Under the second method, purchased mortgages and mortgage-related
securities are held for investment by Freddie Mac and financed with debt,
equity and other liabilities. Mortgage assets held by Freddie Mac are
referred to as the “retained portfolio.” The corpdration recognizes net
interest income on the retained portfolio, which is the interest income
earned on these assets net of the interest expense on the liabilities
funding them. The corporation's ability to grow the retained portfolio
is dependent on the availability of spreads between asset yields and
financing costs that generate attractive returns on capital, which may
not prevail in all interest-rate environments.

The retained and sold portfolios together comprise the “total mortgage
portfolio” During 1995, the total mortgage portfolio grew 6 percent
from $533 billion to $566 billion. At December 31, 1995, the retained
portfolio accounted for $107 billion, or 19 percent, of the total mort-
gage portfolio with the remaining $459 billion, or 81 percent, in the
sold portfolio, The retained portfolio is comprised of $44 billion in
mortgages and $63 billion in mortgage-related securities, including

$56 billion of repurchased PCs.

A portion of the PCs issued by Freddie Mac is resecuritized and reissued
as multiclass PCs that qualify for treatment as real estate mortgage
investment conduits (REMICs) under the Internal Revenue Code of
1986. Because substantially all REMICs are formed by resecuritizing
existing PCs and other mortgage securities already guaranteed by
Freddie Mac, they do not increase credit risk to the corporation or the
size of the sold portfolio. A single REMIC series consists of multiple
classes with varying maturities and interest rates and is designed to
appeal to the needs of a variety of investors. For Freddie Mac, the
issuance of multiclass securities responds to investor needs, supports
market prices for PCs and generates additional fee income, which is
recorded as other income.

Freddie Mac also maintains a non-mortgage investment portfolio
primarily for liquidity and working capital purposes. The investment
portfolio, which totaled approximately $21 billion at December 31,
1995, consists principally of federal funds sold, reverse repurchase
agreements and highly rated, short-term investments, the majority of
which are funded with debt or other funding sources of maturities
similar to those of the assets being financed. The corporation recog-
nizes net interest income on the investment portfolio which is the
interest income earned on the investment assets net of the interest
expense associated with the liabilities funding them.

Freddie Mac employs three financial disciplines in managing the cor-
poration. The first is disciplined credit risk management. Credit risk
management has become even more critical as intense competition in
the primary market, shifts in product mix and increases in average
LTV ratios have increased the credit risk of new mortgage originations
over the past two years.

Freddie Mac also adheres to a strong interest-rate risk management
discipline. The primary objective is to keep the risk of decline in the
value of the corporation or its earnings within acceptable levels, In doing
so, Freddie Mac continually reassesses its funding mix in light of changes
in market conditions and asset composition.

A-2

Lastly, Freddie Mac invests shareholder capital in a disciplined fashion
The company seeks to invest capital only when long-term returns
exceed certain thresholds and are appropriate given the risks of the
investment. This discipline means Freddie Mac will not pursue growth,
market share or short-term earnings at the cost of unacceptable
returns on capital.

Market Overview

Freddie Mac competes directly with the Federal National Mortgage
Association (Fannie Mae) for purchases of residential mortgages (pri-
marily “conventional” mortgages that are not insured or guaranteed by
agencies of the U.S. government) in the conforming mortgage market.
“Conforming” mortgages are those mortgages having original principal
amounts that do not exceed statutory loan limits based on housing
prices, as established annually by Freddie Mac and Fannie Mae as required
by their charters, and which meet other statutory requirements. The
one-unit single-family loan limit is tied to an increase in the average pur-
chase price of single-family conventionally financed homes as reported
by the Federal Housing Finance Board. As a result of the 1995 index
increase, Freddie Mac and Fannie Mac raised their single-family one-
unit conforming loan limits to $207,000 effective January 1996.

Freddie Mac estimates that approximately $575 billion of conventional
single-family mortgages were originated in 1995. Of that amount
approximately $220 billion, or 38 percent, were sold to Freddie Mac
and Fannie Mae. Freddie Mac and Fannie Mae purchased a combined
total of approximately 47 percent and 54 percent of the conventional
single-family mortgages originated in 1994 and 1993, respectively.

The percentage of conventional single-family mortgages sold into the
secondary market declined sharply in 1994 and early 1995 due in part
to the high proportion of residential mortgage originations represented
by ARMs during this period. Depository institutions, which originate a
large share of ARMs, tend to retain these mortgages in their portfolios
because ARMs present generally lower exposure to interest-rate risk
than fixed-rate mortgages. The decline in secondary market share of
primary market originations also reflected a cyclical contraction similar
to that experienced in 1988 after a period of high mortgage refinancing.
Depository portfolio lenders also entered 1995 with strong deposit and
capital levels, which allowed them to originate mortgages at competitive
prices and take on the additional credit risk of holding more loans in
their portfolios. The secondary market purchase share increased during
the second half of 1995 as declining interest rates made fixed-rate
mortgages more attractive to borrowers compared to ARMs.

Freddie Mac and Fannie Mae compete for mortgages on the basis of the
relative strength of their respective mortgage purchase programs and
security products, customer service, technological innovations and price.
Price is of particular importance to originators in deciding whether to
sell mortgages to Freddie Mac or Fannie Mae.

Price differences or “spreads” between Freddie Mac PCs and competing
securities reflect, in part, the different remittance cycles of these securi-
ties. Because Freddie Mac’s Gold PC, with a 45-day payment delay,
offers a faster remittance of mortgage principal and interest payments to
investors than Fannie Mae securities with a similar coupon and maturity,


RECENT UNAUDITED FINANCIAL INFORMATION

FEDERAL HOME LOAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

Appendix B

(unaudited)
@ollars in millions, except per share amounts)
Quarter Ended
March 31, December 31, March 31,
1996 1995 1995
Interest income:
Mortgages $ 820 $ 803 $ 770
Guaranteed mortgage securities . . . 1,238 1,075 612
Investments and mortgage securities purchased under
agreements to resell ... 369 405 455,
2,427 2,283 1,837
Interest expense on debt securities:
Short-term debt . (517) (525) (587)
Long-term debt . (1,398) (1,302) (927)
(1,915) (1,827) (1,514)
Interest expense due to security program cycles............+..00- (125) (93) (30)
(2,040) (1,920) (1,544)
Net interest income on earning assets . 387 363 293
Management and guarantee income 305 300 295
Other income, net . . 9 9 13
Total revenues 701 672 601
Provision for mortgage losses. (80) (70) (60)
REO operations expense . (76) (76) (69)
Administrative expenses . . (105) (102) (97)
Total non-interest expenses . (261) (248) (226)
Income before income taxes . 440 424 375,
Provision for income taxes. (139) (133) qi7)
Net income $301 $291 $258
Preferred stock dividends (16) (17) (16)
Net income available to common stockholders $285 $274 $242
Earnings per common share ......-...- 6000s eee eter eee eee $1.60 $153 $1.34
Weighted average common shares outstanding (thousands) ......... 178,413 179,473 180,760


IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
PREFERRED STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STA-
BILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

ADDITIONAL INFORMATION

This Offering Circular should be read in conjunction with, and is qualified in its entirety by:

* the Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifica-
tions, Limitations, Restrictions, Terms and Conditions (the ‘Certificate of Designation’’)
relating to the Variable Rate, Non-Cumulative Preferred Stock (the “Preferred Stock’),
which will be in substantially the form attached as Appendix A to this Offering Circular,

recent unaudited financial information of Freddie Mac attached as Appendix B to this

Offering Circular, which information was contained in materials originally released on April
15, 1996, and

Freddie Mac’s Information Statement dated March 29, 1996 (the ‘Information State-
ment’) attached to this Offering Circular.

Freddie Mac furnishes its stockholders with annual reports containing financial information
audited by independent public accountants and quarterly reports containing unaudited financial
information.

The shares of Preferred Stock are exempt from the registration requirements of the Securities Act
of 1933 and are “exempted securities” within the meaning of the Securities Exchange Act of 1934.
Accordingly, no registration statement has been filed with the Securities and Exchange Commission, and
Freddie Mac does not file periodic reports with the Securities and Exchange Commission.

Copies of Freddie Mac’s most recent annual and quarterly reports and its most recent proxy
statement are available, and copies of the Certificate of Designation as executed will be available,
without charge from Shareholder Relations, Federal Home Loan Mortgage Corporation, 8200 Jones
Branch Drive, McLean, VA 22102, telephone 800/424-5401, ext. 2581.

Dividends paid on the Preferred Stock have no exemption under federal law from federal, state or
local taxation.

The distribution of this Offering Circular and the offer, sale and delivery of the Preferred Stock in
certain jurisdictions may be restricted by law. Persons who receive this Offering Circular should inform
themselves about and observe any such restrictions.


Deferred Items: The corporation receives fees and incurs costs at the
time mortgages are purchased or sold. These fees and costs are
deferred and amortized over the estimated weighted average lives of
the mortgages to result in a level yield. The amount of amortization
charged to interest income and Management and guarantee income
may vary from period to period, depending on the difference between
the actual and expected lives of the mortgages. The corporation
manages the interest-rate risk associated with deferred purchase

and sale premiums, discounts, fees and costs, in part, through other
on-balance sheet instruments that exhibit opposite behavior in
response to changing prepayment rates.

Coupon Distribution: The low interest rates that prevailed in the
refinancing wave during 1993 and early 1994 caused the coupon rate
distribution of Freddie Mac’s total mortgage portfolio to shift downward.
This shift has reduced the susceptibility of Freddie Mac’s portfolio to
future refinancing waves. The following table shows the distribution of
the total mortgage portfolio by coupon range.

Coupon Range
December 31, 1995 1994 1993
0% to 6.99% 19.3% 22.2% 18.9%
7% to 7.99% 40.6 38.5 33.9
8% to 8.99% 25.0 22.3 23.0
9% to 9.99% 94 98 13.3
10% to 10.99% 4s 5.6 8.6
11% or greater 12 1.6 2.3
Total 100.0% 100.0% 100.0%
Weighted Average Coupon 7.81% 7.79% 8.03%

Off-balance Sheet Financial Instruments: The corporation enters
into certain off-balance sheet financial transactions, primarily interest-
rate swaps, caps, floors and corridors, as an “end user” and not for
trading or speculative purposes. Interest-rate swaps are contractual
agreements between two parties for the exchange of periodic payments
based on a notional principal amount and agreed-upon fixed and variable
interest rates. Interest-rate caps and floors are contracts under which
one party, in exchange for a one-time up-front payment, is entitled to
receive from a counterparty one or more periodic future payments
based on a notional amount when interest rates exceed the cap rate or
fall below the floor rate. Interest-rate corridors combine purchased and
sold interest-rate caps or floors to effectively reduce the cost of the
interest-rate cap or floor protection. Currently, all of the interest-rate
corridors entered into by Freddie Mac involve interest-rate caps.

‘The primary objective of these transactions is to lower the corporation’s
financing costs as well as reduce the corporation’s exposure to interest-
rate risk. To a lesser extent, the corporation also enters into interest-rate
contracts to increase yields on specific assets held in both the corpora-
tion’s retained portfolio and investment portfolio. The corporation's use

of interest-rate contracts is expected to grow as funding requirements
for its retained portfolio continue to increase. Currently, all of the
corporation's interest-rate contracts are U.S. dollar denominated.

As of December 31, 1995, approximately 15 percent of the notional
contract amount of the corporation's interest-rate contracts involved
non-ULS. counterparties, In certain cases, the obligations of some U.S.
counterparties have been guaranteed by their foreign affiliates. The
following table summarizes the notional or contractual amounts of
interest-rate contracts and other hedging instruments along with their
remaining contractual maturities.

i r Contractual Amount

December 31, 1994
(dollars in millions)
‘Outstanding at period end:
Debt-linked swaps $37,277 $17,333
Asset-linked swaps 7,107 1,661
Interest-rate swaps 4,000 2,840
Interest-rate caps 4,448 3,145
Interest-rate floors 6,078 4,950
Corridors 2,529 908
Spread-lock agreements 24 -
Total 358,463 $30,837
Contractual maturi
Under one year $ 6,763 $ 6,893
From one to five years 28,977 15,043
From five to ten years 19,982 7,883
Over ten years 2,741 1,018
Total $58,463 $30,837

(1) Gertain of the corporation’s interest-rate contracts contain provisions permit
ting termination prior to contractual maturity. In addition, interest-rate
contracts generally may be terminated by mutual consent of the parties, or
effectively canceled by entering into an offsetting transaction

The majority of Freddie Mac's interest-rate agreements are interest-
rate swap agreements executed in conjunction with debt financing
(debt-linked swaps). Debt-linked swaps effectively convert longer-term
debt to short-term variable-rate financing or convert short-term vari-
able-rate financing to longer-term fixed-rate debt, as appropriate,
During 1994 and 1995, most debt-linked swap transactions involved
the receipt of variable-rate amounts that reprice or adjust within one
year and payment of fixed-rate amounts over the terms of the swaps,
which generally range from two to ten years. Freddie Mac also enters
into asset-linked swaps that are linked to specific assets held in the
corporation’s retained mortgage or investment portfolios, Debt-linked
and asset-linked swaps, when combined with the underlying asset or
liability, synthetically create debt instruments and interest-earning
assets that achieve a lower effective financing cost or higher effective
asset yield than those available on alternative instruments and reduce


CONSOLIDATED BALANCE SHEETS

December 31, 1995 1994
(dollars in millions)
Assets
Retained mortgage portfolio $107,424 $ 72,828
Unamortized purchase and sale premiums, discounts and fees 282 343
Reserve for losses on retained mortgages (295) (290)
Total mortgages, net 107,411 72,881
Cash and cash equivalents 7,483 11,442
Investments 4,745 11,895
Mortgage securities purchased under agreements to resell 9,217 5,913
Accounts receivable and other assets 6,769 2,689
Real estate owned, net 800 948
Accrued interest receivable 156 431
$137,181 $106,199
Liabilities and Stockholders’ equity
Debt securities, net:
Due within one year $ 62,141 $ 47,307
Due after one year 57,187 44,746
Total debt securities, net 119,328 92,053
Accrued interest and other accrued expenses 2,078 1,358
Income taxes payable 85 R
Principal and interest due to Mortgage Participation Certificate (PC) investors 8,806 5,885
130,297 99,368
Reserve for losses on sold mortgages 388 443
Contingencies:
Single-class Mortgage Participation Certificates 459,045 460,656
Less-Underlying mortgages sold (459,045) (460,656)
Subordinated borrowings 633 1,226
Stockholders’ equity:
Common stock, $0.84 par value, 181,500,000 shares authorized,

181,028,603 and 180,837,618 shares issued, respectively 152 152
Non-cumulative 7.90% preferred stock $1.00 par value, 30,000,000

shares authorized, 22,500,000 shares issued and outstanding 23 23
Non-cumulative 6.72% preferred stock, $1.00 par value,

12,000,000 shares authorized, issued and outstanding 2 2
Additional paid-in capital 916 913
Retained earnings 4,884 4,074
Net unrealized gain (loss) on securities reported at fair value 33 Qa)
Treasury stock, at cost, 2,238,596 and 75,338 shares, respectively (s7) (5)

Total Stockholders’ equity 5,863 5,162

$137,181 $106,199

See accompanying Notes to Consolidated Financial Statements.

A-22


UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement (the “Underwriting
Agreement”), the Corporation has agreed to sel to each of the Underwriters named below, and each of
the Underwriters, for whom Goldman, Sachs & Co., Bear, Stearns & Co. Inc. and Salomon Brothers
Inc are acting as representatives (the “‘Representatives”), has severally agreed to purchase from the
Corporation the respective number of shares of Preferred Stock set forth opposite its name below.

Number of Shares

Underwriter of Preferred Stock

Goldman, Sachs & Co. ... 950,000
Bear, Stearns & Co. Inc. 950,000
Salomon Brothers Inc 950,000
Lehman Brothers Inc. 2.0... ccc cece tt teers 200,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . 200,000
Morgan Stanley & Co. Incorporated . 200,000
Oppenheimer & Co., Inc. ..... 200,000
Paine Webber Incorporated .... . 200,000
Prudential Securities Incorporated . 200,000
Smith Barney Inc. 200,000
Blaylock & Partners L.P. .......... 62,500
J.C. Bradford & Co. 62,500
Craigie Incorporated . . 62,500
A.G. Edwards & Sons, Seen e eee ete teen : 62,500
Interstate/Johnson Lane Corporation. . . bce eee eee : 62,500
McDonald & Company Securities, Inc. . 62,500
Morgan Keegan & Company, Inc. . 62,500
Piper Jaffray Inc..........- 0.008 62,500
Pryor, McClendon, Counts & Co.. In 62,500
Redwood Securities Group, Inc. 62,500
Muriel Siebert & Co., Inc. ... 62,500
Wheat, First Securities, Inc. . __ 62,500

0 5,000,000

Under the terms of the Underwriting Agreement, the several Underwriters are committed to take
and pay for all of the shares of Preferred Stock offered hereby, if any are taken.

The Underwriters propose to offer the Preferred Stock in part directly to the public at the initial
offering price set forth on the cover page of this Offering Circular and in part to certain dealers at such
price less a concession not in excess of $.60 per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $.30 per share on sales to certain brokers and dealers. After
the shares of Preferred Stock are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the representatives.

The Corporation has granted the Underwriters an option exercisable for 30 days after the date of
this Offering Circular to purchase up to an aggregate of 500,000 additional shares of Preferred Stock
solely to cover overallotments, if any. If the Underwriters exercise their overallotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 5,000,000 shares of Preferred Stock offered.

Prior to this offering, there has been no public market for the Preferred Stock. The Preferred Stock
has been approved for listing on the NYSE. Trading of the Preferred Stock on the NYSE is expected to
commence within a fourteen-day period after the initial delivery of the Preferred Stock. The Represent-
atives have advised the Corporation that they intend to make a market in the Preferred Stock prior to
the commencement of trading on the NYSE, but are not obliged to do so and may discontinue any such
market making at any time without notice.

19


Administrative Expenses

The major components of administrative expenses are costs related to
personnel, occupancy and equipment. Administrative expenses increased
$16 million, or 4 percent, from $379 million in 1994 to $395 million
in 1995. The rate of administrative expense growth in 1995 was less than
the rate of revenue growth and approximately equal to average total
mortgage portfolio growth. The ratio of administrative expenses to
revenues declined from approximately 17 percent in 1994 to approxi-
mately 16 percent in 1995, Administrative expenses as a percentage

of the average total mortgage portfolio were 7.3 basis points for 1995,
unchanged from 1994. Administrative expenses are expected to increase
in 1996 with technology initiatives and credit risk management being
primary areas of investment. Direct development costs related to sig-
nificant technological initiatives have been capitalized and are expensed
over relatively short periods of time.

Administrative expenses increased $18 million, or § percent, from 1993
to 1994, less than both revenue growth and average total mortgage
portfolio growth during that period.

Other Items

Effective January 1, 1996, the corporation will revise the method by
which it reports balances and associated income for Freddie Mac PCs
held in the retained mortgage portfolio. This reporting change has no
impact on total revenues or net income. The change is designed to
more clearly portray portfolio balances and associated revenues for
Freddie Mac’s two principal revenue sources: mortgage portfolio
investment and credit guarantee.

Prior to 1996, PCs held in the retained portfolio were included in the

retained portfolio balance and excluded from the sold portfolio balance.
Both the PC coupon interest and Management and guarantee income on
these securities were included in Net interest income as a component

of interest earned on the retained portfolio.

Under the new reporting presentation, these PCs will continue to be
included in the retained portfolio as guaranteed mortgage security
investments, but will also be included in total PCs outstanding (sold
portfolio). The total mortgage portfolio balance can be calculated as
the sum of the retained portfolio and the sold portfolio, less. PCs held.
in the retained portfolio.

The guarantee fee income on these PCs will now be reported as part of
Management and guarantee income. The PC coupon interest will con-
tinue to be reported as part of Net interest income on earning assets.

‘The following table provides pro forma information relating to this
reporting change for 1995, 1994 and 1993, respectively.

Year ended December 31, 1995 1994 1993
(dollars in millions)
Retained portfolio:
Mortgages $ 43,753 $ 40,970 $ 39,357
Guaranteed mortgage securities 63,671 31,858 16,341
Ending portfolio balance $107,424 $72,828 $ 55,698
Average portfolio balance $ 86,872 $ 62,990 $ 43,573
Net interest income $ 1,297 $ 1,047 $ 728
Net interest yield 1.10% 1.129% 0.93%
Total PCs outstanding:
Ending balance $515,051 $491,325 $454,906
Average balance $497,246 $481,434 $435,274
Management and
guarantee income $ 1186 $ 1,174 $ 1,053
‘Average guarantee fee rate 23.9bp —.24.4bp 24.2 bp

In March 1994, the corporation received from the Internal Revenue
Service (IRS) a Revenue Agent Report for its 1985 and 1986 federal
income tax returns. In-anticipation that this report would assert a
deficiency, management previously had established reserves for addi-
tional taxes and related interest.

Positions taken by the IRS resolved several open issues, including
hedging issues that were treated in a manner consistent with regulations
issued by the IRS in October 1993. The resolution of these issues
allowed the corporation to reduce its existing reserves for contingent
taxes and report a one-time reduction in its 1994 provision for
income taxes of $16 million, and also to reduce its reserves for related
contingent interest.

In conjunction with this reduction in reserves, several actions were
taken by management. First, along with the change in the reporting of
uncollectible interest on single-family mortgages implemented in 1994,
the corporation wrote off $120 million of accrued but uncollectible
interest that had previously been provided for in mortgage loss reserves.
The balance of mortgage loss reserves was not reduced by this transac-
tion. Second, the corporation retired high-cost debt, generating $16
million, or $0.08 per common share, of after-tax extraordinary losses.
‘These actions and the reduction in tax and interest reserves had no
effect on 1994 net income.

The corporation also recorded an additional $28 million after-tax extra-
ordinary loss on retirement of high-cost debt in addition to the actions
described above. In total, 1994 after-tax extraordinary losses on debt
retirements amounted to $44 million, or $0.24 per common share.

During 1993, the corporation recorded a $20 million after-tax extra-
ordinary loss associated with the retirement of high-cost debt.

Effective January 1, 1993, Freddie Mac adopted SFAS No. 109, “Accounting
for Income Taxes.” The $20 million net benefit from adopting the
standard was reported as a cumulative effect of a change in accounting


Multifamily Mortgage Purchases

Under its multifamily mortgage purchase programs, Freddie Mac purchases multifamily mort-
gages from approved lenders in exchange for cash or multifamily mortgage-related securities. Freddie
Mac generally does not purchase individual multifamily mortgages with an original aggregate principal
amount exceeding $50 million.

In addition to the statutory requirements for the purchase of multifamily mortgages set forth in the
Freddie Mac Act, the corporation has established multifamily mortgage purchase standards, including
credit, appraisal and underwriting guidelines as set forth in its Multifamily Seller/Servicer Guide.
From time to time, Freddie Mac modifies its non-statutory mortgage purchase standards. Freddie Mac
may also grant waivers or modifications to these standards in connection with the purchase of specific
mortgages when compensating factors (such as high debt coverage ratios, low loan-to-value ratios
(“LTV ratios’’) or credit enhancements) are present.

Freddie Mac purchases for cash conventional multifamily mortgages with terms generally ranging
from 5 to 25 years. Multifamily mortgages purchased for cash which have terms of 20 years or longer
generally are fully amortizing. Each mortgage generally may be paid in full or in part prior to maturity,
sometimes subject to payment of a prepayment premium which may be in the form of a yield
maintenance fee based on a benchmark interest rate at the time of prepayment, or a percentage of the
amount prepaid. The corporation also purchases for cash multifamily mortgages that provide refinanc-
ing of multifamily mortgages held by the corporation in its sold or retained portfolio that are in danger
of defaulting. The refinancing of existing multifamily mortgages allows borrowers to reduce their debt
burdens by permitting more of the cash flow to be used for property maintenance. In 1995, these
refinancings represented approximately 6 percent of Freddie Mac’s multifamily mortgage purchases.

In 1996, Freddie Mac initiated a program for the purchase of multifamily mortgages with rate
reset features (“Multifamily Rate Reset Mortgages”). Multifamily Rate Reset Mortgages provide for 5
years of level payments of principal and interest based on an amortization schedule of up to 25 years,
with a borrower option to extend the term of the mortgage for an additional 5 years at a new fixed rate.
The interest rate applicable during the second 5-year period is set at a predetermined spread over a
comparable 5-year Treasury security available at the end of the original mortgage term.

Also in 1996, Freddie Mac introduced the Multifamily PC One Program. Under this program,
Freddie Mac purchases multifamily mortgages for cash with the expectation that it will securitize those
mortgages as single-loan PCs promptly following purchase. Mortgages purchased under the PC One

Program have similar features to mortgages purchased under the Multifamily Conventional Cash
Program.

Freddie Mac regularly purchases seasoned multifamily mortgages in exchange for PCs. Freddie
Mac may also purchase newly originated multifamily mortgages in exchange for PCs or other
multifamily mortgage-related securities in certain negotiated transactions. The multifamily mortgages
purchased for PCs may be fully amortizing mortgages, amortizing balloon mortgages or, in the case of
certain negotiated transactions, interest-only balloon mortgages. Fully amortizing mortgages generally
have original terms of from 10 to 30 years and provide for level monthly payments of principal and
interest sufficient to amortize the mortgages over their original terms. Amortizing balloon mortgages
have original terms of from 5 to 15 years, provide for level monthly payments of principal and interest
sufficient to amortize the mortgages over a period of up to 30 years and require a balloon payment at
maturity. Interest-only balloon mortgages have original terms of from 3 to 10 years, provide for interest-
only monthly payments during their terms and require a balloon payment at maturity.

Conventional multifamily mortgages purchased by Freddie Mac in exchange for mortgage-related
securities may allow prepayment at any time, or, in some cases, may be subject to contractual
restrictions on prepayment. In certain cases, prepayment of multifamily mortgages purchased in
exchange for mortgage-related securities may require the payment of a mortgage prepayment premium.

6


insurance program insures the full principal amount of individual mortgages with original principal
amounts up to a maximum of $155,250, depending upon property location. Most mortgages insured
under the FHA single-family program have LTV ratios in excess of 90 percent and are underwritten to
standards that are often less stringent than those used by Freddie Mac. The reform proposals have
ranged from privatizing FHA and expanding its authority to insure different types of mortgage
products, to restricting its authority by limiting the FHA to providing pool insurance on mortgages held
by Freddie Mac or other market participants. Modifying FHA’s structure and expanding its authority
could place additional competitive pressures on Freddie Mac. Alternatively, restricting FHA’s authority
could increase the share of mortgages originated by the conventional market.

In late 1995 and early 1996, market uncertainty arose over the federal government’s willingness
and ability to make scheduled payments on U.S. Treasury securities and other debts in the event the
Congressionally authorized ceiling on outstanding government debt was not raised. Because Freddie
Mac’s debt and other fixed-income securities are priced and trade by reference to Treasury securities,
the corporation’s access to the capital markets, its funding and investment operations, and other
activities potentially could be disrupted in the event of a default on, or downgrading or interruption in
the issuance of, U.S. Treasury securities.

Defaults, Foreclosures and REO
General

In the normal course of business, certain of the mortgages retained or securitized by Freddie Mac
will default and be foreclosed upon. In most of these cases, Freddie Mac acquires the real estate
securing such mortgages as real estate owned (“REO”). Defaults that lead to foreclosure and/or
acquisition of property as REO often result in losses to Freddie Mac because the amount realized upon
ultimate disposition of a property and/or recoveries under applicable mortgage insurance policies or
from other sources may not be sufficient to pay all principal, financing costs, foreclosure expenses and
other costs related to holding the property pending disposition. The remaining defaults generally involve

either repurchases by sellers of conventional mortgages or FHA/VA mortgages on which Freddie Mac
receives insurance or guaranty payments.

For those mortgages that default, significant periods of time may elapse after default and
foreclosure before Freddie Mac acquires title to, and may exercise its right to sell, REO. Foreclosure
proceedings on single-family mortgages typically are not initiated until a mortgage has been delinquent
for at least 90 days. State law imposes varying notice and other requirements with respect to foreclosure
actions (including, in some states with judicial foreclosure procedures, a requirement for time-
consuming court proceedings at several stages of the foreclosure process). In addition, some state
statutes grant to borrowers rights to redeem properties for periods of up to two years after foreclosure.

Freddie Mac generally does not acquire clear title to these properties until the expiration of any such
right.

For those properties that become REO, Freddie Mac’s policy generally is to dispose of such
properties at market value as quickly as possible, taking into consideration local market conditions.
Consistent with prudent management, Freddie Mac occasionally rents acquired properties pending sale
in order to reduce its carrying costs and losses. Freddie Mac also may make repairs prior to sale in order

to increase the value of the acquired property and, in the case of a multifamily property, in order to
increase the cash flow on the property.


When it becomes apparent that a borrower will not be able to repay

a mortgage, the principal method of collection historically has been
foreclosure. However, foreclosure is not always the most effective
resolution method because of the time and expense related to acquiring,
managing and disposing of the property. As a result, Freddie Mac has
been prudently increasing its loss mitigation activities, primarily the use
of early intervention alternatives to foreclosure. Foreclosure alternatives
are central to Freddie Mac’s overall loss mitigation strategies that are
designed to reduce the number of foreclosed properties and ultimately
the level of total credit-related costs and expenses. However, the use of
foreclosure alternatives tends to accelerate the recognition of credit-
related expenses by shifting losses related to delinquent mortgages and
REO from net interest income and REO operations expense to charge-
offs. Freddie Mac expects to improve the efficiency and increase the use
of foreclosure alternatives in 1996. The two foreclosure alternatives

most frequently employed by Freddie Mac are pre-foreclosure sales
and loan modifications.

A pre-foreclosure sale is a transaction in which Freddie Mac accepts
less than a full payoff of the unpaid principal balance of a defaulted
mortgage from the sale of a home prior to foreclosure, Pre-foreclosure
sales are Freddie Mac’s most commonly utilized foreclosure alternative
and result in average losses that are approximately 60 percent of the
average loss incurred if a property ultimately is acquired by the corpo-
ration through foreclosure and becomes REO.

A loan modification is a loan agreement that changes one or more of
the original terms of a mortgage, usually the borrower's interest rate
or payment period. Freddie Mac expects that, on average, loan modi-
fications will avoid approximately 75 percent of the loss normally
incurred if a property were to go through the foreclosure process.

While potential savings from loan modifications can be significant,
losses could be incurred by the corporation from their overuse. These
losses can occur in the loan modification process as a result of modifying
a loan that is likely to redefault at a later time or modifying a loan that
ultimately would have returned to performing status. Freddie Mac’s
loan modification policies limit the circumstances in which loan modi-
fications are used in order to avoid these errors.

Freddie Mac’s loss mitigation efforts also provide incentives, mortgage
performance data and specialized training to mortgage servicers to
improve the management of non-performing mortgages. The corpor-
ation also seeks to leverage its Loan ProspectorTM technology and is
developing more sophisticated decision support tools that can be inte-
grated into its loss mitigation programs. These tools provide assessments
of the economic costs associated with available foreclosure alternatives
as well as information on the probability of a loan going to foreclosure.

Freddie Mac also has been improving the processes involved in acquiring,
managing and disposing of REO properties. The goal of these efforts is
to maximize REO sales proceeds and reduce operating expenses. During
1995, the corporation improved its property valuation process to help
ensure that the highest potential sales proceeds are received, In some

cases, this includes performing minor repairs or upgrades to properties.

Loss mitigation is a key component of Freddie Mac’s strategy for man-
aging non-performing assets and lowering future credit losses. These
activities reinforce Freddie Mac’s commitment to protect and enhance
the value of its portfolio by enhancing the capabilities of servicers and
mortgage loan processing technology, and should have an increasingly
positive impact on credit performance over the next several years.

Credit Performance: The following table summarizes mortgage delin-
quencies, REO activity and charge-offs for 1995 as compared to 1994

Year ended December 31, 1995, 1994”
(dollars in millions)
Delinquencies, end of period
Single-family:””
Total portfolio 0.61% 0.5796
Freddie Mac at-risk” 0.60%. 0.55%
Multifamily” 2.88% 3.79%
REO, end of period
Single-family $713 $781
Multifamily 87 167
Total $ 800 $ 948
REO activity for period:
Properties in inventory —
beginning of period 8,802 7,888
Properties acquired 15,577 15,460
Properties disposed of (16,237) (14,546)
Properties in inventory —
end of period 8,142 8,802
Number of foreclosure alternatives
settled” 5,945 3,452
Charge-offs for period
Single-family:
Foreclosure alternatives” $ 85 S$ 38
REO acquisitions 200 155
285 193,
Multifamily 20 34
Total $ 305 $227

(1) Multifamily delinquencies and REO balances reflec the implementation of
Statement of Financial Accounting Standards No. 114, which requires the

reclassification and transfer from REO to delinquencies of mortgages previ-

ously classified as in-substance foreclosures

Based on the number of mortgages 90 days or more delinquent

Includes those mortgages for which Freddie Mac has assumed primary defoult

tisk. Excludes mortgages for which the lender or issuer has retained primary

default risk by pledging collateral or agreeing to repurchase mortgages that

default. Lender risk may be limited to a certain portion of the mortgages

delivered.

Based on the net carrying value of mortgages 60 or more days delinquent

Excludes mortgages in litigation that are less than 60 days delinquent

(5) Primarily consist of pre-foreclosure sales and loan modifications.

(2)
(3)

(4)


Freddie Mac’s mortgage purchase activities have historically been concentrated in the single-
family fixed-rate segment of the mortgage market. In part, this is because most borrowers in the
conforming conventional market prefer fixed-rate mortgages to ARMs, particularly in lower interest-
rate environments. It also reflects the preference shown by many large depository institutions for
holding ARMs in their own portfolios at least during the first several years after originating them,
rather than promptly selling them in the secondary market as they routinely do with most of their new
fixed-rate originations. The ability of such institutions to fund ARMs with relatively low-cost deposit
liabilities provides them with an attractive spread and enables them to compete effectively for ARM
originations against mortgage bankers and other originators, which tend to have higher funding costs
and to be less deeply capitalized than depository institutions. As a result, the percentage of ARMs
available for purchase by Freddie Mac has been and continues to be considerably smaller than the
percentage of fixed-rate mortgages.

Financing of Mortgage Purchases

Freddie Mac finances its mortgage purchases by securitizing mortgages as PCs, and with short-
and long-term debt securities, other liabilities and equity capital. The relative amounts of mortgages
that are retained or securitized are determined in accordance with the corporation’s overall capital and
interest-rate risk management strategies. See “Management's Discussion and Analysis of Financial
Condition and Results of Operations — Results of Operations — Net Interest Income on Earning
Assets.”

The following table presents the relative proportions of the total mortgage portfolio represented by
the sold and retained portfolios as of December 31 for each of the years shown.

Sold and Retained Portfolios

As of December 31,
1995 1994 1993 1992 1991

Sold Portfolio

Single-Class PCs . 37.4% 36.9% 35.4% 43.2% 56.0%

Multiclass PCs . 43.6 49.6 53.6 49.6 38.2
Total Sold Portfolio 81.0% 86.5% 89.0% 92.8% 94.2%

Retained Portfolio... 0.6... 6c eee eee eee eee 19.0% 13.5% 11.0% 1.2% 5.8%
Total Mortgage Portfolio ............- 0. cece eee 100.0% 100.0% 100.0% 100.0% 100.0%



P&I Due consists of an interest-free component and an interest-bearing
component. The interest-free component arises from the pass-through
of scheduled principal and interest payments, The interest-bearing
component, known as the PC Variance, arises from the pass-through of
principal prepayments, and bears a rate equal to the average coupon on
the PCs backed by the prepaying mortgages.

The cash balances associated with the P&I Due liability are held for
periods that range from less than one week to over two months. While
the aggregate cash balance associated with P&I Due varies with prepay-
ment levels and other factors, there is a core level below which this cash
balance is highly unlikely to fall. The corporation generally uses this core
cash balance as a source of long-term funding for the retained mortgage
portfolio. The variable amount of cash balances above this core level is
generally invested in short-term money market instruments or used as
a substitute for short-term debt.

Freddie Mac is exposed to interest-rate risk on P&I Due because changes
in prepayment rates, short-term interest rates and other factors can
cause material fluctuations in the interest expense paid on the PC
Variance and the interest income (or reduction in interest expense) on
cash balances associated with P8d Due. Countervailing changes in other
components of the corporation’s asseV/liability mix, or the corporation’s
asseVliability rebalancing, may partially or totally offset these fluctua-
tions. However, in certain environments, these fluctuations can cause
material changes in the corporation’s short-term net interest income
and earnings.

Freddie Mac manages repricing and prepayment risk by funding the
retained mortgage portfolio with a mixture of liabilities designed to
match the expected cash flow characteristics of the financed mortgages,
while allowing the corporation to adjust debt maturities in response to
changes in prepayment rates. This is largely accomplished through the
issuance of long-term callable debt and through the use of off-balance
sheet interest-rate contracts that effectively create long-term debt with
downward interest-rate adjustment features, The use of these debt
instruments provides interest-rate risk protection over a wide range of
both increasing and decreasing interest-rate environments by allowing
the corporation to reprice its funding costs as interest rates decline and
mortgages prepay, or keep its funding costs stable as interest rates rise
and morigages remain in the portfolio. At December 31, 1995, approxi-
mately 73 percent of Freddie Mac’s effective long-term debt funding
consisted of debt with call protection or downward interest rate
adjustment features.

Freddie Mac’s financing strategies emphasize long final maturities on
debt, coupled with call options allowing the corporation to refinance
the debt prior to maturity. Callable debt allows the corporation to use
longer final maturities than would be prudent without the call option.
The following graph illustrates the earliest and latest available maturities
of Freddie Mac’s outstanding long-term debt as of December 31, 1995.
The solid line illustrates the cumulative amount of the corporation’s
long-term debt that is available for repricing either through maturity
or the exercise of the call option in each year for the next ten years
and beyond, These earliest repricing opportunities provide substantial
protection against prepayment risk, The dotted line shows the cumula-

tive final maturity of the corporation's long-term debt, without regard
to call features. These long final maturities provide protection if
prepayments slow and the lives of the corporation’s assets extend

COMPOSITION OF LONG-TERM DEBT FUNDING
100%
von
20% 4
70%-|
60%
so%-4
40%
30% -|

20% +

ow — T r ; T :

1997 1999 2001 2003 2005+

DATE OF EARLIEST REPRICING
DATE OF LATEST REPRICING

The percentage of effective long-term debt with call or downward

rate adjustment features decreased to approximately 73 percent from
approximately 81 percent at December 31, 1994, During 1995, the
corporation purchased for the retained portfolio Freddie Mac PCs
with underlying mortgage note rates that were below prevailing current
coupon mortgage rates. Lower coupon mortgages reduce prepayment
risk and thus decrease the need for callable debt.

In its efforts to reduce debt costs, Freddie Mac expanded the investor
base for its debt issuances during 1995 by creating a global debt facility
to improve the corporation's access to the international bond markets.
Freddie Mac’s international funding program is separate from the
corporation’s domestic funding programs because it incorporates
elements required or preferred by bond investors outside of the
United States, Freddie Mac issued approximately $1.5 billion of
callable bonds during 1995 through its global debt facility.

Freddie Mac also uses short-term liabilities to finance a portion of the
retained mortgage portfolio expected to prepay in the short term. The
corporation increases the level of short-term funding when prepayment
levels rise to reflect the effective shortening of the maturities of the
retained mortgage portfolio. This also tends to offset the increase in
PC Variance expense that generally occurs when prepayment rates rise.
The objective of this debt funding strategy is to minimize the impact of
changes in interest rates and prepayment rates on net interest income.
The corporation's purchases of ARMs are primarily Rinded by the
issuance of floating-rate debt

A-10


In December 1995, HUD issued final regulations implementing the new program approval
authority granted under the GSE Act. Under the regulations, HUD may request information about any
program which it believes may be subject to prior approval. Freddie Mac is required to seek prior
approval only for new programs that are “significantly different” from current activities. The term
“significantly different” is not defined in the regulations. In adopting these regulations, the Secretary
indicated his intention to implement his new program approval authority under the GSE Act in a
manner that avoids the creation of undue burdens on the GSEs and fosters competition.

Treasury Oversight

The Secretary of the Treasury must approve the issuance of, including the interest rates and
maturities on, all notes, debentures and substantially identical types of unsecured debt obligations of
Freddie Mac, as well as the issuance of types of mortgage-related securities not issued prior to the
enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).
The Secretary of the Treasury performs this function by coordinating GSE and agency debt offerings
with Treasury Department funding activities.

Regulations Affecting Mortgage-Related and Debt Securities

In addition to being subject to governmental regulation of its own business activities, Freddie
Mac’s issuance and sale of mortgage-related and debt securities is affected by a broad array of
legislative and regulatory actions related to the activities of banks, savings institutions, insurance
companies, securities dealers and other regulated entities that comprise a significant part of Freddie
Mac’s customer base for these securities. As is the case with the regulation of many businesses, certain
aspects of the regulations affecting its customers are beneficial to Freddie Mac (for example, the
generally favorable treatment of mortgage-related securities as compared with unsecuritized mortgages
under risk-based capital regulations applicable to depository institutions). Other provisions (for exam-
ple, limitations on the ability of regulated institutions to purchase and own certain types of mortgage-
related securities based upon concerns about the prepayment sensitivity and illiquidity of such securi-
ties) may have a constraining effect on the marketability of the corporation’s securities. The more
significant of these regulatory provisions are summarized below.

Risk-Based Capital Regulations

Risk-based capital regulations adopted by the various federal bank and savings association
regulatory agencies affect Freddie Mac’s single-class and multiple-class securities programs. Among
other things, these regulations assign lower credit-risk weights to most mortgage-related securities
issued or guaranteed by Freddie Mac and Fannie Mae than to the underlying mortgages themselves,
thereby requiring regulated financial institutions to maintain higher levels of capital for a given quantity
of unsecuritized mortgages than would be required for an equivalent quantity of mortgage-related
securities.

Risk-based capital regulations applicable to insured depository institutions also may affect the
market for mortgage-related securities issued by Freddie Mac and others. These regulations generally
assign Freddie Mac and Fannie Mae mortgage-related securities, including those backed by GNMA
Certificates, to the second lowest risk weight, while GNMA-guaranteed securities are assigned the
lowest risk weight, thereby eliminating the need to maintain any risk-weighted capital in support of
GNMaA securities. Accordingly, the capital costs of holding Freddie Mac and Fannie Mae securities as
investments are higher for federally insured depository institutions than the costs of holding comparable
GNMA-guaranteed securities.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) mandated
that each of the federal bank and savings association regulatory agencies revise their risk-based capital
standards to ensure that those standards adequately take into account interest-rate risk. Under these
standards, financial institutions with high levels of measured risk are subject to increased capital
requirements. To a certain extent, these rules have an adverse effect on the market for certain types of
mortgage-related securities that increase the capital requirements for insured depository institutions.

19


7.NOTES AND BONDS PAYABLE

The following tables do not include the effect of interest-rate agreements (see Note 10). Notes and bonds payable consists of the following:

December 31, 1995 1994

Balance, Net’ Effective Rate” Balance, Net’ _Effective Rate”

(dollars in millions)
Due within one year:
Discount notes, mortgage securities
sold under agreements to repurchase
and medium-term notes $ 51,458 5.65% $43,408

5.80%
Current portion of long-term debt 10,683 5.68 3,899 5.85
Total due within one year 62,141 5.66 47,307 5.80
Due after one year (maturing between 1997 — 2022) 57,187 6.74 44,746 6.41
Total $119,328 $92,053
(1) Net of unamortized discounts or premiums, hedging gains or losses and debt issuance costs totaling $111 million and $63 million at December 31, 1995 and

1994, respectively.

(2) Represents the weighted average effective rate at the end of the period, and includes the amortization of discounts, premiums, hedging gains or losses and debt

issuance costs

The following table provides additional information related to amounts due within one year.

1995 1994
Average Maximum Average Maximum
Balance Balance Balance Balance
Outstanding Outstanding Outstanding Outstanding
Balance, During _Effective at Any Balance, During —_Effective at Any
Net the Year Rate Month End Net the Year Rate Month End
(dollars in millions)
Discount notes $49,024 $45,491 5.89% $49,024 $42,989 $33,280 4.36% $42,989
Mortgage securities sold under
agreements to repurchase - u - 106 19 520 2.34 2,260
Medium-term notes 2,434 2,000 6.49 2,501 400 18 2.92 1,265
Mortgage securities sold under agreements to repurchase are collateralized Calll Period Balance, Net Effective
borrowing transactions in which Freddie Mac sells PCs with an agreement _Inception Date Maturity of Discount Rate
to repurchase PCs that are substantially the same. These agreements dollars in millions)
require the underlying PCs to be delivered to the dealers who arranged 1996 1996-2010 $29,185 6.04%
the transactions. At December 31, 1994, the book value, including 1997 1998-2007 8,960 7.29
accrued interest, of the PCs underlying the agreements was $20 million, i998 2000-2008 8,744 72
‘The market values of these PCs approximated their book value. 1999 2002-2009 3,248 7.54
2000 2005-2010 2,060 7.24
A significant portion of Freddie Mac’s long-term debt is callable. Callable 2001 2010 25 8.35
debt gives Freddie Mac the option to redeem the debt security in whole Toul $5222 659%

or in part at anytime on or after a specified date. The following table

summarizes the amounts, average interest rates and call periods of callable
debt as of December 31, 1995.

A-30


In the event that the amount of dividends payable per share of the Preferred Stock is adjusted
pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to
be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post
Declaration Date Dividends and Retroactive Dividends to the holders of Preferred Stock.

See “Certain Federal Income Tax Consequences —- Dividends — Recent Proposals” for a discus-
sion of certain proposals to reduce the Dividends-Received Percentage.

Determination of LIBOR

“LIBOR” means, with respect to a Dividend Period relating to a Dividend Payment Date (in the
following order of priority):

(i) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-
month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related
Determination Date;

(ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the
related Determination Date, LIBOR will be the arithmetic mean (if necessary rounded upwards to
the nearest whole multiple of 1/128%) of the rates (expressed as percentages per annum) for
Eurodollar deposits having a three-month maturity that appear on Reuters Monitor Money Rates
Page LIBO (‘Reuters Page LIBO”) as of 11:00 a.m. (London time) on such Determination Date;

(iii) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the
related Determination Date, Freddie Mac will request the principal London offices of four leading
banks in the London interbank market to provide such banks’ offered quotations (expressed as
percentages per annum) to prime banks in the London interbank market for Eurodollar deposits
having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at
least two quotations are provided, LIBOR will be the arithmetic mean (if necessary rounded
upwards to the nearest whole multiple of 1/128%) of such quotations;

(iv) if fewer than two such quotations are provided as requested in clause (iii) above, Freddie
Mac will request four major New York City banks to provide such banks’ offered quotations
(expressed as percentages per annum) to leading European banks for loans in Eurodollars as of
11:00 a.m. (London time) on such Determination Date. If at least two such quotations are
provided, LIBOR will be the arithmetic mean (if necessary rounded upwards to the nearest whole
multiple of 1/128%) of such quotations; and

(v) if fewer than two such quotations are provided as requested in clause (iv) above, LIBOR
will be LIBOR determined with respect to the Dividend Period immediately preceding such
current Dividend Period.

If the rate for Eurodollar deposits having a three-month maturity that initially appears on Telerate
Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related
Determination Date is superseded on Telerate Page 3750 or Reuters Page LIBO, as the case may be, by
a corrected rate before 12:00 noon (London time) on such Determination Date, the corrected rate as so
substituted on the applicable page will be the applicable LIBOR for such Determination Date.

Absent manifest error, Freddie Mac’s determination of LIBOR and its calculation of the applica-
ble dividend rate for each Dividend Period will be final and binding. Investors may obtain the dividend
rates for the current and preceding Dividend Periods by writing or calling the Investor Inquiry
Department at Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washing-
ton, D.C. metropolitan area, phone 800/336-FMPC; within Washington, D.C. metropolitan area, phone

703/450-3777).
Optional Redemption

The Preferred Stock will not be redeemable prior to June 30, 2001. On or after that date and
subject to any further limitations which may be imposed by law, Freddie Mac may redeem the
Preferred Stock, in whole or in part, at any time or from time to time, out of funds legally available

12


FEDERAL HOME LOAN MORTGAGE CORPORATION

Freddie Mac is a shareholder-owned government-sponsored enterprise (“GSE”) chartered on July
24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act, Title III of the Emergency
Home Finance Act of 1970, as amended (the “Freddie Mac Act”). Freddie Mac’s statutory purposes
are (i) to provide stability in the secondary market for residential mortgages, (ii) to respond appropri-
ately to the private capital market, (iii) to provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to mortgages on housing for low- and moderate-
income families involving a reasonable economic return that may be less than the return earned on other
activities) and (iv) to promote access to mortgage credit throughout the United States (including
central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments
and improving the distribution of investment capital available for residential mortgage financing.

The principal activity of Freddie Mac consists of the purchase of first lien, conventional, residential
mortgages, including both whole loans and participation interest in such mortgages. Its mortgage
purchases are primarily financed by sales of single-class guaranteed mortgage-related securities,
primarily various types of mortgage participation certificates (“PCs”). Freddie Mac guarantees the
payment of interest due on PCs and the principal of the underlying mortgages. Freddie Mac also
finances mortgage purchases with debt securities, other liabilities and equity capital.

Freddie Mac is subject to two primary types of risk in the conduct of its business: credit risk
associated with the mortgages it purchases and the institutions with which it does business; and interest-
rate risk that principally results from mortgage prepayments that may create mismatches in the
Corporation’s assets and liabilities associated with its mortgage portfolio. For a discussion of the impact
and management of these risks, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Risk Management” in the Information Statement.

The principal office of Freddie Mac is in McLean, Virginia. Freddie Mac has regional offices that
are primarily responsible for the performance of various marketing activities and quality control
procedures. These offices are located in Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; McLean,
Virginia; New York, New York and Woodland Hills, California.

A more detailed discussion of the business of the Corporation appears under “Business” in the

Information Statement. The preceding description of the business of Freddie Mac is qualified in its
entirety by that discussion.

USE OF PROCEEDS

The Corporation will apply the net proceeds from the sale of Preferred Stock to its general funds to
be used for general corporate purposes, including the purchase of residential mortgages and the
repayment of outstanding indebtedness. The precise amounts and timing of the application of the
proceeds will depend upon the funding requirements of the Corporation.

The Corporation engages in financing transactions continuously. The amount and nature of such
transactions are dependent upon a number of factors, including the volume of mortgage prepayments
and mortgages purchased by the Corporation, as well as general market conditions.

CAPITALIZATION

The following table sets forth the capitalization of the Corporation at March 31, 1996 and as
adjusted to reflect the sale of the Preferred Stock offered hereby. This table should be read in
conjunction with the financial statements of the Corporation and other information contained in the
Information Statement.


possible to predict the outcome, Freddie Mac does not believe that the litigation would have a material
adverse effect on the corporation’s financial condition or results of operations.

Litigation and claims resolution are subject to many uncertainties and are not susceptible to
assurable predictability. Nevertheless, management believes that the outcome of all currently pending

claims will not have a material adverse effect on the corporation’s financial condition or results of
operations.

REGULATION AND GOVERNMENTAL RELATIONSHIPS

From time to time, Freddie Mac’s statutory, structural and regulatory relationships with the
federal government may be subject to review or modification. While Freddie Mac’s GSE status is often
advantageous for the corporation, on occasion proposals have been advanced that could adversely affect
Freddie Mac’s fulfillment of its statutory purposes, as well as the corporation’s results of operations.

Regulation of Freddie Mac

Freddie Mac is subject to oversight by three agencies of the federal government; the Office of
Federal Housing Enterprise Oversight (““OFHEO”), an independent office within HUD created by the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the “GSE Act”); the
Secretary of HUD and the Secretary of the Treasury.

OFHEO Oversight

The GSE Act provided for the creation of a separate office within HUD, substantially independent
of the Secretary of HUD, headed by a director (the “Director”), appointed by the President of the
United States and confirmed by the Senate, for a five-year term. The Director has exclusive regulatory
authority for ensuring the adequate capitalization and safe operation of Freddie Mac in accordance
with the GSE Act. The Director is required, among other things, to conduct an annual on-site
examination of both Freddie Mac and Fannie Mae to determine the condition of each enterprise for the
purpose of ensuring its financial safety and soundness. The Director is authorized to levy annual
assessments, payable semiannually, on the two enterprises to cover OFHEO’s reasonable expenses.

The Director is required under the GSE Act to establish and monitor compliance with three
separate capital standards applicable to both Freddie Mac and Fannie Mae. These capital standards
consist of a minimum capital measure, a critical capital measure and a risk-based capital measure.

The minimum capital standard requires Freddie Mac to maintain “core capital” equal to the sum
of 2.50 percent of its aggregate on-balance sheet assets, determined in accordance with GAAP, and 0.45
percent of its aggregate off-balance sheet obligations (consisting of the unpaid principal balance of
outstanding mortgage-related securities and substantially equivalent instruments issued or guaranteed
by it, other off-balance sheet obligations and one-half of its average mortgage purchase commitments).
In the case of other off-balance sheet obligations and mortgage purchase commitments, the Director is
required to adjust the percentage to reflect differences in the credit risk of those obligations and
commitments in relation to mortgage-related securities. In June 1995, OFHEO issued a proposed
minimum capital regulation, which would not change significantly OFHEO’s current implementation of

the minimum capital standard. OFHEO has announced that it expects to issue a final minimum capital
regulation in 1996.

The critical capital requirement involves the same structure as the minimum capital standard

except that the percentages for on-balance sheet assets and off-balance sheet obligations are 1.25 and
0.25, respectively.

The risk-based standard includes credit risk and interest-rate risk components and an additional
amount of capital for management and operations risk. Together, the credit risk component and the
interest-rate risk component consist of an amount of “total capital” determined by the Director to be
sufficient for Freddie Mac to maintain positive capital for a period of ten years under specified highly
stressful economic scenarios. Total capital consists of “core capital” (defined to include the sum of the

16


The increase in the proportion of credit-enhanced purchases moderates
short-term revenue growth while the associated decreases in credit-
related expenses are not realized until several years after purchase when
mortgages normally reach their peak period of default. In addition, many
credit-enhanced transactions produce significant amounts of float income,
as a result of remittance agreements between the mortgage seller and

Freddie Mac, which is recognized as interest income primarily at the
time of mortgage prepayment. Despite the impact on short-term earn-
ings growth, credit-enhanced purchases can provide attractive returns
‘on equity since the lower guarantee fee rates are expected to be more
than offset by lower credit-related expenses over time.

Management and guarantee income does not include interest deemed
uncollectible on non-performing mortgages. If these non-performing
mortgages had been fully performing, they would have contributed an
additional $23 million, $32 million and $24 million to Management
and guarantee income in 1995, 1994 and 1993, respectively.

The $99 million, or 10 percent, increase in Management and guarantee
income from 1993 to 1994 was due to a $36.4 billion, or 9 percent,
increase in the average sold portfolio balance coupled with a 0.3 basis
point increase in the average guarantee fee rate. The increase in the
average guarantee fee rate reflected a $30 million acceleration of
deferred expense amortization in 1993 resulting from high levels of
mortgage prepayments that occurred in that year.

Year ended December 31, 1995 1994 1993
(dollars in millions)

Issuances of original issue securities:””

30-year single-family fixed-rate” $54,426. $ 65,750 $103,103
15-year single-family fixed-rate 13,110 24,673 61,741
5- and 7-year ballooryresets 3,719. 9,889 23,052
Adjustable-rate 14,267 16,589 20,828

Multifamily 355 209 -
Toul”

$85,877 $117,110 $208,724
Exchanges of 75-day PCs to
Gold PCs $1,117 $ 1,022 $ 4,139
Issuances of resecuritized PCs:
Multiclass PCs $15,372 $ 73,131 $143,336
Giant PCs 19,979 37,479 41,321
Total $35,351 $110,610 $184,657

(1) Original issue securities include PCs and REMICs backed by newly purchased
mortgages, rather than previously existing PCs.

(2) Includes 20-year single-family fixed-rate mortgages.

(3) Includes issuances of $71.6 billion, $100.5 billion and $187.9 billion of
Gold PCs and $14.3 billion, $16.6 billion and $20.8 billion of 75-day
PCs in 1995, 1994 and 1993, respectively.

Other Income, Net

Other income, net, decreased $27 million compared to 1994 primarily
due to lower REMIC fee income attributable to.a significant decline in
REMIC settlement volumes. REMIC volumes have been adversely
affected by decreases in mortgage originations and PC settlements
from 1994 to 1995, as well as reduced investor demand for certain
REMIC securities in response to rising interest rates during 1994 and

early 1995 and the resulting relative lack of liquidity of these REMIC
securities.

‘The remaining components of Other income, net, increased $5 million
compared to 1994. These components, consisting largely of income
related to securities’ market activities, fee for service activities and other
fees collected from seller/servicers, tend to fluctuate from period to
period. Freddie Mac experienced modest increases in revenues and
expenses relating to Loan ProspectorTM during 1995, but the effect

of these changes on net income is not material.

Other income, net, decreased $62 million between 1993 and 1994
due primarily to lower REMIC fee income attributable to the sharp
decline in REMIC issuances in 1994.

Credit-Related Expenses

Total credit-related expenses consist of the Provision for mortgage losses
and REO operations expense. The Provision for mortgage losses is charged
against income in an amount considered appropriate to maintain the
corporation’s reserves for mortgage losses at levels that management
deems adequate to absorb losses incurred on the retained and sold
mortgage portfolios. REO operations expense includes foreclosure-
related costs, REO valuation adjustments and other income and expense
items related to operating and disposing of acquired properties

‘Total credit-related expenses increased $116 million, or 27 percent,
from $425 million in 1994 to $541 million in 1995. The Provision for
mortgage losses increased from $200 million in 1994 to $255 million
in 1995. The provision was increased during 1995 to cover increased
single-family charge-offs. As discussed in “Risk Management — Credit
Risk — Credit Performance — Mortgage Charge-offs and REO,”
single-family charge-offs increased due to increased REO acquisition
losses resulting from economic weakness and declining average house
prices in California and certain areas within the Northeast region, as
well as increased loss mitigation activities which tend to shift losses
from net interest income and REO operations expense to charge-offs.

Single-family REO operations expense increased $73 million, from
$181 million in 1994 to $254 million in 1995. This increase was due to
costs related to higher REO acquisitions along with higher holding and
disposition costs resulting from declining average house prices in the
areas mentioned above. Multifamily REO operations expense decreased
$12 million, from $44 million in 1994 to $32 million in’1995,
reflecting the decreasing REO balance.

A-16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

‘The Federal Home Loan Mortgage Corporation (Freddie Mac or the cor-
poration) is a federally chartered and stockholder-owned corporation. The
principal activity of Freddie Mac is the purchase of residential mortgages
from mortgage lenders to increase the availability of funds for home owner-
ship. Freddie Mac finances a majority of these purchases by securitizing and
selling the mortgages to investors as guaranteed mortgage pass-through
securities called Mortgage Participation Certificates (PCs). Mortgages
financed by the issuance of PCs are referred to as the “sold portfolio.”
To a lesser extent, Freddie Mac finances mortgage purchases with debt,
equity and other liabilities. Mortgages and mortgage-related securities
held as investments are referred to as the “retained portfolio.” Together,
the retained and sold portfolio comprise the “total mortgage portfolio.”

Freddie Mac’s financial reporting and accounting policies conform to
generally accepted accounting principles (GAAP). The preparation of
financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Certain prior year amounts have been reclassified to
conform to current year presentation. The following is a summary of

the corporation’s significant accounting policies.

Consolidation

The consolidated financial statements include the accounts of the cor-
poration and its majority-owned subsidiary, the West* Mac Associates
Limited Partnership, which is the owner and developer of Freddie Mac’s
corporate headquarters buildings. The interests of the minority partners
are immaterial in relation to the consolidated financial statements and
are included in “Accrued interest and other accrued expenses.” Material
intercompany transactions have been eliminated in consolidation.

Mortgages

Freddie Mac classifies mortgages and mortgage-related securities as held
for investment and reports them at amortized cost when it has the positive
intent and ability to hold them to maturity. Mortgages that Freddie Mac
does not intend to hold to maturity are classified as held for sale and are
reported at the lower of cost or market value as determined based on
‘outstanding sale commitments or current market prices for mortgages not
subject to forward sale commitments, Substantially all of the mortgages
held for sale at December 31, 1995 and 1994 were subject to forward
sale commitments. The lower of cost or market value is calculated based
on the aggregate of all mortgages held for sale. Mortgage-related securities
that Freddie Mac does not have the positive intent to hold to maturity are
classified as available-for-sale and are reported at fair value with unrealized
gains and losses reported in Stockholders’ equity on a net of tax basis.

Freddie Mac discontinues recognizing interest income on mortgages when
collection of interest is doubtful. Interest income is recognized on such
mortgages only to the extent cash payments are received. Effective January
1, 1994, the corporation changed the way it reports uncollectible interest
on single-family mortgages to be more consistent with industry practices

Previously, accrued but uncollected interest was reflected as a charge-off
against reserves for losses on mortgages. Under the current method,
uncollectible interest is charged directly against interest income. As a
result of the change, loss provisions, charge-offs and Net interest income
on earning assets and Management and guarantee income are reduced

by approximately equal amounts, with no material effect on net income.
Uncollectible interest on multifamily mortgages has historically been charged
against interest income. Previously reported amounts in the financial
statements do not reflect the change in reporting of uncollectible interest
on single-family mortgages.

On January 1, 1995, the corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, “Accounting by Creditors for
Impairment of a Loan}” as amended by SFAS No. 118, “Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures.”
Under SFAS No. 114, loans deemed to be in-substance foreclosures are
no longer transferred to real estate owned (REO), but rather continue to
be carried in the mortgage portfolio until Freddie Mac obtains physical
possession of the collateral, which is normally when the foreclosure
process is completed. As a result, prior period mortgage and REO
balances have been restated to reflect the adoption of SFAS No. 114.
The adoption of SFAS No. 114 did not have a material effect on results
of operations.

Securitization and Resecuritization Activity

Freddie Mac sells or issues single-class PCs representing undivided interests
in primarily conventional mortgages. Because Freddie Mac guarantees
payment on the mortgages underlying the PCs, the PCS are reflected as
contingent liabilities. To compensate it for assuming this risk, and as com-
pensation for administration of principal and interest payments, Freddie
Mac receives fee income recorded as “Management and guarantee income”
over the lives of the PCs. Freddie Mac recognizes losses currently on PC
issuances and outstanding PC issuance commitments when the underlying
mortgages fail to generate management and guarantee fee income sufficient
to cover all anticipated expenses and probable credit losses to be incurred
by Freddie Mac over the life of the securities.

Freddie Mac also issues multiclass PCs, referred to as real estate mortgage
investment conduits (REMICS), representing beneficial ownership interests
in specific pools of single-class PCs, mortgages or other REMICs. A
majority of the fees received from issuing REMICs is recognized as “Other
income, net” in the period the fees are received with the remaining portion,
which is equivalent to the future costs related to managing the REMICs,
being deferred and amortized over the weighted average life of the REMICs.

Unamortized Purchase and Sale Premiums, Discounts and Fees
“Unamortized purchase and sale premiums, discounts and fees” associated
with acquiring mortgages and issuing single-class PCs are amortized over
the estimated weighted average lives of the related mortgages using the
effective interest method. Amortization of purchase premiums, discounts,
and fees for retained mortgages and mortgage-related securities is included
in interest income on the retained mortgage portfolio. Amortization of sale
premiums, discounts and fees on PCs and purchase premiums, discounts

and fees on mortgages underlying PCs is included in “Management and
guarantee income”

A-25


OFFERING CIRCULAR a
Freddie
Mac

5,000,000 Shares

Federal Home Loan Mortgage Corporation

Variable Rate, Non-Cumulative
Preferred Stock

Dividend Rate: (3-Month LIBOR + 1.0%)
4377

Dividend Rate Cap: 9.00%

Payment Dates: March 31, June 30, September 30 and

December 31 of each year, beginning
June 30, 1996

Dividend Reset Frequency: Quarterly

Dividend Adjustment: Dividend amount subject to adjustment upon
certain adverse changes to dividends-
received deduction prior to April 26, 1998

Liquidation Preference: $50 per share plus current dividends

Optional Redemption: On or after June 30, 2001

Issue Date: On or about April 26, 1996

Initial Dividend Rate: 4.7091% (from April 26, 1996 through
June 30, 1996)

Listing: New York Stock Exchange

FREDDIE MAC’S OBLIGATIONS UNDER THE TERMS OF THE PREFERRED STOCK ARE OBLIGATIONS OF FREDDIE MAC
ONLY AND ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, THE UNITED STATES OR ANY AGENCY
OR INSTRUMENTALITY OF THE UNITED STATES OTHER THAN FREDDIE MAC.

Initial Public ‘Underwriting Proceeds to
Offering Price(1) Discount(2)_ Freddie Mac(1)(3)
Per Share $50.90 $.875 $49.125
Total(4) $250,000,000 $4,375,000 $245,625,000

(1) Plus accrued dividends, if any, from April 26, 1996.

(2) Freddie Mac has agreed to indemnify the several Underwriters against certain liabilities. See “Underwriting.”

(3) Before deducting expenses payable by Freddie Mac estimated at $200,000.

(4) Freddie Mac has granted the Underwriters an option to purchase up to an additional 500,000 shares to cover overallotments. If all
such shares are purchased, the total Initial Public Offering Price, Underwriting Discount and Proceeds to Freddie Mac will be
$275,000,000, $4,812,500 and $270,187,500, respectively. See “Underwriting.”

Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Salomon Brothers Inc

The date of this Offering Circular is April 23, 1996.


Use of Proceeds .................. To be added to the working capital of Freddie Mac and used

for general corporate purposes, including the purchase of
residential mortgages and repayment of outstanding debt.
Transfer Agent, Dividend Disbursing
Agent and Registrar ............. First Chicago Trust Company, New York, New York.
NYSE Listing . The Preferred Stock has been approved for listing on the New
York Stock Exchange (the “NYSE”).

SUMMARY SELECTED FINANCIAL DATA

At or For the
Quarter Ended
March 31, At or For the Year Ended December 31

996 _*'1995_— 19951994 «993 199:
(dollars in millions, except per share amounts)

BALANCE SHEET

Retained portfolio - $117,420 $ 77,313 $107,424

$ 72.828 $ 55,698 $ 33.896 $ 27,046
Total assets... . $143,792 $113,625 $137,181 $ 106,199 $ 83,880 $ 59502 $ 46,860
Primary capital base(1) . -$ 6,701 $ 6075 $ 6546 $ 5,895 $ 5.197 § 4355 §$ 3,303
Adjusted total capital base(2).$ 7,342 $ 7,309 $ 7,179 $ 7A $ 6.680 $ 5.813 $ 5,265

MORTGAGE PURCHASE AND
» FINANCING ACTIVITIES

Mortgage purchases .......$ 36.231 $ 13,400 $ 98,386 $ 124,246 $ 229.706 $ 191.126 $ 99.965
Number of mortgages

purchased ............. 338,951 124A AS 933,559 1,256,549 2,315,162 1,969,851 1,061.942
Mortgage security
settlements(3) ..... woe. $ 32,741 $ 11,214 $ 85,877 $ LI7I10 $ 208.724 $ 179.207 $ 92.479

Mortgage Participation
Certificates (“PCs")(4). ... $524,327 $492,194 $515,051 $ 491,325 $ 454.906 $ 407.514 $ 359,163

INCOME STATEMENT

Net interest income on

earning assets(5) ........ $ 387 $ 293 $ 1.298 $ 1.047 $ 808 695 § 683
Management and guarantee

income(S).............$ 305 $ 295 $ 1185 $ 1174 $ 1077 $ 936 $ 792
Net income ......... --$ 301 $ 258 $ 1,091 $ 983 § 786 $ 622. $ $55
Earnings per common

share(6) 2... 2.0.60. -$ 160 $ 134 $ 569 $ 5.08 $ 4.07 $ 3.29 $ 3.08
Dividends per common

share(6) .... seeeee $ 035 $ 030 $ 120 $ 1.04 $ 0.88 $ 0.76 = $ 0.67
Return on.common equity .. . 22% 22% 22% 23% 22% 21% 24%

(1) “Stockholders’ equity” and “Reserves for losses on mortgages.”

(2) “Primary capital base” and “Subordinated borrowings.”

(3) Single-class Mortgage Participation Certificates.

(4) Includes balances of Freddie Mac PCs held in the retained portfolio. Data for 1993 through 1995 have been restated to
reflect this revised reporting implemented in first quarter 1996.

(5) Guarantee fee income on mortgages underlying Freddie Mac PCs held in the retained portfolio is no longer included in net
interest income on earning assets, but is included in management and guarantee income. Data for 1993 through 1995 have
been restated to reflect this revised reporting implemented in first quarter 1996.

(6) In April 1992, Freddie Mac effected a three-for-one split of its Common Stock. All earnings per share and dividends per
share amounts have been adjusted retroactively to reflect the three-for-one stock split.



mortgages purchased by the corporation may be repaid by the borrower, in whole or in part, at any time
prior to maturity without penalty. By contrast, the multifamily mortgages purchased by the corporation
often may be repaid prior to maturity only upon payment of a prepayment premium or, in some cases, are
subject to contractual restrictions on prepayment for a period of time following origination.

The corporation finances mortgage purchases principally by sales of guaranteed mortgage-related
securities, including various types of mortgage participation certificates (“PCs”). Freddie Mac also
finances mortgage purchases with debt securities, other liabilities (primarily cash temporarily held
pending disbursement to security holders) and equity capital. Mortgages financed by PCs sold to
investors are referred to as the “sold portfolio.” Mortgages and mortgage-related securities held for
investment by Freddie Mac and financed by debt securities, other liabilities and equity capital are
referred to as the “retained portfolio.” The sold and retained portfolios are collectively referred to as the

“total mortgage portfolio.” Freddie Mac’s mortgage purchase and mortgage-related securities sales
programs are described below.

Mortgage Purchases

Freddie Mac purchases a variety of single-family mortgages with fixed or adjustable interest rates
or interest rate reset features. Single-family mortgages acquired by Freddie Mac are purchased mainly
from mortgagees approved by the Secretary of Housing and Urban Development (“HUD”) for
participation in mortgage insurance programs under the National Housing Act (primarily mortgage
bankers) or from federally insured financial institutions (primarily commercial banks and thrift
institutions). Freddie Mac purchases multifamily mortgages with fixed interest rates or interest-rate
reset features from a limited network of multifamily mortgage originators, including federally insured
financial institutions, mortgage bankers, investment bankers and insurance companies.

Freddie Mac fulfills its statutory purposes of providing a reliable and low-cost source of mortgage
funding for the benefit of a diverse range of homeowners and renters primarily through the purchase of
conventional, conforming single-family mortgages, as well as through its multifamily mortgage
purchase programs and other initiatives. See “Regulation and Governmental Relationships — Regula-
tion of Freddie Mac” and “Management's Discussion and Analysis of Financial Condition and Results
of Operations — Regulatory Matters — Housing Goals.” Freddie Mac views the financing of afforda-
ble housing as an integral part of its mission and business. Accordingly, the corporation purchases most
single-family and multifamily mortgages in support of affordable housing through its standard mort-
gage purchase programs and under the same credit standards as its other mortgage purchases. In
addition, Freddie Mac has initiated a variety of targeted programs to develop experience in order to
better serve this segment of the residential mortgage market with the ultimate goal of incorporating
these programs into its standard mortgage purchase programs. See “— Recent Initiatives —
Expanding Markets and Community Development Lending.”

Freddie Mac Act Mortgage Purchase Requirements

The Freddie Mac Act imposes limits, which are subject to annual adjustment, on the maximum
original principal amount of any type of mortgage that Freddie Mac may purchase. For 1996 the
maximum original principal amount of a first-lien conventional single-family mortgage is $207,000 for
a one-family dwelling, $264,750 for a two-family dwelling, $320,050 for a three-family dwelling and
$397,800 for a four-family dwelling. Separate limits, expressed on a per-unit basis, apply to the
maximum original principal amount of multifamily mortgages purchased by Freddie Mac. These per-
unit limits may be increased by 92 percent for properties located in HUD-designated “thigh cost” areas.
The applicable loan purchase limits for both single-family and multifamily mortgages are 50 percent
higher for properties located in Alaska, Guam, Hawaii or the U.S. Virgin Islands.

The Freddie Mac Act also provides that Freddie Mac may not purchase a first-lien conventional
single-family mortgage if the outstanding principal balance at the time of purchase exceeds 80 percent
of the value of the real property securing the mortgage unless one of several conditions is met. These
conditions generally provide credit enhancement to Freddie Mac (and therefore limit Freddie Mac’s
exposure to loss) or incentives for sellers to deliver only mortgages of acceptable quality. They consist of

4


Stock options allow for the purchase of Freddie Mac’s common stock at a
price equal to the fair market value on the grant date. Because the option
price is equal to the fair market value on the grant date, the options do not
result in compensation expense. Options may be exercised for a period
of 10 years from the grant date, subject to a vesting schedule generally
commencing one year from the grant date. The following is a summary
of the status of stock options.

Available for

Exercise Outstanding Price Per Share

December 31, 1992 630,401 2,244,552 $14.10 — $45.81
Granted 476,740 49.06- 51.44
Exercised (232,839) 14.10 ~ 40.69
Canceled (78,425) 20.19- 49.06
December 31, 1993 1,083,988 2,410,028» 14,10- 51.44
Granted 509,660 50.94 60.44
Exercised (307,194) 14.10 53.44
Canceled (131,240) 27.83- 60.38
December 31, 1994 1,359,353 2,481,254 14.10 - 60.44
Granted 539,730 $8.69 77.75
Exercised (230,782) 16.29 60.38
Canceled (47,467) _39.06 - 68.13
December 31,1995 1,391,153 2,742,735 $24.96 — $77.75

Dividend rights provide participants the right to receive, at the time stock
options are exercised, an amount equal to dividends paid on the stock
from the date the options were granted. Compensation expense related
to dividend rights charged to operations in 1995, 1994, and 1993 was
$3.0 million, $2.4 million, and $2.0 million, respectively.

Restricted stock entitles participants to all the rights of a stockholder,
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 the corporation. The value of shares awarded is amortized to
compensation expense over the restricted or vesting period. Compensation
expense charged to operations was $2.2 million, $1.8 million, and $1.7
million in 1995, 1994, and 1993, respectively. During 1995, 43,480
shares of restricted stock were granted. At December 31, 1995, 129,416
shares of restricted stock remained outstanding,

Regulatory Capital

The Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (the GSE Act) established risk-based and minimum capital standards
for Freddie Mac. The risk-based capital standard will require Freddie Mac
to maintain an amount of “total capital” sufficient for the corporation to
maintain positive total capital for a ten-year period under highly stressful
economic scenarios. Total capital includes “core capital” and general
reserves for mortgage and foreclosure losses and certain other amounts
available to absorb losses. Core capital consists of the par or stated values
of outstanding common and perpetual preferred stock, paid-in capital
and retained earnings, measured under GAAP

‘The minimum capital standard is an amount of core capital equal to the
sum of 2.50 percent of aggregate on-balance sheet assets, measured under
GAAP 0.225 percent of its average morgage purchase commitments and,
generally, 0.45 percent of its other aggregate off-balance sheet obligations,
including the aggregate unpaid principal balance of the corporation's PCs.

As of December 31, 1995, Freddie Mac’s core capital amounted to approx-
imately $5.8 billion, which exceeded the minimum capital requirement
under the GSE Act. Freddie Mac believes that a reasonable interpretation
of the risk-based capital standard would not require the corporation to
substantially increase its capitalization, and that the corporation

has adequate access to the capital markets to raise any necessary addi-
tional capital.

10. FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK AND CONCENTRATIONS

OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

In the normal course of business the corporation is a party to transactions
involving financial instruments with off-balance sheet risk. These financial
instruments include PCs, commitments to purchase mortgages, commit-
ments to sell PCs, and interest-rate agreements and other hedging
instruments. These instruments expose the corporation to credit risk
and market risk in excess of the amounts reported in the balance sheet.
The following summarizes financial instruments with off-balance sheet
risk at December 31, 1995 and 1994.

December 31, 1995 1994
(dollars in millions)

Financial instruments whose contractual
amounts represent credit risk:

Guaranteed PCs” $459,045, $460,656
Commitments to purchase mortgages 32,730 40,256
Financial instruments whose notional
or contractual amounts exceed the
amount of credit risk:
Commitments to sell PCs 1,659 652
Interest-rate agreements and
other hedging instruments 58,463 30,837

(1) Excludes $12.4 billion and $14.1 billion at December 31, 1995 and 1994,
respectively, of Freddie Mac REMIC securities collateralized by Government
National Mortgage Association (GNMA) securities. Also excludes $56.0 bil-
lion and $30.7 billion at December 31, 1995 and 1994, respectively, of
PCs held in the retained mortgage portfolio.

A-32


Earnings Per Share

Earnings per common share are based on net income less dividends
declared on “6,72% Non-cumulative preferred stock” and “7.90% Non-
cumulative preferred stock,” divided by the weighted average number of
shares of common stock outstanding during the year. Stock options are
not included in the weighted average number of shares outstanding
because they do not have a material dilutive effect.

Interest-Rate Agreements and Other Hedging Instruments
Freddie Mac uses certain off-balance sheet financial instruments,
primarily interest-rate swaps, caps, floors and corridors, as an “end
user” with the objective of lowering the corporation's financing costs
or increasing investment yields, as well as reducing the corporation’s
exposure to interest-rate risk. When these instruments meet specific
criteria, they are accounted for as hedges on either a deferral or an
accrual basis, depending upon the nature of the hedge strategy

Interest-rate agreements — The net differential received or paid under
interest-rate agreements is recognized as an adjustment to interest income
or expense on the associated assets or liabilities on an accrual basis. Net
premiums paid for interest-rate agreements are included in “Accounts
receivable and other assets” and are amortized to interest income or
expense over the terms of the agreements. Gains and losses on termi-
nated interest-rate agreements are deferred over the remaining lives of
the hedged items. As of December 31, 1995 and 1994, the unamortized
balance of deferred gains and losses was not material to the consolidated
financial statements.

Other hedging instruments — To hedge against fluctuations in interest
rates that may affect the cost of certain debt issuances, the corporation
enters into short sales of Treasury securiti

and spread-lock agreements.
Gains and losses resulting from these transactions that are designated and
perform effectively as hedges are deferred and amortized as adjustments to
interest expense over the lives of the hedged borrowings. Gains and losses
resulting from transactions that do not perform effectively as hedges are
recognized currently. As of December 31, 1995 and 1994, the unamortized
balance of deferred gains and losses was not material to the consolidated
financial statements.

Consolidated Statements of Cash Flows

For purposes of reporting cash flows, Freddie Mac considers federal funds
and highly liquid investment securities with original maturities of three
months or less to be cash equivalents. Freddie Mac’s Consolidated Statements
of Cash Flows are prepared using the indirect method of presentation.

Freddie Mac enters into non-cash transactions involving the securitization
of mortgages, resecuritization of existing PCs and foreclosure on defaulted
mortgages. Non-cash mortgage securitization and PC resecuritization
transactions include: (1) the exchange of mortgages with a seller for a like
amount of PCs, backed by the identical mortgages (Guarantor Program);
(2) the exchange of existing Freddie Mac PCs with a seller for an interest
in a Freddie Mac PC, backed by a group of PCs exchanged under the
program (Giant PC Program); and (3) the exchange of existing single-
class PCs with a seller for a like amount of multiclass PCs, backed by

the identical single-class PCs.

A-27

New Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of” This standard provides guidance
on the carrying value of long lived assets, including REO, and is effective
January 1, 1996. Management believes that adopting the new standard
will not have a material effect on the consolidated financial statements.

In October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-
Based Compensation,” which requires entities to measure compensation
costs related to awards of stock-based compensation using either the fair
value method or the intrinsic value method. Under the fair value method,
compensation expense is measured at the grant date based on the fair value
of the award. Under the intrinsic value method, compensation expense is
equal to the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock.
Entities electing to measure compensation costs using the intrinsic value
method must make pro forma disclosures, beginning after the effective
date of January 1, 1996, of net income and earnings per share as if the
fair value method had been applied. Freddie Mac has elected to account
for stock-based compensation programs using the intrinsic value method
consistent with existing accounting policies and, therefore, the standard
will have no effect on the consolidated financial statements,

2. MORTGAGES

The following is a summary of the components of the retained mortgage
portfolio

December 31, 1995, 1994
Gollars in millions)
Single-family:
30-year fixed-rate” $ 71,653 $44,633
15-year fixed-rate 15,692 16,609
Balloon/resets 5,585 6,157
Adjustable-rate 10,642 2,464
Multifamily 3,852 2,965
Total $107,424 $72,828

(1) Includes 20-year fixed-rate mortgages, second mortgages and mobile
home loans.

At December 31, 1995 and 1994, the retained mortgage portfolio
included $1.2 billion and $0.4 billion, respectively, of mortgages held for
sale, The market value of mortgages held for sale at December 31, 1995
and 1994 approximated their carrying value

The retained mortgage portfolio also includes Freddie Mac PCs, REMICs
and other mortgage-related securities. These mortgage-related securities
have been classified in the table above based on the underlying mortgages.
The estimated fair value and corresponding gross unrealized gains and
losses of mortgage-related securities held in the retained mortgage port-
folio are summarized in the table on the following page. No available-for-
sale securities were sold during 1995.


CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Preferred Stock and payments thereon are generally subject to taxation by the United States
and other taxing jurisidictions to the same extent and in the same manner as stock of and payments
thereon by any other corporation. The following discussion addresses some of the U.S. federal income
tax consequences that may result from ownership of the Preferred Stock by a U.S. person who holds the
Preferred Stock as a capital asset. For this purpose, a U.S. person is an individual who is a citizen or
resident of the United States for federal income tax purposes, a corporation, partnership or other type of
entity organized under the laws of the United States or any political subdivision thereof, or an estate or
trust the income of which, regardless of its source, is subject to U.S. federal taxation. This discussion
does not purport to address all rules which may apply to particular investors. Investors are encouraged

to consult their own tax advisors regarding the federal, state, local and foreign tax considerations
applicable to an investment in the Preferred Stock.

This discussion reflects current federal income tax laws and regulations and administrative and
judicial interpretations thereof. Changes to any of these subsequent to the date of this Offering Circular
may affect the tax consequences described herein.

Dividends
Current Law

Distributions on the Preferred Stock which are paid out of current earnings and profits, or earnings
and profits accumulated after 1984, generally constitute dividends taxable as ordinary income. To the
extent that the amount of any distribution paid on a share of Preferred Stock exceeds the current or
accumulated earnings and profits for federal income tax purposes attributable to that share, such excess
will be treated first as a return of capital (rather than as ordinary income) and will be applied against
and reduce the holder’s adjusted tax basis in that share of Preferred Stock. Any such amount in excess
of the holder’s adjusted tax basis will then be taxed as capital gain. For purposes of the remainder of this

discussion, it is assumed that dividends paid with respect to the Preferred Stock will constitute dividends
for U.S. federal income tax purposes.

Dividends received by corporations generally will be eligible for the dividends-received deduction.
The dividends-received deduction is available only with respect to a dividend received on stock held for
more than 45 days (or more than 90 days in the case of a dividend on preferred stock attributable to
periods aggregating in excess of 366 days), including the day of disposition, but excluding the day of
acquisition or any day which is more than 45 days (or 90 days) after the date on which the Preferred
Stock becomes ex-dividend. The length of time that a corporate shareholder is deemed to have held
stock for these purposes is reduced for periods during which the shareholder’s risk of loss with respect to
the stock is diminished by reason of the existence of certain options, contracts to sell, short sales or other
similar transactions. The amount of such deduction generally will equal 70 percent of the amount of the
dividends received, subject to reduction in certain events, including where a holder has indebtedness
outstanding that is directly attributable to an investment in the Preferred Stock. For this purpose,
indebtedness of a depository institution attributable to deposits received in the ordinary course of its
business is not treated as indebtedness directly attributable to an investment in the Preferred Stock.

For purposes of the corporate alternative minimum tax, alternative minimum taxable income is
increased by 75 percent of the amount by which a corporation's adjusted current earnings exceeds its
alternative minimum taxable income prior to the addition of the applicable tax preference item. The
amount of any dividend that is included in a corporate shareholder's adjusted current earnings will not
be reduced by any dividends-received deduction otherwise allowable with respect to that dividend.

Recent Proposals

On March 19, 1996, the Clinton Administration submitted to Congress a proposed fiscal 1997
budget. This proposed budget contains certain tax proposals (the “Proposals”’) which, if enacted, could
adversely affect holders of the Preferred Stock.

16


Dividends

From 1990 through 1995, Freddie Mac paid aggregate dividends of approximately $820 million on
the outstanding shares of Common Stock. From 1992 through 1995, Freddie Mac paid aggregate
dividends of approximately $212 million on the outstanding shares of Preferred Stock. Freddie Mac will

pay approximately $62.3 million in aggregate dividends on the Common Stock and $16.1 million in
aggregate dividends on the Preferred Stock for the first quarter of 1996.

MANAGEMENT

Freddie Mac’s Board of Directors consists of 18 members, including 13 members elected annually
by the holders of the Common Stock and five members appointed annually by the President of the
United States. The Presidential appointees must include at least one person from each of the mortgage
lending, home building and real estate industries and one person from a consumer or community
interest organization or who has demonstrated a career commitment to the provision of low-income
housing. All directors serve for a term ending on the date of each annual meeting of stockholders, unless
they are re-elected or reappointed, as applicable, and have identical fiduciary duties to the corporation’s
stockholders.

Information concerning the directors of Freddie Mac, compensation of certain executive officers
and of directors, stock ownership of management and any person or group owning more than 5 percent
of the Common Stock and related matters may be found in the Proxy Statement (the ‘Proxy
Statement”) for the Annual Meeting of Stockholders of Freddie Mac to be held on May 14, 1996. The
Proxy Statement, as and when available, is incorporated by reference into this Information Statement.

Freddie Mac will provide a copy of the Proxy Statement, without charge, to each person to whom
this Information Statement has been delivered, upon the written or oral request of that person. Such
requests should be addressed to Shareholder Relations, Freddie Mac, 8200 Jones Branch Drive,
McLean, Virginia 22102 (outside the Washington, D.C. metropolitan area, telephone (800) 424-5401,
ext. 2581; within the Washington, D.C. metropolitan area, telephone (703) 903-2581).

28


VALUATION METHODS AND ASSUMPTIONS
‘The following methods and assumptions were used to estimate the fair
values of Freddie Mac’s existing assets and liabilities.

Mortgages, net

The retained mortgage portfolio consists of retained mortgages and
mortgage-related securities. The fair value for mortgage-related securities
is based on quoted market prices. The fair value of retained mortgages is
estimated using an option-adjusted spread (OAS) model. The process
involves calculating an OAS, a constant spread that, when added to cach
period’s Treasury rate used for discounting, equates the present value of
the expected cash flows to the market price of a benchmark Freddie Mac
PC. The OAS is then applied to specific Freddie Mac assets benchmarked
to that security to determine their estimated value. In this way, the estimated
value of retained mortgages is calibrated to the actual market price of a
benchmark security. The estimated present value of default costs is sub-
tracted to arrive at the net fair value of the retained mortgage portfolio.

Cash and cash equivalents; Investments and mortgage
securities purchased under agreements to resell; Real estate
owned, net; Other assets; Principal and interest due to PC
investors; Other liabilities; and Subordinated borrowings

For these assets and liabilities, the carrying amount is either fair value or
a reasonable estimate of fair value.

Debt securities, net

For debt securities with an original maturity of less than one year, the
carrying amount approximates fair value. For debt securities with an
original maturity exceeding one year, the fair values are based on quoted
market prices. Fair value estimates include the fair values of associated
interest-rate agreements (see Note 10)

Guarantee fees on sold mortgages, net

The fair value is approximated using the OAS model described under
“Mortgages, net.” Interest-only stripped securities (IOs) serve as the
benchmark security for valuing the guarantee fee stream because the cash
flow pattern of IOs, which is calculated as a fixed percentage of the out-
standing mortgage balance, resembles that of guarantee fees. The fair value
of the guarantee fee stream includes estimated reinvestment income
earned during the period between remittance of mortgage principal and
interest to Freddie Mac and disbursement of funds to security holders,
and is net of estimated administrative costs. The present value of future

default costs on the underlying sold mortgage portfolio is deducted from
the fair value of the guarantee fee stream.

Outstanding commitments to purchase and sell mortgages
The fair value of mandatory commitments is estimated as the total pair-off
fees the seller must pay if the mortgages are not delivered. Optional pur-
chase commitments are assumed to have a fair value of zero.

Interest-rate agreements and other hedging instruments
The fair values are based on quoted market prices. The estimated fair
values of debt- and asset-linked swaps are included in the estimated fair
values of the associated debt or assets (see Note 10).

Estimated income taxes on difference between fair values
and GAAP values

Freddie Mac will eventually pay income taxes on the future earnings
derived from current assets and liabilities. Therefore, the fair value
balance sheet includes an estimate of additional income taxes by applying
the statutory tax rate (35 percent for 1995 and 1994) to the excess of
net fair value over stockholders’ equity measured under GAAP

A-39


principle for 1993. The net benefit resulted from adjusting deferred tax
amounts to reflect the federal statutory income tax rate of 34 percent in
effect at January 1, 1993, as opposed to the higher tax rates that were in
effect when the associated timing differences originated.

During 1993, the corporation recognized a one-time tax benefit of
$17 million for the remeasurement of its net deferred tax asset at the
higher federal statutory income tax rate of 35 percent established by
the Omnibus Budget Reconciliation Act of 1993 (OBRA). Taxes
associated with 1993 earnings were $11 million higher due to the
increased statutory income tax rate. Thus, the adoption of OBRA
provided a net benefit of $6 million to 1993 earnings.

Regulatory Matters

Capital Standards: Under the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (the GSE Act), Freddie Mac is
subject to certain minimum and risk-based capital standards. In its
most recent classification, the Director of OFHEO classified Freddie
Mac “adequately capitalized,” OFHEO’s highest classification. As of
December 31, 1995, Freddie Mac’s core capital was $5.8 billion.

The Director of OFHEO is developing a regulation that will implement
the risk-based capital standard using a stress test model. Freddie Mac
has used stress test models for internal assessments of capital adequacy
for several years, Freddie Mac believes that a reasonable interpretation
of the risk-based capital standard would not require the corporation
to substantially increase its capitalization, and that the corporation has
adequate access to the capital markets to raise any necessary additional
capital. While the risk-based capital standard can have a significant
impact on the corporation, it is impossible to determine at this time
what, if any, impact the final regulations will have on Freddie Mac.

See Note 9 to the Consolidated Financial Statements for further infor-
mation regarding regulatory capital standards.

Housing Goals: The GSE Act requires the Secretary of the Department of
Housing and Urban Development (HUD) to establish three mortgage
purchase goals for Freddie Mac — a goal for the purchase of mortgages
on housing for low- and moderate-income borrowers (the “Low- and
Moderate-Income Goal”); a goal for the purchase of mortgages on
housing located in central cities, rural areas and other underserved areas;
and a goal for the purchase of mortgages on housing for low-income
borrowers in low-income areas and for very low-income borrowers (the
“Special Affordable Goal”). In October 1993, the Secretary established
interim housing goals for the transition period of 1993 and 1994.

In November 1994, the Secretary extended the interim housing goals
through 1995, pending adoption of final regulations. During the transi-
tion period, the goal for the purchase of mortgages on housing located
in central cities, rural areas and other underserved areas included

only purchases of mortgages on housing located in areas designated as.
central cities by the United States Office of Management and Budget
(the “Central Cities Goal”).

Freddie Mac met the Low- and Moderate-Income Goal of 28 percent
in 1993 and 30 percent in 1994 and 1995, with low- and moderate-
income purchases of 29 percent, 37 percent and 39 percent of the

corporation's qualifying mortgage purchases in each year, respectively.
Freddie Mac did not meet its Central Cities Goal of 26 percent in 1993
and 30 percent in 1994 and 1995, with qualifying mortgage purchases
of 24 percent, 25 percent and 23 percent in each year, respectively.
Freddie Mac met its Special Affordable Goal of $11.9 billion for the
two-year period of 1993 and 1994 with $12.7 billion of qualifying
purchases, but did not meet the $750 million multifamily portion of
this goal with $495 million of qualifying multifamily purchases. Freddie
Mac met its Special Affordable Goal of $3.357 billion for 1995, includ-
ing the $375 million multifamily portion of this goal, with over $5.4
billion of qualifying purchases, including over $1.0 billion of qualifying
multifamily mortgage purchases.

In December 1995, the Secretary issued final regulations establishing
new affordable housing goals for the years 1996 through 1999.

Under the final regulations, HUD redefined the goal for the purchase
of mortgages on housing located in central cities, rural areas and other
underserved areas to measure mortgage purchases based on the income
and minority composition of targeted metropolitan and rural areas (the
“Underserved Areas Goal”). The new goals provide that 40 percent of

the total number of dwelling units financed by the corporation’s mortgage
purchases meet the Low- and Moderate-Income Goal in 1996 and

42 percent in each of 1997, 1998 and 1999; 21 percent of the total
number of dwelling units financed by the corporation's mortgage pur-
chases meet the Underserved Areas Goal in 1996 and 24 percent in
each of 1997, 1998 and 1999; and 12 percent of the total number of
dwelling units financed by the corporation’s mortgage purchases meet
the Special Affordable Goal in 1996 and 14 percent in each of 1997,
1998 and 1999, including at least $981 million in qualifying multi-
family mortgage purchases in each year from 1996 through 1999.

Management views the purchases of mortgages benefiting low- and
moderate-income families and neighborhoods as an integral part of
Freddie Mac’s mission and business and remains committed to profitably
fulfilling the needs of underserved borrowers and markets. Freddie Mac
expects to purchase the majority of its single-family and multifamily
mortgages counted toward the housing goals through its standard
purchase programs.

LIQUIDITY AND CAPITAL ADEQUACY

Liquidity

Freddie Mac’s primary business programs present significant liq
demands that are driven by the maturities of debt, purchases of
mortgages, payments to security holders and general operations. The
corporation's sources of cash to meet these needs include short- and
long-term borrowings, mortgage repayments and cash flows from
operations. Because of its strong financial performance, regular and
significant participation as an issuer in the capital markets, and status
as a government-sponsored enterprise, the corporation has had ready
access to debt and other funding markets to meet its liquidity needs.
Freddie Mac also expanded its funding capabilities during 1995 by
issuing callable debt outside of the United States.

A-18


Mortgage-Related Securities
@ollars in billions)
Year ended December 31,
1995 1994 1993 1992 1991

Original Issue PCs(1)
Single-family 30-year fixed-rate(2) ....

$54.4 $ 65.8 $103.1 $ 80.2 $57.3
Single-family 15-year fixed-rate.......

13.1 24.6 61.7 57.9 16.2

Single-family 5- and 7-year Balloon/Reset . 3.7 9.9 23.1 25.9 11.4
Single-family adjustable-rate . 14.3 16.6 20.8 15.2 7.6
Multifamily . 0.4 0.2 =— _
$85.9 $117.1 $208.7 $179.2 $92.5

Exchanges: 75-day PCs to Gold PCs® Lecce eee $12 $ 10 $ 41 $ 9.2 $16.2

Resecuritized PCs(3)

Multiclass PCs . $15.4 $ 73.1 $143.4 $131.3 $72.0
Giant BCs 20.0 37.5 413 22.0 _12.6

Total $35.4 $110.6 $184.7 $153.3 $84.6

(1) Original issue PCs include both single- and multiple-class PCs backed by mortgages, rather than previously issued PCs.
(2) Includes PCs backed by single-family 20-year fixed-rate mortgages. |
(3) Includes GNMA certificates resecuritized as Freddie Mac Multiclass and Giant PCs.

The following table sets forth Freddie Mac’s original issue settlement activity for its PCs by PC
type during the years shown.

PC Settlements
(dollars in billions)

‘Year ended December 31,
1995 1994 1993 1992 1991

$71.6 $100.5 $187.9 $63.8 $81.7
14.3 16.6 20.8 (15.4 (10.8

$85.9 $117.1 $208.7 $79.2 $92.5

Gold PCs®.
75-day PCs(1) .

Total

(1) PCs issued under the corporation’s 75-day PC programs include all PCs backed by ARMs, graduated payment, tiered-
payment, and growing equity mortgages and certain Multifamily PCs.

Single-Class Securities

PCs and Multifamily PCs. The majority of single-family mortgages acquired by Freddie Mac are
sold as PCs. Freddie Mac also sells Multifamily PCs backed by multifamily mortgages acquired in both
cash and structured transactions. PCs are original issue single-class securities that represent undivided
interests in first-lien or second-lien, fixed-rate or adjustable-rate, conventional or FHA/VA single-
family mortgages and provide for monthly payment of interest and pass-through of principal due or
collected on the underlying mortgages. Freddie Mac receives a management and guarantee fee with

respect to its outstanding PCs. Freddie Mac guarantees the payment of interest due on PCs and the
principal of the underlying mortgages.

Giant PCs. Giant Mortgage Participation Certificates (““Giant PCs”) are resecuritized single-class
mortgage-related securities. Giant PCs provide a means for combining existing PCs to meet a market
need, and for aggregating single-family PCs into larger pools, thereby creating a more liquid security.
Giant PCs represent beneficial ownership interests in pools consisting primarily of PCs or other Giant

PCs. Freddie Mac’s guarantees with respect to Giant PCs are economically equivalent to the guarantees
on the underlying PCs.

10


State Laws

The Secondary Mortgage Market Enhancement Act of 1984 (“SMMEA”) provides, among other
things, that certain investors are authorized to purchase, hold and invest in securities issued or
guaranteed by Freddie Mac and Fannie Mae to the same extent that the investor is authorized to
purchase, hold or invest in obligations issued or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof. SMMEA also provided that, prior to October 4, 1991,
a state could enact legislation that prohibited or limited an investor’s authority to invest in securities
issued or guaranteed by Freddie Mac or Fannie Mae. Pursuant to SMMEA, 18 states currently have
legislation in effect that limits the ability of certain entities chartered by such states (principally
insurance companies) to invest in Freddie Mac securities. Freddie Mac does not believe that such

legislation has had or will have a material adverse effect on the markets for Freddie Mac mortgage-
related securities.

Certain states recently have enacted or introduced legislation that would restrict the ability of state
and/or local government agencies and various state-regulated entities to invest in certain types of
securities, including mortgage-related securities. It is unclear, in light of the expiration of the period for
state legislative action under SMMEA, whether these states have the authority to enact or enforce any
such legislation at this time, and what effect, if any, the passage of such legislation would have on the
market for Freddie Mac mortgage-related securities.

In 1995, the NAIC published a proposed Investments of Insurers Model Act (the “Model Act”)
that would set forth guidelines for investments by insurers, including investments in mortgage-related
securities, and impose additional restrictions on investments by certain insurance companies in certain
mortgage-related securities. The Model Act is expected to be published in final form in 1996, and would

be applicable in any particular state only in the form and to the extent adopted by that state’s
legislature.

Governmental Relationships

In order to support its statutory purposes, Freddie Mac’s GSE status affords the corporation
certain benefits such as the corporation’s exemption from the registration requirements of the federal
securities laws, favorable treatment of the corporation’s securities under various legal investment laws
and other regulations, and access to the Federal Reserve Bank of New York’s book-entry system for the
corporation’s mortgage-related and debt securities. In addition, the Secretary of the Treasury has
discretionary authority to purchase obligations issued by Freddie Mac up to a maximum of $2.25 billion
outstanding at any one time. Finally, Freddie Mac also is exempt from state and local taxes, except real
property tax on real estate which it owns.

From time to time, proposals have been made to change the relationship of GSEs such as Freddie
Mac to the federal government. For example, various legislative and regulatory proposals have
advocated the partial or complete elimination of the exemptions from registration under federal
securities laws of securities issued by the GSEs, including Freddie Mac. Similarly, both federal and
local government officials have proposed that the income of the GSEs be subjected to taxation by the
District of Columbia or other states. In addition, from time to time other policy changes (such as the
modification or elimination of the mortgage interest tax deduction) have been suggested that may affect
the mortgage markets, including the secondary mortgage market. Finally, legislative and other propos-
als have recommended the imposition of certain fees (“user fees”) by the federal government on
securities issued by Freddie Mac, Fannie Mae and other GSEs. All or a portion of the proposed user
fees might be passed on in the form of higher fees on newly purchased mortgages, and could cause the
GSEs to shift funding of mortgage purchases away from the issuance of certain types of securities.

Separately, legislation has been introduced in Congress that would regulate the “derivatives
activities” of Freddie Mac and other companies. Certain aspects of these legislative proposals would
subject Freddie Mac to new or additional capital requirements, accounting requirements, risk manage-
ment requirements, supervisory oversight and other substantive regulation of its present business

22


Short-swing Transactions. Freddie Mac has a short-swing trading policy for transactions in the
corporation’s common and preferred stock by directors and certain officers (“insiders”) similar to the
short-swing transaction reporting provisions applicable to insiders of public companies with equity
securities registered with the Securities and Exchange Commission under the Securities Exchange Act
of 1934. Under the corporation’s policy, insiders must file initial reports of beneficial ownership of the
corporation’s equity securities, and reports of changes in beneficial ownership, with the corporation’s
legal division. Purchases and sales, or sales and purchases, of any Freddie Mac equity security of the
same class beneficially owned by an insider within a six-month period generally are prohibited by the
policy. Freddie Mac will make available to the public copies of ownership reports filed under the policy
upon request to the corporation’s Shareholder Relations Department.

General. The Common Stock is identified by the ticker symbol “FRE” on the New York and
Pacific Stock Exchanges. From time to time, the Common Stock may be admitted to unlisted trading
status on other national securities exchanges. Put and call options with respect to the Common Stock
are traded on the American Stock Exchange. The transfer agent for the Common Stock is First Chicago
Trust Company of New York, Mail Suite 2589, P.O. Box 2536, Jersey City, N.J., 07303-2536.

Preferred Stock

Authorized Issuance. The Board of Directors may increase the authorized number of shares of
Preferred Stock at any time, without the consent of the holders of the Preferred Stock.

Dividends. Dividends on shares of the Preferred Stock are not mandatory. Holders of Preferred
Stock are entitled to receive non-cumulative, quarterly cash dividends that are payable on March 31,
June 30, September 30 and December 31 of each year (each, a ‘Dividend Payment Date’’), at the
annual rate of $1.975 per share for the 1992 Preferred Stock and $1.68 per share for the 1993 Preferred
Stock when, as and if declared by the Board of Directors in its sole discretion, out of funds legally
available for payment of dividends. Dividends will be paid to holders of record on the record date fixed
by the Board of Directors, not to be earlier than 45 days or later than 10 days preceding the applicable
payment date.

The Preferred Stock ranks prior to the Common Stock with respect to dividends, to the extent
provided in the Certificate of Designation for the Preferred Stock. No dividend can be declared or paid
or set apart for payment on the Common Stock unless dividends have been declared and paid or set
apart on the Preferred Stock in respect of the then-current quarterly dividend period. The 1992
Preferred Stock and the 1993 Preferred Stock rank on a parity with each other with respect to
dividends. Dividends on the Preferred Stock are not cumulative.

Optional Redemption. The 1992 Preferred Stock is not redeemable prior to June 30, 1997. The
1993 Preferred Stock is not redeemable prior to September 30, 1998. On or after such dates and subject
to the limitation on capital distributions described above and any further limitations that may be
imposed by law or regulation, Freddie Mac may redeem the Preferred Stock, in whole or in part, at any
time at the redemption price of $25.00 per share plus an amount equal to the dividend for the then-
current quarterly dividend period accrued through and including the date of redemption.

Other Provisions. Additional information about the liquidation preferences and other rights, terms
and provisions of the Preferred Stock may be obtained upon request to Freddie Mac’s Shareholder
Relations Department.

Short-swing Transactions. Freddie Mac’s short-swing transaction policy also applies to transac-
tions in Freddie Mac’s preferred stock.

General. The 1992 Preferred Stock is identified by the ticker symbol ‘““FREpr” and the 1993
Preferred Stock is identified by the ticker symbol “FREpra” on the New York and Pacific Stock
Exchanges. The transfer agent, dividend disbursing agent and registrar for the Preferred Stock is First
Chicago Trust Company of New York, Mail Suite 2589, P.O. Box 2536, Jersey City, N.J., 07303-2536.

27


activities with respect to certain transactions (such as forward sales and repurchase agreements
involving mortgage-related securities, and interest-rate swaps).

Under the GSE Act, the Secretary of HUD, the Comptroller General of the United States, the
Secretary of the Treasury and the Director of the Congressional Budget Office were each directed to
conduct and submit to Congress a study analyzing the effect of eliminating any federal sponsorship of
Freddie Mac and Fannie Mae, and allowing each corporation to continue to operate as a fully private
entity. Both Freddie Mac and Fannie Mae will have the opportunity to comment on these reports and
express their views to Congress. In Freddie Mac’s view, elimination of any federal sponsorship of
Freddie Mac would be contrary to the best interests of the corporation, the secondary market for
residential mortgages, and America’s homeowners and renters.

Elimination or modification of Freddie Mac’s various exemptions, new or additional fees or
substantive regulation of Freddie Mac’s business activities, any further alteration or elimination of
Freddie Mac’s major ties to the federal government or any significant amendments to the Freddie Mac
Act or other federal legislation bearing on Freddie Mac could require or cause Freddie Mac to change
the nature and/or extent of its business activities, and could adversely affect the scope of its activities
and results of operations. Any modification of Freddie Mac’s relationship to the federal government,
including assessment of user fees, repeal of its exemptions, or any modification of the present tax
treatment of mortgage interest payments, would require legislation to be passed by Congress and signed
by the President. Legislation that adversely affects Freddie Mac or its shareholders, if challenged,
would be subject to judicial review to ensure its conformity with the requirements of the United States
Constitution (including the Fifth Amendment’s ban on uncompensated takings of property). To date,
Congress has not enacted any such proposals.

CUSTOMER AND MARKET SUPPORT ACTIVITIES
Securities Sales and Trading Group

Freddie Mac makes a market in its own mortgage-related and debt securities by distributing these
securities to, and trading these securities with, Freddie Mac’s customers and other counterparties,
including mortgage sellers, investors and dealers in such securities. Trading services are organized and
provided through Freddie Mac’s Securities Sales and Trading Group (““SS&TG”). SS&TG biys, sells
and exchanges Freddie Mac fixed-income securities in various financial transactions (including forward
sales and reverse repurchase agreements) that use mortgage pass-through, debt and resecuritized
securities. Such transactions are subject to limits established by the Board of Directors.

The positions in securities maintained by SS&TG, as well as the interest-rate risks of these
financial transactions, are hedged with purchases and sales of Freddie Mac securities, or in certain cases
with transactions in Treasury securities and mortgage pass-through securities of Fannie Mae and
Ginnie Mae. To manage customer credit risk, SS&TG analyzes and monitors the financial condition
and trading positions of all customers and establishes trading limits consistent with such reviews. In
addition, SS&TG has established overall policies, trading procedures and controls, that are reviewed on
an ongoing basis, to manage credit, interest-rate and operations risk.

Reverse Repurchase Program

Freddie Mac engages in reverse repurchase (“reverse repo”) transactions through SS&TG with
approved seller/servicers, depository institutions and other financial institutions and investors. In these
transactions, SS&TG customers sell PCs or other Freddie Mac securities to Freddie Mac and agree to
repurchase them at a later date. As of December 31, 1995, the outstanding balance of reverse repo
agreements between SS&TG and its customers was approximately $6.3 billion.

Under a reverse repo agreement, Freddie Mac lends funds to its customers on the security of PCs
or other securities to which the repurchase obligation relates. The customer sells the securities to
Freddie Mac for cash and agrees to repurchase them on a specified future date at an agreed price that is
higher than the price at which the securities were sold to Freddie Mac. The difference between the
purchase price paid by Freddie Mac and the repurchase price payable by the customer represents the

23


CONSOLIDATED STATEMENTS OF INCOME

Year ended December 31,

1995 1994 1993
(dollars in millions, except per share data)
Interest income:
Retained mortgage portfolio $ 6,505 $4,528 $ 3,296
Investments and mortgage securities purchased under agreements to resell 1,888 1,287 1,127
8,393 5,815 4,423
Interest expense on debt securities:
Short-term notes and bonds (2,898) (1,644) (858)
Long-term notes and bonds (3,866) (2,619) (1,641)
(6,764) (4,263) (2,499)
Interest expense due to security program cycles (233) (440) (1,072)
(6,997) (4,703) 3,571)
Net interest income on earning assets 1,396 1112 852
Management and guarantee income 1,087 1,108 1,033
Other income, net 39 66 128
Total revenues 2,522 2,286 2,013
Provision for mortgage losses (255) (200) (300)
REO operations expense (286) (225) (224)
Administrative expenses (395) (379) (361)
Total non-interest expenses (936) (804) (885)
Income before income taxes, extraordinary item and cumulative effect
of change in accounting principle 1,586 1,482 1,128
Provision for income taxes:
Current (387) (423) (509)
Deferred (108) (32) 167
‘Total provision for income taxes (495) (455) (342)
Income before extraordinary item, net of taxes, and cumulative
effect of change in accounting principle 1,091 1,027 786
Extraordinary loss on retirement of debt, net of taxes _— (44) (20)
Cumulative effect of change in accounting principle = = 20
Net income $ 1,091 $983 $786
Preferred stock dividends (65) (65) (52)
Net income available to common stockholders $ 1,026 $ 918 $ 734
Earnings per common share $ 5.69 $ 5.08 $ 4.07

See accompanying Notes co Consolidated Financial Statements.

A-21


The following table summarizes the principal amounts, net, at December
31, 1995 of short- and long-term notes and bonds payable and subordi-
nated borrowings (see Note 8) scheduled to mature in the years 1996-
2005 and thereafter, assuming callable debt is (1) paid at scheduled
maturity, and (2) is redeemed at the initial call date.

Assuming Callable
Scheduled Debt is Redeemed at
Maturity Initial Call Date
Gollars in millions)
1996 $ 59,647 $ 85,107
1997 6,442 11,856
1998 11,055 10,258
1999 74123 5,707
2000 10,083 4,163
2001 2,009 570
2002 3,005 216
2003 4,263 534
2004 5,891 134
2005 7,716 668
Thereafter 2,727 148
Total $119,961 $119,961
8. SUBORDINATED BORROWINGS
Subordinated borrowings consist of the following:
December 31, 1995 1994
Effective Effective
Maturity Balance Rate” Balance _ Rate”
Gollars in millions)
Capital debentures 1995 $= -% $ 225 10.95%
1996 150 10.27 150 10.27
2000 - - 400 9.22
2016 200 8.40 200 8.40
350 9715
Unamortized
discounts and fees (8) (3)
342 962
Zero coupon
capital debentures 2019 3,178 10.26 3,178 10.26
Unamortized
discounts and fees (2,887) (2,914)
291 264
Total subordinated
borrowings $ 633 $ 1,226

(1) Represents the weighted average effective rate at the end of the period, and
includes the amortization of discounts, premiums, hedging gains or losses
and debt issuance costs.

The capital debentures and zero coupon capital debentures are subordinated
to all obligations and liabilities of Freddie Mac, including obligations of
others that Freddie Mac has guaranteed, whether existing at the date of
issuance or thereafter incurred or created. The zero coupon capital
debentures rank equally with the capital debentures.

In 1994, the corporation extinguished $68 million ($887 million face
value and 10.26% average rate) of zero coupon capital debentures. As a
result, Freddie Mac recorded extraordinary losses of $67 million ($44
million after taxes, or $0.24 per common share) in 1994.

9. STOCKHOLDERS’ EQUITY

Non-cumulative, Fixed-Rate Preferred Stock

Freddie Mac issued 22.5 million shares of 7.90 percent preferred stock on
April 27, 1992 and 12.0 million shares of 6.72 percent preferred stock on
August 2, 1993. Both the 7.90 percent and 6.72 percent non-cumulative
fixed-rate preferred stocks are redeemable at the corporation’s option at
any time after five years from the date of issuance at $25 per share plus
accrued dividends. Both classes of preferred stock carry a liquidation
value of $25 per share plus accrued dividends and no significant voting
rights or rights to purchase other Freddie Mac stock or securities.

Employee Stock Purchase Plan

Freddie Mac has established an Employee Stock Purchase Plan (ESPP)
under which up to 3.0 million shares of common stock may be issued to
qualified employees. In 1995, employees pledged to purchase 247,073
shares on July 31, 1996. The purchase price under the ESPP will be
equal to 85 percent of the fair market value of the stock on July 1, 1995
or July 31, 1996, whichever is lower. Employees purchased 190,985
shares and 194,615 shares for the years ended December 31, 1995 and
December 31, 1994, respectively, under the ESPP The ESPP qualifies as
an “employee stock purchase plan” under Section 423 of the Internal
Revenue Code of 1986, as amended. No shares may be issued under the
current ESPP after December 31, 2004.

Stock Compensation Plan

Under Freddie Mac’s 1995 Stock Compensation Plan (the Stock Plan), the
corporation is permitted to grant stock options (with or without dividend
rights), restricted stock, stock appreciation rights (SARs) and various other
performance awards that are based on or related to common stock to
employees. To date, no SARs or performance awards have been granted.
‘The corporation has the right to impose performance conditions with
respect to any awards to employees under the Stock Plan. The maximum,
number of shares of common stock which may be granted to employees
under the Stock Plan is 8.4 million shares.

Freddie Mac has also established a Directors’ Stock Compensation Plan
(the Directors’ Plan). Under the Directors’ Plan, the corporation is
permitted to grant stock options and restricted stock to members of the
Board of Directors who are non-employees. The maximum number of
shares of common stock which may be granted under the Directors’
Plan is 600,000 shares.

At December 31, 1995, 4,842,234 shares remained available for grant
under the 1995 Stock Plan and the Directors’ Plan. The common stock
delivered under these plans may be shares held in Freddie Mac's treasury,
authorized but previously unissued shares, or shares purchased by
Freddie Mac on the open market. No awards may be made under these
plans after December 31, 2004.

A-31


par value of outstanding stock, paid-in capital and retained earnings, as determined in accordance with
GAAP), unallocated reserves for mortgage and certain foreclosure losses and any other amounts from
sources of funds available to absorb losses that the Director determines to be appropriate to include in
determining total capital. Freddie Mac has utilized an internal risk-based capital model for asset-
liability management purposes for several years.

In February 1995, the Director published an Advance Notice of Proposed Rulemaking (“ANPR”)
soliciting written public comments prior to publication of a proposed risk-based capital standard. The
ANPR discussed a substantial number of issues and policy alternatives raised by the Director under the
statutory risk-based capital requirement, and requested comments on the appropriate capital measure-
ment of credit risk, interest-rate risk and related issues. The Director has stated that a proposed risk-
based capital regulation will be issued for public comment in 1996 and that, due to the complexity of the
subject, the proposed regulation likely will be issued in the form of two separate proposals. Following
the submission and consideration of public comments, a final risk-based capital regulation will be
issued. Under the GSE Act, the final regulation will become effective immediately upon issuance.

The GSE Act provides that Freddie Mac must be classified at least quarterly within one of four
levels of capital adequacy. Currently, OFHEO bases its capital classifications on whether Freddie
Mac’s core capital level meets the minimum and critical capital standards. One year after the effective
date of a final risk-based capital regulation, OFHEO also will base its capital classifications on whether
Freddie Mac’s total capital level meets the risk-based capital standard.

In the event that Freddie Mac is classified as less than adequately capitalized, the GSE Act
requires the Director to take a number of mandatory remedial measures and provides the Director with
discretionary authority to take various optional measures depending on the category in which Freddie
Mac is classified. The remedial measures are similar to those available to regulators of other federally
chartered or insured financial institutions. Freddie Mac will not be subject to any of the remedial
measures if it is classified as adequately capitalized, although certain violations of law, or practices that

could lead to a rapid depletion of the corporation’s capital, also would be subject to sanctions under
other provisions of the GSE Act.

In its first classification of Freddie Mac, the Director classified Freddie Mac as “adequately
capitalized” as of June 30, 1993, and the Director has classified Freddie Mac as “adequately
capitalized” in each of its subsequent classifications to date.

HUD Oversight

Affordable Housing Goals. The GSE Act requires the Secretary of HUD to establish three
mortgage purchase goals for Freddie Mac: a goal for the purchase of mortgages on housing for low- and
moderate-income borrowers (the “Low- and Moderate-Income Goal’); a goal for the purchase of
mortgages on housing located in central cities, rural areas and other underserved areas; and a special
affordable housing goal for the purchase of mortgages on housing for low-income persons in low-income
areas and for very low-income persons (the “Special Affordable Goal”). In October 1993, the Secretary
of HUD established interim housing goals for the transition period of 1993 and 1994. In November
1994, the Secretary extended the interim housing goals through 1995, pending the adoption of final
regulations. During the transition period, the goal for the purchase of mortgages on housing located in
central cities, rural areas and other underserved areas included only purchases of mortgages on housing
located in areas designated as central cities by the United States Office of Management and Budget (the
“Central Cities Goal’).

In December 1995, the Secretary of HUD issued final regulations establishing new affordable
housing goals for years 1996 through 1999. Under the final regulations, HUD redefined the goal for the
purchase of mortgages on housing located in central cities, rural areas and other underserved areas to
measure mortgage purchases based on the income and minority composition of targeted metropolitan
and rural areas (the “Underserved Areas Goal”). The new goals provide that 40 percent of the total
number of dwelling units financed by the corporation’s mortgage purchases meet the Low- and
Moderate-Income Goal in 1996 and 42 percent in each of 1997, 1998, and 1999; 21 percent of the total

17


OFFERING SUMMARY

Initial Rate... .
Rate Cap
Calculation Agent
Frequency see
Payment Dates................

DRD Protection

Preferences

Optional Redemption...............

Liquidation Rights.................

Voting Rights ..................0.

Preemptive and Conversion Rights ....

Federal Home Loan Mortgage Corporation (‘Freddie Mac”
or the “Corporation”).

5,000,000 shares (assuming the Underwriters’ over-allotment
option is not exercised) of Variable Rate, Non-Cumulative
Preferred Stock (the “Preferred Stock”), with a redemption
price and liquidation preference of $50 per share.

(3-Month LIBOR_ + 1.0%)
1.377
Dividends will accrue from April 26, 1996 and will reset
quarterly. For information about how and when LIBOR will

be determined, see “Description of Preferred Stock —
Determination of LIBOR.”

.» 4.7091% (from April 26, 1996 through June 30, 1996).
- 9.00%.

. Freddie Mac.
- Quarterly, when, as and if declared by the Board of Directors.

March 31, June 30, September 30 and December 31 of each
year, beginning June 30, 1996.

If, prior to April 26, 1998, certain amendments to the
Internal Revenue Code of 1986, as amended (the “‘Code’’),
are enacted that reduce the percentage of the dividends-
received deduction below 70%, the amount of dividends
payable in respect of the Preferred Stock will be adjusted to
offset the effect of such reduction. However, no adjustment
will be made to the extent that the percentage of the
dividends-received deduction is reduced below 50%. Such
adjustment may result in a dividend rate in excess of 9% per
annum,

The Preferred Stock will be entitled to a preference, both as
to dividends and upon liquidation, over the common stock
(and any other junior stock) of Freddie Mac. The Preferred
Stock will rank on a parity, both as to dividends and upon
liquidation, with other currently outstanding series of Freddie
Mac preferred stock.

Beginning June 30, 2001, Freddie Mac will have the option to
redeem the Preferred Stock at any time, in whole or in part,
at the redemption price of $50 per share plus the dividend for
the then-current quarterly dividend period accrued through
the redemption date.

In the event of any dissolution or liquidation of Freddie Mac,
holders of the Preferred Stock will be entitled to receive, out
of any assets available for distribution to stockholders, up to
$50 per share plus the dividend for the then-current quarterly
dividend period accrued through the liquidation payment
date.

None, except with respect to certain changes in the terms of
the Preferred Stock.

None.



Mac is also subject to credit risk from possible financial instability of
mortgage insurers. To protect the corporation against such risks,
Freddie Mac requires servicers to meet minimum net worth and other
eligibility requirements, conducts quality control checks and on-site
audits, and institutes remedial actions against seller/servicers that fail to
comply with these standards, Similarly, Freddie Mac limits acceptable
mortgage insurers to financially sound entities

From time to time, Freddie Mac faces risk in connection with major
natural disasters. In most cases, credit losses experienced by Freddie
Mac on properties securing its mortgages within disaster areas have
exhibited no material increase from levels in comparable areas not
affected by natural disasters. This experience is partly attributable to
the fact that homeowner losses often are mitigated by property insurance
and by federal and state disaster relief programs. Freddie Mac’s own
policies extending forbearance to borrowers with properties damaged
by natural disasters also may contribute to fewer defaults. Freddie Mac
revised its single-family mortgage servicing standards in 1995 to require
servicers to ensure that borrowers whose mortgages have been sold to
Freddie Mac obtain flood insurance when their dwellings are located in
Special Flood Hazard Areas. Also, Freddie Mac changed its underwriting
standards in 1995 to require earthquake insurance or similar protection
‘on certain condominium and multifamily properties in designated areas
of California. Freddie Mac continues to pursue avenues to mitigate
risks associated with natural disasters.

Freddie Mac is also subject to credit risk relating to its non-mortgage
investment portfolio and off-balance sheet financial instruments.
Credit risk exists to the extent the counterparties to these transactions
do not fulfill their obligations to Freddie Mac under the terms of the
specific security or contract. The credit risk inherent in the investment
portfolio is mitigated to a great extent through Freddie Mac’s policy of
investing in highly-rated instruments and through the short-term, highly
liquid nature of the assets in the corporation’s investment portfolio. At
December 31, 1995, the portfolio consisted primarily of federal funds
sold, reverse repurchase agreements, Eurodollar time deposits and
obligations of states and municipalities. Freddie Mac’s management of
the credit risk associated with off-balance sheet financial instruments is
discussed in “Risk Management — Interest-Rate Risk — Off-balance
Sheet Financial Instruments”

INTEREST-RATE RISK

Interest-rate risk is the risk that changes in interest rates could materially
change the long-term value or short-term earnings of the corporation.
Freddie Mac is subject to interest-rate risk primarily as a result of the
ability of borrowers to prepay their mortgages, in most cases without
penalty, before the scheduled maturities. Mortgage prepayments can
cause fluctuations in earnings if they create mismatches between the
maturities of the corporation’s assets and liabilities, including the sold
portfolio and related contingent guarantee liability. Changing prepay-
ment rates also may require changes in the rate of amortization of
deferred income and expense balances.

Freddie Mac’s primary interest-rate risk management objective is to
maintain the risk of decline in the corporation's value or earnings within
acceptable levels. The corporation’s interest-rate risk management

Ad

strategies are designed to manage the risk of the corporation as a
whole rather than individual components. Freddie Mac’s proprietary
computer-based financial models estimate the value of the corporation,
and its earnings and capital levels under many interest-rate scenarios.
These models help the corporation monitor and manage interest-rate
risk, and assist in determining appropriate funding for the retained
mortgage portfolio. The substantial growth in the retained portfolio in
recent years has made this the primary focus of Freddie Mac's interest-
rate risk management activities. The corporation secks to fund newly
purchased mortgage assets to meet risk/return objectives, while at the
same time ensuring that the overall portfolio meets risk/return targets
Consequently, Freddie Mac regularly reevaluates its funding strategies
with interest-rate risk objectives in mind, and adjusts its mix of debt
instruments to suit portfolio rebalancing needs.

The graph below illustrates the stable growth of Freddie Mac’s earnings
in a wide variety of mortgage rate environments.

EARNINGS vs. MORTGAGE RATES
(dollars in millions)

$3005 710%
$2504
$200
$150

$100

$504

1992

1993
BE ner income
= AVERAGE MORTGAGE RATES

*30-year single-family fixed-rate mortgages

Repricing and Prepayment Risk: The corporation’s net interest income
can increase or decrease whenever mortgage assets in the retained
portfolio are repaid faster or slower than expected and the costs of the
liabilities funding these assets cannot be correspondingly adjusted.

Freddie Mac is also exposed to interest-rate risk related to principal and
interest payments on mortgages underlying the sold portfolio. Timing
differences between Freddie Mac’s receipt of principal and interest pay-
ments from servicers and the subsequent pass-through to PC investors
result in the liability “Principal and Interest Due to Mortgage Participation
Certificate Investors” (P&I Due). The aggregate balance of P&J Due

is determined by the size of the sold portfolio, prepayment rates,
mortgage coupon rates and the rates of scheduled amortization.


Under Section 303(b)(2) of the Freddie Mac Act, Freddie Mac’s right to declare dividends on, and
its right to redeem, any of its stock is subject to prior regulatory approval by the Director if such
“capital distribution” (as defined in the GSE Act) would decrease Freddie Mac’s capital below the risk-
based capital level for Freddie Mac established in the GSE Act or would decrease its core capital to an
amount less than the minimum capital level Freddie Mac is required to maintain by the GSE Act. See
“Regulation and Governmental Relationships — Regulation — OFHEO Oversight.” In addition, pur-
suant to the GSE Act, the Director may require Freddie Mac to submit a report to the Director after
the declaration of, and before making, any such capital distribution.

The descriptions of the Common Stock and the Preferred Stock set forth below do not purport to be
complete and are qualified in their entirety by the respective Certificates of Designation for such
securities.

Common Stock

Authorized Issuance. The Board of Directors may increase the authorized number of shares of
Common Stock at any time without the consent of the holders of the Common Stock.

Dividends. Dividends on shares of the Common Stock are not mandatory. Subject to the dividend
priority of the Preferred Stock described below, holders of outstanding shares of Common Stock are
entitled to receive cash dividends when, as and if declared by the Board of Directors.

No Optional Redemption. The Common Stock is not subject to optional redemption by Freddie
Mac.

No Preemptive Rights and No Conversion Rights. No holder of the Common Stock has any
preemptive right to purchase or subscribe for any other shares, rights, options or other securities of any
class of stock of Freddie Mac that at any time may be sold or offered for sale by Freddie Mac. The
holders of shares of the Common Stock do not have any right to convert such shares into or exchange
such shares for any other class or series of stock or obligations of Freddie Mac.

Voting Rights. Holders of Common Stock are entitled to one vote per share in the election of non-
appointed Directors and on all other matters presented to them for their vote.

Additional Classes or Series of Stock, Freddie Mac has the right to create and issue additional
classes or series of stock ranking prior to, on a parity with or junior to the Common Stock, as to
dividends, liquidation or otherwise, without the consent of the holders of the Common Stock.

Amendments. Without the consent of the holders of the Common Stock, Freddie Mac has the
right to amend, alter, supplement or repeal any terms of the Common Stock to cure any ambiguity, to
correct or supplement any term that may be defective or inconsistent with any other term or to make
any other provisions so long as such action does not materially and adversely affect the interests of the
holders of the Common Stock. Otherwise, the terms of the Common Stock may be amended, altered,
supplemented or repealed only with the consent of the holders of at least two-thirds of the outstanding
shares of the Common Stock.

Ownership Reporting System. The Board of Directors has adopted an ownership reporting system
similar to the disclosure system applicable to public companies that have a class of securities registered
with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Beneficial
owners of more than 5 percent of the outstanding shares of Common Stock are required to file
ownership reports with Freddie Mac's Shareholder Relations Department and with the New York and
Pacific Stock Exchanges, on which the stock is listed. Freddie Mac may impose sanctions upon
shareholders for failure to comply with its beneficial ownership reporting system, including forfeiture of
voting rights for the portion of the stock that is held in excess of the reporting threshold. Freddie Mac’s
policy is to make available copies of ownership reports filed with the corporation upon request to the
Shareholder Relations Department. In addition, information regarding the stock ownership of certain
shareholders is provided on an annual basis in Freddie Mac’s proxy statement.

26


FEDERAL HOME LOAN MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)

(dollars in millions)

March 31, December 31, March 31,
1996 199: 1995
Assets
Retained portfolio:
Mortgages $ 45,208 $ 43,753 $ 41,309
Reserve for losses on retained mortgages (303) (295) (292)
44,905 43,458 41,017
Guaranteed mortgage securities 72,212 63,671 36,004
Unamortized purchase and sale premiums, discounts and fees 224 282 302
Retained portfolio, net .. 117,341 107,411 77,323
Cash and cash equivalents. 5,423 7,483 17,158
Investments. . . . 3,971 4,745 7,905
Mortgage securities purchased under agreements to resell . 8,260 9,217 6,824
Accounts receivable and other assets... . ae 7,979 7,525 3,467
Real estate owned, net ... 818 800 948
$143,792 $137,181 $113,625
Liabilities and Stockholders’ Equity
Debt securities, net
Due within one year $ 67,053 $ 62,141 $ 51,093
Due after one year . . bees 56,584 57,187 49,346
Total debt securities, net Dee e earn eter eee teeereees 123,637 119,328 100,439
Principal and interest due to Mortgage Participation
Certificate (PC) investors 11,069 8,806 4,743
Other liabilities 2,047 2,163 1,426
136,753 130,297 106,608
Reserve for losses on sold mortgages ......... 0. ese e eee e eens 386 388 432
Guarantees:
Mortgage Participation Certificates . 524,327 515,051 492,194
Less—Underlying mortgages (524,327) (515,051) (492,194)
Subordinated borrowings . 641 633 1,234
Stockholders’ equity .... 6,012 5,863 5,351
$143,792 $137,181 $113,625



Non-Cumulative Preferred Stock and the holders of the outstanding shares of such parity stock shall be
entitled to receive upon such dissolution, liquidation or winding up of Freddie Mac as aforesaid, then,
subject to paragraph (b) of this Section 7, all of the assets of Freddie Mac available for distribution to
stockholders shall be distributed to the holders of outstanding shares of the Non-Cumulative Preferred
Stock and to the holders of outstanding shares of such parity stock pro rata, so that the amounts so
distributed to holders of the Non-Cumulative Preferred Stock and to holders of such classes or series of
such parity stock, respectively, shall bear to each other the same ratio that the respective distributive
amounts to which they are so entitled (including any adjustment due to changes in the Dividends-
Received Percentage) bear to each other. After the payment of the aforesaid amounts to which they are
entitled, the holders of outstanding shares of the Non-Cumulative Preferred Stock and the holders of
outstanding shares of any such parity stock shall not be entitled to any further participation in any
distribution of assets of Freddie Mac.

(b) Notwithstanding the foregoing, upon the dissolution, liquidation or winding up of Freddie
Mac, the holders of shares of the Non-Cumulative Preferred Stock then outstanding shall not be
entitled to be paid any amounts to which such holders are entitled pursuant to paragraph (a) of this
Section 7 unless and until the holders of any classes or series of stock of Freddie Mac ranking prior upon
liquidation to the Non-Cumulative Preferred Stock shall have been paid all amounts to which such
classes or series are entitled pursuant to their respective terms.

(c) Neither the sale of all or substantially all of the property or business of Freddie Mac, nor the
merger, consolidation or combination of Freddie Mac into or with any other corporation or entity, shall
be deemed to be a dissolution, liquidation or winding up for the purpose of this Section 7.

8. Additional Classes or Series of Stock

The Board of Directors shall have the right at any time in the future to authorize, create and issue,
by resolution or resolutions, one or more additional classes or series of stock of Freddie Mac, and to
determine and fix the distinguishing characteristics and the relative rights, preferences, privileges and
other terms of the shares thereof. Any such class or series of stock may rank prior to or on a parity with
or junior to the Non-Cumulative Preferred Stock as to dividends or upon liquidation or otherwise.

9. Miscellaneous
(a) Any stock of any class or series of Freddie Mac shall be deemed to rank:

(i) prior to the shares of the Non-Cumulative Preferred Stock, either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of Freddie Mac, as the case may
be, in preference or priority to the holders of shares of the Non-Cumulative Preferred Stock;

(ii) on a parity with shares of the Non-Cumulative Preferred Stock, either as to dividends or
upon liquidation, whether or not the dividend rates or amounts, dividend payment dates or
redemption of liquidation prices per share, if any, be different from those of the Non-Cumulative
Preferred Stock, if the holders of such class or series shall be entitled to the receipt of dividends or
of amounts distributable upon dissolution, liquidation or winding up of Freddie Mac, as the case
may be, in proportion to their respective dividend rates or amounts or liquidation prices, without
preference or priority, one over the other, as between the holders of such class or series and the
holders of shares of the Non-Cumulative Preferred Stock; and

(iii) junior to shares of the Non-Cumulative Preferred Stock, either as to dividends or upon
liquidation, if such class or series shall be Common Stock, or if the holders of shares of the Non-
Cumulative Preferred Stock shall be entitled to receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of Freddie Mac, as the case may be, in preference or
priority to the holders of shares of such class or series.

(b) Freddie Mac and any agent of Freddie Mac may deem and treat the holder of a share or shares
of Non-Cumulative Preferred Stock, as shown in Freddie Mac’s books and records, as the absolute

A-6


In 1995, approximately 180 mortgage sellers signed up to use Loan ProspectorSM; approximately
39,000 mortgages were underwritten through Loan ProspectorSM for credit purposes; approximately
4,600 of these mortgages were also the subject of collateral assessment; and more than $1 billion in
mortgages underwritten through Loan ProspectorSM were purchased by the corporation. Loan Pros-
pectorS js an open system capable of underwriting mortgages sold to purchasers other than Freddie
Mac, including mortgages processed in a pilot program in which the loan amount may exceed the
corporation’s individual loan purchase limits, or that do not conform to the corporation’s underwriting
criteria. Freddie Mac earns a fee on all mortgages underwritten through Loan ProspectorSM.

GoldWorks®. In July 1995, Freddie Mac commercially introduced GoldWorks®, an electronic
information network for the mortgage industry. GoldWorks® provides mortgage market participants
with a single link with Freddie Mac and other parties involved in the mortgage origination and purchase
process, such as credit bureaus and mortgage insurers. GoldWorks® also is an open system through
which Freddie Mac customers may conduct business with the corporation as well as access third party
services such as services for tracking, sharing and transferring title documents; disseminating mortgage
rate sheets and product announcements; and selling mortgage products not purchased by the corpora
tion to third-party investors. Freddie Mac earns fees on services offered and used through Gold Works®

Mortgage Purchase Volume

Set forth below is a summary of Freddie Mac’s mortgage purchase activity for the years shown.

Purchases of Mortgages
dollars in millions)

Year ended December 31,
1995 1994 1993 1992 1991

Single-family 30-year fixed-rate(1) ......... $58,244 $ 70,390 $115,375 $ 85,200 $61,275
Single-family 15-year fixed-rate......... 13,806 25,543 68,471 62,203 18,190
Single-family 5- and 7-year Balloon/Reset ... 3,822 9,984 24,497 28,184 = 12,471
Single-family adjustable-rate(2)...........- 20,949 17,482 21,172 15,512 7,793
Multifamily . 1,565 847 191 27 236

Total $98,386 $124,246 $229,706 $191,126 $99,965

(1) Includes single-family 20-year fixed-rate mortgages and mortgage revenue bonds.
ge

(2) Includes FHA/VA. mortgages purchased and held in Freddie Mac’s retained mortgage portfolio in securitized form (i.e.,
Government National Mortgage Association (““GNMA” or “Ginnie Mae”) Certificates).

Freddie Mac purchases single-family mortgages primarily by issuing commitments pursuant to
which it agrees in advance to purchase specified dollar amounts of mortgages for delivery for cash or
securities over a specified period of time such as three, six or twelve months. These contracts are called

‘master commitments.” Sellers enter into master commitments to assure a secondary market outlet for
the mortgages they expect to originate and sell over the term of the contract and to lock in the
underwriting standards that will apply to those mortgages, and in some cases, to lock in the manage-
ment and guarantee fees payable to Freddie Mac. Freddie Mac commits to purchase mortgages for
either mandatory or optional delivery. By entering into master commitments with sellers, Freddie Mac
seeks to assure that it will receive a competitive share of the mortgages the sellers originate over the
contract term. As of December 31, 1995, Freddie Mac had approximately $31.4 billion in outstanding
master commitments to purchase mortgages, of which approximately $20.4 billion provided for
mandatory delivery (or the payment of pair-off fees in the event of non-delivery) and approximately $11
billion provided for delivery at the option of mortgage sellers. Master commitments normally are
fulfilled by successive separate deliveries of mortgages by sellers. Offers to sell mortgages also are
considered on a negotiated basis outside of the master commitment process. During 1995, as in 1994,
Freddie Mac increased its purchases of mortgages through large transactions with major originators
and competed for (but was not awarded) other similar transactions.

8


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

HIGHLIGHTS OF 1995 ,

In 1995, Freddie Mac generated record revenues and earnings. Revenues
increased 10 percent, to $2.5 billion from $2.3 billion in 1994, and Net
income increased 11 percent, to $1.091 billion from $983 million in
1994. Earnings per common share were up 12 percent, to $5.69 from
$5.08. The corporation's return on common equity was 22 percent in
1995, the fourteenth consecutive year this rate of return exceeded 20
percent, Freddie Mac achieved record revenues and solid earnings growth
despite lower business volumes and a challenging crédit environment.

Freddie Mac’s 1995 revenues and earnings growth were driven by
continued disciplined expansion of the corporation’s retained mortgage
portfolio. The retained portfolio, which surpassed $100 billion during
the fourth quarter, grew by $35 billion, or 48 percent, in 1995 and
now comprises approximately 19 percent of the corporation's total
mortgage portfolio. The corporation's net interest income doubled
from 1992 to 1995 as a result of retained portfolio growth, including
the repurchase of outstanding PCs, and increased interest-free funding
related to capital growth.

Freddie Mac’s total mortgage portfolio grew at a rate of 6 percent during
1995, approximately equal to the estimated growth in outstanding
residential mortgage debt. In recent years, Freddie Mac’s total mortgage
portfolio has generally grown at a faster rate than the growth in out-
standing residential mortgage debt, but did not exceed that growth rate
in 1995 due in part to borrower preference for adjustable-rate mortgages
(ARMs) during the early part of the year. ARMs are less likely than fixed-
rate mortgages to be sold into the secondary market at, or for a period of
time after, origination. The volume of mortgage originations continually
increased during 1995 as declining mortgage rates spurred originations
both for the purchase of homes and for refinancings. Demand for ARMs
declined and the volume of fixed-rate mortgage originations increased.

Administrative expenses increased modestly at the rate of 4 percent
in 1995, reflecting Freddie Mac’s continued commitment to corporate
cost management.

Credit-related expenses increased by 27 percent, from $425 million in
1994 to $541 million in 1995. Because mortgages generally experience
their peak default period approximately three to five years after origina-
tion, credit-related expenses in 1995 were primarily related to mortgages
originated prior to 1992. California loans account for approximately
25 percent of Freddie Mac’s total mortgage portfolio, but contributed
63 percent of total credit losses in 1995. California experienced a deep
economic recession in the early 1990s, with significant declines in
employment levels and house prices. The increase in credit-related
increased use of loss
mitigation strategies, particularly foreclosure alternatives, which tend to
accelerate the recognition of credit-related expenses through charge-offs.

expenses was also attributable to the corporation’:

In the next two to three years, Freddie Mac’s credit performance will
increasingly depend upon the performance of mortgages originated in
1992 and 1993. These are primarily refinanced fixed-rate mortgages
with relatively low loan-to-value (LTV) ratios. These mortgages were
originated after Freddie Mac tightened its underwriting guidelines

to significantly reduce the purchase of higher-risk loans such as low-
documentation and negative amortization mortgages. In addition, house

A-l

prices have been stable‘or improving in most regions in the period since
these mortgages were originated. As a result, 1992 and 1993 mortgage
purchases are expected to experience lower average percentage loss rates
than pre-1992 purchases. However, these mortgages, which are entering
the peak default period, comprise the largest portion of the corporation’s
total mortgage portfolio. Therefore, small proportional changes in the
credit performance of these mortgages can have a significant dollar
impact on the corporation’s results of operations.

The major underwriting changes instituted by Freddie Mac since 1991
along with continued significant advances in underwriting capabilities,
the most significant being the successful introduction of Freddie Mac’s
automated underwriting service, Loan ProspectorTM, have built the
foundation for improved credit performance in the future. In addition,
Freddie Mac has continued to develop its strategies for reducing credit
losses normally associated with non-performing mortgages.

The record earnings achieved in 1995 further strengthened the
corporation's capital base. The Office of Federal Housing Enterprise
Oversight (OFHEO) classified Freddie Mac “adequately capitalized,”
OFHEO’s highest classification, in its most recent capital classification.
Disciplined capital deployment underlies all of Freddie Mac’s business
activities. The corporation invests capital only when expected long-term
returns and related risks are acceptable. Freddie Mac's common share
repurchase program, initiated during 1995, allows the return of capital
to shareholders during periods when there are fewer opportunities to
invest capital at attractive returns.

Freddie Mac produced solid earnings growth in 1995 at a time when

total mortgage portfolio growth and growth in credit-related expenses
diverged from longer-term trend lines. By aggressively managing risks,
prudently deploying capital and maintaining a strong market position,
Freddie Mac has built a solid foundation for future growth in its total

mortgage portfolio, revenues and earnings.

BUSINESS AND MARKET OVERVIEW

Business Overview

The principal business activity.of Freddie Mac is the purchase or secu-
ritization of single-family and multifamily residential mortgages from
mortgage lenders, which include both depository institutions and
mortgage bankers. Freddie Mac uses two principal methods to finance
its mortgage purchases, each of which generates a different source of
revenue for the corporation.

Under the first method, mortgages are securitized and issued to investors
as guaranteed mortgage pass-through securities called Mortgage Parti-
cipation Certificates or “PCs.” Mortgages financed by the issuance of
PCs are referred to as the “sold portfolio.” Freddie Mac guarantees the
payment of principal and interest on PCs and bears the risk of borrower
default on the mortgages backing the PCs. For assuming this risk, and as
compensation for administration of principal and interest payments, the
corporation receives fee income which is recorded as “Management
and guarantee income” over the lives of the underlying mortgages.

The amount of this fee income is the difference between the effective
interest rate received by Freddie Mac on mortgages it purchases and
the effective interest rate paid to PC holders.


In addition to debt issuances, the corporation maintains an investment
portfolio of highly rated and marketable short-term investments to
draw upon as necessary. At December 31, 1995 and 1994, Freddie
Mac held approximately $21 billion and $29 billion, respectively, of
highly rated marketable assets, including cash and cash equivalents,
short-term investments and reverse repurchase agreements.

Capital Adequacy

Freddie Mac maintains capital as a cushion to absorb unforeseen losses
that might arise in fulfilling its mortgage guarantee obligations and
conducting its business programs and to meet regulatory capital require-
ments, The primary method by which Freddie Mac assesses its capital
adequacy for internal purposes is through the use of internally devel-
oped stress test models that measure the corporation’s survival in
response to severe changes in interest-rate and credit environments

‘The corporation maintains its primary capital base, which is the sum
of Stockholders’ equity and Reserves for losses on mortgages, at a level
management believes is sufficient to absorb unforeseen losses while
permitting the payment of dividends at appropriate levels. Over the past
three years, the corporation has added $2.2 billion to its primary capital
base and increased its primary capital ratio (primary capital as a percent-
age of total assets and PCs) from 0.93 percent at December 31, 1992 to
110 percent at December 31, 1995. The increase was driven by strong
earnings and a preferred stock issuance during that time period. The
following table summarizes the components of Freddie Mac’s capital base.

December 31, 1995 1994 1993
(dollars in millions)

Common stock (par) $ 152 $ 152 $ 152
Preferred stock (par) 35 35 35

Additional paid-in capital 916 913 au

Retained earnings 4,884 4,074 3,344
Net unrealized gain (loss) on
securities reported at fair value 33 (7) -
Treasury stock, at cost (157) (5) (5)
Stockholders’ equity $5,863 $5,162 $4,437
Reserves for losses on mortgages 683 733 760
Primary capital base $6,546 $5,895 $5,197
Subordinated borrowings 633 1,226 1,483
Adjusted total capital base $7,179 $7,121 $6,680

In June 1995, Freddie Mac announced its intention to purchase up to
$200 million of its common stock in open market purchases over a
twelve-month period. This repurchase program is intended to return
to shareholders equity capital that currently is invested in short-term
non-mortgage investments. The repurchase program has a modest
impact on Freddie Mac’s capital growth, but is not expected to
adversely affect growth in the retained or sold mortgage portfolios or
the corporation's overall capital adequacy. As of December 31, 1995,
Freddie Mac had purchased approximately $151 million of its common
stock in conjunction with the repurchase program.

RECENT EVENTS

Board of Directors

On January 5, 1996, President Clinton appointed Joel I. Ferguson to
the Board of Directors of Freddie Mac. Mr. Ferguson is president and
co-owner of F&S Development Company in Lansing, Michigan, a
developer of multifamily properties, and co-owner of First Housing
Corporation, a real estate management company.

On January 17, 1996, Barbara C. Jordan, a member of Freddie Mac's
Board of Directors for the past six years, passed away. Ms. Jordan, a
noted public figure and a former member of Congress, was Professor
of Public Service at the University of Texas at the time of her death.
Capital Authorizations

On March 1, 1996, the Board of Directors of Freddie Mac authorized
management to issue up to $500 million of preferred stock and repur-
chase up to $1 billion of common stock. The preferred stock issuance
is intended to provide capital to support asset growth in attractive
market environments, and the common stock repurchase authorization
provides the flexibility to return capital to shareholders in periods
when fewer growth opportunities are available.

It is expected that most or all of the preferred stock will be issued in
one or more public offerings in 1996, Based on management's current
expectations for asset growth and capital resources, relatively little of the
additional common stock repurchase authority is likely to be utilized
during 1996. If attractive opportunities for asset growth decrease sig-
nificantly during the year, 1996 repurchases could occur at a faster rate.

EFFECT OF NEW ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board (FASB)
issued SFAS No, 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.” This statement
provides guidance on the carrying value of long-lived assets, including
REO, and is effective January 1, 1996. Management believes that
adoption of SFAS No. 121 will not have a material effect on reported
results of operations or financial position

In October 1995, the FASB issued SFAS No. 123, “Accounting for
Stock-Based Compensation,” which requires entities to measure com-
pensation costs related to awards of stock-based compensation using
either the fair value method or the intrinsic value method. Under the
fair value method, compensation expense is measured at the grant date
based on the fair value of the award. Under the intrinsic value method,
compensation expense is equal to the excess, if any, of the quoted market
price of the stock at the grant date over the amount the employee must
pay to acquire the stock, Entities electing to measure compensation costs
using the intrinsic value method must make pro forma disclosures,
beginning after the effective date of January 1, 1996, of net income and
earnings per share as if the fair value method had been applied. Freddie
Mac has elected to account for stock-based compensation programs
using the intrinsic value method consistent with existing accounting
policies and, therefore, the standard will have no effect on the con-
solidated financial statements

A-19


TABLE OF CONTENTS

Page
FEDERAL HOME LOAN MORTGAGE CORPORATION... 3
BUSINESS .. 3
General. . 3
Mortgage Purchases . . 4
Mortgage Purchase Volume .. 8
Financing of Mortgage Purchases 9
Market Conditions and Competition . 11
Defaults, Foreclosures and REO. 13
Litigation wee 15
REGULATION AND GOVERNMENTAL RELATIONSHIPS 16
Regulation of Freddie Mac. ......... 0. cece cece ee 16
Regulations Affecting Mortgage-Related and Debt Securities . 19
Governmental Relationships 22
CUSTOMER AND MARKET SUPPORT ACTIVITIES 23
Securities Sales and Trading Group... 23
PC Price Performance ......... 24
PROPERTIES AND EMPLOYEES. 24
CAPITALIZATION 25
EQUITY SECURITIES 25
Common Stock . . 26
Preferred Stock 27
Dividends .... 28
MANAGEMENT . 28
Executive Officers 29
INDEPENDENT PUBLIC ACCOUNTANTS... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS A-l
FIVE-YEAR FINANCIAL HIGHLIGHTS. . A-20
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS A-21
ADDITIONAL FINANCIAL INFORMATION .. A-40

MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS AND INTERNAL

CONTROL STRUCTURE ...... 06. tenn e tenn eeeeenneeen nee A-41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON MANAGEMENT'S

ASSERTION ABOUT THE EFFECTIVENESS OF THE INTERNAL CONTROL

STRUCTURE OVER FINANCIAL REPORTING....... 00. e cece een e nee enn neeee A-42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON CONSOLIDATED

FINANCIAL STATEMENTS


Freddie Mac calculates pension costs using assumptions as of the beginning of
the year and calculates the funded status of the plans using assumptions as
of the end of the year. The following table sets forth the funded status, the
assumptions used to calculate the funded status and amounts recognized
in Freddie Mac’s Consolidated Balance Sheets.

December 31, 1995 1994
(dollars in thousands)
Actuarial present value of
benefit obligations:
Vested benefits $ 52,644 $ 37,395
Non-vested benefits 7,200 5,154
Accumulated benefit obligation $ 59,844 $ 42,549
Pension liability:
Projected benefit obligation $ 88,182 $ 62,718
Plan assets at fair value (73,701) (53,421)
Projected benefit obligation
in excess of plan assets 14,481 9,297
Unrecognized net actuarial
gain (loss) (3,778) 445
Unrecognized prior service cost (528) (541)
Initial unrecognized net asset
being recognized over 17 years (1,349) (1,392)
Pension liability included in
Accrued interest and other
accrued expenses $ 8,826 $ 7,809
Major assumptions:
Assumed discount rate 1.5% 8.5%
Rate of increase in
compensation levels” 45 to'5.5% 5.0 to 6.0%
Consumer price index 3.5% 4.0%
Expected long-term rate of
return on plan assets 9.0% 8.0%

(1) Range of rates based on employee age.

Freddie Mac also offers a Thrift/401 (k) Savings Plan (the Savings Plan)
to employees who have worked full-time at Freddie Mac for at least one
year. Under the Savings Plan, employees may contribute from I percent
to 12 percent of their annual salaries, but not to exceed $9,240 in 1995
and 1994, Freddie Mac matches employees’ contributions to the Savings
Plan up to 6 percent of their annual salaries depending upon the length
of service. In addition, Freddie Mac is authorized to make an annual con-
tribution to a profit sharing account in the Savings Plan on behalf of each
eligible employee based on salary level. Freddie Mac madé contributions
to the Savings Plan of $10.3 million, $9.0 million, and $6.9 million in
1995, 1994 and 1993, respectively.

‘The corporation is required to accrue the estimated cost of retiree bene-
fits, other than pensions, as employees render the services necessary to
carn their postretirement benefits, Freddie Mac provides postretirement
health care benefits to retired employees on a contributory basis after
attaining age 55, who have rendered at least five years of service after age
35. The corporation's postretirement health care plan currently is not
funded. The following table provides the status of the plan at December
31, 1995 and 1994,

December 31, 1995 1994
(ollars in thousands)
Accumulated postretirement benefit
obligation (APBO):
Retirees $809 $630
Fully eligible, active plan participants 1,663 970
Unrecognized net gain 2,761 2,692
Other active plan participants 7,288 6,244
Net postretirement benefit liability
included in Accrued interest and
other accrued expenses $12,521 $10,536

‘The components of net periodic postretirement benefits are as follows:

Year Ended December 31, 1995 1994 1993
(Gollars in thousands)
Service cost, benefits attributed to

employee service during the year $1,503 $1,537 ‘$1,584
Interest cost on accumulated

postretirement benefit obligation 664 537 522
Net amortization and deferral (110) (42) -

Net periodic postretirement

benefits cost $2,057 $2,032 $2,106

‘The assumed discount rate was 7.5 percent and 8.5 percent at December
31, 1995 and 1994, respectively. The assumed health care cost trend rate
used in measuring the accumulated postretirement benefit obligation was
11.0 percent in 1995, gradually declining to 6.5 percent in the year 2003
and remaining at that level thereafter. A one-percent increase in the
assumed health care cost trend rate would increase the APBO by approxi-
mately 22 percent. The effect of this change on the sum of the service cost
and interest cost components of net periodic postretirement benefit cost
would be an increase of 24 percent.

A-37


therefor, at the redemption price of $50.00 per share plus an amount equal to the dividend (calculated
as provided in the Certificate of Designation) for the then-current Dividend Period accrued through and
including the date of such redemption. If less than all of the outstanding shares of the Preferred Stock
are to be redeemed, Freddie Mac will select shares to be redeemed from the outstanding shares not

previously called for redemption by lot or pro rata (as nearly as possible) or by any other method which
Freddie Mac in its sole discretion deems equitable.

Freddie Mac will give notice of any such redemption by mail to holders of the Preferred Stock not
less than 30 days and not more than 60 days prior to the date fixed by the Board of Directors for such
redemption. Each such notice will state the number of shares of Preferred Stock being redeemed, the
redemption price, the redemption date and the place at which a holder’s certificate(s) representing
shares of the Preferred Stock must be presented upon such redemption.

See “Regulatory Matters” for a description of possible regulatory restrictions on Freddie Mac’s
redemption of the Preferred Stock.

From and after the redemption date, the shares of Preferred Stock called for redemption will no

longer be deemed outstanding, and all rights of the holders thereof as holders of the Preferred Stock will
cease.

Regulatory Matters

Neither Freddie Mac’s right to declare dividends on nor its right to redeem the Preferred Stock is
currently subject to prior regulatory approval. Under the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 (the ‘GSE Act’’), the exercise of these rights may be subject to regulatory
approval only if the Corporation fails to meet applicable capital standards.

The GSE Act established minimum capital, critical capital and risk-based capital standards for the
Corporation.

The GSE Act has required the Corporation to maintain “core capital” in an amount that equals or
exceeds the levels established under the minimum and critical capital standards since the GSE Act was
enacted. The Director (the “‘Director”) of the Office of Federal Housing Enterprise Oversight
(“OFHEO”) has issued a proposed minimum capital regulation that interprets the minimum capital
standard and that proposes to implement a calculation methodology that is similar to the methodology
OFHEO has applied on an interim basis since the GSE Act was enacted. The Director has stated that a
final minimum capital regulation will be issued in 1996.

The GSE Act does not require the Corporation to maintain “total capital” at a level that equals or
exceeds the risk-based capital standard until the Director issues a final risk-based capital regulation
establishing the risk-based capital stress test (and the risk-based capital level cannot be determined
from the GSE Act alone). The Director has stated that OFHEO expects to publish for comment in 1996
and 1997 a proposed regulation, in two parts, establishing the risk-based capital test, and subsequently
to issue a final risk-based capital regulation. The final risk-based capital regulation becomes effective
when issued but, until the risk-based capital regulation has been in effect for one year, the Director must
base any determination of the Corporation’s capital adequacy solely on whether the core capital of the
Corporation is equal to or exceeds the minimum and critical capital levels.

Subject to the applicability of the risk-based capital standard described above, the Corporation
may pay a dividend without prior OFHEO approval if the payment would not decrease the total capital
of the Corporation to an amount less than the risk-based capital level for the Corporation and would not
decrease the core capital level to an amount less than the minimum capital level for the Corporation.
Beginning one year after the final risk-based capital regulation is issued, if the Corporation’s total
capital is less than the risk-based capital level, but its core capital equals or exceeds the minimum
capital level, the Corporation is prohibited from making a dividend payment that would decrease its
core capital to an amount less than the minimum capital level. At any time, if the Corporation’s core
capital is less than the minimum capital level, the Corporation may make a dividend payment only if the
Director determines that the dividend payment satisfies certain statutory standards and if the Director

13


FIVE-YEAR FINANCIAL HIGHLIGHTS

December 31, 1995 1994 1993 1992 1991
(dollars in millions, except per share amounts)
Balance Sheet
Retained portfolio” $107,424 $ 72,828 $ 55,698 $ 33,896 $ 27,046
Total assets $137,181 $ 106,199 $ 83,880 $ 59,502 $ 46,860
Debt securities, net $119,328 $ 92,053 $ 48,510 $ 28,173 $ 28,300
Total liabilities $130,297 $ 99,368 $ 77,406 $ 53,795 $ 41,725
Capital base:
Stockholders’ equity $ 5,863 $ 5,162 $ 4,437 $ 3,570 $ 2,566
Reserves for losses on mortgages” 683 733 760 785 737
Primary capital base S$ 6,546 $ 5,895, $ 5,197 $ 4,355 $ 3,303
Subordinated borrowings 633 1,226 1,483 1,458 1,962
Adjusted total capital base $ 7,179 $ 7,121 $ 6,680 $ 5,813 $ 5,265
Mortgage Participation Certificates (PCs) $459,045 $ 460,656 $ 439,029 $ 407,514 $ 359,163
Primary capital ratio” 1.10% 1.04% 0.99% 0.93% 0.81%
Adjusted total capital ratio” 1.20% 1.26% 1.28% 1.24% 1.30%
‘Total mortgage portfolio $566,469 $ 533,484 $ 494,727 $ 441,410 $ 386,209
Mortgage Purchase and Financing Activities
Mortgage purchases $ 98,386 $* 124,246 $ 229,706 $ 191,126 $ 99,965
Number of mortgages purchased 933,559 1,256,549 2,315,162 1,969,851 1,061,942
Mortgage PC settlements:
Single-class $ 85,877 $ 117,110 $ 208,724 $ 179,207 $ 92,479
Multiclass (REMICs) $ 15,372 $ 73,131 $ 143,336 $ 131,284 $ 72,032
Long-term debt:
Issued $ 29,643 $ 22,744 $ 24,784 $ 9,660 $ 4,346
Retired (11,082) (6,462) (9,924) (5,159) (2,652)
Net $ 18,561 $ 16,282 $ 14,860 $ 4,501 $ 1,694
Income Statement and Performance Ratios
Net interest income on earning assets'” $ 1,396 $ 1,112 $ 852 $ 695 $ 683
Management and guarantee income” $ 1,087 $ 1,108 $ 1,033 $ 936 $ 792
‘Total revenues” $ 2,522 $ 2,286 $ 2,013 $ 1,687 $ 1,506
Income before income taxes $ 1,586 $ 1,482 $ 1,128 $ 901 $ 800
Net income $ 1,091 $ 983 $ 786 $ 622 $ 555
Earnings per common share“ $ 569 $ 5.08 $ 4.07 $ 3.29 $ 3.08
Dividends per common share“ $ 1.20 $ 1.04 $ 0.88 $ 0.76 $ 0.67
Dividend payout ratio on common stock 21.09% 20.47% 21.63% 23.14% 21.62%
‘Weighted average common shares outstanding (in thousands)” 180,322 180,666 180,421 180,165 180,095
Return on common equity” 22% 23% 22% 21% 24%
Return on stockholders’ equity” 20% 21% 20% 20% 24%
Return on average assets and contingencies 0.19% 0.18% 0.16% 0.14% 0.15%
Ratio of earnings to fixed charges” 1.23:1 13h 1.3221 1.3211 1.28:1
Ratio of earnings to combined fixed charges
and preferred stock dividends” 1,22:1 1.3021 1.30:1 1.30:1 N/A

(J) Prior years data have been restated to reflect the transfer of multifamily in-substance foreclosures from real estate owned to the retained portfolio pursuant to the
adoption of Statement of Financial Accounting Standards No. 114 in 1995.

(2) “Reserve for losses on retained morigages” and “Reserves for losses on sold mortgages.”

(3) “Primary capital base” divided by “Toal assets” and “Mortgage Participation Certificates.”
(4) “Adjusted total capital base” divided by “Total assets” and “Mortgage Participation Certificates.”
(5) Prior years amounts do not inciude pro forma adjustments to reflect the adoption in 1994 of a change in the reporting of uncollectible interest on single-family mortgages.

(6) In April 1992, Freddie Mac effected a three-for-one split of its common stack. All earnings per common share, dividends per common share and weighted average
common shares outstanding have been adjusied retroactively 10 reflect the three-for-one stack split.

(7) “Net income” less preferred stock dividends divided by the simple average of the beginning and ending balances of “Stockholders' equity,” net of par and additional

paid-in capital of preferred stock

(8) Net income divided by the simple average of the beginning and ending balances of “Stockholders’ equity.”
(9) Earnings represent consolidated pretax income plus consolidated fixed charges, less interest capitalized. Fixed charges include interest (including amounts capitalized)

and the portion of net rental expense deemed representative of interest

A-20


The corporation uses actual prepayment experience and estimates of
future prepayments to determine the constant yield needed to apply the
effective interest method. Weighted average life estimates and associated
amortization amounts are periodically revised to account for changes in
actual and expected prepayment experience.

Reserves for Losses on Mortgages

Reserves for losses are maintained at levels that, in the opinion of manage-
ment, are adequate to absorb credit losses incurred on mortgages in the
retained and sold portfolios. These levels are estimated by management
based on an evaluation of numerous factors including, but not limited
to, general and regional economic conditions, prior and expected future
default experience and mortgage collateral values. Reserves are increased
through periodic provisions charged to expense and decreased by charge-
offs, net of recoveries.

As noted above, Freddie Mac adopted SFAS No. 114 on January 1, 1995.
Under SFAS No. 114, multifamily loans that will not be repaid in accor-
dance with their contractual terms are measured for impairment based

on the fair value of the collateral less estimated selling expenses. When
the value of the collateral is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. This method

of accounting for impairment of multifamily loans is consistent with the
methods used by Freddie Mac prior to the adoption of SFAS No. 114.
Single-family mortgages are excluded from the scope of the standard, with
the exception of troubled debt restructurings. Single-family troubled
debt restructurings are measured for impairment by discounting the
estimated cash flows to be received under the restructured terms. When
the present value is less than the carrying amount of the loan, the differ-
ence is recorded as a charge-off to the Reserve for losses on mortgages.
Previously, losses on troubled debt restructurings were recognized to the
extent the sum of estimated cash flows was less than the carrying amount
of the loan. The adoption of SFAS No. 114 did not have a material effect
on the results of operations.

Effective January 1, 1994, Freddie Mac changed the way it reports uncol-
lectible interest on single-family mortgages such that uncollectible interest
is no longer charged to the Reserve for losses on mortgages. See “Summary
of Significant Accounting Policies — Mortgages” for further discussion of
this reporting change.

Investments

At December 31, 1995 and 1994, non-mortgage investments were clas

fied as available-for-sale since the corporation does not have the positive
intent to hold these securities to maturity. Available-for-sale securities
are reported at fair value with unrealized gains and losses reported in
Stockholders’ equity on a net of tax basis.

Real Estate Owned

REO is carried at the lower of cost or fair value less estimated selling costs.
Accordingly, provisions for estimated REO disposition costs and for losses
occurring subsequent to foreclosure due to changes in the fair value of
the property are recognized through the REO valuation allowance with

a corresponding charge to “REO operations expense.” REO-related
expenses and income during the holding period are also included as part
of REO operations expense.

As noted previously, prior period multifamily REO and mortgage balances
have been restated to reflect the adoption of SEAS No. 114, which was
effective January 1, 1995, The adoption of SFAS No. 114 did not have a
material effect on results of operations.

Debt Issuance Costs

Debt issuance costs are deferred and amortized over the period

during which the related indebtedness is outstanding using the effective
interest method.

Security Program Variances

Timing differences between Freddie Mac’s receipt of principal and interest
payments from seller/servicers and subsequent pass-through to PC
investors results in the liability “Principal and interest due to Mortgage
Participation Certificate investors” (P&I Due). P& Due balances arising
from the pass-through of prepaid mortgages are interest-bearing at the PC
coupon rate from the date of prepayment until the date the PC security
balance is reduced (an average of 30 days) and non-interest-bearing from
the date the PC security balance is reduced to the date of payment to the
PC investor (an additional 8 to 38 days depending on the type of security).
Interest expense resulting from P&I Due balances is reported as “Interest
expense due to security program cycles.”

In 1995, the corporation revised its method of recognizing interest expense
on P&I Due balances. Previously, interest expense on P&I Due balances
was recognized from the date of prepayment to the date the PC security
balance was reduced. Under the revised accounting method, the same
dollar amount of interest expense is recognized over the period between
the date of prepayment and the date of payment to the PC investor, con-
sistent with the corresponding period during which investment income is
earned on the prepayment proceeds. The change in accounting method
did not have a material effect on the consolidated financial statements.
Previously reported amounts in the financial statements do not reflect the
change in reporting of interest expense on P& Due balances,

Income Taxes

Effective January 1, 1993, Freddie Mac adopted SFAS No. 109, “Accounting
for Income Taxes,” and reported the effect of adopting the standard as a
cumulative effect of a change in accounting principle in 1993. SFAS No.
109 required a change from the deferred method required by Accounting
Principles Board Opinion (APB) No. 11, which the corporation used in
accounting for income taxes prior to 1993, to the asset and liability
method of 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 differences between the
financial reporting and tax reporting basis of assets and liabilities using
enacted statutory tax rates. To the extent tax rates change, deferred tax
assets and liabilities are adjusted in the period the tax rate change is
enacted. Deferred tax expense represents the net change in the deferred
tax asset or liability balance during the year. This amount, together with
income taxes payable for the current year represents the total “Provision

for income taxes” for the year.

A-26


Administrative Expenses

Administrative expenses for the first quarter of 1996 totaled $105 million compared to $97 million
in the first quarter of 1995. The ratio of administrative expenses to revenues was 15 percent for the first
quarter of 1996, down slightly from 16 percent for the first quarter of 1995. Annualized administrative
expenses as a proportion of the average total mortgage portfolio for the first quarter of 1996 remained
unchanged from the first quarter of 1995 at 7.3 basis points.

REGULATION AND GOVERNMENTAL RELATIONSHIPS

From time to time, Freddie Mac’s statutory, structural and regulatory relationships with the
federal government may be subject to review or modification. While Freddie Mac’s GSE status is often
advantageous for the Corporation, proposals have been advanced that could adversely affect Freddie
Mac’s fulfillment of its statutory purposes, as well as the Corporation's results of operations. A more
detailed discussion of Freddie Mac’s regulatory and governmental relationships appears under “‘Regula-
tion and Governmental Relationships” in the Information Statement.

DESCRIPTION OF PREFERRED STOCK

The description of the Preferred Stock set forth below does not purport to be complete and is

qualified in its entirety by the Certificate of Designation, which will be in substantially the form
attached as Appendix A.

General

Under §306(f) of the Freddie Mac Act, Freddie Mac is authorized to issue an unlimited number of
shares of preferred stock. The shares of Preferred Stock being offered hereby will have a par value of
$1.00 per share. The Preferred Stock is created pursuant to the Certificate of Designation.

First Chicago Trust Company, New York, New York, will be the transfer agent, dividend
disbursing agent and registrar for the Preferred Stock.

Authorized Issuance

Freddie Mac has been authorized by its Board of Directors to issue the 5,000,000 shares of
Preferred Stock offered hereby. The Board of Directors may increase the authorized number of shares
at any time, without the consent of the holders of Preferred Stock.

Dividends

Dividends on shares of the Preferred Stock will not be mandatory. Holders of Preferred Stock will
be entitled to receive non-cumulative, quarterly cash dividends which will accrue from but not including
April 26, 1996 and will be payable on March 31, June 30, September 30 and December 31 of each year
(each, a “Dividend Payment Date”), commencing June 30, 1996 when, as and if declared by the Board
of Directors in its sole discretion, out of funds legally available therefor. Dividends will accrue at a
variable per annum rate (not greater than 9% per annum) equal to (a) the sum of LIBOR, determined
quarterly as described under “Determination of LIBOR,” and 1.0%, divided by (b) 1.377, with the
resulting dividend per share being rounded to the nearest cent (with one-half cent rounded up). If a
Dividend Payment Date is not a “Business Day,” the related dividend will be paid on the next Business
Day with the same force and effect as though paid on the Dividend Payment Date, without any increase
to account for the period from such Dividend Payment Date through the date of actual payment. For
these purposes, “Business Day” means a day other than (i) a Saturday or a Sunday, (ii) a day on which
New York City banks are closed or (iii) a day on which the offices of Freddie Mac are closed. Dividends
will be paid to holders of record on the record date fixed by the Board of Directors, not to be earlier than
45 days or later than 10 days preceding the applicable Dividend Payment Date. If declared, the initial
dividend, which will be for the period from but not including April 26, 1996 through and including June
30, 1996, will be 4.7091% or $.43 per share and will be payable on July 1, 1996. Thereafter, the

9


CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31, 1995 1994 1993
(dollars in millions)

Cash Flows from Operating Activities:

Net income $ 1,091 $ 983 $ 786
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of mortgage purchase and sale premiums, discounts and fees 98 167 2723
Amortization of deferred debt issuance costs 7 99 86
Provision for mortgage losses 255 200 300
Provision for REO disposition losses 102 inet 135
Provision (benefit) for deferred federal income taxes 108 32 (167)
Net change in payables and receivables 3,573 (32,683) (2,028)
4,204 (32,074) (1,401)
Mortgages purchased for resale (27,716) (24,577) (66,277)
PCs sold 24,173 41,081 77,498
(3,543) 16,504 11,221
Net cash provided by (used in) operating activities 1,752 (14,587) 10,606
Cash Flows from Investing Activities:
Mortgages purchased and held as investments (41,618) (21,850) (32,666)
Mortgage principal repayments 5,839 2,113 5,093
Net (increase) decrease in investments 7,194 2,137 (6,007)
Mortgage securities purchased under agreements to resell (29,847) (27,993) (42,225)
Repayments on mortgage securities purchased under agreements to resell 26,543 26,278 42,087
Net cash used in investing activities (31,889) (19,315) (33,718)
Cash Flows from Financing Activities:
Notes and bonds issued 29,643 22,744 24,784
Notes and bonds retired (11,082) (6,462) (9,924)
18,561 16,282 14,860
Short-term borrowings issued 835,927 707,682 474,148
Short-term borrowings retired (827,877) (681,585) (469,214)
8,050 26,097 4,934
Proceeds from stock transactions, net (152) 2 292
Dividends paid (281) (253) (211)
Net cash provided by financing activities 26,178 42,128 19,875
Net increase (decrease) in cash and cash equivalents (3,959) 8,226 (3,237)
Cash and cash equivalents at January 1, 11,442 3,216 6,453
‘Cash and cash equivalents at December 31, $7,483 $ 11,442 $ 3,216
Supplemental Cash Flow Information
Year ended December 31, 1995 1994 1993
(dollars in- millions)
Cash paid during the year for:
Interest S$ 6,492 $ 4,298 S$ 3,413
Taxes 376 437 460
Non-cash financing activities:
PCs issued under Guarantor program 61,742 77,286 131,470
Giant PCs issued 19,979 37,479 41,321
Multiclass PCs issued 15,372 73,131 143,336
‘Transfers to real estate owned 1,206 1,517 1,170

See accompanying Notes to Consolidated Financial Statements.

A-24


monitoring credit risk exposure. The corporation’s policy for requiring
collateral from counterparties in interest-rate agreements is based on
independent credit ratings, estimated credit loss exposure on net gain
positions and internal assessments of counterparty credit quality. Freddie
Mac has not set aside specific reserves for counterparty credit exposure
and does not believe such reserves are necessary at this time based on the
corporation's collateral and counterparty policy requirements.

The exposure to credit losses on hedging instruments can be estimated
by calculating the cost to replace at current market values all hedging
instruments outstanding with each counterparty for which the corporation
was in a net gain position. The corporation's estimate of the exposure to
credit losses for hedging instruments in a net gain position was $27 mil-
lion at December 31, 1995. Collateral supporting the corporation’s net
gain position at December 31, 1995 had an estimated aggregate market
value of $3 million. Substantially all of the corporation’s uncollateralized
net gain position of $24 million at December 31, 1995 resulted from
positions taken with counterparties having among the highest credit
ratings available from major rating agencies. Although hedging instru-
ments are utilized to reduce the corporation’s exposure to interest-rate

December 31, 1995 1994

By Product Type Amount Percentage += Amount —_ Percentage

(dollars in millions)

Single Family:

30-year fixed-rate” $318,003 56.85% $288,350 54.13%

15-year fixed-rate 128,443 22.96 130,701 24.53

ARMs 61,472 10.99 59,544 1h18

Balloor/Resets 44,780 8.01 47,805 8.98

Multifamily 6,665 119 6,297 1.18
$559,363 100.00% $532,697 100.00 %

(1) Includes 20-year fixed-rate morigages, second mortgages and mobile
home loans.

11, INCOME TAXES
“The components of the “Provision for income taxes” gonsist of the following

Year Ended December 31, 1995 1994 1993
(dollars in millions)

risk, Freddie Mac’s exposure to credit risk can fluctuate from period to Current tax provision $387 $423 $509
period due to changes in interest-rates. Deferred tax provision (benefit):
At December 31, 1995, receivable and payable amounts resulting from Amortzation of debe discounts 6 s 0.6
hedging transactions totaled $534 million and $610 million, respectively Amortization of mortgage purchase
and sale premiums, discounts
Concentrations of Credit Risk and fees 1s (55) (96)
The following tables summarize the total mortgage portfolio by geographical Provision for mortgage and REO
distribution and mortgage product type. Excluded from the total mortgage losses in excess of deductions 46 32 4)
portfolio at December 31, 1995 and 1994 are $7.1 billion and $0.8 bil- Amortization of deferred hedging n 4 D
lion, respectively, of GNMA mortgage securities since these securities do Capitalization of development costs ‘ 6 , ‘ } 4 3 ,
not represent a credit risk to the corporation. Other items, net ” 50 48)
December 31, 1995 1994 Total deferred tax provision (benefit) 108 32 (167)
By Region” ‘Amount Percentage Amount __ Percentage Total provision for income taxes $495 $455 $ 342
(dollars in millions)
West $186,664 33.37% $180,463 33.88% Deferred tax assets and liabilities reflect the tax effect of temporary
Northeast 148,026 26.46 146,054 27.42 differences between the amounts of assets and liabilities for financial
North Central 99,822 17.85 92,608 17.38 reporting purposes and the tax basis of those assets and liabilities. The
Southeast 70,919 12.68 64.942 12.19 net deferred tax asset is included in “Accounts receivable and other
Southwest. $3,932 9.64 48,630 9.13 . ee "
assets.” Management believes that it is more likely than not that the total
$559,363 100.00% _$532,697_100.00% deferred tax asset will be realized in future periods. The table on the
By State following page summarizes the composition of the deferred tax asset
California $136,610 24.42% $135,645 25.46% and liability as of December 31, 1995 and 1994
New York. 32,163 5.75 31,891 5.99
Illinois 27,510 4.92 26,444 4.97
Florida 23,791 4.25 22,553 4.23
New Jersey 23,782 4.25 23,659 4.44
Alll others 315,507 56.41 292,505 54.91
$559,363, 100.00 % $532,697 100.00 %

(1) Region Designation—Northeast (CT, DE, DC, ME, MD, MA, NH, Nj, NY,
PA, PR, RI, VT, VA, VI, WV); Southeast (AL, FL, GA, KY, MS, NC, SC,
TN); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southwest
(AR, CO, KS, LA, MO, NE, NM, OK, TX, WY); West (AK, AZ, CA, GU,
HI, ID, MT, NV, OR, UT, WA).

A-35


Gold PCs generally trade at higher prices. However, factors such as dif-
ferences in liquidity, temporary supply and demand imbalances and

investor perceptions can cause the price premiums on Gold PCs to fall
below the level that reflects the full value of the Gold PC's faster remittance.

In 1995, as in 1994, the spreads between Freddie Mac and Fannie
Mae pass-through securities did not reflect the full value of this faster
remittance. Management believes this is due to investor concerns
that Freddie Mac PCs have less liquidity than comparable Fannie Mae
securities, as well as a shift in the primary purchasers of mortgage
securities from buy and hold investors to investors who more actively
trade their portfolios. Continuing concerns over the liquidity of

PCs, and changes in the market and investor base for mortgage
securities, may continue to adversely affect spreads, contributing to
competitive pressures.

Freddie Mac supports the market for its PCs and PC spreads relative to
Fannie Mae pass-through securities and other comparable securities in
a variety of ways, including the acquisition of PCs for resecuritization as
REMICs and other securities; the purchase of PCs for Freddie Mac’s
retained portfolio and for other corporate purposes; and through other
market-related activities. In 1995, market support activities included
the use of several external money management firms to actively trade

a relatively small portion of Freddie Mac’s retained portfolio, and the
initiation of a focused marketing effort to educate dealers and investors
about the relative advantages of trading and investing in Freddie Mac
PCs, The trading activities of external money management firms did
not have a material effect on Freddie Mac’s 1995 net earnings. Freddie
Mac may undertake additional activities to support the market for PCs
in the future, although it also may determine to increase, reduce or
discontinue all or any one of its efforts at any time.

Freddie Mac’s market share, as a percentage of combined Freddie Mac
and Fannie Mae purchases, was approximately 42 percent for the full
year 1995, compared to approximately 43 percent in 1994. Asin 1994,
market share continued to be influenced by the level of large purchases
from individual lenders’ existing portfolios. ‘The extent to which Freddie
Mac and Fannie Mac make these large portfolio purchases can cause
significant fluctuations in their respective purchase volumes and
market share over relatively short time periods, Market share also may
be affected by Freddie Mac’s credit and capital deployment disciplines
to the extent the corporation declines, or is not awarded, certain
transactions on the basis of credit or pricing terms.

The corporation fully re-entered the multifamily purchase market in

1994 and has purchased approximately $2.4 billion of multifamily
mortgages over the past two years.

RISK MANAGEMENT

Freddie Mac is subject to two primary business risks: credit risk and
interest-rate risk. The management of these risks affects both the level and
stability of the corporation's earnings, capital base and long-term value.

Credit Risk

Freddie Mac’s primary credit risk is the risk that the corporation will
not receive amounts due from mortgage borrowers, potentially resulting
in a loss if Freddie Mac is unable to sell the mortgaged property at a

A-3

price sufficient to pay the amount owed on the mortgage and related
disposition costs. Borrower default on a single-family mortgage can
occur as a result of various adverse events affecting a borrower after
origination, or because the mortgage is made to a borrower unable or
unwilling to support the economic obligations of the mortgage. A
credit loss also occurs if a seller/servicer fails to pass through borrower
payments to Freddie Mac, most commonly in connection with insolvency
of that mortgage servicer. For multifamily mortgages, the principal
factors affecting default risk are the level of debt coverage, the property
condition and LTV ratios of the mortgaged properties. To a lesser
extent, Freddie Mac also is exposed to credit risk on its non-mortgage
investment portfolio and off-balance sheet financial instruments.

Freddie Mac’s management of credit risk comprises three broad areas:
underwriting standards, sensitivity of mortgage default rates to changes
in economic conditions and other risk factors and the resolution of
non-performing assets. The effectiveness of Freddie Mac’s credit risk
management is reflected primarily in the levels of mortgage delinquen-
cies and charge-offs, real estate owned (REO) balances and associated
expenses. Freddie Mac strives to be the industry leader in credit risk
management by building and maintaining a high-quality portfolio, and
by providing low-cost credit processes and achieving continuous
process improvement.

Underwriting standards: Freddie Mac seeks to ensure, through effective
underwriting standards, that the mortgages it purchases are protected
by adequate borrower income and equity in the underlying collateral,
and by the borrower's willingness and ability to repay the mortgage
obligation. In addition, the corporation purchases mortgages only from
seller/servicers that maintain approved underwriting and servicing
standards and sufficient net worth as required by Freddie Mac. For
single-family mortgages, Freddie Mac generally obtains warranties from
each of its sellers that purchased mortgages meet the corporation's
underwriting criteria and other contractual commitments. The corpo-
ration also monitors seller/servicers’ compliance with these standards
through quality control reviews, on-site audits and institutional
eligibility enforcement, and actively investigates situations involving
possible fraud. For multifamily mortgages, Freddie Mac relies on a
combination of an intensive, individualized underwriting process,
restrictions on the types of mortgage sellers that are eligible to partic-
ipate in Freddie Mac’s multifamily programs and, to a lesser extent,
seller warranties.

One measure Freddie Mac uses to determine the effectiveness of

its single-family underwriting standards is the ratio of early payment
defaults (EPDs) on “at-risk” single-family mortgages (those mortgages
for which the corporation has assumed primary default risk) in relation
to the total single-family mortgage portfolio. Specifically, EPDs repre-
sent at-risk single-family mortgages that become 90 or more days
delinquent within 12 months of purchase and ultimately enter the
foreclosure process. Management believes EPDs serve as a measure

of portfolio quality because they historically have been predictive of
default rates in future years. While the rate of EPDs for 1994 mortgage
purchases has increased, the rate is lower than those experienced in 1990
and early 1991. Management believes the decline in EPDs is the result of
the high proportion of refinanced mortgages purchased from 1992 to


Michael K. Stamper was appointed Executive Vice President—Risk Management in February
1990. Mr. Stamper served as National Sales Director and head of the Marketing and Sales Division
from January 1989 to February 1990. From August 1985 to January 1989 he served as General
Manager of SS&TG. Prior to that time, Mr. Stamper served as Vice President—Market Analysis from

July 1984 to July 1985 and Vice President—Corporate Planning and Development from November
1982 to July 1984.

David A. Andrukonis was appointed Senior Vice President and General Manager—Seller Division
in March 1994. From May 1993 to March 1994, he was Senior Vice President—Competitive Advan-
tage Program. Mr. Andrukonis served as Vice President—Mortgage Finance from January 1991 to
May 1993 and Director of Product Development and Pricing from June 1988 to January 1991 and held
various other positions at Freddie Mac between the time he joined the corporation in June 1980 and
June 1988.

Henry J. Cassidy was appointed Senior Vice President—Single-Family Risk Management in
January 1996. Prior to that Mr. Cassidy served as Vice President—Mortgage Credit Policy since
March ‘1990. From October 1986 to March 1990 he served as Vice President—Corporate Finance and
held various other positions at Freddie Mac since the time he joined the corporation in 1984.

John D. Fisk was appointed Senior Vice President—Investor and Dealer Services in May 1993.
Mr. Fisk served as Vice President—Structured Finance from August 1992 to May 1993, General
Manager and Vice President—SS&TG from January 1989 to August 1992 and Head Trader for
SS&TG from July 1987 to January 1989 and held various other positions at Freddie Mac between the
time he joined the corporation in February 1983 and July 1987.

John P. Harding was appointed Senior Vice President—Planning and Research in May 1995.
From 1989 to 1995 Mr. Harding worked on and completed his Ph.D. in Real Estate and Finance and
taught various courses at the University of California at Berkeley. Prior to that, Mr. Harding was
Senior Vice President and Chief Financial Officer for H.F. Holdings, Inc., a savings and loan holding
company, from 1986 to 1989.

Stephen T. Hopkins was appointed Senior Vice President and National Sales Director in October
1994. Mr. Hopkins had been Acting Senior Vice President and National Sales Director since April
1994. Prior to that appointment, Mr. Hopkins served as Vice President—Marketing and Sales for
Freddie Mac’s North Central region since September 1983, and as regional director of that region since
1979. Mr. Hopkins joined Freddie Mac in 1976.

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—Information Systems and Services
effective January 1995. He had been Vice President—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—Systems and Data Processing.

Ronald J. Majewicz was appointed Senior Vice President and Corporate Controller in January
1992 and served as Acting Senior Vice President—Human Resources from September 1994 to May
1995. Mr. Majewicz served as Vice President—Internal Audit from June 1988 to January 1992. Prior
to joining Freddie Mac, Mr. Majewicz served as Vice President of Auditing and Director of Auditing
for the National Life Insurance Company from 1978 to 1988.

Maud Mater was appointed Senior Vice President—General Counsel and Secretary in June 1984.

Prior to that time, Ms. Mater served as Vice President—General Counsel and Secretary from October
1982 to June 1984.

30


be the period from but not including the preceding Dividend Payment Date through and including the
related Dividend Payment Date. Freddie Mac will calculate the dividend rate for each Dividend Period
based on LIBOR determined as of two London Business Days (defined as any day, other than a
Saturday or Sunday, on which banks are open for business in London) prior to the first day of such
Dividend Period (each a “Determination Date”). Each dividend shall be calculated on the basis of the
actual number of days elapsed, assuming a year of 360 days, and the dividend rate shall be applied to
the $50 per share redemption value. Each such dividend shall be paid to the holders of record of
outstanding shares of the Non-Cumulative Preferred Stock as they appear in the books and records of
Freddie Mac on such record date as shall be fixed in advance by the Board of Directors, not to be earlier
than 45 days nor later than 10 days preceding the applicable Dividend Payment Date. No dividends
shall be declared or paid or set apart for payment on the Common Stock or any other class or series of
stock ranking junior to or (except as hereinafter provided) on a parity with the Non-Cumulative
Preferred Stock with respect to the payment of dividends unless dividends have been declared and paid
or set apart (or ordered by the Board of Directors to be set apart) for payment on the outstanding Non-
Cumulative Preferred Stock in respect of the then-current Dividend Period; provided, however, that the
foregoing dividend preference shall not be cumulative and shall not in any way create any claim or right
in favor of the holders of Non-Cumulative Preferred Stock in the event that Freddie Mac shall not have
declared or paid or set apart (or the Board of Directors shall not have ordered to be set apart) dividends
on the Non-Cumulative Preferred Stock in respect of any prior Dividend Period. In the event that
Freddie Mac shall not pay any one or more dividends or any part thereof on the Non-Cumulative
Preferred Stock, the holders of the Non-Cumulative Preferred Stock shall not have any claim in respect
of such non-payment so long as no dividend is paid on any junior or parity stock in violation of the next
preceding sentence.

(b) “LIBOR” means, with respect to a Dividend Period relating to a Dividend Payment Date (in
the following order of priority):

(i) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-
month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related
Determination Date;

(ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the
related Determination Date, LIBOR shall be the arithmetic mean (if necessary rounded upwards
to the nearest whole multiple of 1/128%) of the rates (expressed as a percentage per annum) for
Eurodollar deposits having a three-month maturity that appear on Reuters Monitor Money Rates
Page LIBO (‘Reuters Page LIBO”) as of 11:00 a.m. (London time) on such Determination Date;

(iii) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the
related Determination Date, Freddie Mac shall request the principal London offices of four leading
banks in the London interbank market to provide such banks’ offered quotations (expressed as
percentages per annum) to prime banks in the London interbank market for Eurodollar deposits
having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at
least two quotations are provided, LIBOR shall be the arithmetic mean (if necessary rounded
upwards to the nearest whole multiple of 1/128%) of such quotations;

(iv) if fewer than two such quotations are provided as requested in clause (iii) above, Freddie
Mac shall request four major New York City banks to provide such banks’ offered quotations
(expressed as percentages per annum) to leading European banks for loans in Eurodollars as of
11:00 a.m. (London time) on such Determination Date. If at least two such quotations are
provided, LIBOR will be the arithmetic mean (if necessary rounded upwards to the nearest whole
multiple of 1/128%) of such quotations; and

(v) if fewer than two such quotations are provided as requested in clause (iv) above, LIBOR
shall be LIBOR determined with respect to the Dividend Period immediately preceding such
current Dividend Period.

If the rate for Eurodollar deposits having a three-month maturity that initially appears on Telerate
Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related

A-2


Accounting Standards

The Financial Accounting Standards Board (“FASB”), the organization responsible for promul-
gating financial accounting and reporting standards followed by most U.S. public companies in
connection with the preparation of financial statements, recently has issued a number of accounting
pronouncements or proposals affecting the market for mortgage-related securities.

Mark-to-Market Accounting. SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities,” requires banks, savings associations, other financial institutions and other public
companies that maintain investment portfolios generally to value a portion of those portfolios, including
mortgage-related securities, at their actual market value, rather than at their amortized cost. SFAS
No. 115 requires this ‘‘mark-to-market” adjustment to be recorded, for securities that are not “held-to-
maturity,” either in the reporting company’s earnings or directly in its capital accounts.

Prior to the adoption of SFAS No. 115, financial institutions often classified their investments in
Freddie Mac mortgage-related securities as “‘held-to-maturity” and valued these investments at their
amortized cost. Under SFAS 115, in order to classify an investment as held-to-maturity, an investor
must show both the ability and the intent to hold the investment until maturity. Sales of securities
classified in the “held-to-maturity” category may result in the reclassification of all “‘held-to-maturity”
securities and require such securities to be marked-to-market. The combined effects of SFAS No. 115
and the FFIEC Policy Statement generally have had a negative effect on the market for both original
issue and resecuritized mortgage-related securities.

Accounting for Mortgage Servicing. In 1995, FASB issued SFAS No. 122, “Accounting for
Mortgage Servicing Rights.” SFAS No. 122, which is effective for fiscal years beginning after
December 15, 1995, requires mortgage banking enterprises to recognize the right to service mortgage
loans as a separate asset when an originated mortgage loan is sold or securitized with servicing rights
retained, and to subsequently account for those mortgage servicing rights at the lower of cost or market
value. Previously, the value of originated mortgage servicing rights was recognized over the life of the
mortgage loan as net servicing income. While SFAS No. 122 does not directly affect Freddie Mac, it
may have an impact on the market for mortgage-related securities to the extent SFAS No. 122 changes
the motivations of financial institutions to enter into transactions in mortgage-related securities.

Accounting for Transfers of Assets. Also in 1995, FASB issued Proposed Statement of Financial
Accounting Standards, “Accounting for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities.” The proposed standard on transfers of assets, which would be effective for
transfers of assets occurring after December 31, 1996, would require certain transactions involving the
sale and repurchase of mortgage-related securities to be accounted for as sales of assets with gains and
losses on such transactions recognized immediately. Currently, these transactions often are accounted
for as financing transactions. This proposed standard, if it becomes effective, could adversely affect the
market for mortgage-related securities if market participants are discouraged from entering into such
transactions due to the adverse accounting effects for certain investors of the treatment. of such
transactions as sales rather than financings.

Government Securities Dealer Regulations

The Government Securities Act Amendments of 1993 (“GSA”) authorized the National Associa-
tion of Securities Dealers (“NASD”) and bank regulators, for the first time, to adopt sales practice
rules applicable to the marketing of government securities, including securities issued by Freddie Mac
and Fannie Mae. These rules, which are intended to regulate the conduct of government securities
dealers and brokers, will become applicable only after the NASD, or the appropriate banking regulator,
has adopted regulations implementing the authority conferred under the GSA. In 1995, the NASD
reproposed certain amendments to its Rules of Fair Practice that would apply its existing sales practice
tules to transactions by its members in government securities. To date, financial institution regulatory
authorities have not published comparable rules applicable to sales of government securities by financial
institution government securities dealers. It is unclear what effect, if any, such rules may have on the
market for the corporation’s securities.

21


CAPITALIZATION

The following table sets forth Freddie Mac’s capitalization as of December 31, 1995. Dollars are in
millions.

Debt securities:
Notes and bonds payable due within one year:

Discount notes, mortgage sec
and medium-term notes ..

ies sold under agreements to repurchase

see $ 51,458
Current portion of long-term debt .... . 10,637
Multiclass debt securities due within one year... 46

62,141

Notes and bonds payable due after one year:
Debentures 55,994
Medium-term notes . nae 749
Multiclass debt securities due aft 444
57,187
Total debt securities, net .. 119,328
Subordinated borrowings due after one year, net. . 633
Stockholders’ equity 5,863
Total capitalization... $125,824

See Notes 7, 8 and 9 to Consolidated Financial Statements for further information about Freddie
Mac’s debt securities, subordinated borrowings and stockholders’ equity. Amounts of debt securities
and subordinated borrowings are net of unamortized discounts, premiums, hedging gains or losses and
debt issuance costs.

EQUITY SECURITIES

Freddie Mac is authorized to issue preferred stock and common stock in the manner and amount,
and, in the case of voting common stock, subject to any limitations on concentration of ownership, as
may be prescribed by the Board of Directors of Freddie Mac. There is no limitation on the number of
shares of preferred stock or of voting common stock that Freddie Mac is authorized to issue.

Freddie Mac had issued and outstanding 178,790,007 shares of its voting common stock (the
“Common Stock”) as of December 31, 1995. Each share of the Common Stock has a par value of $0.84
per share. In June 1995, the Board of Directors authorized the repurchase by the corporation of up to
$200 million in Common Stock, which amount was repurchased between June 1995 and February 1996
in open market transactions. On March 1, 1996, the Board of Directors authorized the repurchase of up
to $1 billion in additional shares of Common Stock. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Recent Events — Capital Authorizations.”

Freddie Mac has issued and outstanding 22.5 million shares of its 7.90%. Non-Cumulative
Preferred Stock (the “1992 Preferred Stock”) and 12 million shares of its 6.72% Non-Cumulative
Preferred Stock (the ‘1993 Preferred Stock”). Each share of the 1992 Preferred Stock and the 1993
Preferred Stock has a par value of $1.00 per share. The 1992 Preferred Stock and the 1993 Preferred
Stock are collectively referred to as the “Preferred Stock.” On March 1, 1996, the Board of Directors
authorized the issuance of up to $500 million of additional non-cumulative preferred stock on terms to
be determined by Freddie Mac’s management at the time of issuance. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Recent Events — Capital
Authorizations.”

25


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended December 31, 1995, 1994 and 1993

6.72%

‘Net Unrealized Gain

Non-cumulative Non-cumulative Additional (Loss) on Securives Toul
Common Preferred Paidvin Stockholders?
Stock Stock Capital Equity
(dollars in millions, except per share amounts)
Balance, December 31, 1992 $151 $— $629 $3,570
Net Income 786
Cash dividends declared:
Common stock
(80.88 per share) (159)
7.90% Non-cumulative preferred
stock ($1.98 per share) (44)
6.72% Non-cumulative preferred
stock ($0.69 per share) (8)
Proceeds on common and
treasury stock transactions, net 1 1 qd)
Proceeds on preferred
stock issuance, net 12 281 293
Balance, December 31, 1993 152 12 on 4,437
Net income 983
Cash dividends declared:
Common stock
($1.04 per share) (188)
7.90% Non-cumulative preferred
stock ($1.98 per share) (44)
6.72% Non-cumulative preferred
stock ($1.68 per share) (21)
Change in net unrealized gain (loss)
on available-for-sale securities, net of tax (7)
Proceeds on common and
treasury stock transactions, net 2 2
Balance, December 31, 1994 152 2 913 5,162
Net income 1,091
Cash dividends declared:
Common stock
($1.20 per share) (216)
7.90% Non-cumulative preferred
stock ($1.98 per share) (44)
6.72% Non-cumulative preferred
stock ($1.68 per share) 1)
Change in net unrealized gain (loss)
on available-for-sale securities, net of tax 40
Proceeds on common and
treasury stock transactions, net 3 (149)
Balance, December 31, 1995 $152 $12 $916 $5,863

See accompanying Notes to Consolidated Financial Statements

A-23


Under the Proposals, the 70-percent dividends-received deduction generally available to corporate
shareholders, as discussed above under “Current Law,” would be reduced from 70 percent to 50 percent
for dividends received or accrued after the thirtieth day after the date of enactment of the provision. If
this provision or a similar provision is enacted prior to April 26, 1998, the amount of dividends payable
per share of Preferred Stock will be adjusted as discussed above under “Description of Preferred
Stock — Changes in the Dividends-Received Percentage.” Additionally, the Proposals would change
the holding period required for eligibility for the dividends-received deduction, effective for dividends
received or accrued after the thirtieth day after the date of enactment. The holder would be required to
hold the stock for at least 46 days during the 90-day period beginning on the date that is 45 days before
the date on which the shares become ex-dividend with respect to such dividend. In the case of a dividend
on preferred stock attributable to periods aggregating in excess of 366 days, the shares must have been

held for at least 91 days during the 180-day period beginning on the date that is 90 days before the ex-
dividend date.

It is impossible to predict whether the Proposals will be enacted either in their current form or in
some other form.

Dispositions, Including Redemptions

Any sale, exchange, redemption (except as discussed below) or other disposition of the Preferred
Stock generally will result in taxable gain or loss equal to the difference between the amount received
and the shareholder’s adjusted tax basis in the Preferred Stock. Such gain or Joss generally will be

capital gain or loss and will be long-term capital gain or loss if the holding period for the Preferred
Stock exceeds one year.

A redemption of Preferred Stock may be treated as a dividend, rather than as payment in exchange
for the Preferred Stock, unless the redemption is “not essentially equivalent to a dividend” with respect
to the holder within the meaning of section 302(b)(1) of the Code. In applying this standard, the holder
must take into account not only the Preferred Stock and other stock of Freddie Mac that it owns
directly, but also the Preferred Stock and other stock of Freddie Mac that it constructively owns within
the meaning of section 318 of the Code. A redemption payment made to a holder will be “not essentially
equivalent to a dividend” if it results in a “meaningful reduction” in the holder's aggregate stock
interest in Freddie Mac. Because of the ambiguities in applying this rule, each holder should consult its
tax advisor to determine whether a redemption of Preferred Stock will be treated as a dividend or as
payment in exchange for the Preferred Stock. If the redemption payment is treated as a dividend, the
rules discussed above under “Dividends” apply.

Information Reporting and Backup Withholding

Payments of dividends on shares of Preferred Stock held of record by U.S. persons other than
corporations and other exempt holders are required to be reported to the IRS.

Backup withholding of U.S. federal income tax at a rate of 3] percent may apply to payments
made with respect to shares of Preferred Stock, as well as payments of proceeds from the sale of shares
of Preferred Stock, to holders that are not “exempt recipients” and that fail to provide certain
identifying information (such as the taxpayer identification number of the holder) in the manner
required. Individuals generally are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients.

LEGALITY OF INVESTMENT

National banks may deal in, underwrite and purchase for their own accounts the shares of
Preferred Stock without regard to limitations generally applicable to investment securities. 12 U.S.C.
§24, seventh paragraph. The Preferred Stock is subject to a 100% risk weighting for capital adequacy
purposes. Office of the Comptroller of the Currency, Interpretive Letter No. 581, Federal Banking Law
Reporter, 1992-1993 Transfer Binder 983,402 (April 6, 1992).

17


Executive Officers

As of March 29, 1996, the executive officers of Freddie Mac are as follows:
Year of
Name Age Affiliation Position
Leland C. Brendsel ......... 53 1982 Chairman and Chief Executive Officer
David W. Glenn . 52 1987 President and Chief Operating Officer

John P. Gibbons 44 1991 Executive Vice President and Chief Financial
Officer (Interim)

Michael K. Stamper ........ 49 1982 Executive Vice President—Risk Management

David A. Andrukonis........ 38 1980 Senior Vice President and General Manager—
Seller Division

Henry J. Cassidy........... 52 1984 Senior Vice President—Single-Family Risk
Management

John D. Fisk ...........005 39 1983 Senior Vice President—Investor and Dealer
Services .

John P. Harding ........... 51 1995 Senior Vice President—Planning and Research

Stephen T. Hopkins......... 45 1976 — Senior Vice President and National Sales
Director

Melvin M. Kann
William I. Ledman ...

55 1993 Senior Vice President and General Auditor
47 1994 Senior Vice President—Information Systems

and Services
Ronald J. Majewicz......... 46 1988 Senior Vice President and Corporate Controller
Maud Mater .............. 48 1976 Senior Vice President—General Counsel

and Secretary
46 1995 Senior Vice President—Human Resources
35 1996 Senior Vice President—Corporate Finance
46 1989 Senior Vice President—Servicer Division

48 1993 Senior Vice President—Corporate Relations
(Interim)

dete eneeers 56 1991 Senior Vice President—Multifamily Housing

Candice D. Mendenhall .
Gregory J. Parseghian....
Paul T. Peterson ..
Ann B. Schnare...

Thomas J. Watt

The following is a brief biographical description of each executive officer of Freddie Mac.

Leland C. Brendsel was elected Chairman and Chief Executive Officer in November 1989. He
served as President and Chief Executive Officer from September 1987 to November 1989, Acting
President—Chief Executive Officer from September 1985 to September 1987 and Executive Vice
President—Finance and Chief Financial Officer from September 1982 to September 1985.

David W. Glenn was appointed President and Chief Operating Officer in March 1990. He served
as Executive Vice President—Chief Operating Officer from November 1989 to March 1990 and
Executive Vice President—Finance and Chief Financial Officer from November 1987 to November
1989. Prior to joining Freddie Mac, Mr. Glenn was Senior Vice President of CalFed, Inc., and
California Federal Savings and Loan Association (currently California Federal Bank, FSB) from
August 1984 to October 1987.

John P. Gibbons was appointed Executive Vice President and Chief Financial Officer (Interim) in
January 1996. Mr. Gibbons had served as Senior Vice President—Corporate Relations since June 1994
and as Assistant to the Chairman since May 1993. He served as Acting Chief Financial Officer from
May 1993 to June 1994. Prior to that, Mr. Gibbons served as Vice President—Financial Research from
July 1991 to May 1993. Prior to joining Freddie Mac, Mr. Gibbons served in several capacities with
Merrill Lynch & Co. from 1985 to June 1991, including Director of Mortgage Finance and Vice
President of the Mortgage Research Group.

29


March 31, 1996

As
_Actual_— Adjusted(1)

“(@ollars in millions)

Debt Securities:
Notes and bonds payable due within one year:
Discount notes, mortgage securities sold under agreements to repurchase,

and medium-term notes $ 56,522 $ 56,522

Current portion of long-term debt __ 10,531 10,531

67,053 67,053

Notes and bonds payable due after one year 2.2.1... eee ee eee 56,584 56,584

Total debt securities, net 123,637 123,637

Subordinated Borrowings . 2.0... .0 6.666. o eee 641 641
Stockholders’ Equity:

Preferred Stock, $1.00 par value and $25.00 liquidation value 35 35
Preferred Stock, $1.00 par value and $50.00 Hiquidation \ value . .
Common Stock, $0.84 par value . bene

Retained earnings .....
Net unrealized gain on secu
Less: treasury stock, at cost..............

Total stockholders’ equity
Total Capitalization ©... 6.6... ee eee tenets

(1) “As adjusted” reflects anticipated proceeds of $250 million from the issuance of 5 million shares of Preferred Stock and the
deduction of $5 million in estimated transaction costs. The actual costs may differ.

See Notes 7, 8 and 9 to the 1995 Consolidated Financial Statements included in the Information
Statement for further information about Freddie Mac’s debt securities, subordinated borrowings and
stockholders’ equity. Amounts of debt securities and subordinated borrowings are net of unamortized
discounts, premiums, hedging gains or losses and debt issuance costs.

The Corporation engages in transactions affecting stockholders’ equity (including repurchases of
its common stock) from time to time and issues or retires debentures, notes and other debt obligations
on an ongoing basis. Accordingly, on any date subsequent to March 31, 1996, stockholders’ equity may
differ, and the amount of debt obligations outstanding will differ, and may differ substantially, from the
figures contained in the capitalization table above.

SELECTED FINANCIAL DATA

The following selected financial data for the years 1991 through 1995 have been summarized or
derived from the audited financial statements or the internal accounting records of the Corporation.
These data are qualified in their entirety by, and should be read in conjunction with, the detailed
information, audited financial statements and notes to financial statements that are presented in the
Information Statement. The following selected financial data for the quarters ended March 31, 1996
and March 31, 1995 have been summarized or derived from unaudited financial statements (which are
included in Appendix B to this Offering Gircular) or from internal accounting records, but in the
opinion of management of the Corporation, all adjustments necessary for a fair presentation have been
included. Adjustments included herein are of a normal, recurring nature.



‘The decrease in net interest yield was partially offset by an increase in
the proportion of interest-earning assets represented by mortgages and
mortgage-related securities as opposed to shorter term non-mortgage
investments. The average balance of retained mortgages and mortgage-
related securities increased 38 percent compared to 1994 while the
average balance of the investment portfolio increased 6 percent. This
shift in the mix of interest-earning assets tends to increase net interest
yield since mortgage assets usually generate higher net yields than short-
term investments. The disciplined growth of the retained portfolio
combined with the corporation's common stock repurchase program
initiated in 1995 (see “Liquidity and Capital Adequacy — Capital
Adequacy”) were the primary drivers of the shift in the mix of interest-
earning assets. As the corporation repurchases outstanding common
shares and returns capital to its shareholders, the portfolio. of short-
term investments is decreased over time.

Management expects the majority of growth in interest-earning assets in
1996 to be in the retained mortgage portfolio rather than in the non-
mortgage investment portfolio. Based on market conditions in early 1996,
the retained portfolio is expected to grow substantially during the year.
Actual growth in the retained portfolio will depend on the availability of
attractive returns on capital invested in mortgage assets for the retained
portfolio. These returns are a function of the difference between the
expected yield on the mortgage assets and the expected cost of debt
financing, as well as the amount of capital supporting these investments.
Both the expected yield on mortgage assets and the expected cost of debt
financing can vary over the life of the investment depending primarily
on changes in interest rates and mortgage prepayment speeds. The cost
of debt can also vary with changes in the supply of and demand for both
Freddie Mac debt securities and callable debt securities generally. Future
growth in the retained portfolio is expected to continue to be funded with
a mix of debt instruments, primarily long-term callable debt, designed
to maximize expected return on equity while limiting interest-rate risk
Any changes in investor preferences, funding costs or other factors that
reduce the market demand for callable debt securities generally, could
result in a slower rate of growth for the retained portfolio and could
increase the corporation's exposure to interest-rate risk on its existing

mortgage assets.

The primary drivers of the corporation’s net interest yield in 1996 will
be the declining net yield on the existing portfolio, the volume and
initial net yields of retained portfolio purchases in 1996, the mix of mort-
gage assets versus non-mortgage investments and the relative growth
rates of interest-earning assets versus non-interest-bearing funding.

Interest income on retained mortgage assets does not include interest
deemed uncollectible on non-performing mortgages. If these non-
performing mortgages had been fully performing, they would have
contributed an additional $105 million, $153 million and $138 million
to retained mortgage portfolio interest income in 1995, 1994 and 1993,
respectively.

In the third quarter of 1995, the corporation modified its method of
reporting PC Variance expense. During the time between receipt of
principal and interest payments from seller/servicers and the subsequent
pass-through to PC investors, Freddie Mac earns interest income

A-15

from the investment of these funds (investment income) and incurs
interest expense on the funds owed but not yet paid to investors
(PC Variance expense)

Float balances arising from mortgage prepayments are invested and
interest income is earned from the date proceeds are remitted to
Freddie Mac through the date Freddie Mac remits these proceeds to PC
investors, which is generally 38 to 68 days, depending on the type of
security and the remittance agreement between the seller and Freddie
Mac, Previously, interest expense on PC variance balances was recognized
for an average of 30 days following receipt of prepayment proceeds
Under the revised method of reporting, the same dollar amount of

PC Variance expense is recognized over the 38 to 68 day period,
consistent with the corresponding period during which investment
income will be earned.

The corporation believes that this modification more appropriately
matches the recognition of the expense with the corresponding
investment income, and provides more comparable period-to-period
net interest yields. The modification did not have a material effect on
1995 results,

‘The $340 million, or 44 percent, increase in net interest income on
earning assets between 1993 and 1994 reflected a 21 percent increase
in average interest-earning assets driven by retained portfolio growth
of 49 percent, In addition, net interest income was enhanced by a 23
basis point increase in the Net interest yield on earning assets on a
fully taxable equivalent basis. The increase in net interest yield was
due to both an increase in the proportion of interest-earning assets
represented by mortgages and growth in non-interest-bearing funding
approximately equal to the rate of growth in interest-earning assets.

Management and Guarantee Income

Management and guarantee income, the fee Freddie Mac earns for
administering payments and providing its credit guarantee on mortgages
in the sold mortgage portfolio, decreased $21 million, or 2 percent from
1994 due to a 0.3 basis point decrease in the average guarantee fee
rate coupled with a $2.2 billion decrease in the average sold portfolio
balance. The decrease in the average sold portfolio balance reflects a
reduction in primary market mortgage originations from 1994 to
1995, the cyclical decline in the secondary market purchase share of
these originations, and purchases of outstanding PCs and REMICs for
the corporation’s retained mortgage portfolio

‘The average guarantee fee rate continues to be impacted by lower fee
rates on new additions to the sold portfolio combined with the ongoing
liquidation of existing balances having comparatively higher fee rates.
‘The lower guarantee fee rates on new additions primarily are due to
an increasing proportion of mortgage purchases since the latter half
of 1994 that carry some type of credit enhancement (see “Risk
Management —- Credit Risk Management — Portfolio Sensitivity”)
The increase in mortgage purchases with lower guarantee fee rates
also has resulted from an increase during 1995 in the proportion of
purchases of seasoned loans from lenders’ existing portfolios in credit-
enhanced transactions.


Information Statement ———

Freddie
Mac

Federal Home Loan
Mortgage Corporation

The Federal Home Loan Mortgage Corporation (‘Freddie Mac” or the “‘corporation”) is a
shareholder-owned government-sponsored enterprise (“GSE”) established by Congress in 1970 to
provide a continuous flow of funds for residential mortgages. Freddie Mac performs this function
principally through the purchase of residential mortgage loans from mortgage originators on a
continuous basis under all market conditions. To finance its mortgage purchase activities, Freddie Mac
offers and sells its securities to investors directly and through selected dealers, underwriters and
underwriting syndicates. The corporation's securities are exempt from registration under the federal
securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. Freddie
Mac makes available information for the securities it issues, including the terms of the securities, the
distribution or selling arrangements and other pertinent information, in the Offering Circular and any
Offering Circular Supplement applicable to each particular offering. Neither the United States nor any
agency or instrumentality of the United States is obligated, either directly or indirectly, to fund the
mortgage purchase or financing activities of Freddie Mac.

This Information Statement contains important financial and other information concerning Fred-
die Mac and should be read carefully by investors in, and prospective purchasers of, Freddie Mac
securities. This Information Statement should be read in conjunction with the Offering Circular and
any Offering Circular Supplement for the particular securities being offered and in conjunction with
any supplements to this Information Statement made available by Freddie Mac, including supplements
for calendar quarters ending after December 31, 1995. Freddie Mac also periodically makes available
statistical information on its mortgage purchase and securities sales volume as well as other relevant
information about Freddie Mac. Copies of available supplements, reports and information can be
obtained by writing or calling Freddie Mac’s Investor Inquiry Department at 8200 Jones Branch Drive,
McLean, Virginia 22102 (outside the Washington, D.C. metropolitan area, telephone (800) 336-
FMPC; within the Washington, D.C. metropolitan area, telephone (703) 450-3777).

The principal office of Freddie Mac is located at 8200 Jones Branch Drive, McLean, Virginia
22102 (telephone (703) 903-2000).

This Information Statement describes the business and operations of Freddie Mac as of March 29,
1996, and the financial condition of Freddie Mac as of the date of the financial statements included
herein. Recipients of this Information Statement should retain it for future reference until a subsequent
Information Statement is made available by Freddie Mac, but delivery or retention of this Information

Statement shall not create any implication that the information provided is correct at any time after the
date hereof.

INFORMATION STATEMENT DATED MARCH 239, 1996


AVERAGE BALANCE SHEETS

Year ended December 31,

1995 1994 Pro Forma 1993”
Interest Interest Interest
Average Income/ Average Average Iticome/ Average Average Income/ Average
(dollars in millions) Balance Expense Rate Balance Expense Rate _Balance__Expense_Rate
Assets
Interest-earning assets:
Retained mortgages, net $ 86,506 $6,505 7.52% $ 62,474 $4,528 7.25% $ 41,865 $3,216 7.68%
Investments:
Cash and investments 24,146 1,437 5.96" 22,110 973 4.40" 25,732 838 3.26"
‘Mortgage securities purchased under
agreements to resell 7,397 451 6.10 7,515 3144.18 8,783 289 3.30
31,543 1,888 5.99 29,625 1,287 4.34 34,515 1,127 3.27
Total interest-earning assets, 118,049 8,393 7.11 92,099 5,815 6.31 76,380 4,343 5.69
All other assets 3,412 3,189 3,061
Total assets $121,461 $ 95,288 $ 79,441
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Debt securities, net:””
Short-term notes and bonds $ 47,502 2,898 6.10 $ 35,303 1,644 4.66 $ 26,837 858 3.20
Long-term notes and bonds $9,058 3,780 6.40 40,940 2,476 6.08 23,308 1,492 6.41
Subordinated borrowings 945 86 9.07 1,430 1439.99 1,473 149 10.07
107,505 6,764 6.29 T1673 4,263 5.49 51,615 2,499 4.84
Due to PC investors 3,982 2335.86 6,383 4406.90 12,856 1,072 8.34
‘Total interest-bearing liabilities 111,487 6,997 6.28 84,056 4,703 5.60 64,471 3,571 5.54
All other liabilities 4,430 6,420 10,983
Stockholders’ equity 5,544 4,812 3,987
Total liabilities and stockholders’ equity __ $121,461 $ 95,288 $79,441
Net interest income/yield $1,396 1.18% $1,112 1.21% $772 1.01%
Net interest yield
(fully taxable equivalent basis) 1.23% 1.25% 1.02%
Sold portfolio
Management and guarantee income/spread $457,476 $1,087 23.8bp $459,715 $1,108 24.1bp $423,273 $1,009 23.8bp

(1) 1993 is presented on a pro forma basis for comparative purposes t0 reflect the adoption in 1994 of a change in the reporting of uncollectible interest on

single-family mortgages.

(2) Rates computed on a fully taxable equivalent basis are 6.18%, 4.54% and 3.34% for the years ended December 31, 1995, 1994 and 1993, respectively.
(3) Average balances and average rates do not-include the effect of off-balance sheet interest-rate agreements.

RATE/VOLUME ANALYSIS

(dollars in millions)

1995 vs, 1994
Increase or (Decrease) Due To”

1994 vs, 1993,
Increase or (Decrease) Due To'”

Rate Volume Total Rate Volume Total
Income from interest-earning assets:
Retained mortgages, net $175 $1,802 $1,977 $(191) $1,503 $1,312
Investments 514 87 601 335 (175) 160
Total income from interest-earning assets $689 $1,889 $2,578 $ 144 $1,328 $1,472
Expense on interest-bearing liabilities:
Debt securities, net $690 $1,811 $2,501 $ 369 $1,395 $1,764
Due to PC investors (9) (148) (207) (161) (471) (632)
Total expense on interest-bearing liabilities $631 $1,663 $2,294 $ 208 $ 924 $1,132
Change in Net interest income” $(23)  $ 307 $ 284 $ 165 $ 175 $ 340
Change in Management and guarantee income $115) $ (6)  $ (21) $ 12 $87 $99

(1) Combined rate/volume variances, a third element of the calculation, are allocated based on the relative size of the rate and volume variances.

(2) Reflects changes in total interest-earning assets and net interest yield.

A-13


The composition of Freddie Mac's mortgage purchases and total mort-
gage portfolio by product type is presented in the following tables.

Year ended December 31, 1995 1994 1993

(dollars in millions)
Purchases of mortgages:

30-year single-family fixed-rate” $ 58,244 $ 70,390 $115,375

15-year single-family fixed-rate 13,806 25,543 68,471
5- and 7-year balloon/resets 3,822 9,984 24,497
Adjustable-rate 20,949 17,482 21,172
Multifamily 1,565 847 191
Total $ 98,386 $124,246 $229,706

Credit risk distribution:

Freddie Mac at-risk” $ 76,619 $108,838 $220,989
Credit-enhanced or guaranteed” 21,767 15,408 8,717
December 31, 1995, 1994 1993

(dollars in millions)
Outstanding portfolio balances:

30-year single-family fixed-rate” $318,003 $288,350 $261,807

15-year single-family fixed-rate 128,443. 130,701 125,629
5~ and 7-year balloon/resets 44,780 47,805 46,812
Adjustable-rate 68,578 60,331 $3,175
Multifamily 6665 6,297 7,304
Total $566,469 $533,484 $494,727

Credit risk distribution:
Freddie Mac at-risk”
Credit-enhanced or guaranteed”

$511,777 $495,218 $468,673
54,692 38,266 26,054

(1) Excludes repurchased Freddie Mac PCs since repurchases do not affect the
unpaid principal balance of the total mortgage portfolio.

(2) Includes 20-year single-family fixed-rate mortgages

(3) Includes those mortgages for which Freddie Mac has assumed primary
default risk

(4) Includes mortgages and mortgage-related securities for which the lender or
issuer has retained primary default risk by pledging collateral or agreeing to
repurchase mortgages that default. Lender risk may be limited to a certain
portion of the mortgages delivered

‘The shift toward originations of higher-risk single-family mortgage
products such as ARMs, particularly in the latter half of 1994 and early
1995, had no significant impact on the overall product mix of the total
mortgage portfolio. This was primarily due to the low volume of mort-
gage purchases during that period. The corporation's current mortgage
portfolio consists largely of low-coupon, fixed-rate mortgages.

Shifts in the types of single-family mortgage products originated by
lenders significantly affect the product mix of Freddie Mac purchases.
During 1994, rising interest rates increased the proportion of primary
market originations represented by ARMs, while borrower demand

for fixed-rate mortgage products decreased. Declining interest rates
during 1995 have made 30-year fixed-rate mortgages increasingly more

A-6

attractive to borrowers compared with ARMs. At the end of 1995, ARMs
comprised only about one-quarter of total primary market originations,
down from approximately one-half at the beginning of 1995. Freddie

Mac manages the credit risk related to higher-risk mortgage products
by making appropriate adjustments to its own mortgage products and
underwriting standards, and by requiring additional compensation or
credit enhancements on higher-risk mortgages.

Freddie Mac increasingly has utilized credit enhancements to address
the increased risk of loss inherent in higher LTV ratio single-family
mortgage originations and less stringent primary market underwriting.
Credit enhancements require the lender to retain primary default risk
either by pledging collateral or through a recourse agreement in which
the lender agrees to repurchase mortgages that default. The increased
use of credit enhancement types other than recourse provisions tends
to lessen Freddie Mac’s exposure to institutional credit risk, the risk
that a seller/servicer does not perform or defaults on its payment
obligations to the corporation. The corporation especially has used
credit enhancements in large purchases of seasoned ARMs from
lenders’ existing portfolios.

As of December 31, 1995, approximately 10 percent of Freddie Mac’s
outstanding mortgage portfolio carried some type of credit enhance-
ment or were government guaranteed mortgages or mortgage-related
securities. This compares to 7 percent of the outstanding mortgage
portfolio at December 31, 1994. Approximately 81 percent of 1995
credit-enhanced purchases used non-recourse loss protection compared
to 69 percent in 1994. The portion of the total mortgage portfolio for
which Freddie Mac has assumed primary default risk, through the absence
of credit enhancements or government guarantees, is designated as
“at-risk” by Freddie Mac. The corporation believes supplemental
reporting of at-risk data presents a more meaningful discussion of
credit risk and provides additional comparability with the reporting
of other secondary market institutions.

Geographic diversification mitigates the effect of changing regional and
national economic conditions on Freddie Mac’s total mortgage portfolio.
‘The geographic distribution of Freddie Mac’s total mortgage portfolio is
generally reflective of the distribution of outstanding residential mortgage
debt in the United States. The diversification of Freddie Mac’s portfolio,
however, cannot insulate it entirely from weak economic conditions

in geographic regions in which Freddie Mac has a relatively larger
proportion of its total mortgage portfolio. As discussed in “Credit
Performance,” persistent economic weakness in California and the
Northeast region has continued to adversely affect Freddie Mac's
overall credit performance. Information about regional and significant
state credit concentrations is provided in Note 10 to the Consolidated
Financial Statements.

Non-performing Assets: The amounts recovered by Freddie Mac on
delinquent mortgages and REO are affected by the corporation’s
strategies to manage the resolution of non-performing assets. Freddie
Mac works with servicers to manage and resolve delinquencies as they
occur and measures servicer effectiveness by monitoring mortgage

delinquency rates and other credit performance measures.


on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD
Formula would be equal to the greater of the Dividends-Received Percentage and .50 applied to each
Affected Dividend Payment Date) over (y) the sum of the dividend paid by the Corporation on each
Affected Dividend Payment Date. The Corporation shall make only one payment of Retroactive
Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any
such amendment, the Corporation receives either an unqualified opinion of nationally recognized
independent tax counsel selected by the Corporation or a private letter ruling or similar form of
assurance from the IRS to the effect that such amendment does not apply to a dividend payable on an
Affected Dividend Payment Date for the Non-Cumulative Preferred Stock, then such amendment shall
not result in the payment of Retroactive Dividends with respect to such Affected Dividend Payment
Date. The opinion referenced in the previous sentence shall be based upon legislation amending or
establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

In the event that the amount of dividends payable per share of Non-Cumulative Preferred Stock is
adjusted pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive
Dividends are to be paid, the Corporation will cause notice of each such adjustment and, if applicable,
Post Declaration Date Dividends and Retroactive Dividends to be given as soon as practicable to the
holders of Non-Cumulative Preferred Stock.

(d) Notwithstanding any other provision of this Certificate, the Board of Directors, in its discre-
tion, may choose to pay dividends on the Non-Cumulative Preferred Stock without the payment of any
dividends on the Common Stock or any other class or series of stock from time to time outstanding
ranking junior to the Non-Cumulative Preferred Stock with respect to the payment of dividends.

(e) No dividend shall be declared or paid or set apart for payment on.any shares of the Non-
Cumulative Preferred Stock if at the same time any arrears or default exists in the payment of dividends
on any outstanding class or series of stock of Freddie Mac ranking prior to or (except as provided
herein) on a parity with the Non-Cumulative Preferred Stock with respect to the payment of dividends.
If and whenever dividends, having been declared, shall not have been paid in full, as aforesaid, on shares
of the Non-Cumulative Preferred Stock and on the shares of any other class or series of stock of Freddie
Mac ranking on a parity with the Non-Cumulative Preferred Stock with respect to the payment of
dividends, all such dividends that have been declared on shares of the Non-Cumulative Preferred Stock
and on the shares of any such other class or series shall be paid pro rata, so that the respective amounts
of dividends paid per share on the Non-Cumulative Preferred Stock and on such other class or series
shall in all cases bear to each other the same ratio that the respective amounts of dividends declared but
unpaid per share on the shares of the Non-Cumulative Preferred Stock (including any adjustments due

to changes in the Dividends-Received Percentage) and on the shares of such other class or series bear to
each other.

(f) Holders of shares of the Non-Cumulative Preferred Stock shall not be entitled to any
dividends, in cash or in property, other than as herein provided and shall not be entitled to interest, or
any sum in lieu of interest, on or in respect of any dividend payment.

3. Optional Redemption

(a) The Non-Cumulative Preferred Stock shall not be redeemable prior to June 30, 2001. Subject
to this limitation and to any further limitations which may be imposed by law, Freddie Mac may
redeem the Non-Cumulative Preferred Stock, in whole or in part, at any time or from time to time, out
of funds legally: available therefor, at the redemption price of $50.00 per share, plus an amount,
determined in accordance with Section 2 above, equal to the dividend, if any, otherwise payable for the
then-current Dividend Period accrued through and including the date of such redemption. If less than
all of the outstanding shares of the Non-Cumulative Preferred Stock are to be redeemed, Freddie Mac
shall select shares to be redeemed from the outstanding shares not previously called for redemption by

lot or pro rata (as nearly as possible) or by any other method which Freddie Mac in its sole discretion
deems equitable.

A-4


Multiple-Class Securities

Freddie Mac has issued a number of types of securities that divide the cash flows of the underlying
mortgages, PCs or other securities into classes having a variety of features. These features include,
among other things, variations relating to (i) expected maturities or weighted average lives; (ii) whether
principal and interest, principal only or interest only is to be received and (iii) whether the coupon (if
any) on the class is fixed or variable rate (and if variable rate, the index to which the variable rate
relates). Freddie Mac’s multiple-class mortgage-related securities include Multiclass Mortgage Partici-
pation Certificates (‘“Multiclass PCs’), Multiclass GNMA-Backed Securities, Stripped Giant Mort-
gage Participation Certificates (‘‘Stripped Giant PCs”) and Stripped Giant GNMA-Backed Securities.
Multiple-class securities backed directly or indirectly by PCs provide a means for improving the
liquidity and value of PCs.

Multiclass PCs. Freddie Mac’s principal activity in the area of multiple-class securities is the
issuance and sale of Multiclass PCs that qualify for treatment as Real Estate Mortgage Investment
Conduits (“REMICs”) under the Internal Revenue Code. To date, Freddie Mac has issued Multiclass
PCs representing beneficial ownership interests in pools consisting of PCs, Giant PCs, Stripped Giant
PCs, other Multiclass PCs, multifamily mortgages, manufactured housing installment sale contracts
and REMIC securities issued by issuers other than Freddie Mac. Multiclass PCs are issued in series,
with each series consisting of two or more classes. Freddie Mac also issues Multiclass GNMA-Backed
Securities that qualify for REMIC treatment. Multiclass GNMA-Backed Securities are similar to
Multiclass PCs in most respects. The primary difference is that the pools underlying Multiclass
GNMA-Backed Securities consist of GNMA Certificates, Giant GNMA-Backed Securities or securi-
ties issued under GNMA’s REMIC program.

Stripped Giant PCs. Stripped Giant PCs are resecuritized securities issued in classes or “strips,”
each of which is entitled to receive interest only, principal only or a specified portion of the principal and
interest payments received on an underlying pool of securities. Freddie Mac issues Stripped Giant PCs
backed by PCs, Giant PCs and classes of Multiclass PCs including Gold MACS® (Modifiable And
Combinable Securities). Gold MACS® are multiple-class stripped securities that are issued with
various coupons and that permit a holder to exchange with. Freddie Mac a class or classes of a Gold
MACS® series for a different class or classes of the same Gold MACS® series, thereby changing the
coupons of the securities held.

Market Conditions and Competition

The volume of Freddie Mac’s mortgage purchases depends primarily on the volume of conforming
conventional mortgages originated in the primary market, the share of conforming conventional
mortgages sold into the secondary market and the share of those mortgages sold to Freddie Mac rather
than its principal competitor, Fannie Mae. Freddie Mac is limited in its mortgage purchases to
conforming mortgages that satisfy mortgage principal amount limits and credit-related standards
mandated by statute.

Freddie Mac estimates that approximately $575 billion of conventional single-family mortgages
were originated in 1995; a total of approximately $220 billion, or 38 percent of that amount, were sold
to Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae purchased a combined total of

approximately 47 percent and 54 percent of the conventional single-family mortgages originated in
1994 and 1993, respectively.

Freddie Mac and Fannie Mae generally compete for the purchase of the same types of mortgages.
The two companies are structured similarly and have the same business lines. Freddie Mac competes on
the basis of its products, services and business processes, the liquidity of its securities in the secondary
mortgage markets and its pricing strategies and credit standards. Once a decision to sell a conforming
mortgage is made by a mortgage originator, the entity to which the mortgage is sold depends on the
originator’s assessment of, among other things, the relative attractiveness of Freddie Mac’s and Fannie
Mae’s products, services and prices. That assessment is reflected in the relative market shares of the two
companies. Freddie Mac’s share of the conventional single-family mortgages sold to the two entities in

11


Candice D. Mendenhall was appointed Senior Vice President—Human Resources in June 1995.
Before joining Freddie Mac, Ms. Mendenhall held several positions at Manchester, Inc., a large
outplacement firm, between 1992 and 1995, the most recent being Executive Vice President of
Operations. Prior to that, Ms. Mendenhall was Vice President and Chief Administrative Officer for The
Hair Cuttery, a large, privately-owned retail chain, from 1988 to 1992. From 1983 to 1987, Ms.
Mendenhall was Senior Vice President of Employee Relations at Mellon Bank.

Gregory J. Parseghian was appointed Senior Vice President—Corporate Finance in February
1996. Prior to joining Freddie Mac, Mr. Parseghian was a managing director, chief fixed-income
strategist and head of collateralized mortgage obligations and mortgage derivatives trading at Salomon
Brothers, Inc. Prior to that, Mr. Parseghian was a partner and senior portfolio manager at BlackRock
Financial Management, Inc. Mr. Parseghian worked at First Boston Corporation from 1982 through
1993, most recently as managing director and head of fixed-income research.

Paul T. Peterson was appointed Senior Vice President—Servicer Division in July 1995 and served
as Acting Senior Vice President—Servicer Division since January 1995. Prior to that, he had served as
Senior Vice President—Corporate Finance from January 1992 to January 1995, as Vice President—
Corporate Finance from March 1990 to January 1992 and as Director of Portfolio Management from
April 1989 to March 1990. Prior to joining Freddie Mac, Mr. Peterson served as President of Market
Street Mortgage Corporation from 1986 to 1989 and as President and Chief Executive Officer of Cal
America Savings and Loan Association from 1983 to 1986.

Ann B. Schnare was appointed Senior Vice President—Corporate Relations (Interim) in January
1996. Ms. Schnare has served as Vice President—Housing Economics since 1993. Prior to joining the
corporation, Ms. Schnare served as Senior Vice President of ICF-Kaiser International, Inc., an
international engineering, construction and consulting services company, from 1987 to 1993.

Thomas J. Watt was appointed Senior Vice President—Multifamily Housing in May 1991. Prior to
joining Freddie Mac, Mr. Watt served as Managing Director—Real Estate for State House Capital
Management, a subsidiary of Connecticut Mutual Life Insurance Company, from 1989 to 1991. From
1984 to 1989 Mr. Watt served as Senior Vice President for CIGNA Investments, Inc.

INDEPENDENT PUBLIC ACCOUNTANTS
The Consolidated Financial Statements and the supplemental Consolidated Fair Value Balance

Sheets of the corporation included in this Information Statement have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report appearing herein.

31


owner of such share or shares of Non-Cumulative Preferred Stock for the purpose of receiving payment
of dividends in respect of such share or shares of Non-Cumulative Preferred Stock and for all other
purposes whatsoever, and neither Freddie Mac nor any agent of Freddie Mac shall be affected by any
notice to the contrary. All payments made to or upon the order of any such person shall be valid and, to
the extent of the sum or sums so paid, effectual to satisfy and discharge liabilities for moneys payable by
Freddie Mac on or with respect to any such share or shares of Non-Cumulative Preferred Stock.

(c) The shares of the Non-Cumulative Preferred Stock, when duly issued, shall be fully paid and
non-assessable.

(d) The Non-Cumulative Preferred Stock shall be issued, and shall be transferable on the books of
Freddie Mac, only in whole shares, it being intended that no fractional interests in shares of Non-
Cumulative Preferred Stock shall be created or recognized by Freddie Mac.

(e) For purposes of this Certificate, the term “Freddie Mac” means the Federal Home Loan

Mortgage Corporation and any successor thereto by operation of law or by reason of a merger,
consolidation or combination.

(f) This Certificate and the respective rights and obligations of Freddie Mac and the holders of the
Non-Cumulative Preferred Stock with respect to such Non-Cumulative Preferred Stock shall be
construed in accordance with and governed by the laws of the United States, provided that the law of
the Commonwealth of Virginia shall serve as the federal rule of decision in all instances except where

such law is inconsistent with Freddie Mac’s enabling legislation, its public purposes or any provision of
this Certificate.

(g) Any notice, demand or other communication which by any provision of this Certificate is
required or permitted to be given or served to or upon Freddie Mac shall be given or served in writing
addressed (unless and until another address shall be published by Freddie Mac) to the Federal Home
Loan Mortgage Corporation, 8200 Jones Branch Drive, McLean, Virginia 22102, Attn: Senior Vice
President-General Counsel and Secretary. Such notice, demand or other communication to or upon
Freddie Mac shall be deemed to have been sufficiently given or made only upon actual receipt of a
writing by Freddie Mac. Any notice, demand or other communication which by any provision of this
Certificate is required or permitted to be given or served by Freddie Mac hereunder may be given or
served by being deposited first class, postage prepaid, in the United States mail addressed (i) to the
holder as such holder’s name and address may appear at such time in the books and records of Freddie
Mac or (ii) if to a person or entity other than a holder of record of the Non-Cumulative Preferred Stock,
to such person or entity at such address as appears to Freddie Mac to be appropriate at such time.

(h) Freddie Mac, by or under the authority of the Board of Directors, may amend, alter,
supplement or repeal any provision of this Certificate pursuant to the following terms and conditions:

(i) Without the consent of the holders of the Non-Cumulative Preferred Stock, Freddie Mac
may amend, alter, supplement or repeal any provision of this Certificate to cure any ambiguity, to
correct or supplement any provision herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to matters or questions arising under
this Certificate, provided that such action shall not materially and adversely affect the interests of
the holders of the Non-Cumulative Preferred Stock.

(ii) The consent of the holders of at least 667% of all of the shares of the Non-Cumulative
Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote
at a meeting called for the purpose at which the holders of shares of the Non-Cumulative Preferred
Stock shall vote together as a class, shall be necessary for authorizing, effecting or validating the
amendment, alteration, supplementation or repeal of the provisions of this Certificate if such
amendment, alteration, supplementation or repeal would materially and adversely affect the
powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms or conditions
of the Non-Cumulative Preferred Stock. The creation and issuance of any other class or series of
stock, or the issuance of additional shares of any existing class or series of stock of Freddie Mae
(including the Non-Cumulative Preferred Stock), whether ranking prior to, on a.parity with or

AT


Guaranteed Mortgage Participation Certificates

Freddie Mac guarantees to PC holders the timely payment of interest at
the PC coupon rate, and the timely payment of principal on mortgages
underlying Gold PCs or the ultimate payment of principal on mortgages
underlying 75-day PCs. Several types of credit risk are associated with the
issuance and guarantee of PCs. These include the risk of loss from: (1)
borrower default on the mortgage; (2) the failure of institutions holding
monthly remittances payable to Freddie Mac; and (3) mortgage fraud. These
credit risks are mitigated through Freddie Mac’s uniform underwriting and
servicing criteria and warranties obtained from sellers. Freddie Mac also
requires collateral in the form of security interests in the underlying real
estate supporting the mortgages backing the PCs, as well as mortgage
insurance for mortgages exceeding certain loan-to-value (LTV) ratios. Certain
transactions may also include other forms of credit enhancement provided
by the seller, Management continually monitors the corporation’s credit
exposure and provides for probable losses incurred through the “Reserve
for losses on sold mortgages.” As of December 31, 1995 and 1994, this
reserve stood at $388 million and $443 million, respectively (see Note 3).

As part of administering its PC programs, Freddie Mac is required to
repurchase the mortgages backing PCs when certain events occur.
Specifically, Freddie Mac may be required under certain conditions to
repurchase balloon/reset mortgages, convertible adjustable-rate mort-
gages (CARMS), and mortgages in default. Under the balloon/reset and
the CARM programs, the mortgagor has the option, if certain conditions
are met, to reset or convert the mortgage to a market-based fixed-rate
mortgage. If the mortgagor elects to reset or convert the mortgage rate,
Freddie Mac is obligated to repurchase the mortgage from the security
pool and may either place the mortgage in its retained portfolio or
securitize and sell the mortgage as part of a pool underlying a new PC.
Freddie Mac is also required to repurchase mortgages collateralizing PCs
when the mortgages are deemed to be in default as defined in the
security offering documents.

Commitments

Freddie Mac can incur market risk — the risk of adverse interest-rate
movements — between the time it commits to purchase mortgages under
the Cash Program and the time it finances those purchases either by issuing
PCs collateralized by mortgages purchased under the Cash Program or by
issuing debt. Freddie Mac manages market risk under the Cash Program
by committing to issue PCs at substantially the same time it commits to
purchase mortgages similar to the Guarantor Program. Issuing PCs under
the Guarantor Program does not expose the corporation to market risk
because the purchase of mortgages and issuance of PCs occur simultaneously.
Market risk related to financing mortgage purchases with debt is mitigated
through the use of hedging instruments as discussed in “Interest-Rate
Agreements and Other Hedging Instruments.”

At the time a commitment to purchase is entered into, Freddie Mac is
subject to credit risk similar to that of its PC programs (see above). In
addition, Freddie Mac is exposed to a loss if a party to a mandatory
purchase commitment fails to deliver mortgages which Freddie Mac has
committed to sell as PCs under a mandatory delivery agreement. The loss
in such an event is equal to the change in market value of the mortgages
to be delivered to Freddie Mac, and is offset by the pair-off fee payable

to Freddie Mac by the mortgage seller. The maximum delivery period for
mandatory purchase commitments is 90 days for fixed rate mortgages
and 105 days for adjustable-rate mortgages (ARMs). If a party fails to
deliver morigages under a mandatory purchase commitment, the corpo-

ration fulfill its mandatory sale commitments with retained mortgages
held for sale.

The following table summarizes Freddie Mac’s outstanding commitments
to purchase mortgages.

December 31, 1995 1994
(dollars in millions)
Commitments to Purchase:
Cash Program
Mandatory S$ 827 $ 297
Optional 1 1
Guarantor Program
Mandatory 36 1,050
Optional 445 213
Master Commitments
Mandatory 20,445 30,141
Optional 10,976 8,954

Under the optional commitment programs, lenders may or may not
exercise their commitment option, Under the mandatory programs, the
lender may buy back the commitment at any time by paying a pair-off
fee, A master commitment is a contract between Freddie Mac and a
mortgage lender which sets forth the terms and conditions under which
Freddie Mac will purchase mortgages from approved seller/servicers. A
master commitment may provide for the purchase of mortgages under
one or more purchase programs with various product attributes, e.g.,
conventional fixed-rate or conventional ARMs.

Interest-Rate Agreements and Other Hedging Instruments
The corporation enters into interest-rate swaps, caps, floors and corridors
and, to a lesser extent, short sales of Treasury securities and spread-lock
agreements to lower financing costs or increase investment yields and to
hedge against fluctuations in interest rates. The corporation is an “end
user” and does not use these instruments to generate trading profits or
for speculative purposes. All of the corporation’ interest-rate agreements
are currently ULS. dollar denominated. In addition, the corporation is not
a party to leveraged hedging instruments. The table on the following page
summarizes the notional or contractual amounts of these instruments
and their related fair values.

A-33


number of dwelling units financed by the corporation’s mortgage purchases meet the Underserved
Areas Goal in 1996 and 24 percent in each of 1997, 1998 and 1999, and 12 percent of the total number
of dwelling units financed by the corporation’s mortgage purchases meet the Special Affordable Goal in
1996 and 14 percent in each of 1997, 1998 and 1999, including at least $981 million in qualifying
multifamily mortgage purchases in each year from 1996 through 1999.

Under the GSE Act, if the Secretary of HUD finds that Freddie Mac has failed to meet or there is
a substantial probability that Freddie Mac will not meet any of the housing goals and that the goals are
“feasible,” the Secretary of HUD may require Freddie Mac to prepare a “housing plan” that describes
the specific actions Freddie Mac will take to achieve the goal for the next calendar year or to make
improvements as are reasonable in the remainder of the current year. The Secretary of HUD is
empowered to issue cease and desist orders or to assess civil money penalties upon a finding, after a
hearing on the merits, that Freddie Mac has failed to make a timely submission of a housing plan
complying with the GSE Act or to make a good faith effort to comply with a housing plan approved by
the Secretary of HUD. For further information on Freddie Mac’s performance under these affordable
housing goals, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Results of Operations — Regulatory Matters — Housing Goals.”

In 1995, the Secretary requested Freddie Mac to file a housing plan, in accordance with the GSE
Act, based on Freddie Mac’s failure to meet the Central Cities Goal for 1994. Freddie Mac filed this
plan in accordance with the Secretary’s request, detailing the corporation’s efforts to increase its
mortgage purchases in underserved areas, including OMB-designated central cities.

By letter dated March 4, 1996, the Secretary notified Freddie Mac of his determination that the
corporation failed to meet the 1995 Central Cities Goal, that the corporation had up to 30 days to
comment on that determination, and that the Secretary proposed to require Freddie Mac to submit a

housing plan describing the specific actions that Freddie Mac will take to meet the 1996 Underserved
Areas Goal.

Fair Lending. Freddie Mac is subject to the anti-discrimination provisions of the Fair Housing
Act. In addition, the GSE Act requires the Secretary of HUD to adopt regulations prohibiting Freddie
Mac from engaging in discriminatory practices in its mortgage purchase activities and periodically to
review and comment on Freddie Mac’s 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 the
enterprises to (i) submit data to HUD to assist HUD in investigating whether a mortgage lender with
which the enterprise does business has failed to comply with the Fair Housing Act or the Equal Credit
Opportunity Act and (ii) 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 the Equal Credit Opportunity Act (““ECOA”) pursuant to a final
adjudication and after opportunity for an administrative hearing. In December 1995, HUD issued final
regulations implementing the fair housing provisions of the GSE Act.

New Program Approval. Under the GSE Act, Freddie Mac must obtain the approval of the
Secretary of HUD for any new Freddie Mac program before implementing the program. The law
defines a “new program” as a program for the purchasing, servicing, selling, lending on the security of,
or otherwise dealing in, conventional mortgages that (i) is significantly different from programs that
were approved or engaged in by Freddie Mac before the date the GSE Act was enacted or
(ii) represents a material expansion of programs above limits expressly contained in any prior approval.
There have been no such HUD-imposed limits applicable to Freddie Mac’s mortgage programs. The
Secretary of HUD is required to approve any new program unless the Secretary of HUD determines
that the new program is not authorized under the Freddie Mac Act or that the program is not in the
public interest. In addition, the GSE Act also provides new program approval authority to the Director

of OFHEO for a transition period ending 12 months after the risk-based capital regulations become
effective.

18


December 31,

1995 1994
Gross Gross Gross Gross
Amortized Unrealized Unrealized _ Estimated Amortized Unrealized Unrealized _ Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
(dollars in millions)
Held to maturity $57,678 $1,935 $ - $59,613 $31,316 $28 $(2,090) $29,254
Available-for-sale 5,848 190 (148) 5,890 - - - -
Total $63,526 $2,125 $(148) $65,503 $31,316 $28 $(2,090) $29,254

In November 1995, the FASB issued “A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities.” Freddie Mac implemented the report on December 31, 1995,
and in doing so transferred $6 billion of mortgage-related securities from
held to maturity to available-for-sale which resulted in a $27 million
unrealized gain, net of eax, being recorded to Stockholders? equity

3. RESERVES FOR LOSSES ON MORTGAGES
Freddie Mac maintains reserves to provide for credit losses on the
retained and sold mortgage portfolios. The following is a combined
analysis of these reserves for losses on mortgages for the years ended
December 31, 1995, 1994 and 1993

1995 1994 1993

(dollars in millions)

Beginning balance $733 $760 $785
Provision 255 200 300
Charge-offs, net (305) (227) (325)

Ending balance $ 683 $733 $760

At December 31, 1995, the reserve balance consisted of a general reserve
available to absorb losses on the total mortgage portfolio and a specific
valuation allowance related to impaired loans pursuant to SFAS No. 114,

as discussed in Note 1. At December 31, 1995, the corporation's recorded
investment in impaired loans and the related valuation allowance were

as follows: ‘
Recorded —_ Valuation Net
Investment Allowance Investment

(dollars in millions)

Impaired loans for which:

Valuation allowance required $449 $(67) $382
No valuation allowance required 453 - 453
Total $902 $(67) $835

For the year ended December 31, 1995, the average recorded investment
in impaired loans was $938 million and the related interest income rec-
ognized was $74 million.

4. INVESTMENTS

Presented below are the amortized cost and estimated market values of
non-mortgage investments at December 31, 1995 and 1994, Estimated
fair values and corresponding gross unrealized gains and losses in the
following table include the effect of interest-rate agreements which,
when linked to specific investments, enable the corporation to achieve

a specific investment objective at a desired yield (see Note 10)

December 31, 1995 1994
Gross Gross Gross Gross
Amortized Unrealized Unrealized _Estimated Amortized Unrealized Unrealized _Estimated
Cost Gains Losses Fair Value Cost Gains Losses __Fair Value
(dollars in millions)
Federal Funds $ 105 $- $3 - $ 105 $ 5,533 $- $ - $ 5,533
Eurodollar time deposits 5 ~ 5 1,727 ~ - 1,727
Obligations of states and
municipalities 1,040 6 GB) 1,043 1,715 3 (10) 1,708
Auction rate preferred stock 446 - ~ 446 1,064 - - 1,064
Medium-term notes 1,196 16 ay 1,201 1,237 12 (is) 1,234
Other securities 1,943 14 (22) 1,945 630 9 (10) 629
Total $4,735 $36 $(26) 84,745 $11,906 $24 $035) $11,895

At December 31, 1995 and 1994, all investments were classified as available-for-sale. Included in Stockholders’ equity at December 31, 1995 and 1994

were net unrealized gains (losses) on available-for-sale non-mortgage investments, net of tax, totaling $6 million and $(7) million, respectively. Sales of

investment securities were immaterial in 1995, 1994 and 1993.

ns \


Market LTV ratios on mortgages originated for the purchase of a home
(purchase money mortgages) have increased in recent years, although
this trend was partially masked by the high volume of refinancings
from 1992 to mid-1994. Refinanced single-family mortgages generally
have lower LTV ratios than purchase money mortgages because refi-
nancing borrowers usually have increased their equity in the underlying
properties through the combined effects of house-price appreciation
and principal amortization. Rising interest rates during 1994 caused a
significant decline in refinancing activity from 1993. Although interest
rates declined throughout most of 1995, refinancing activity did not
increase significantly from the overall 1994 level. In response to the
increase in originations of higher LTV purchase money mortgages,
Freddie Mac increased mortgage insurance requirements during 1994
and 1995 for most high-LTV mortgages. The increasing proportion of
purchase money mortgages caused the average LTV ratios of mortgages
purchased by Freddie Mac to increase from 74 percent in 1994 to 77
percent in 1995.

Mortgage Purchase

Characteristics 1995 1994 1993
Percentage of purchases
represented by refinancings 35% 55% = 72%
Average LTV of purchases:
Refinancings 68% 68% 67%
Purchase money mortgages 81% 81% 79%
Total purchases 77% 74% = 10%

The following table sets forth default rates with respect to single-family
mortgages of all types in Freddie Mac’s total mortgage portfolio within
the indicated ranges of origination LTV ratios. The rates shown relate
to the total original unpaid principal balance of single-family first-lien
mortgages that defaulted during the designated year, expressed as
percentages of the aggregate original unpaid principal balance as of the
beginning of each year.

Origination LTV Ratio Range of
Defaulted Single-Family Mortgages

Year ended December 31, 1995 1994
0% to 75% 0.24% 0.26%
Above 75% to 80%. 0.45 0.49
Above 80% to 85% 0.50 0.44
Above 85% to 90% 0.83 0.82
Above 90% to 95% 0.49 0.63

A-5S

Another factor affecting single-family mortgage risk is product mix.
Freddie Mac has experienced generally higher default rates on ARMs
than on fixed-rate mortgages, and lower default rates on 15-year fixed-
rate mortgages than on 30-year fixed-rate mortgages. ARMs present
greater credit risk in part because the mortgage coupon is tied to a
specified index, and borrower payments rise and fall, within limits,
with changes in the index. Generally, 1-year fixed-rate mortgages pose
a lower default risk than 30-year fixed-rate mortgages due in part to.
the faster principal amortization inherent in the 15-year product.
Balloon/reset mortgages generally have default rates above those of 30-
year fixed-rate mortgages but less than those of ARMs. Balloon/reset
mortgages, which Freddie Mac began purchasing in late 1989, are mort-
gages that amortize on a 30-year fixed-rate schedule, but require full
repayment or refinancing in 5 or 7 years. Freddie Mac generally
receives higher management and guarantee fees for these higher-risk
mortgage products.

Freddie Mac also has experienced generally higher default losses on
2+ to 4-unit single-family mortgages and multifamily mortgages than
on one-unit single-family mortgages, largely because these multi-unit
mortgages generally have higher average balances, are at least in part
non-owner occupied and tend to experience the adverse effects of
economic weakness more than one-unit single-family mortgages. In
addition, 2- to 4-unit properties are located primarily in urban areas
that have experienced significant economic distress in recent years.
Approximately 3 percent of Freddie Mac’s total mortgage portfolio
consists of 2- to 4-unit single-family mortgages.

Multifamily mortgages present different credit risks from owner-occupied,
single-family mortgages where borrowers often will continue to make
mortgage payments to avoid loss of a residence even when the unpaid
principal balance of the mortgage exceeds the market value of the
underlying property. Like 2- to 4-unit properties, multifamily properties
often are located in urban areas that have experienced economic distress.
In addition, the values of multifamily properties are sensitive to factors
not applicable to single-family mortgages, such as changes in certain
tax laws and rent control regulations. Because multifamily properties
primarily are viewed by borrowers as investments, and generally do not
involve recourse to an individual for the mortgage debt or private mort-
gage insurance (as is the case for single-family mortgages), the perfor-
mance of multifamily mortgages largely depends upon the net cash flow
generated from the property, as well as the property’s market value. In
Freddie Mac’s experience, the principal factor in default risk for multi-
family mortgages is the level of debt service coverage of the property
securing the mortgage. LTV ratios also provide a measure of potential
loss severity: In light of these factors, Freddie Mac generally receives
higher management and guarantee fees for multifamily mortgages than
single-family mortgages.


‘The remaining contractual maturities of investments at December 31, 1995 and 1994 were as follows:

Remaining maturity at December 31, 1995

1994

Amortized Cost

Estimated Fair Value

Amortized Cost __ Estimated Fair Value

(dollars in millions)

Due within one year $3,849 $3,853 $11,246 $11,238
Due after one year through five years 886 892 660 657
Total $4,735 $4,745 $11,906 $11,895

5. MORTGAGE SECURITIES PURCHASED UNDER
AGREEMENTS TO RESELL

Mortgage securities purchased under agreements to resell (reverse repur-
chase agreements) are collateralized lending transactions in which Freddie
Mac purchases PCs with an agreement to sell back the exact same security.
The following table provides information regarding the balances of
reverse repurchase agreements in 1995 and 1994.

1995 1994

Gollars in millions)
Average outstanding during the year $ 7,398 $7,531
Maximum month-end outstanding

balance 13,584 8,163
Due within one year $ 8,139 $5,861
Due after one year through five years 1,078 52
Balance, December 31 $9,217 $5,913

‘The amount a customer can borrow under a reverse repurchase agree-
ment is limited to approximately 97 percent of the market value of the
securities collateralizing the agreement, depending on the type of collateral

andr the credit quality of the customer. The master agreements governing

reverse repurchase agreement transactions provide for the delivery of
securities collateralizing the agreements to Freddie Mac (or its custodian
bank) and provide that Freddie Mac has the right to sell the collateral in

the event of a borrower default, All reverse repurchase agreements permit

Freddie Mac to obtain additional collateral as margin if the market value
of the securities subject to the reverse repurchase agreement declines.

6. REAL ESTATE OWNED

The following table provides an analysis of Freddie Mac’s REO activity
for the years ended December 31, 1995, 1994 and 1993.

REO, Valuation ~—_ REO,
Gross Allowance Net

(dollars in millions)

Balance, December 31, 1992 $ 537 $ (5) $ 532
Additions 1,170 (116) 1,054
Dispositions and write downs (844) 29 (815)

Balance, December 31, 1993 863 (92) 71
Additions 1,517 (102) 1,415
Dispositions and write downs (1,348) 110 (1,238)

Balance, December 31, 1994 1,032 (84) 948
Additions 1,206 (102) 1,104
Dispositions and write downs (1,357) 105 (1,252)

Balance, December 31, 1995 $881 $ (81) $ 800

A-29


mortgage insurance from a Freddie Mac-approved mortgage insurer, recourse to the seller or equivalent
forms of credit enhancement as determined by Freddie Mac, or the retention of at least a 10 percent
participation interest in the mortgages by the seller. Comparable conditions apply to the purchase of
conventional single-family second mortgages where the total loan-to-value ratio exceeds 80 percent, but
not to the purchase of conventional multifamily mortgages or FHA/VA mortgages.

Finally, the Freddie Mac Act provides that Freddie Mac may purchase, so far as practicable, only
mortgages that Freddie Mac deems to be of such quality, type and class as to meet, generally, the
purchase standards of private institutional mortgage investors. This aspect of the Freddie Mac Act
requires that the mortgages purchased be readily marketable to institutional mortgage investors.

Single-Family Mortgage Purchases

Freddie Mac purchases single-family mortgages for cash and in exchange for PCs. In addition to
the requirements of the Freddie Mac Act, single-family mortgages purchased under these programs
generally are subject to the corporation’s credit, appraisal, underwriting and other purchase guidelines
set forth in its Single-Family Seller/Servicer Guide. Freddie Mac may modify these guidelines or grant
waivers with respect to the purchase of specific mortgages.

Freddie Mac purchases single-family 15-year, 20-year and 30-year fixed-rate mortgages, ARMs
and Balloon/Reset mortgages. Balloon/Reset mortgages typically have original terms to maturity of
either five or seven years and provide for level payments of principal and interest during the original
term with principal payments typically based on a 30-year amortization schedule. At the expiration of
the original term, the then-remaining unpaid principal balance of the mortgage is payable in full,
although the borrower may elect to extend the mortgage term with an interest-rate adjustment if the
borrower satisfies certain conditions associated with such an extension. Freddie Mac began purchasing

Balloon/Reset mortgages in 1989. Approximately $12.8 billion in Balloon/Reset mortgages are
scheduled to reset in 1996 and 1997.

Freddie Mac purchases single-family mortgages for cash primarily for resale as PCs to parties other
than the sellers of the mortgages. Freddie Mac generally coordinates the volume of and effective interest
rates on its cash mortgage purchase commitments with its commitments to sell PCs. This procedure
effectively enables Freddie Mac to reduce interest-rate risk and realize income on a portion of the
difference in rates between mortgages purchased and PCs sold. The remaining cash mortgage purchases
are held for investment and financed by debt securities, equity capital and other liabilities. Sellers
typically choose to sell mortgages for cash if they have relatively straightforward secondary market needs
and prefer to sell mortgages as soon as they have been originated without having to accumulate the
volume generally needed for efficient securitization, and also without requiring the operational support
necessary for participation in the securities markets. Freddie Mac’s cash purchase prices for mortgages
generally reflect the prices at which Freddie Mac can sell the related PCs; as a result sellers can realize
certain of the benefits of securitization without incurring all of the associated costs.

Freddie Mac also purchases mortgages in exchange for PCs representing interests in the mortgages
purchased from one or more sellers. Sellers may choose to exchange mortgages for PCs for several
reasons. Owning PCs rather than the underlying mortgages may reduce the exposure of an institution to
credit risk and increase the financial flexibility and liquidity of the institution, which may use the PCs as
collateral for repurchase agreement transactions and other borrowings and for other purposes. In

addition, in the case of depository institutions, regulatory capital requirements generally favor holding
mortgage assets in securitized form.

Sellers with relatively complex secondary market needs and the desire and capability to participate
actively in the securities market may prefer to sell mortgages in exchange for PCs when the sale or other
utilization of PCs provides a greater flexibility or overall return than is available through a sale of
mortgages for cash. Sellers that originate a volume of mortgages sufficient for efficient securitization
and that prefer to determine the particular mortgages included in each pool may choose to sell
mortgages for PCs. Sellers that prefer to sell mortgages in smaller amounts rather than in bulk, but that
also want to take advantage of a securities execution, often can accomplish both of these objectives by
exchanging mortgages, together with other sellers, in exchange for PCs. Such PCs may be available as
soon as the next business day, thereby enabling these mortgage sellers to reduce their use of warehouse
credit lines and lower their borrowing costs.


Percentage applicable to the dividend in question is less than 50%, then the DRP will equal .50. If the
amount of any dividend payable on the Preferred Stock is adjusted through such application of the
DRD Formula, the resulting dividend rate may exceed 9% per annum. No amendment to the Code,
other than a change in the percentage of the dividends-received deduction set forth in section 243(a)(1)
of the Code or any successor provision, will give rise to an adjustment. Notwithstanding the foregoing
provisions, if, with respect to any such amendment, the Corporation receives either an unqualified
opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter
ruling or similar form of assurance from the Internal Revenue Service (the “IRS’’) to the effect that
such an amendment does not apply to a dividend payable on the Preferred Stock, then such amendment
will not result in the adjustment provided for pursuant to the DRD Formula with respect to such
dividend. The opinion referenced in the previous sentence must be based upon the legislation amending
or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.
Unless the context otherwise requires, references to dividends in this Offering Circular will mean
dividends as adjusted by the DRD Formula. The Corporation’s calculation of the dividends payable as
so adjusted shall be final and not subject to review.

Notwithstanding the foregoing, if any such amendment to the Code is enacted after the dividend
payable on a Dividend Payment Date has been declared but before such dividend is paid, the amount of
the dividend payable on such Dividend Payment Date will not be increased; instead, additional
dividends (the “Post Declaration Date Dividends’), equal to the excess, if any, of (x) the product of the
dividend paid by the Corporation on such Dividend Payment Date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage
applicable to the dividend in question and .50) over (y) the dividend paid by the Corporation on such
Dividend Payment Date, will be payable (if declared) to holders of Preferred Stock on the record date
applicable to the next succeeding Dividend Payment Date, in addition to any other amounts payable on
such date.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received
Percentage retroactively applies to a Dividend Payment Date as to which the Corporation previously
paid dividends on the Preferred Stock (each, an “Affected Dividend Payment Date”), the Corporation
will pay (if declared) additional dividends (the “Retroactive Dividends’’) to holders of Preferred Stock
on the record date applicable to the next succeeding Dividend Payment Date (or, if such amendment is
enacted after the dividend payable on such Dividend Payment Date has been declared, to Holders of
Preferred Stock on the record date applicable to the second succeeding Dividend Payment Date
following the date of enactment)-in an amount equal to the excess of (x) the product of the dividend
paid by the Corporation on each Affected Dividend Payment Date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage
and .50 applied to each Affected Dividend Payment Date) over (y) the sum of the dividend paid by the
Corporation on each Affected Dividend Payment Date. The Corporation will make only one payment of
Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with
respect to any such amendment, the Corporation receives either an unqualified opinion of nationally
recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form
of assurance from the IRS to the effect that such amendment does not apply to a dividend payable on an
Affected Dividend Payment Date for the Preferred Stock, then such amendment will not result in the
payment of Retroactive Dividends with respect to such Affected Dividend Payment Date. The opinion
referenced in the previous sentence must be based upon the legislation amending or establishing the
DRP or upon a published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation will be
made, and no Post Declaration Date Dividends or Retroactive Dividends will be payable by the
Corporation, in respect of the enactment of any amendment to the Code on or after April 26, 1998.


Conversely, certain aspects of these rules permit (and may even facilitate) purchases of certain types or

combinations of mortgage-related securities that tend to reduce the interest-rate risk exposure of a
particular institution.

Most mortgages sold to Freddie Mac are sold “without recourse” for purposes of the financial
institution risk-based capital regulations. Under these regulations, sales of mortgages to Freddie Mac
that involve recourse to the seller generally have been treated as if the mortgages had not been sold. By
requiring banking and savings institutions to maintain the same capital levels as would be required if the
mortgages had not been sold, these regulations discourage such institutions from selling mortgages in
the secondary market on a recourse basis. Sellers may provide credit enhancements that protect Freddie
Mac from credit risk in forms other than recourse. Depending upon the particular arrangement

involved, these credit enhancements may or may not be treated for regulatory purposes as recourse
sales.

In the first quarter of 1995, the Federal Reserve Board and the Federal Deposit Insurance
Corporation (“FDIC”) adopted amendments to their risk-based capital guidelines for assets sold with
specified low levels of recourse. Under these amendments, when a bank sells a mortgage with such
limited recourse, its risk-based capital requirement would reflect only the amount of risk actually
remaining with the bank. This may encourage banks to sell mortgages with limited recourse in the
future. In addition, comprehensive revisions to the risk-based capital requirements for mortgages sold
with recourse are under consideration by other banking regulatory agencies. If adopted, these revisions
could increase or decrease the amount of capital particular banks and savings institutions would be
required to hold under various circumstances.

Similarly, the National Association of Insurance Commissioners (“NAIC”) has issued risk-based
capital guidelines for life insurance and related companies. Under the guidelines, capital requirements
applicable to mortgage-related securities with a rating of “A” or better (including Freddie Mac

mortgage-related securities) are significantly lower than capital requirements applicable to the underly-
ing mortgages themselves.

Other Regulations Affecting Financial Institutions

FFIEC Policy Statement. The Federal Financial Institutions Examination Council (“FFIEC”),
whose members include several agencies that regulate depository institutions, adopted a Supervisory
Policy Statement on Securities Activities (the “Policy Statement”) that, among other things, sets forth
guidelines for investing in certain types of mortgage-related securities. Under the Policy Statement, a
security that, under certain tests, exhibits greater price volatility than a standard 30-year fixed-rate
mortgage-related security or fails to meet certain estimated weighted-average-life criteria generally is
not a suitable investment for depository institutions. Although these investments may be used as
interest-rate risk reduction tools by institutions with well-managed portfolios and specific interest-rate
tisk policies, implementation of the Policy Statement generally has had a negative effect on the market

among depository institutions for certain types of multiple-class mortgage-related securities that
Freddie Mac issues.

Advisories on Structured Notes. In 1994, each of the federal bank regulatory agencies issued an
advisory setting forth supervisory policies with respect to purchases of “structured notes.” These
advisories indicate that debt securities whose cash flows are dependent on one or more indices in ways
that create the risk characteristics of forward contracts or options may be inappropriate holdings for
many depository institutions. These characteristics include substantial price sensitivity, complexity,
illiquidity and high amounts of leverage relative to fixed-income instruments with comparable face
values. The advisories stress the need for appropriate supervision and review of investments in
structured notes and indicate that it may be considered an unsafe and unsound practice to invest in
these securities without the knowledge and ability to measure, monitor and manage the risks. Although
these advisories potentially may have an adverse effect on the market among depository institutions for
certain types of Freddie Mac debt securities, investor demand for certain complex structured notes is

limited, at present, and Freddie Mac has issued a relatively small amount of this type of unsecured debt
in the past two years.

20


dividend payable to holders of Preferred Stock will vary from Dividend Period to Dividend Period. The
“Dividend Period” relating to a Dividend Payment Date will be the period from but not including the
preceding Dividend Payment Date through and including the related Dividend Payment Date. Freddie
Mac will calculate the dividend rate for each Dividend Period based on LIBOR determined as of two
London Business Days (defined as any day, other than a Saturday or Sunday, on which banks are open
for business in London) prior to the first day of such Dividend Period (each, a ‘Determination Date”).
Each dividend will be calculated on the basis of the actual number of days elapsed, assuming a year of
360 days, and the dividend rate will be applied to the $50 per share redemption value.

The Preferred Stock will rank prior to the Voting Common Stock, par value $0.84 per share, of
Freddie Mac (the “Common Stock’’) with respect to dividends, to the extent provided in the Certificate
of Designation. No dividend may be declared or paid or set apart for payment on the Common Stock (or
any other junior stock) unless dividends have been declared and paid or set apart (or ordered to be set
apart) on the Preferred Stock in respect to the then-current Dividend Period. The Preferred Stock will
rank on a parity with the 6.72% Non-Cumulative Preferred Stock (the “1993 Preferred Stock’’) issued
on August 2, 1993 and currently outstanding and the 7.90% Non-Cumulative Preferred Stock (the
“1992 Preferred Stock”) issued on April 27, 1992 and currently outstanding (together, the “Existing
Preferred Stock”) with respect to dividends.

Dividends on the Preferred Stock will not be cumulative. If a dividend is not paid on the Preferred
Stock, the holders of the Preferred Stock will have no claim in respect of such non-payment so long as no

dividend is paid on the Common Stock (or any other junior stock) or the Existing Preferred Stock for
the then-current period.

The Board of Directors may, in its discretion, choose to pay dividends on the Preferred Stock
without the payment of any dividends on the Common Stock.

No dividends will be declared or paid or set apart for payment on any shares of the Preferred Stock
if at the same time any arrears or default exists in the payment of dividends on any outstanding class or
series of stock of Freddie Mac ranking prior to the Preferred Stock with respect to the payment of
dividends. At the time of issuance of the Preferred Stock, no class or series of stock of Freddie Mac
ranking prior to the Preferred Stock will exist.

Holders of shares of the Preferred Stock will not be entitled to any dividends, whether payable in
cash or property, other than as described above and will not be entitled to interest, or any sum in lieu of
interest, in respect of any dividend payment. See “Regulatory Matters” for a description of possible
regulatory restrictions on Freddie Mac’s payment of dividends.

Changes in the Dividends-Received Percentage

If, prior to April 26, 1998, one or more amendments to the Code are enacted that reduce the
percentage of the dividends-received deduction (currently 70 percent) as specified in section 243(a)(1)
of the Code or any successor provision (the “Dividends-Received Percentage”), certain adjustments
may be made in respect of the dividends payable by the Corporation, and Post Declaration Date
Dividends and Retroactive Dividends (as such terms are defined below) may become payable, as
described below.

The amount of each dividend payable (if declared) per share of Preferred Stock for dividend
payments made on or after the effective date of such change in the Code will be adjusted by multiplying
the amount of the dividend payable described above under “Dividends” (before adjustment) by a factor,
which will be the number determined in accordance with the following formula (the “DRD Formula”),
and rounding the result to the nearest cent (with one-half cent rounded up):

1-.35(1-.70)
1-.35(1-DRP)

For the purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as
a decimal) applicable to the dividend in question; provided, however, that if the Dividends-Received

10


Due to the time and expense of acquiring, managing and disposing of property, foreclosure is not
always the most effective method of resolving problems associated with non-performing mortgages. As a
result, Freddie Mac has increased its use of alternative loss mitigation strategies for single-family and
multifamily mortgages. These strategies include pre-foreclosure sales (in which the corporation accepts
less than the full principal balance outstanding on the mortgage), loan modifications and other forms of
refinancing, forbearance and other foreclosure alternatives. Foreclosure alternatives have tended to
accelerate charge-offs for affected properties, but are expected to reduce overall credit costs by
eliminating costs associated with acquisition, management and disposition of properties taken in
foreclosure. Accordingly, the corporation expects that the increasing use of foreclosure alternatives
ultimately will reduce the number of foreclosed properties and the overall level of credit-related
expenses. See “Management's Discussion and Analysis of Financial Condition and Results of Opera-
tions — Risk Management — Credit Risk — Non-performing Assets.”

Freddie Mac manages the risk of loss from defaults, foreclosure and REO activities by monitoring
and managing the various factors that influence this risk. The most significant of these factors are the
quality and effectiveness of the corporation’s mortgage purchase underwriting standards; the sensitivity
of the total mortgage portfolio to changing economic conditions; and the corporation’s ability to resolve
and dispose of its REO assets on terms advantageous to Freddie Mac. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk.”

REO Activities
Freddie Mac’s REO activities during 1995 and 1994 are reflected in the table below.

Single-Family REO
Number of REO Number of REO
properties in Number of Number of properties in Average net loss
inventory as of property property inventory as of Average holding —_per property
January 1 acquisitions dispositions _ December 31 __period (in days) _disposition(1)
1995 .... 8,632 15,530 16,116 8,046 210 $39,266 (35% loss rate)
1994 ..... 7,670 15,289 14,327 8,632 200 $35,353 (33% loss rate)

Multifamily REO

Number of REO Number of REO
properties in. Number of Number of properties in ‘Average net loss
inventory as of property property inventory as of Average holding —_per property
January 1 acquisitions dispositions December 31__period (in days) _dlisposition(1)
1995 .... 170 47 121 96 463 $829,902 (57% loss rate)
1994 .... 218 171 219 170 400 $614,641 (55% loss rate)

(1) Cumulative net mortgage and REO-related losses with respect to properties disposed of in the indicated year. Comprised
principally of mortgage charge-offs, uncollected interest, REO holding period income and expenses, REO valuation

adjustments and REO disposition gains or losses. Excludes net losses on facilitated sales of defaulted mortgages prior to
foreclosure.

Note 6 of Notes to Consolidated Financial Statements summarizes Freddie Mac’s REO activity
for the years ended 1995, 1994, and 1993. For further information concerning Freddie Mac’s single-
family and multifamily REO, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Risk Management — Credit Risk — Credit Performance.”

Economic weakness in California has led to increased REO acquisitions of single-family properties
in that area by Freddie Mac and other financial institutions. While REO acquisitions by Freddie Mac
increased in 1995 (and may increase further in future periods), they are expected to remain a small
percentage of Freddie Mac’s overall asset base. Freddie Mac anticipates, however, that its ability to
dispose of REO properties in a timely manner and/or at advantageous prices in the near future may be
adversely affected, particularly in the West, by the increasing volume of REO properties in that region
offered for sale by the corporation and by other financial institutions.

14


Determination Date is superseded on Telerate Page 3750 or Reuters Page LIBO, as the case may be, by
a corrected rate before 12:00 noon (London time) on such Determination Date, such corrected rate as so
substituted on the applicable page shall be the applicable LIBOR for such Determination Date.

(c) If, prior to April 26, 1998, one or more amendments to the Internal Revenue Code of 1986, as
amended (the ‘‘Code”’), are enacted that reduce the percentage of the dividends-received deduction as
specified in section 243(a)(1) of the Code or any successor provision (the ‘Dividends-Received
Percentage’), certain adjustments may be made in respect of the dividends payable by the Corporation,
and Post Declaration Date Dividends and Retroactive Dividends (as such terms are defined below) may
become payable, as described below.

The amount of each dividend payable (if declared) per share of Non-Cumulative Preferred Stock
for dividend payments made on or after the effective date of such change in the Code will be adjusted by
multiplying the amount of the dividend payable pursuant to clause (a) of this Section 2 (before
adjustment) by a factor, which shall be the number determined in accordance with the following
formula (the “‘DRD Formula’), and rounding the result to the nearest cent (with one-half cent rounded
up):

1-.35(1-.70)
1=-35(1-DRP)

For the purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as
a decimal) applicable to the dividend in question; provided, however, that if the Dividends-Received
Percentage applicable to the dividend in question is less than 50%, then the DRP shall equal .50. In the
event an adjustment to any dividend payable on the Non-Cumulative Preferred Stock is made pursuant
to this Section 2(c), the resulting dividend rate may exceed 9% per annum. No amendment to the Code,
other than a change in the percentage of the dividends-received deduction set forth in section 243(a)(1)
of the Code or any successor provision, shall give rise to an adjustment.

Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation
receives either an unqualified opinion of nationally recognized independent tax counsel selected by the
Corporation or a private letter ruling or similar form of assurance from the Interna] Revenue Service
(the “IRS”) to the effect that such an amendment does not apply to a dividend payable on the Non-
Cumulative Preferred Stock, then such amendment shall not result in the adjustment provided for
pursuant to the DRD Formula with respect to such dividend. The opinion referenced in the previous
sentence shall be based upon the legislation amending or establishing the DRP or upon a published
pronouncement of the IRS addressing such legislation. Unless the context otherwise requires, references
to dividends herein shall mean dividends as adjusted by the DRD Formula. The Corporation’s
calculation of the dividends payable as so adjusted shall be final and not subject to review.

Notwithstanding the foregoing, if any such amendment to the Code is enacted after the dividend
payable on a Dividend Payment Date has been declared but before such dividend is paid, the amount of
the dividend payable on such Dividend Payment Date shall not be increased. Instead, additional
dividends (the “Post Declaration Date Dividends”), equal to the excess, if any, of (x) the product of the
dividend paid by the Corporation on such Dividend Payment Date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage
applicable to the dividend in question and .50) over (y) the dividend paid by the Corporation on such
Dividend Payment Date, shall be payable (if declared) to holders on the record date applicable to the
next succeeding Dividend Payment Date in addition to any other amounts payable on such date.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received
Percentage retroactively applies to a Dividend Payment Date as to which the Corporation previously
paid dividends on the Non-Cumulative Preferred Stock (each, an “Affected Dividend Payment Date”),
the Corporation shall pay (if declared) additional dividends (the “Retroactive Dividends”) to holders on
the record date applicable to the next succeeding Dividend Payment Date (or, if such amendment is
enacted after the dividend payable on such Dividend Payment Date has been declared, to Holders on
the record date applicable to the second succeeding Dividend Payment Date following the date of
enactment) in an amount equal to the excess of (x) the product of the dividend paid by the Corporation

A-3


Federal savings associations and federal savings banks may invest in the shares of Preferred Stock
without regard to limitations generally applicable to investments. 12 U.S.C. §1464(c)(1)(E). Preferred
Stock held by a federal savings association or federal savings bank is subject to a 100% risk weighting
for capital adequacy purposes. 12 C.F.R. §567.6(a)(1)(iv)(T).

Federally insured state-chartered banks, state-chartered banks which are members of the Federal
Reserve System, and federally insured state-chartered savings banks and state-chartered savings and
Joan associations may invest in the shares of Preferred Stock to the extent permitted by SMMEA (as
defined below) and by applicable state law, after complying with any procedures imposed by the state.
Preferred Stock held by such an institution is subject to a 100% risk weighting for federal capital
adequacy purposes. 12 C.F.R. Part 325, Appendix A; 12 C.F.R. Part 208, Appendix A; 12 C.F.R.
§567.6(a)(1)(iv)(T).

Federal credit unions may purchase the shares of Preferred Stock without regard to limitations
generally applicable to investments. 12 U.S.C. §1757(7)(E).

The shares of Preferred Stock are “stock... of a corporation which is an instrumentality of the
United States” within the meaning of §7701(a)(19)(C)(ii) of the Internal Revenue Code of 1986 for
purposes of the 60 percent of assets limitation applicable to domestic building and loan associations.

In addition to the specific authorizations discussed above, §106 of the Secondary Mortgage Market
Enhancement Act of 1984 (“SMMEA”) provides that any person, trust, corporation, partnership,
association, business trust or business entity created pursuant to or existing under the laws of the United
States or any state (including the District of Columbia and Puerto Rico) is authorized to purchase, hold
and invest in securities issued or guaranteed by Freddie Mac (including the shares of Preferred Stock)
to the same extent that the investor is authorized to purchase, hold or invest in obligations issued or
guaranteed as to principal and interest by the United States or any agency or instrumentality thereof.
Prior to October 4, 1991, states were authorized by SMMEA to enact legislation which specifically
referred to §106 and either prohibited or limited an investor’s authority to purchase, hold or invest in
securities issued or guaranteed by Freddie Mac. 15 U.S.C. §77r-1. To the best of Freddie Mac’s
knowledge, 18 states currently have legislation limiting to varying extents the ability of certain entities
(in most cases, insurance companies) to invest in securities issued or guaranteed by Freddie Mac,
including the shares of Preferred Stock.

Notwithstanding the preceding paragraphs, investors should consult their legal advisors to deter-
mine whether and to what extent the shares of Preferred Stock constitute legal investments for such
investors or are eligible to be used as security for borrowings. The foregoing does not take into
consideration the application of statutes, regulations, orders, guidelines or agreements generally gov-
erning investments made by a particular investor, including but not limited to “prudent investor”
provisions, safety and soundness conditions and percentage-of-assets limits. The regulatory authorities
that administer the statutes or regulations discussed or referred to above generally reserve discretion
whether securities, such as the Preferred Stock, that are otherwise acceptable for investment may be
purchased or pledged by the institutions subject to their jurisdiction. An institution under the jurisdic-
tion of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union
Administration, the Department of the Treasury or any other federal or state agency with similar

authority should review any applicable regulations, policy statements and guidelines before purchasing
the Preferred Stock.


Balance Sheet
Retained portfolio
Total assets... . .
Debt securities, net
‘Total liabilities . .
Capital base:
Stockholders’ equity
Reserves for losses on
mortgages(!) .

Primary capital base
Subordinated borrowings . .
Adjusted total capital base . . .

Mortgage Participation Certificates
(“PCs")(2) .
Freddie Mac PCs
portfolio os
Primary capital ratio(3) . . . .
Adjusted total capital ratio(4
Return on common equity(5)
Return on average assets and
average contingencies(6) ...... .
Mortgage Purchase and Financing
Activities
Mortgage purchases ...........
Number of mortgages purchased . -
Mortgage PC settlements:
Single-class..... . .
Multiclass (REMICs) .
Long-term debt:
Issued... .
Retired. .

Net. .

Income Statement
Net interest income on earning
assets(7)
Management and guarantee
income(7)...... 0.0.2
Income before income taxes. .
Net income . .
Earnings per common share(8) -
Weighted average common shares
outstanding (in thousands)(8)
Dividends per common share(8) . . .
Dividend payout ratio on common
stock ovo... sees eee
Ratio of earnings to fixed
charges(9) : ee
Ratio of earnings to ined fixed
charges and preferred stock
dividends(9)

held in retained

At ur For the

Quarter Ended
March 31, ____At or For the Year Ended December 31, __
1996 «19951995 1994 1993 1992 191
(dollars in millions, except per share amounts) ~
$117,420 $ 77,313 $107,424 $ 72,828 $ 55.698 $ 33,896 $ 27,046
$143,792 $113,625 $137,181 $ 106,199 $ 83,880 $ 59,502 $ 46,860
$123,637 $100,439 $119,328 $ 92.053 $ 48,510 $ 28173 $ 28,300
$136,753 $106,608 $130,297 $ 99.368 $ 77.406 $ 53,795 $ 41,725
$ 6012 $ 5351 $ 5863 $ 5162 $ 4437 S$ 3570 $ 2,566
683 __160 185
$6,546 $5,197 4,355
633 Ag 1,483 1,458
$7479 § 7,121 6,680 $5,813
$524,327 $492,194 $515,051 $ 491,325 $ 454,906 $ 407,514 $ 359,163
$ 63,138 $ 33.441 $ 56,006 $ 30,669 $ 15,877 N/A N/A
1.11% 1.06% 1.10% 1.04% 0.99% 0.93% 0.81%
1.21% 1.28% 1.20% 1.26% 1.28% 1.24% 1,30%
22% 22% 22% 23% 22% 21% 24%
0.20% 0.18% 0.19% 0.18% 0.16% 0.14% 0.15%
$ 36,231 $ 13,400 $ 98,386 $ 124,246 $ 229,706 $ 191,126 $ 99,965
338.951 121,115 933,559 1,256,549 2,315,162 1,969,851 1,061,942
$ 32,741 $ 11214 $ 85,877 $ 117,110 $ 208,724 $ 179.207 $ 92,479
$ 5,153 $ 2956 $ 15,372 $ 73,131 $ 143,336 $ 131,284 $ 72,032
$ 9,084 $ 6050 $ 29,643 $ 22,744 $ 24,784 $ 9660 $ 4,346
$ (9.784) (1,312) _ (61,082) (6,462) (9,924) (5,159) (2,652)
$ (700) $ 4,738 $ 18,561 $ 16,282 $ 14860 $ 4501 $ 1,694
$ 387 $ 293 $ 1,298 $ 1047 $ 808 S$ 695 $ 683
$° 305 $ 295 $ 1185 $ 1,174 $ 1077 $ 936 $ 792
$ 440 $ 375 $ 1,586 $ $ 1128 $ 901 $ 800
S 301 $ 258 $ 109 $ $ 786 $ 622 $ 555
$ 160 $ 134 $ 569 § $ 407 $ 3.29 $ 3.08
178,413 180,760 _ 180,322 180,666 180,421 180,165 180,095
$ 035 $ 030 $ 120 S$ 1.04 0.88 0.76 0.67
291% = 22.41% 21.09% 20.47% 21.63% 23.14% 21.62%
1.22:1 1.24:1 1.231 13h 1320 1324 1.28:1
12u: 1.2311 1.22:1 1.30:1 1.30:1 1.3031 N/A

(1) “Reserve for losses on retained mortgages” and “Reserve for losses on sold mortgages.””

(2) Includes balances of Freddie Mac PCs held in the retained portfolio. Data for 1993 through 1995 have been restated to reflect this
revised reporting implemented in first quarter 1996.

QB)
(4)
(5)

(6)
ion)

“Primary capital base” divided by “Total assets” and “PCs” less Freddie Mac PCs held in the retained portfolio.
“Adjusted total capital base” divided by “Total assets” and “PCs” less Freddie Mac PCs held in the retained portfolio.

“Net income” (annualized for the quarterly periods) less preferred stock dividends, divided by the simple average of the beginning
and ending balances of “Stockholders' equity,” net of par and additional paid-in capital of preferred stock. for the reporting period.
Contingencies consist of PCs, less Freddie Mac’s PCs held in the retained portfolio.
Guarantee fee income on mortgages underlying Freddie Mac PCs held in the retained portfolio is no longer included in net interest

income on earning assets, but is included in management and guarantee income. Data for 1993 through 1995 have been restated to
reflect this revised reporting implemented in first quarter 1996.

(8)
9

interest (including amounts capitalized) and the portion of net rental expense deemed representative of interest

In April 1992, Freddie Mac effected a three-for-one split of its Common Stock. All earnings per share and dividends per share
amounts and weighted average shares outstanding have been adjusted retroactively to reflect the three-for-one stock split.
Earnings represent consolidated pretax income plus consolidated fixed charges. less interest capitalized. Fixed charges include


the corporation’s exposure to interest-rate risk. Similarly, interest-rate
caps, floors and corridors produce lower effective debt costs and higher
asset yields when combined with short-term debt issuances and asset
purchases by limiting the impact of significant interest-rate changes on
these instruments. To a lesser extent, the corporation uses short sales
of Treasury securities and spread-lock agreements to hedge against the
effects of changes in interest rates on the cost of debt used to finance
the retained portfolio.

During 1995, the corporation entered into $38.0 billion notional
amount of interest-rate agreements, $6.6 billion notional amount

of interest-rate agreements matured and $3.7 billion notional amount
were called prior to contractual maturity. Interest-rate agreements
were called prior to contractual maturity at their par values and thus
no gains or losses were deferred or recorded to income. The notional
principal amount of outstanding interest-rate agreements increased to
$58.5 billion at December 31, 1995, from $30.8 billion at December
31, 1994, The increase in the notional principal amount of interest-
rate agreements compared to December 31, 1994 primarily reflects
increased funding needs associated with continued growth of the
retained mortgage portfolio during 1995. Notional amounts serve only
as a factor in determining periodic interest amounts to be received and
paid and do not themselves represent actual amounts to be exchanged.
Thus, they do not directly reflect the corporation’s exposure to credit
and market risks.

Failure of a counterparty to perform under the terms of an interest-rate
agreement exposes the corporation to credit risk. The corporation's
aggregate exposure to credit loss for interest-rate agreements can be
estimated by calculating the cost to replace at current market values all
outstanding agreements for each counterparty with which the corporation
was in a net gain position. The corporation’s estimate of its aggregate
exposure to credit risk for transactions in a gain position was $27 mil-
lion at December 31, 1995, compared to $828 million at December
31, 1994. The substantial decrease in credit loss exposure reflects a
general decrease in interest rates since early 1995, which caused the
payment obligations of counterparties under interest-rate agreements,
where Freddie Mac receives a variable-rate obligation to decrease.

Freddie Mac manages the counterparty credit risk associated with
interest-rate agreements by dealing only with institutions that meet
high credit standards, limiting its exposure to any one counterparty,
regularly monitoring financial positions and requiring collateral in many
cases. At December 31, 1995, four counterparties, each with a credit
rating of A+ or better from one or more nationally recognized credit
rating agencies, accounted for approximately 52 percent of the
notional amount of the corporation's outstanding interest-rate agree-
ments. Collateral supporting the corporation’s net gain positions at
December 31, 1995 had an estimated market value of $3 million,

compared to $498 million at December 31, 1994. Substantially all of
the corporation’s uncollateralized net gain position of $24 million at
December 31, 1995 resulted from positions taken with counterparties
having among the highest credit ratings available from major rating
agencies. The corporation's policy for requiring collateral from counter-
parties to interest-rate agreements is based on independent credit ratings,
estimated credit loss exposure on net gain positions and assessments of
counterparty credit quality. Freddie Mac has not set aside specific reserves
for counterparty credit exposure and does not believe such reserves are
necessary at this time given the corporation’s collateral and counter-
party policy requirements. To date, Freddie Mac has not incurred any
counterparty defaults relating to interest-rate agreements.

Although Freddie Mac’s interest-rate risk management strategies are
designed to minimize the corporation’s exposure to market risk resulting
from changes in interest rates, Freddie Mac’s exposure to credit loss
can fluctuate from period to period due to changes in interest rates.
Further information regarding off-balance sheet financial transactions
is included in Note 10 to the Consolidated Financial Statements.

AVERAGE BALANCE SHEETS AND

RATE/VOLUME ANALYSIS.

The table on the following page presents average balance sheets for the
years ended December 31, 1995, 1994 and 1993, as well as informa-

tion with respect to yields earned on assets and rates paid on liabilities
for these periods.

Monthly weighted average balances are calculated for interest-earning
assets, interest-bearing liabilities and contingencies. When monthly
weighted average balance information is not available, a simple month-
to-month average balance is calculated. The accompanying rate/volume
analysis details the changes to Net interest income on earning assets
and Management and guarantee income during 1995, 1994 and 1993
resulting from changes in average balances and interest rates.

A-12


junior to the Non-Cumulative Preferred Stock, shall not be deemed to constitute such an
amendment, alteration, supplementation or repeal.

(iii) Holders of the Non-Cumulative Preferred Stock shall be entitled to one vote per share on
matters on which their consent is required pursuant to subparagraph (ii) of this paragraph (h). In
connection with any meeting of such holders, the Board of Directors shall fix a record date, neither
earlier than 60 days nor later than 10 days prior to the date of such meeting, and holders of record
of shares of the Non-Cumulative Preferred Stock on such record date shall be entitled to notice of
and to vote at any such meeting and any adjournment. The Board of Directors, or such person or
persons as it may designate, may establish reasonable rules and procedures as to the solicitation of
the consent of holders of the Non-Cumulative Preferred Stock at any such meeting or otherwise,
which rules and procedures shall conform to the requirements of any national securities exchange
on which the Non-Cumulative Preferred Stock may be listed at such time.

(i) RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE NON-CUMULATIVE
PREFERRED STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCON-
DITIONAL ACCEPTANCE BY THE HOLDER (AND ALL OTHERS HAVING BENEFICIAL OWN-
ERSHIP OF SUCH SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS OF THIS
CERTIFICATE. NO SIGNATURE OR OTHER FURTHER MANIFESTATION OF ASSENT TO
THE TERMS AND PROVISIONS OF THIS CERTIFICATE SHALL BE NECESSARY FOR ITS
OPERATION OR EFFECT AS BETWEEN FREDDIE MAC AND THE HOLDER (AND ALL SUCH
OTHERS).

IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Freddie Mac this 23rd
day of April 1996.

[Seal]

Maud Mater, Secretary

A-8


approves the payment, and under these circumstances the Corporation is prohibited from making any

dividend payment that would decrease the Corporation’s core capital to less than the critical capital
level.

In addition to the preceding requirements that relate directly to the payment of dividends, the
Director has authority, under certain conditions, to require the Corporation to submit for the Director's
approval a capital restoration plan or to restrict the Corporation’s activities, either of which also could
affect the payment of dividends. Specifically if the Director determines, after the risk-based capital
regulation has been in effect for one year, that the Corporation fails to meet the risk-based capital
standard, or if the Director determines, at any time, that the Corporation fails to meet the minimum
capital standard, the Corporation will be required to submit for the Director’s approval a capital
restoration plan setting forth a feasible plan for restoring the Corporation’s capital level. In addition, if
the Corporation at any time fails to meet the minimum capital standard, the Director is authorized to
impose various limitations on the Corporation’s activities. If, at any time, the Director determines that
the Corporation fails to meet the critical capital standard, the Director must appoint a conservator for
the Corporation.

If the Director does not approve a required capital restoration plan or determines that the
Corporation has failed to make reasonable efforts to comply with such a plan, then the Director may
treat the Corporation as not meeting capital standards that it otherwise meets and take the actions
authorized when the Corporation does not meet such standards. Similarly, if the Director determines
that the Corporation is engaging in conduct not approved by the Director that could result in a rapid
depletion of core capital or that the value of the property subject to mortgages held or securitized by the
Corporation has decreased significantly, the Director is authorized to treat the Corporation as not
meeting capital standards that it otherwise meets.

If the Corporation fails to meet or is treated by the Director as not meeting applicable capital
standards and the Director has reasonable cause to believe that the Corporation or any executive officer
or director of the Corporation is engaging in or about to engage in any conduct (which could include the
payment of dividends) that threatens to result in a material depletion of the Corporation’s core capital,
then the Director is authorized to commence proceedings pursuant to which, after a hearing, the
Director could issue a cease and desist order prohibiting such conduct. If the Director determines that
the conduct in question is likely to cause a significant depletion of core capital, the Director can issue
such an order without a hearing, which would be effective until completion of the cease-and-desist

proceedings, and can do so without regard to whether the Corporation meets all applicable capital
standards.

The Director has the authority to require the Corporation to submit a report to the Director

regarding any capital distribution (including any dividend) declared by the Corporation before the
Corporation makes the distribution.

The foregoing discussion with respect to the payment of dividends is equally applicable to Freddie
Mac’s redemption of the Preferred Stock and is based on Freddie Mac’s understanding and interpreta-
tions of the relevant provisions of the GSE Act. OFHEO has not yet issued any definitive guidance as to
its interpretations of these provisions of the Act. Until OFHEO has provided such guidance, there can
be no assurance that the foregoing discussion will be consistent with OFHEO’s interpretation in every
respect. A more detailed discussion of the regulatory oversight of Freddie Mac’s capitalization and the
terms used above appears under “Regulation and Governmental Relationships — Regulation of Fred-
die Mac — OFHEO Oversight” in the Information Statement.

No Preemptive Rights and No Conversion

No holder of the Preferred Stock will have any preemptive right to purchase or subscribe for any
other shares, rights, options or other securities of any class of Freddie Mac which at any time may be
sold or offered for sale by Freddie Mac. The holders of shares of Preferred Stock will not have any right

to convert such shares into or exchange such shares for any other class or series of stock or obligations of
Freddie Mac.

14


FEDERAL HOME LOAN MORTGAGE CORPORATION

Freddie Mac was chartered on July 24, 1970 pursuant to the Federal Home Loan Mortgage
Corporation Act, Title III of the Emergency Home Finance Act of 1970, as amended (the “Freddie
Mac Act”). Freddie Mac’s statutory purposes are (i) to provide stability in the secondary market for
residential mortgages, (ii) to respond appropriately to the private capital market, (iii) to provide
ongoing assistance to the secondary market for residential mortgages (including activities relating to
mortgages on housing for low- and moderate-income families involving a reasonable economic return
that may be less than the return earned on other activities) and (iv) to promote access to mortgage
credit throughout the United States (including central cities, rural areas and underserved areas) by
increasing the liquidity of mortgage investments and improving the distribution of investment capital
available for residential mortgage financing. To meet these statutory purposes, Freddie Mac continu-
ously purchases residential mortgages from mortgage originators, and finances such purchases under all
market conditions. Freddie Mac strives to fulfill these purposes through the purchase of investment-
quality mortgages from all communities and geographic segments of the United States, and thereby
improve the quality of life by making the American dream of decent accessible housing a reality.

The principal office of Freddie Mac is located in McLean, Virginia. Freddie Mac has regional
offices located in Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; McLean, Virginia; New York, New
York; and Woodland Hills, California.

BUSINESS
General

As a GSE chartered by Congress principally to provide a reliable source of funds for residential
mortgages, Freddie Mac engages in a single line of business operations: the purchase of residential
mortgages and the financing of those purchases primarily through the sale of mortgage-related
securities and unsecured debt. In addition, Freddie Mac can engage in activities that are incidental to
and supportive of its primary line of business. The corporation’s success in pursuing this unitary
business operation is dependent largely upon the skills of its management and employees in responding
to conditions prevailing in the mortgage markets and the general capital markets. In its 25 years of
operations, Freddie Mac has been very successful. Specifically, it routinely has been able to generate
profitable returns and achieve a sound financial condition while operating in a wide variety of economic
and market environments. If these or other factors should change in a manner that adversely affects the
corporation’s business prospects, limitations within Freddie Mac’s charter which prevent the corpora-
tion from diversifying into new business endeavors unrelated to the fulfillment of its statutory purposes
limit Freddie Mac’s flexibility to respond to such changes.

Freddie Mac is subject to two primary types of risk in the conduct of its business: credit risk
associated with the mortgages it purchases and the institutions with which it does business; and interest-
rate risk that principally results from mortgage prepayments that may create mismatches in the
corporation’s assets and liabilities associated with its mortgage portfolio. For a discussion of the impact
and management of these risks, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Risk Management.”

Freddie Mac purchases first-lien, conventional residential mortgages, including both whole loans and
participation interests in such mortgages (referred to collectively as “mortgages”). Freddie Mac
purchases both fixed-rate mortgages and adjustable-rate mortgages (“ARMs”). A conventional mortgage
is a mortgage that does not have the benefit of any guarantee or insurance by the United States or any of
its agencies or instrumentalities. A mortgage secured by a property with one to four living units is referred
to as a “single-family” mortgage, and a mortgage secured by a property with five or more living units is
referred to as a “multifamily” mortgage. To a lesser extent, Freddie Mac also purchases mortgages that
are fully insured by the Federal Housing Administration (“FHA”) or guaranteed, in part, by the
Department of Veterans Affairs (collectively, “FHA/WVA” mortgages) and subordinate lien mortgages
(“‘second” mortgages) on single-family properties. Currently, substantially all of the single-family

3


MANAGEMENT’S REPORT ON THE FINANCIAL STATEMENTS AND INTERNAL CONTROL STRUCTURE

The management of the Federal Home Loan Mortgage Corporation
(the corporation or Freddie Mac) is responsible for the preparation,
integrity, and fair presentation of the corporation’s annual consolidated
financial statements. The annual consolidated financial statements
presented have been prepared in accordance with generally accepted
accounting principles, and, as such, include amounts based on
judgments and estimates made by management. Management has

also prepared the other information included in this annual report,

and is responsible for its accuracy and consistency with the consoli-
dated financial statements.

‘The annual consolidated financial statements referred to above have
been audited by Arthur Andersen LLP independent public accountants,
who have been given unrestricted access to all financial records and
related data, including minutes of all meetings of stockholders, the
Board of Directors, and committees of the Board. Management believes
that all representations made to Arthur Andersen LLP during the audit
were valid and appropriate.

In addition, management is responsible for establishing and maintain-
ing an internal control structure over financial reporting, including
controls over the safeguarding of assets. The objective of the internal
control structure is to provide reasonable assurance to management
and the Board of Directors as to the preparation of the financial state-
ments in accordance with generally accepted accounting principles.

Management has made its own assessment of the effectiveness of the
corporation’s internal control structure over financial reporting, includ-
ing controls over the safeguarding of assets, as of December 31, 1995,
in relation to the criteria described in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 1995, the corporation’s internal con-
trol structure was effective in achieving the objective stated above.

However, there are inherent limitations in the effectiveness of any
internal control structure, including the possibility of human error
and the circumvention or overri

ing of controls, Accordingly, even
an effective internal control structure can provide only reasonable
assurance with respect to the reliability of the financial statements.
Furthermore, the effectiveness of any internal control structure can
change with changes in circumstances.

Management also recognizes its responsibility for fostering a strong
ethical climate so that Freddie Mac's affairs are conducted according to
the highest standards of personal and corporate conduct. This respon-
sibility is characterized and reflected in Freddie Mac’s ethical standards
policy, which is publicized throughout the corporation. The ethical

standards policy addresses, among other things, potential conflicts of
interests, acceptable employee activities conducted outside of Freddie
Mac, acceptable financial activities, confidentiality of proprietary
information, and ethical business conduct, including compliance with
selected laws and regulations. Freddie Mac maintains a systematic
program to assess compliance with these policies.

The corporation has an Internal Audit Department whose responsi-
bilities include monitoring compliance with established policies and
procedures and evaluating Freddie Mac’s internal control structure.
‘The Internal Audit Department is independent of the activities it
reviews. Operational and special audits are conducted, and internal

audit reports are submitted to appropriate management and the audit
committee of Freddie Mac’s Board of Directors.

The Audit Committee of the Board of Directors meets periodically
with management, internal auditors, and Freddie Mac’s independent
public accountants to review matters relating to financial accounting
and reporting policies and control procedures. Both Arthur Andersen
LLP and the Internal Audit Department have full and free access, with
and without management present, to the Audit Committee.

Land C Srondy

Leland C. Brendsel
Chairman and Chief Executive Officer

jee KR Li bbows —

John P Gibbons
Executive Vice President and

Chief Financial Officer (Interim)

A-41


1995

Notional or
contractual amount

‘Average notional or
contractual amount

Gross positive Gross negative

at year end outstanding during year fair values fair values
(dollars in millions)
Debt-linked swaps $37,277 $28,505 $219 $(710)
Asset-linked swaps 7,107 4,361 5 (ila)
Interest-rate swaps 1,000 1,468 2 Q)
Interest-rate caps 4,448 3,804 33 -
Interest-rate floors 6,078 5,413 45 (16)
Interest-rate corridors 2,529 2,485 40 (13)
Short sales of Treasury securities

and spread-lock agreements 24 51 - =

Total $58,463 $46,087 $364 $(855)
1994
Notional or ‘Average notional or
contractual amount contractual amount Gross positive Gross negative
at year end outstanding during year fair values fair values

(dollars in millions)
Debt-linked swaps $17,333 $14,521 $712 $(138)
Asset-linked swaps 1,661 814 20 (9)
Interest-rate swaps 2,840 3,157 9 (3)
Interest-rate caps 3,145 1,762 227 -
Interest-rate floors 4,950 4,110 3 -
Interest-rate corridors 908 134 51 (14)
Short sales of Treasury securities

and spread-lock agreements - 153 - -

Total $30,837 $24,651 $1,022 $(194)

Interest-rate swaps — Interest-rate swaps are contractual agreements
between two parties for the exchange of periodic payments based on a
notional principal amount and agreed-upon fixed and variable rates. The
majority of Freddie Mac’s interest-rate swap agreements are executed in
conjunction with debt issuances (debt-linked swaps) or asset purchases
(asset-linked swaps). These swaps, when combined with the underlying
liability or asset, synthetically create debt and asset yields that produce
lower effective debt costs or higher effective asset yields than those avail-
able on direct debt issuances or asset purchases. To a lesser extent, the
corporation is also a party to interest-rate swaps that stabilize the effective
costs or yields on short-term debt and investment transactions related to
the monthly mortgage and security payment remittance cycle.

Interest-rate caps and floors — interest-rate caps and floors are agree-
ments in which one party makes a one-time up-front premium payment
to another party in exchange for the right to receive interest payments
based on a particular notional amount and the difference between the
agreed-upon index rate over a specified “cap” or “floor” strike rate.
Interest-rate caps and floors can be structured as corridors. A corridor
combines a purchased and sold interest-rate cap or floor to effectively
reduce the cost of the interest-rate cap or floor protection. Currently,

all of the interest-rate corridors entered into by Freddie Mac involve
interest-rate caps.

Similar to debt- and asset-linked swaps, interest-rate caps and floors
produce lower effective debt costs and higher investment yields when
combined with short-term debt issuances and investments by limiting
the impact of interest rate changes on these instruments.

Short sales of Treasury securities and spread-lock agreements —
Short sales of Treasury securities represent obligations to deliver, at a
future date, securities that have not yet been purchased. Spread-lock
agreements are agreements that duplicate the effect of purchases of
Treasury securities but do not actually involve the purchase of Treasury
securities. Both short sales of Treasury securities and spread-lock agree-
ments are used to hedge against the effects of changes in interest rates
on the cost of debt used to finance retained mortgages.

Notional amounts serve as a factor in determining periodic interest amounts
to be received and paid and do not themselves represent actual amounts
to be exchanged. Although the notional amounts of hedging instruments
may be indicative of the extent to which the corporation uses these finan-
cial instruments in managing its interest-rate risk exposure, they do not

directly represent the corporation’s exposure to credit and market risks.

Failure of a counterparty to perform under the terms of a hedging instru-
ment exposes the corporation to credit risk. The corporation reduces

counterparty risk by dealing only with institutions that meet certain credit
guidelines, requiring collateral in certain circumstances and continuously

A-34


No Voting Rights

Section 306(f) of the Freddie Mac Act prohibits the holders of Preferred Stock from voting with
respect to the election of any member of the Board of Directors. Except as set forth under “Amend-
ments” below, the holders of the Preferred Stock will not be entitled to vote.

Liquidation Rights

Upon any voluntary or involuntary dissolution, liquidation or winding up of Freddie Mac, after
payment or provision for the liabilities of Freddie Mac and the expenses of such dissolution, liquidation
or winding up, the holders of the outstanding shares of the Preferred Stock will be entitled to receive out
of the assets of Freddie Mac available for distribution to stockholders, before any payment or
distribution is made on the Common Stock (or any other junior stock), the amount of $50.00 per share
plus an amount equal to the dividend (calculated as provided in the Certificate of Designation) for the
then-current quarterly Dividend Period accrued through and including the date of such liquidation
payment. In the event of the dissolution, liquidation or winding up of Freddie Mac, the rights of the
Preferred Stock are on a parity with those of the Existing Preferred Stock. If the assets of Freddie Mac
available for distribution in such event are insufficient to pay in full the aggregate amount payable to
holders of the Preferred Stock, the Existing Preferred Stock and any other class or series of stock
ranking on a parity upon liquidation with the Preferred Stock and the Existing Preferred Stock, the
assets will be distributed to the holders of Preferred Stock, the Existing Preferred Stock and such parity
stock pro rata, based on the amounts to which they are entitled.

Nothwithstanding the foregoing, holders of the Preferred Stock will not be entitled to be paid any
amount in respect of a dissolution, liquidation or winding up of Freddie Mac until holders of any classes
or series of stock of Freddie Mac ranking prior to the Preferred Stock upon liquidation have been paid
all amounts to which such classes or series are entitled.

A consolidation, merger or combination of Freddie Mac with or into any other corporation or
entity, or the sale of all or substantially all of the property or business of Freddie Mac, will not be

deemed to be a liquidation, dissolution or winding up of Freddie Mac for purposes of these provisions on
liquidation rights.

Additional Classes or Series of Stock

Freddie Mac will have the right to create and issue additional classes or series of stock ranking
prior to, on a parity with or junior to the Preferred Stock, as to dividends, liquidation or otherwise,
without the consent of holders of the Preferred Stock.

Amendments

Without the consent of the holders of the Preferred Stock, Freddie Mac will have the right to
amend, alter, supplement or repeal any terms of the Preferred Stock to cure any ambiguity, to correct or
supplement any term which may be defective or inconsistent with any other term or to make any other
provisions so long as such action does not materially and adversely affect the interests of the holders of
the Preferred Stock. Otherwise, the terms of the Preferred Stock may be amended, altered, supple-
mented or repealed only with the consent of the holders of at least two-thirds of the outstanding shares

of Preferred Stock. On matters requiring their consent, holders of the Preferred Stock will be entitled to
one vote per share.

NYSE Listing

The Preferred Stock has been approved for listing on the NYSE. The NYSE symbol for the
Preferred Stock is FREprB.

15


QUARTERLY RESULTS OF OPERATIONS (unaudited)

1995 1994
4th 3rd 2nd Ist 4th 3rd 2nd Ist
(dollars in millions)
Interest on retained mortgages $ 1,899 $1,694 $1,513 $ 1,399 $ 1,284 $1,163 $1,073 $1,008
Interest on investments 405 518 510 455 382 334 277 294
2,304 2,212 2,023 1,854 1,666 1,497 1,350 1,302
Interest on debt securities (1,827) (1,764) (1,659) (1,514) (1,335) (1,151) (960) (817)
Interest expense due to
security program cycles (83) (80) (42) (28) (45) (64) (120) Qu)
Net interest income on
earning assets 394 368 322 312 286 282 270 274
Management and guarantee income 269 270 mM 216 278 282 276 272
Other income, net 9 7 10 13 8 6 16 36
Total revenues 672 645 604 601 S72 570 562 382
Provision for mortgage losses (70) (65) (60) (60) (50) (50) (50) (50)
REO operations expense (76) (73) (68) (69) (56) (56) (58) (55)
Administrative expenses (102) (99) (97) (97) (97) (95) (95) (92)
Income before income taxes
and extraordinary item 424 408 379 375 369 369 359 385
Provision for income taxes (133) (130) (115) (117) (117) (120) (110) (108)
Extraordinary item, net of taxes = - - - = = = (44)
Net income S291 $278 ~$ 264 $258 $252 $249 $249 $233
Net income available to
common stockholders $ 274 S$ 262 § 248 $ 242 $ 235 $233 $ 233 $ 217
TOTAL PORTFOLIO LIQUIDATION" (annualized) (unaudited)
Quarter Ended
Year ‘March 31, June 30, September 30, December 31, ‘Annual
1995 8.1% 10.7% 15.0% 14.3% 12.0%
1994 214 17.0 12.0 99 16.4
1993 22.3 413 39.3 48.4 38.0
1992 29.8 33.8 29.7 40.0 33.3
1991 9.8 16.1 14.1 18.1 14.6
(1) Liquidation rates on mortgages sold under the PC programs as weil as those retained by Freddie Mac.
MORTGAGE DELINQUENCY STATISTICS (unaudited)
SINGLE-FAMILY MORTGAGES”
Total Number Three or more Foreclosures Approved Freddie Mac
Date of Mortgages Delinquent Payments and In Process Total At-Risk”
12/95 7,080,208 0.27% 0.34% 0.61% 0.60%
12/94 6,835,730 0.25% 0.32% 0.57% 0.55%
12/93 6,585,430 0.27% 0.34% 0.61% N/A
12/92 6,388,896 0.30% 0.34% 0.64% N/A
12/91 6,098,626 0.309 0.319% 0.61% N/A
(1) Numbers ond percentages include all 1- to 4-family mortgages sold under the PC programs as well as those retained by Freddie Mac.
(2) Includes those mortgages for which Freddie Mac has assumed primary default risk
MULTIFAMILY MORTGAGES?
(dollars in millions) Total Dollars of
Total Dollars ‘Two or more Foreclosures Approved Non-Performing
Date of Mortgages Delinquent Payments” and In Process Total Mortgages
12/95 S 6,665 1.12% 1.76% 2.88% $192
12/94 $ 6,297 0.83 % 2.96% 3.79% $239
12/93 $7,374 0.86% 5.06% 5.92% $437
12/92 $ 8,967 2.02% 4.19% 6.81% $610
12/91 $10,321 1.52% 3.90% 5.42% $560

(1) Numbers and percentages include all conventional multifamily fixed-rate mortgages sold under the PC programs as well as those retained by Freddie Mac.

(2) Prior years data have been restated t0 reflect the transfer of multifamily in-subscance foreclosures from real estate owned 0 the retained portfolio pursuant 10 the
‘adopiion of Statement of Financial Accounting Standards No. 114

(3) Excludes mortgages in litigation that are less than 60 days delinquent

A-40


Delinquencies: The overall increase in single-family delinquencies
(based on the number of mortgages delinquent 90 days or more), from.
0.57 percent at December 31, 1994 to 0.61 percent at December 31,
1995, primarily reflected a 9 basis point increase in the delinquency rate
for the West region, which continues to experience areas of economic
weakness, particularly in California. Continued economic weakness in
California and, to a lesser extent, the Northeast is expected to cause
the delinquency rates for those areas to remain at high levels relative
to the delinquency rates in other areas. The single-family delinquency
rate on Freddie Mac’s at-risk portfolio increased from 0.55 percent at
December 31, 1994 to 0.60 percent at December 31, 1995.

The multifamily delinquency rate of 2.88 percent (based on the net
carrying value of mortgages delinquent 60 days or more) and the
balance of non-performing multifamily mortgages both decreased
from December 31, 1994. The decrease in non-performing multifamily
mortgages resulted from successful asset resolution efforts and general
economic improvements in the multifamily market. As of December 31,
1995, none of the multifamily mortgages purchased since Freddie Mac’s
full re-entry into this market in 1994 have defaulted.

Mortgage Charge-offt and REO: The $92 million increase in single-
family charge-offs from 1994 resulted primarily from increased REO
acquisitions. Increased REO acquisitions were driven by continued
economic weakness and declining average house prices in California
and certain areas within the Northeast region. The increase in single-
family charge-offs also reflected the increased use of loss mitigation
strategies, particularly foreclosure alternatives, which tend to accelerate
the recognition of credit losses in the short term. Foreclosure alter-
natives are intended to reduce the number of delinquent mortgages
proceeding to foreclosure, and ultimately reduce total credit-related
expenses and costs by eliminating the expense of acquiring, carrying
and subsequently disposing of REO properties (see also “Results of
Operations — Credit-Related Expenses”).

As previously mentioned, the corporation has experienced weaker
credit performance on single-family mortgages purchased before 1992
Pre-1992 mortgage purchases currently comprise approximately 20
percent of the total single-family mortgage portfolio, but account for
approximately 80 percent of current single-family credit losses, which
consist of charge-offs and REO operations expense. The corporation has
experienced generally stronger credit performance from its post- 1991
mortgage purchases, which consist primarily of lower-coupon, fixed-
rate mortgages. Although the corporation has experienced somewhat
higher EPD rates on 1994 mortgage purchases, it generally expects the
performance of post-1991 mortgage purchases, along with the increasing
level of credit-enhanced mortgage purchases, to positively influence
overall credit results over time.

The dollar amount and number of single-family REO properties
decreased from December 31, 1994, as dispositions outpaced
acquisitions during the year. Although REO property acquisitions and
dispositions both increased compared to 1994, dispositions outpaced
acquisitions as a result of intensive efforts to reduce the average REO
inventory age and reduce the percentage of REO held longer than one

A-8

year. The majority of REO additions continues to consist of foreclosed
California properties, although there remains a significant inflow of
properties from the Northeast region.

‘The volume of single-family REO additions may increase in 1996 as
current delinquencies, primarily California properties, proceed through
the foreclosure process. In addition, the corporation’s growing emphasis
on loss mitigation strategies will continue the accelerated recognition of
credit losses. Based on management's current expectations for delinquency
rates, the transition of mortgages through the delinquency pipeline, average
loss rates, the level of loss mitigation activities and total mortgage
portfolio growth, single-family credit losses in 1996 are expected to
increase in dollar terms, but remain at roughly current levels as a
percentage of the single-family mortgage portfolio. Should economic
conditions such as interest rates, employment rates or house-price
appreciation rates vary materially from management's expectations,

or if management changes its strategy for loss mitigation transactions,
credit losses could vary from expected levels.

Multifamily charge-offs decreased $14 million from 1994 due to a
decrease in REO acquisitions, which reflected strengthening real
estate values in certain areas combined with successful loss mitigation
strategies. The multifamily REO balance decreased by $80 million
from December 31, 1994, as a result of declining acqu
active disposition activity during 1995.

ions and

The corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 114 effective January 1, 1995. This statement requires that
impaired loans be valued based on the present value of expected future
cash flows discounted at the loan’s effective interest rate, or the fair value
of the collateral if the loan is collateral dependent. In addition, under
SFAS No. 114, multifamily loans deemed to be in-substance foreclosed
are no longer transferred to REO, but rather continue to be carried in
the retained mortgage portfolio until the foreclosure process is complete.
As a result, prior period multifamily delinquencies and REO balances
have been restated to reflect the adoption of SFAS No. 114. The adoption
of SFAS No. 114 did not have a material effect on reported results of
operations or financial position. Additional information regarding REO
is provided in Note 6 to the Consolidated Financial Statements,

Reserves for Losses on Mortgages: Management maintains the corpo-
ration’s reserves for mortgage losses at levels it deems are adequate to
absorb losses incurred on the retained and sold portfolios. In estimating
losses incurred on the single-family mortgage portfolio, management
evaluates numerous factors, including general and regional economic
conditions, expected future default experience and mortgage collateral
values. The multifamily reserve valuation process is based on the deter-
mination of collateral deficiencies reflecting assessments of current
market values and incorporates assumptions regarding default proba-
bilities, Management also considers uncertainties related to estimations
in the reserve setting process. The combined reserves for mortgage
losses for the retained and sold portfolios were $683 million and $733
million at December 31, 1995 and 1994, respectively.

Other Credit Risks: Freddie Mac is subject to credit risk from potential
undercapitalization or mismanagement of institutional counterparties.
A significant form of institutional credit risk faced by Freddie Mac
arises in connection with insolvencies of mortgage servicers. Freddie


SUMMARY OF RESULTS

1995 vs. 1994 1994 vs, 1993
Dollar % Pro Forma _Dollar %
Year Ended December 31, 1995 1994 Change Change 1993" Change Change
(dollars in millions, except per share amounts)
Net interest income on earning assets $1,396 $1,112 $284 26 % $ 772 $340 44%
Management and guarantee income 1,087 1,108 21) 2) 1,009 99 10
Other income, net 39 66 27) (41) 128 (62) (48)
Total Revenues $2,522 $2,286 $236 10 % $1,909 $377 20 %
Credit-related expenses 3 541 $ 425 $116 27% $ 420 $5 1%
Administrative expenses 395 379 16 4 361 18 5
‘Total Non-interest expenses $ 936 $ 804 $132 16 % $ 781 $ 23 3%
Net income $1,091 $ 983 $ 108 11% $ 786 $197 25%
Earnings per common share $ 5.69" $ 5.08" $0.61 12% $ 4.07" $1.01 25 %
‘Total mortgage portfolio (dollars in billions) $566.5 $533.5 $33.0 6 % $494.7 $38.8 8%

(1) In 1994, Freddie Mac changed the way it reports uncollectible interest on single-family mortgages. As a result of the change, the Provision for mortgage losses and
the sum of Net interest income on earning assets and Management and guarantee income are reduced by approximately equal amounts, with no material effect un net
income. For comparative purposes, 1993 amounts are reported on a pro forma basis, as if the new method had been in effect for that year. The discussion that fol-
Jows is based on the pro forma amounts resulting from the single-family reporting change, where applicable.

(2) After payments of preferred stock dividends of $65 million, $65 million and $52 million for 1995, 1994 and 1993, respectively.

RESULTS OF OPERATIONS

Freddie Mac had net income of $1.091 billion on revenues of $2.522
billion in 1995, Net iricome in 1995 represented an 11 percent increase
from $983 million reported for 1994, Revenues increased $236 million,
or 10:percent, from $2.286 billion in 1994. Earnings per common
share were $5.69 in 1995, up 12 percent over $5.08 in 1994. Net
income for 1994 was up 25 percent over $786 million in 1993, and
earnings per common share increased 25 percent over $4.07 in 1993.

Net Interest Income on Earning Assets

Net interest income on earning assets increased by $284 million, or
26 percent, from $1.112 billion in 1994 to $1.396 billion in 1995.
Growth in net interest income primarily reflects a $26.0 billion, or
28 percent, increase in average interest-earning assets. The increase in
average interest-earning assets was driven by growth of $24.0 billion, or
38 percent, in the average balance of the retained mortgage portfolio.
In addition, the average investment portfolio balance increased by
$1.9 billion, or 6 percent from 1994.

Net additions to the retained portfolio totaled $35 billion during 1995.
Freddie Mac’s substantial retained portfolio growth was made possible
by a relatively large supply of mortgages and mortgage-related securities
available for purchase by the corporation at attractive mortgage asset-to-
debt spreads. Declining interest rates and the resulting shift in demand
from ARMs to fixed-rate mortgages during the year increased sales of
mortgages into the secondary market. In addition to purchasing and
retaining an increasing volume of mortgages, Freddie Mac was able to
make substantial additions to the retained portfolio by purchasing PCs,
REMICS and other mortgage-related securities throughout 1995 as
attractive spreads became available.

Growth in net interest income was tempered by a 2 basis point decrease
in the Net interest yield on earning assets on a fully taxable equivalent
basis. The decrease in net interest yield compared to 1994 resulted
primarily from a lower average level of non-interest-bearing funding in
proportion to the overall funding mix. In a period when interest-earning
assets are growing faster than non-interest-bearing funding, a higher
proportion of total funding is interest-bearing which, in turn, results
in some compression of net interest yield. While the corporation’s net
interest yield may experience some compression when non-interest-
bearing funding as a proportion of interest-earning assets decreases,
overall net interest income can continue to grow, Net interest yield
also may experience some compression as short-term interest rates
rise because a small portion of the retained portfolio is funded with
short-term debt.

Lower initial net yields on retained portfolio purchases during 1995
also reduced net interest yield. The lower initial net yields resulted
from a flatter yield curve in 1995 as compared to much of 1994. In
a steeper yield curve environment, Freddie Mac’s funding strategy
generally results in the purchase of mortgage assets with relatively
higher initial net yields that decline more rapidly over time. In a
flatter yield curve environment, this same funding strategy results
in lower initial net yields that are more stable over time. Freddie
Mac’s funding strategy is intended to facilitate purchases of mortgage
assets that provide acceptable rates of return on equity in a wide
range of yield curve environments.

A-14


The Corporation has agreed to indemnify the Underwriters against certain liabilities in connection
with the offering and sale of the Preferred Stock.

Certain of the Underwriters, dealers or agents may engage in transactions with, and perform
services for, the Corporation in the ordinary course of business.

INDEPENDENT PUBLIC ACCOUNTANTS

The Consolidated Financial Statements of the Corporation included in the Information Statement,

have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto.

LEGAL MATTERS

The validity of the Preferred Stock will be passed upon for the Corporation by Maud Mater, Esq.,
Senior Vice President-Genera! Counsel and Secretary of the Corporation. As of March 31, 1996, Ms.
Mater was the beneficial owner of 14,107 shares of Common Stock and options covering an additional
26,110 shares of Common Stock. Ms. Mater has been nominated to fill a vacancy on Freddie Mac’s
Board of Directors until an external candidate is identified for recommendation for election at the
Annual Shareholders’ Meeting or substitution by the Board of Directors. Certain legal matters relating
to the Preferred Stock will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton.

Certain federal income tax consequences of the Preferred Stock will be passed upon for Freddie Mac by
Cadwalader, Wickersham & Taft.

20


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON

MANAGEMENT'S ASSERTION ABOUT

THE EFFECTIVENESS OF THE INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING

To the Federal Home Loan Mortgage Corporation: We have examined
management's assertion that the Federal Home Loan Mortgage Corpora-
tion maintained an effective internal control structure over financial
reporting, including controls over the safeguarding of assets, as of
December 31, 1995, included in the accompanying Management's
Report on the Financial Statements and Internal Control Structure.

Our examination was made in accordance with standards established by
the American Institute of Certified Public Accountants and, accordingly,
included obtaining an understanding of the internal control structure
over financial reporting, testing, and evaluating the design and operating
effectiveness of the internal control structure, and such other proce-
dures as we considered necessary in the circumstances. We believe that
our examination provides a reasonable basis for our opinion.

Because of inherent limitations in any internal control structure,
errors or irregularities may occur and not be detected. Also, projec-
tions of any evaluation of the internal control structure over financial
reporting to future periods are subject to the risk that the internal

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
To the Federal Home Loan Mortgage Corporation: We have audited the
accompanying Consolidated Balance Sheets of the Federal Home Loan
Mortgage Corporation, a federally chartered corporation, (the “corpora-
tion”), as of December 31, 1995 and 1994, and the related Consolidated
Statements of Income, Stockholders’ Equity and Cash Flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the corporation’s management. Our

responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted audit-
ing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance about whether the financial state-
ments are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Federal Home
Loan Mortgage Corporation as of December 31, 1995 and 1994, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

control structure may become inadequate because of changes in condi-
tions or that the degree of compliance with the policies or procedures
may deteriorate.

In our opinion, management's assertion that the Federal Home Loan
Mortgage Corporation maintained an effective internal control structure
over financial reporting, including controls over the safeguarding of
assets, as of December 31, 1995, is fairly stated, in all material respects,
based upon criteria established in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring Organizations of
the Treadway Commission.

QAP, Qudusey LLP

Washington, D.C.
January 12, 1996

CONSOLIDATED FINANCIAL STATEMENTS

We have also audited, in accordance with generally accepted auditing
standards, the supplemental Consolidated Fair Value Balance Sheets of
the Federal Home Loan Mortgage Corporation as of December 31, 1995
and 1994. As described in Note 13, the supplemental Consolidated Fair
Value Balance Sheets have been prepared by management to present
relevant financial information that is not provided by the Consolidated
Balance Sheets referred to above and are not intended to be a presen-
tation 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 corporation as a whole. Furthermore, amounts ultimately real-
ized by the corporation from the disposal of assets and settlement of
liabilities may vary significantly 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 13.

AH, Onhasin LLP

Washington, D.C.
January 12, 1996

A-42


(b) In the event Freddie Mac shall redeem any or all of the Non-Cumulative Preferred Stock as
aforesaid, notice of such redemption shall be given by Freddie Mac by first class mail, postage prepaid,
mailed neither less than 30 nor more than 60 days prior to the redemption date, to each holder of record
of the shares of the Non-Cumulative Preferred Stock being redeemed, at such holder’s address as the
same appears in the books and records of Freddie Mac. Each such notice shall state the number of
shares being redeemed, the redemption price, the redemption date and the place at which such holder's
certificate(s) representing shares of the Non-Cumulative Preferred Stock must be presented for
cancellation or exchanges, as the case may be, upon such redemption. Failure to give notice, or any
defect in the notice, to any holder of the Non-Cumulative Preferred Stock shall not affect the validity of

the proceedings for the redemption of shares of any other holder of Non-Cumulative Preferred Stock
being redeemed.

(c) Notice having been mailed as aforesaid, from and after the redemption date specified therein
and upon payment of the consideration set forth in Section 3(a) above, said shares of the Non-
Cumulative Preferred Stock shall no longer be deemed to be outstanding, and all rights of the holders

thereof as holders of the Non-Cumulative Preferred Stock shall cease, with respect to shares so
redeemed.

(d) Any shares of the Non-Cumulative Preferred Stock which shall have been redeemed shall,
after such redemption, no longer have the status of authorized, issued or outstanding shares.

4. No Voting Rights

Except as set forth in Section 9(h) below, the shares of the Non-Cumulative Preferred Stock shall
not have any voting powers, either general or special.

5. No Conversion or Exchange Rights

The holders of shares of the Non-Cumulative Preferred Stock shall not have any right to convert

such shares into or exchange such shares for any other class or series of stock or obligations of Freddie
Mac.

6. No Preemptive Rights

No holder of the Non-Cumulative Preferred Stock shall as such holder have any preemptive right
to purchase or subscribe for any other shares, rights, options or other securities of any class of Freddie
Mac which at any time may be sold or offered for sale by Freddie Mac.

7. Liquidation Rights and Preference

(a) Except as otherwise set forth herein, upon the voluntary or involuntary dissolution, liquidation
or winding up of Freddie Mac, after payment of or provision for the liabilities of Freddie Mac and the
expenses of such dissolution, liquidation or winding up, the holders of the outstanding shares of the
Non-Cumulative Preferred Stock shall be entitled to receive out of the assets of Freddie Mac available
for distribution to stockholders, before any payment or distribution shall be made on the Common Stock
or any other class or series of stock of Freddie Mac ranking junior to the Non-Cumulative Preferred
Stock upon liquidation, the amount of $50.00 per share plus an amount, determined in accordance with
Section 2 above, equal to the dividend, if any, otherwise payable for the then-current Dividend Period
accrued through and including the date of payment in respect of such dissolution, liquidation or winding
up, and the holders of the outstanding shares of any class or series of stock of Freddie Mac ranking on a
parity with the Non-Cumulative Preferred Stock upon liquidation shall be entitled to receive out of the
assets of Freddie Mac available for distribution to stockholders, before any such payment or distribution
shall be made on the Common Stock or any other class or series of stock of Freddie Mac ranking junior
to the Non-Cumulative Preferred Stock and to such parity stock upon liquidation, any corresponding
preferential amount to which the holders of such parity stock may, by the terms thereof, be entitled;
provided, however, that if the assets of Freddie Mac available for distribution to stockholders shall be
insufficient for the payment of the full amounts to which the holders of the outstanding shares of the

A-5S


“interest” component of the transaction. The customer is required to maintain collateral for its
borrowings with a value equal to the outstanding indebtedness owed to Freddie Mac plus a specified
margin to provide overcollateralization.

In the event of reverse repo borrower default by reason of a failure to provide additional collateral,
as required by Freddie Mac, or a failure to meet repurchase obligations, Freddie Mac is entitled to
liquidate the collateral. If there were a delay in liquidating the collateral following a reverse repo
borrower's default, losses could result to Freddie Mac.

Distribution Activities

From time to time, SS&TG assists Freddie Mac in the distribution of its securities by acquiring
securities directly at issuance from Freddie Mac for sale to investors and other market participants.
Distribution activities may include participation in dealer auctions of Freddie Mac securities, conver-
sions of 75-day PCs for Gold PCs, resecuritization of outstanding Freddie Mac securities and other
transactions.

PC Price Performance

Freddie Mac supports the market for its PCs and PC prices relative to prices for Fannie Mae pass-
through securities and other comparable securities, in a variety of ways including the acquisition of PCs
for resecuritization as REMICs and other securities; market-making activities of SS&TG; and the
purchase of PCs for Freddie Mac’s retained portfolio and for other corporate purposes. Recent market
support activities have included the use of several external money management firms to actively manage
and trade a relatively small portion of Freddie Mac’s retained portfolio, the participation by SS&TG in
the dollar roll market for Freddie Mac PCs, and the initiation of a focused marketing effort to present to
dealers and investors the relative advantages of trading and investing in Freddie Mac PCs. From time to
time Freddie Mac awards business to dealers or other market participants based upon their levels of
support in trading and making active, liquid secondary markets in PCs. Freddie Mac anticipates
undertaking additional activities to support the market for PCs in the future, although it may determine
to increase, reduce or discontinue all or any one of its efforts at any time.

PROPERTIES AND EMPLOYEES

Freddie Mac owns a 75 percent interest in a limited partnership that constructed Freddie Mac’s
corporate headquarters near Tysons Corner in McLean, Virginia. The project contemplates a five-phase
development. The first phase was completed in 1991 and accommodates approximately 1,000 employees
and a variety of corporate facilities in a single building comprising approximately 390,000 square feet,
with the remaining headquarters functions located at Freddie Mac’s other sites in Washington, D.C.
and in Reston and Tysons Corner, Virginia.

In 1995, Freddie Mac completed the second and third phases of the corporate headquarters
project. Freddie Mac has expended approximately $150 million to design and construct these two new
buildings comprising an aggregate of approximately 454,000 square feet. These buildings accommodate
a total of approximately 1,500 additional Freddie Mac employees formerly situated in leased facilities.
Although Freddie Mac’s occupancy expenses increased when these two new buildings were occupied,
over time the corporation expects to realize savings over the cost of leasing comparable facilities.

As of December 31, 1995, Freddie Mac had 3,216 full-time and 104 part-time employees.


13. FAIR VALUE DISCLOSURES Limitations

‘The Consolidated Fair Value Balance Sheets present Freddie Mac's esti- ‘The “Net fair value after tax” represents the difference between the esti-
mates of the fair value of the corporation’s existing assets and liabilities, mated fair values of assets and liabilities. This estimate does not attempt to
including rights to future cash flows from these existing assets and liabilities. __ present Freddie Mac’s value as a going concern or the value of anticipated
These balance sheets were prepared on the fair value basis of accounting, _future business. Therefore, net fair value does not represent an estimate
which is a comprehensive basis of accounting other than GAAR to provide _of the aggregate fair value of Freddie Mac’s common stock or Freddie
relevant financial information that is not provided by the historical cost Mac as a whole.

financial statements. These disclosures satisfy the requirements of SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” which
generally requires companies to disclose fair value information about
their financial instruments.

Consolidated Fair Value Balance Sheets

December 31, 1995 1994
Cost Fair Value Cost Fair Value
(dollars in millions)
Assets
Mortgages, net $107,400 $109,200 $ 72,900 $ 66,800
Cash and cash equivalents 7,800 7,500 11,400 11,400
Investments and mortgage securities purchased
under agreements to resell 14,000 13,900 17,800 17,800
Real estate owned, net 800 800 1,000 1,000
Other assets 7,500 7,300 3,100 2,900
Off-balance sheet items:
Guarantee fees on sold mortgages, net - 1,200 - 3,200
Outstanding commitments to purchase
and sell mortgages - 100 - 100
Interest-rate agreements and other hedging instuments - 100 - 300
$137,200 $140,100 $106,200 $103,500
Liabilities and Net Fair Value
Debt securities, net:
Due within one year $ 62,100 $ 61,400 $ 47,300 $ 46,700
Due after one year 57,200 57,000 44,800 42,100
Total debt securities, net 119,300 118,400 92,100 88,800
Principal and interest due to PC investors 8,800 8,800 5,900 5,900
Other liabilities 2,600 2,600 1,800 600
Subordinated borrowings 600 600 1,200 1,300
131,300 130,400 101,000 96,600
Estimated income taxes on differences
between fair values and GAAP values - 1,300 - 600
Net fair value after tax 5,900 8,400 5,200 6,300
$137,200 $140,100 $106,200 $103,500

A-38


Recent Initiatives

Freddie Mac continually examines and modifies its programs and policies in order to broaden its
markets and increase the attractiveness and competitiveness of its mortgage purchase programs and
mortgage-related securities. Freddie Mac endeavors to develop products and services that are attractive
to different types of mortgage sellers and security investors.

Expanding Markets and Community Development Lending. In 1994, Freddie Mac introduced the
Expanding Markets initiative to promote affordable lending, fair lending and community development
lending. The initiative produced a package of single-family mortgage products, programs, services and
tools designed to bring the benefits of the secondary market to more people, and expand access to
mortgage credit for underserved communities. Expanding Markets products and services include:
(1) Affordable Gold with the 3/2 Option—a program designed to help homebuyers who need assistance
with downpayment and closing costs; (2) Affordable Seconds—an automated checklist to help lenders
work with governments, non-profit organizations and other housing finance agencies to find and create
secondary financing terms for their potential borrowers; (3) Fair Lending: an Introduction to Self
Evaluation—a guide for lenders considering a self-evaluation program to assess their fair lending
performance; (4) Gold Measure—an automated worksheet tool to help lenders evaluate risks and
compensating factors to assess a borrower's ability to manage mortgage debt; (5) Discover Gold
Through Expanding Markets—a booklet of over 100 case studies and product information to guide
lenders and illustrate the flexibility of Freddie Mac’s underwriting standards; and (6) Discover Gold
Through Homeownership Education—a publication that offers best practices in homeownership educa-
tion to help lenders select suitable homeownership education and counseling programs and that includes
a “how-to” booklet for potential borrowers on conducting a consumer home inspection.

In addition to these initiatives, the corporation has undertaken a number of pilot projects to gain
experience with particular mortgage products, borrower groups or lender groups in order to incorporate
successfully the features of these transactions into its standard mortgage purchase programs. These
pilots include a lease-purchase program, an FHA rehabilitation mortgage purchase program and a 2- to
4-unit affordable lending program. Other negotiated offerings include HUD and FHA Native Ameri-
can purchase programs, and the U.S. Department of Agriculture’s Rural Housing and Community
Development Service Guaranteed Housing purchase program. These initiatives are intended to expand
access to the secondary market for non-traditional lenders, including housing finance agencies and
community development and non-profit organizations.

Also in 1995, the corporation began a community development lending approach which includes
national alliances with national non-profit housing organizations and national minority religious
organizations with local affiliates and other housing finance participants. Under the terms of these
national alliances, Freddie Mac provides the national organization with seed capital to enable the
national organization and its local affiliates in targeted communities to establish homebuyer readiness
programs, create local alliances with a variety of community resources, and connect potential
homebuyers with lenders offering Freddie Mac mortgage products for purchase by the corporation.

Loan ProspectorSM, In January 1995, Freddie Mac commercially introduced Loan ProspectorSTM,
an automated single-family mortgage underwriting service that evaluates a mortgage loan application
in minutes and determines if the mortgage is eligible for sale to Freddie Mac. The service includes four
components: (i) a product eligibility determination for the sale of the mortgage to Freddie Mac; (ii) a
credit evaluation to assess a borrower’s creditworthiness; (iii) an optional collateral assessment to
determine the adequacy of the mortgaged property to serve as collateral for the mortgage; and (iv) an
optional mortgage insurance component to facilitate the insurance of mortgages with LTV ratios over
80 percent with the insurer of choice.

Loan Prospector provides lenders with the ability to evaluate mortgage application materials
electronically. The service uses statistical models and underwriting guidelines to generate purchase
decisions from Freddie Mac in a matter of minutes. Mortgage applications that do not receive favorable
purchase decisions are referred to the originator’s underwriters for manual underwriting, with feedback
from Loan ProspectorSTM about the issues that caused the loan to be referred.

7


Appendix A
FEDERAL HOME LOAN MORTGAGE CORPORATION

CERTIFICATE OF CREATION, DESIGNATION, POWERS,
PREFERENCES, RIGHTS, PRIVILEGES, QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, TERMS AND CONDITIONS

of

VARIABLE RATE, NON-CUMULATIVE PREFERRED STOCK
(Par Value $1.00 Per Share)

KNOW ALL PERSONS BY THESE PRESENTS, that I, MAUD MATER, Secretary of the
Federal Home Loan Mortgage Corporation, a government-sponsored enterprise of the United States of
America (“Freddie Mac”), do hereby certify that, pursuant to authority vested in the Board of
Directors of Freddie Mac by Section 306(f) of the Federal Home Loan Mortgage Corporation Act, as
amended (12 U.S.C. §1455(f)), said Board of Directors on March 1, 1996, adopted the following
resolution, effective as of the close of business on April 23, 1996, on which date, pursuant to FHLMC
Resolution 96-05, the Chairman and Chicf Executive Officer approved the final terms of the public
issuance and sale of the preferred stock of Freddie Mac designated above, which resolution is now, and
at all times since such date has been, in full force and effect:

RESOLVED, that, the Variable Rate, Non-Cumulative Preferred Stock shall have the following

designation, powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms and
conditions:

1. Designation, Par Value, Number of Shares and Seniority

The class of preferred stock of Freddie Mac created hereby (the ““Non-Cumulative Preferred
Stock’’) shall be designated “Variable Rate, Non-Cumulative Preferred Stock,” shall have a par value
of $1.00 per share and shall consist of 5 million shares. The Board of Directors shall be permitted to
increase the authorized number of such shares at any time. The Non-Cumulative Preferred Stock shall
rank prior to the Voting Common Stock of Freddie Mac (the “Common Stock”) to the extent provided
in this Certificate and shal] rank, both as to dividends and upon liquidation, on a parity with the 6.72%
Preferred Stock issued on August 2, 1993 and the 7.90% Non-Cumulative Preferred Stock issued on
April 27, 1992 (together, the “Existing Preferred Stock’).

2. Dividends

(a) The holders of outstanding shares of Non-Cumulative Preferred Stock shall be entitled to
receive, ratably, when, as and if declared by the Board of Directors, in its sole discretion, out of funds
legally available therefor, non-cumulative, cash dividends at a variable per annum rate (not greater
than 9% per annum) equal to (i) the sum of LIBOR (as defined in clause (b) below) and 1.0%, divided
by (ii) 1.377, with the resulting dividend per share being rounded to the nearest cent (with one-half cent
being rounded up), without taking into account any adjustments referred to in clause (c) below.
Dividends on the Non-Cumulative Preferred Stock shall accrue from April 26, 1996 and are payable
when, as and if declared by the Board of Directors quarterly on March 31, June 30, September 30 and
December 31 of each year (each, a “Dividend Payment Date”) commencing on June 30, 1996. If a
Dividend Payment Date is not a “Business Day,” the related dividend shall be paid on the next Business
Day with the same force and effect as though paid on the Dividend Payment Date, without any increase
to account for the period from such Dividend Payment Date through the date of actual payment. For
these purposes, “Business Day” means a day other than (i) a Saturday or Sunday, (ii) a day on which
New York City banks are closed or (iii) a day on which the offices of Freddie Mac are closed. If
declared, the initial dividend, which will be for the period from but not including April 26, 1996 through
and including June 30, 1996, will be 4.7091% or $.43 per share and will be payable on July 1, 1996.
Thereafter, the dividend payable to holders of Non-Cumulative Preferred Stock will vary from
Dividend Period to Dividend Period. The “Dividend Period” relating to a Dividend Payment Date shall

A-l


mid-1994, improved underwriting standards initiated in the early
1990s, as well as the corporation's increased focus on fraud detection
and mitigation and generally improved economic and market conditions.

‘The higher EPD rates of 1990 and 1991 single-family purchases have
translated into higher annual default rates over time. The corporation
improved mortgage purchase quality during the early 1990s by sus-
pending purchases of low-documentation mortgages and mortgages
that rely on house price appreciation or inflation, such as graduated
payment mortgages. During this time, the corporation also established
stricter mortgage purchase standards with respect to third-party origi-
nated mortgages, improved quality control procedures and removed
many underperforming seller/servicers from its customer base.

Refinanced mortgages purchased from 1992 to mid-1994 generally
have lower LTV ratios and other characteristics associated with enhanced
credit quality, Freddie Mac’s 1992 and 1993 single-family mortgage
purchases, which account for over 50 percent of the corporation’s
current total mortgage portfolio, had significantly better EPD rates and
are showing dramatically lower annual default rates. Although the rate
of EPDs for 1994 mortgage purchases is higher, the lower volume of
mortgages purchased that year makes it likely that the higher EPD
rates on these mortgages will have a relatively smaller impact on the
corporation’s overall default rates.

EARLY PAYMENT DEFAULTS
Basis Points by Funding Quarters

ms

404
20-|

204

1990 1999 1992 1993 1994

The upturn in EPD rates on 1994 mortgage purchases has been driven
by rising LTV ratios associated with the decline in refinancings, and
some deterioration in single-family borrower credit quality. Freddie
Mac continues to implement new initiatives to improve underwriting
effectiveness and reduce credit risk, especially in light of increasing
credit challenges in the primary market. Examples include increased
mortgage insurance requirements during 1994 and 1995 for most
high-LTV mortgages, increased use of credit enhancements on new
mortgage purchases and establishment of additional insurance require-
ments for purchases of mortgages on certain properties located in
areas prone to earthquakes or floods.

A-4

Freddie Mac is leading the mortgage industry in the use of certain
credit scores as a single-family underwriting tool. These credit scores
use a borrower’s credit history to assess ability and willingness to make
timely mortgage payments. The corporation’s research has shown a
strong correlation between certain credit scores and mortgage perfor-
mance. Mortgage defaults tend to rise significantly as these credit
scores weaken. Loan Prospector” combines certain credit scores, LTV
ratios and other loan characteristics, providing lenders with a compre-
hensive underwriting tool to evaluate overall Joan risk. Management
believes these underwriting enhancements will translate into improved
credit performance in the future.

Portfolio Sensitivity: In addition to borrower credit quality, the primary
factors influencing the sensitivity of the single-family mortgage portfolio
to changes in economic conditions are LTV ratios, mortgage product
mix and geographic concentrations.

Freddie Mac’s default experience has shown that mortgages with high
LTV ratios are more sensitive to changes in economic conditions than
mortgages with low LTV ratios. Freddie Mac monitors both the LTV
ratios of new purchases (market LTV ratios) and estimated current LTV
ratios of the total mortgage portfolio. The current LTV ratio compares
the current unpaid principal balance of the mortgage to the estimated
current value of the property collateralizing the mortgage. Current
market values are estimated using regional house-price appreciation and
depreciation data and adjusting the value of the property at origination by
the estimated change in price since origination. The weighted average
current LTV ratio of the corporation’s single-family portfolio at
December 31, 1995 was 64 percent, compared to 65 percent at
December 31, 1994, The distribution of purchase LTV ratios and esti-
mated current LTV ratios of the total single-family (1- to 4-family)
portfolio by current LTV range is set forth below.

Average Purchase LTV

Ratio Range
Year ended December 31, 1995 1994 1993
0% to 70% 26% 34% 41%
Above 70% to 80% 42 39 40°
Above 80% to 90% 18 18 15
Above 90% to 95% 14 9 4
Above 95% - - -
Total 100% 100% 100%
Estimated Current LTV
Ratio Range
As of December 31, 1995 1994 1993
0% to 70% 60% 57% 54%
Above 70% to 80% 19 21 24
Above 80% to 90% 12 2B 14
Above 90% to 95% 4 4 4
Above 95% 5 5 4
Total 100% 100% 100%



RESULTS OF OPERATIONS

The following is a summary of Freddie Mac’s results of operations for the three months ended
March 31, 1996, as compared to the three months ended March 31, 1995. For a discussion of Freddie
Mac’s results of operations for the year ended December 31, 1995, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in the Information Statement.

Year-to-Date Earnings

Earnings per common share rose 19 percent, from $1.34 for the first quarter of 1995 to $1.60 for
the first quarter of 1996. Freddie Mac’s net income increased 17 percent, from $258 million in the first
quarter of 1995 to $301 million in the first quarter of 1996.

Revenues

Freddie Mac’s revenues reached $701 million in the first quarter of 1996 compared with $601
million in the first quarter of 1995, an increase of 17 percent.

Net Interest Income on Earning Assets

Net interest income on earning assets increased from $293 million in the first quarter of 1995 to
$387 million in the first quarter of 1996. The $94 million, or 32 percent, increase in net interest income
was due to a 32 percent increase in average total earning assets, driven by growth of 52 percent in

average retained portfolio balances. The retained portfolio increased by $10 billion during the first
quarter of 1996.

Management and Guarantee Income

Management and guarantee income totaled $305 million for the first quarter of 1996 compared to
$295 million for the first quarter of 1995. The $10 million increase over the first quarter of 1995 reflects
an increase of $30 billion in the average balance of total PCs, partially offset by a 0.6 basis point
decrease in the average guarantee fee rate. The increase in the total PC balance reflects the favorable
effect of lower interest rates on business volumes during the latter half of 1995 and the first quarter of
1996. Declining mortgage rates during these periods resulted in an increase in refinancing activity and a
shift in demand from ARMs toward fixed-rate mortgages, which are less likely than ARMs to be
retained in lenders’ portfolios. The decrease in the average guarantee fee rate reflects lower rates on new

PC issuances than on existing PCs combined with the ongoing liquidation of existing PCs at the
comparatively higher fee rates.

Freddie Mac’s purchase market share during the first quarter of 1996 was 44 percent, unchanged
from the first quarter of 1995.

Other Income, net

Other income, net, totaled $9 million for the first quarter of 1996, compared to $13 million in the
first quarter of 1995.

Credit

Total credit-related expenses, consisting of the provision for mortgage losses and REO operations
expense, were $156 million in the first quarter of 1996, an increase of 21 percent from $129 million in
the first quarter of 1995. Specifically, Freddie Mac increased its provision for mortgage losses to $80
million for the first quarter of 1996, compared to $60 million for the first quarter of 1995. Total
mortgage charge-offs increased from $69 million to $74 million. The increases in credit-related expenses

and charge-offs were due to continued economic weakness in California and increased loss mitigation
activities.

The February 1996 delinquency rate for single-family at-risk mortgages was 0.61 percent, up 6
basis points from March 1995. The February 1996 delinquent multifamily balances were $219 million,
down from $248 million at the end of March 1995.

8


December 31, 1995 1994
(dollars in millions)

Deferred tax assets:
Unamortized purchase and sale

premiums, discounts and fees $ 478 $ 537
Reserve for losses on mortgages 732 823
Accrued interest and other

accrued expenses 182 150
Other 19 -
Total deferred tax asset 1,411 1,510

Deferred tax liabilities:

Accounts receivable and other assets 110 91
Real estate owned, net 589 475
Multiclass debt securities 108 130
Other - 83
Total deferred tax liability 807 7719

Net deferred tax asset $ 604 $ 731

The Omnibus Budget Reconciliation Act (OBRA), which became law on
‘August 10, 1993, increased the maximum federal tax rate for corporations
from 34 percent to 35 percent, effective January 1, 1993. The remeasure-
ment of the net deferred tax asset at the higher tax rate resulted in a $17
million benefit, while the taxes associated with 1993 earnings were $11
million higher. Thus, the adoption of OBRA resulted in a $6 million net
decrease in the 1993 “Provision for income taxes.”

The following table reconciles the expected federal statutory tax provision to
the effective provision for income taxes.

Year Ended December 31, 1995, 1994 1993,
(dollars in millions)
Provision for income taxes at the

statutory rate $555 $519 $395
‘Tax-exempt interest and dividends

received deductions (36) (3) (24)
‘Tax credits (24) (ls) (12)
Reduction in reserve for

contingent taxes - (16) -

Remeasurement of the net deferred

tax asset due to OBRA - (17)
Total provision for income taxes $495 $455, $342
Statutory tax rate 35.0% 35.0% 35.0%
Effective tax rate 31.2% 30.7% 30.3%

Freddie Mac is exempt from state and local taxes, with the exception of
real estate taxes.

In March 1994, the corporation received from the Internal Revenue
Service (IRS) a Revenue Agent Report for its 1985 and 1986 federal
income tax returns. In anticipation that this report would assert a deficiency,
management had previously established reserves for additional taxes and
related interest. Positions taken by the IRS resolved several open issues,
including hedging issues that were treated in a manner consistent with
regulations issued by the IRS in October 1993. The resolution of these
issues allowed the corporation to reduce its existing reserves for contin-
gent taxes and thus report a one-time reduction in its 1994 provision for
income taxes of $16 million and also to reduce its reserves for related
contingent interest.

During 1994, the IRS completed its examination of Freddie Mac's federal
income tax returns for the years 1987 and 1988 and began its examination
of the years 1989 and 1990. In the opinion of management, adequate pro-
vision has been made for all income taxes and related interest. Management
believes that additional tax liability, if any, that may arise for prior periods
as a result of IRS adjustments will not have a material adverse impact on
Freddie Mac’s consolidated financial statements.

12. EMPLOYEE BENEFITS

Freddie Mac maintains a defined benefit pension plan (the Plan) covering
substantially al of its employees. Benefits are based on years of service and
the employee's highest compensation over any three consecutive years of
employment. It is Freddie Mac’s policy to contribute the maximum.
amount deductible for federal income tax purposes each year. Plan assets
consist primarily of corporate bonds and listed stocks.

In addition to the Plan, Freddie Mac maintains nonqualified, unfunded
defined benefit pension plans for officers of the corporation, The related
retirement benefits are paid from Freddie Mac's assets

Consolidated net periodic pension costs related to defined benefit pension
plans consisted of the following:

Year Ended December 31, 1995 1994 1993
(dollars in thousands)
Service cost of current period $5,201 $6,370 $4,662
Interest on projected
benefit obligation 5,276 5,204 4,749
Actual return on plan assets (16,718) 780 (4,837)
Net amortization and deferral 12,255 (4,465) 1,785
Net periodic pension cost $ 6014 $7,889 $6,359

A-36


1995 was approximately $91 billion, or 42 percent. In 1994 and 1993, Freddie Mac’s share of secondary
market sales of newly originated mortgages to the two entities was 44 percent and 45 percent,
respectively.

The markets for Freddie Mac’s original issue and resecuritized securities are closely interrelated.
The issuance of resecuritized mortgage securities by Freddie Mac supports the market for PCs.
Although interest rates are generally the most significant determinant of PC prices, significant
resecuritization activity also tends to increase the prices (and thus reduce the yields) of both PCs and
mortgages. When demand for Multiclass PCs and other resecuritized securities diminishes (as it did in
1994 and 1995), PC prices may be adversely affected.

Following rapid interest rate increases in early 1994, certain types of multiple-class mortgage-
related securities experienced substantial decreases in liquidity. As a result of the difficulty experienced
by some investors in such securities in finding acceptable opportunities to liquidate their investments,
and following investment losses incurred by such investors, market demand for multiple-class mortgage-
related securities generally has decreased. These developments also have led to legislative proposals and
regulatory initiatives that have tended to decrease demand for multiple-class mortgage-related securi-
ties. These developments may represent cyclical phases rather than permanent changes in the character
of the markets for these securities, and future changes in the market and general economy may
stimulate investor appreciation for the risk/reward opportunities provided by such securities.

The level of Freddie Mac’s Multiclass PC issuances in future periods may be adversely affected by
increasing activity by other issuers of multiple-class securities similar to those of Freddie Mac and
Fannie Mae (including GNMA as well as private issuers of mortgage-related and other asset-backed
securities), To date, there has been only a limited number of GNMA multiple-class securities transac-
tions. Investors have tended to favor these GNMA securities over Freddie Mac’s Multiclass GNMA-
Backed Securities. The competitive effect of a GNMA program on the volume and fees of Freddie
Mac’s multiple-class securities program backed by its own securities cannot be assessed at this time,
although management believes a material effect is unlikely. However, in 1995 the volume of mortgage-
related securities issued by private issuers exceeded the combined volume of multiple class securities
issued by both Freddie Mac and Fannie Mae.

Competition is also a consideration in connection with the issuance of Freddie Mac’s non-
mortgage-related debt securities. Freddie Mac competes for funds raised through the issuance of
unsecured debt in the “agency” debt market with other GSEs, including Fannie Mae, the Student Loan
Marketing Association, the Federal Home Loan Bank (“FHLB”) system, and other governmental and
non-governmental issuers. Increases in the issuance of unsecured debt by other GSEs generally, and the
issuance of callable debt in particular, may have an adverse effect on the issuance of Freddie Mac’s
unsecured debt, or result in the issuance of such debt at higher interest rates than would otherwise be
the case. In addition, the availability and cost of funds raised through the issuance of certain types of
unsecured debt may be affected adversely by regulatory initiatives that tend to reduce investments by
certain depository institutions in unsecured debt with greater than normal volatility or interest-rate
sensitivity. See “Regulation and Governmental Relationships — Regulations Affecting Mortgage-
Related and Debt Securities.”

Freddie Mac and Fannie Mae enjoy significant advantages because of their economies of scale and
long-term market presence in the secondary market for conforming mortgages. However, an increasing
number of mortgage originators, including members of the FHLB system, retain newly originated
mortgages for at least some period of time (in particular, ARMs prior to their initial rate adjustments).
The ability of such portfolio lenders to finance mortgage originations by means other than through sales
of mortgages into the secondary market has heightened competition for mortgage purchases. This

source of competition becomes more significant in rising interest rate environments when market
conditions tend to favor ARM originations.

The Secretary of HUD, Congress and others have proposed significant changes in the role and
structure of FHA. FHA provides insurance for both single-family and multifamily housing. The reform
proposals have generally addressed only the single-family FHA program. The single-family FHA

12




Set forth below is a five-year mortgage loss analysis of the total mortgage portfolio.

Mortgage Loss Analysis(1)
1995 1994 1993 1992 1991
Total Servicing Portfolio: G@ollars in millions)

Average portfolio balance, net .. $543,982 $522,189 $465,138 $407,500 $356,876
Year-end portfolio balance, net 566,751 533,376 494,725 441,376 386,067

Net charge-offs............ 305 227 325 367 290
Provision for mortgage losses . . 255 200 300 425 407

Year-end reserve for losses on mortgages . . 683 733 760 785 737
Net charge-offs to average portfolio balance. . 0.06% 0.04% 0.07% 0.09% 0.08%

(1) Information prior to 1994 does not include pro forma adjustments to reflect the adoption in 1994 of a change in the
reporting of uncollectible interest on single-family mortgages.

For financial reporting purposes, the majority of credit costs are recognized at the time of
foreclosure in the form of charge-offs and provisions for estimated selling expenses. At foreclosure, the
mortgage is transferred to REO at fair value with any excess of the cost basis in the loan over the fair
value of the property being recorded as a charge-off to the Reserve for mortgage losses. Also at
foreclosure, estimated costs to sell single-family properties are recognized as REO operations expense.
Estimated costs to sell multifamily properties are accounted for through provisions to the Reserve for
mortgage losses. Subsequent to foreclosure, market conditions, property damage and other factors may
cause the estimated fair value of the property to decrease during the time the property is held by
Freddie Mac. Such losses are recognized currently as REO operations expense.

On January 1, 1995, Freddie Mac adopted Statement of Financial Accounting Standards
(“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No.
118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.”
Under SFAS No. 114, loans are transferred to REO at foreclosure, the point at which the corporation
obtains physical possession of the property. Prior to SFAS No. 114, loans were transferred to REO prior
to foreclosure when the borrower had minimal equity in the underlying collateral, repayment was
expected to come only from the operation or sale of the collateral, and the borrower had effectively
abandoned control of the collateral. Prior period multifamily mortgage and REO balances have been
restated to reflect the adoption of SFAS No. 114. The adoption of SFAS No. 114 did not have a material
effect on results of operations.

Litigation

Freddie Mac is involved as a party to a variety of legal proceedings arising from time to time in the
normal course of its business. Freddie Mac is most frequently involved, directly or indirectly, in
litigation involving mortgage foreclosures. Another type of proceeding arises out of the termination by
the corporation of a seller/servicer’s eligibility to sell mortgages to and service mortgages for Freddie
Mac. 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. The contracts between Freddie Mac and its seller/servicers
generally provide for indemnification of the corporation for liability arising from wrongful actions by
such seller/servicers.

Another type of dispute arises from Freddie Mac’s ownership of properties after foreclosure as
REO. Certain liability risks associated primarily with Freddie Mac’s multifamily and 2- to 4-unit REO,
such as tort liability to third parties and compliance with applicable environmental requirements, are
typical of those associated with property ownership generally. Among the tort claims with which the
corporation is currently dealing are claims involving alleged injury to juvenile tenants caused by the
exposure to lead-based paint. In addition, Freddie Mac is named as a defendant in a class action lawsuit
involving alleged lead paint hazards in certain buildings it owns in New York City. German v. FHLMC,
et al., 93 Civ, 6941 (S.D.N.Y.). Although this litigation is in its early procedural stages and it is not

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