mac's bylaws and New York Stock Exchange Atlanta, GA 30339-5665

(770) 857-8800 requirements.

SOUTHWEST REGION

DIVIDEND PAYMENT 5000 Plano Parkway

Approved by Freddie Mac's Board of Directors, dividends Carrollton, TX 75010-4902

on the company's common stock and non-cumulative (972) 395-4000

preferred stock in 2002 and 2003 were paid on: WESTERN REGION

March 29, 2002 21700 Oxnard Street, Suite 1900

June 28, 2002 Woodland Hills, CA 91367-3642

September 30, 2002 (818) 710-3000

December 31, 2002

March 31, 2003

June 30, 2003

September 30, 2003

December 31, 2003

Subject to approval by Freddie Mac's Board of Directors,

dividends on the company's common stock and noncumulative preferred stock in 2004 are expected to be paid

on:

March 31, 2004

June 30, 2004

September 30, 2004

December 31, 2004

Freddie Mac

223
CORPORATE HEADQUARTERS

8200 Jones Branch Drive

McLean, VA 22102-3110

703.903.2000

800.424.5401

www.freddiemac.com