FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Federal Home Loan Mortgage Corporation (Freddie Mac) <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>
8200 Jones Branch Drive
McLean, VA 22102
(703) 903-2000
http://www.freddiemac.com

UNION CITY, Ca., January 19, 1997/FOOLWIRE/ --- Freddie Mac, also known as the Federal Home Loan Mortgage Corporation, released their fourth quarter fiscal 1996 results last Wednesday. 1996 was a strong year for Freddie Mac. Full year earnings per share were $1.65, up 16% from 1995. Fourth quarter earnings per share were $0.43, up 13% from the comparable period in 1995. There were no material non-recurring items in the fourth quarter.

GOALS FOR 1996. At the beginning of the year they established four priority areas to focus their efforts. First was growing their retained portfolio opportunistically. Second was strengthening credit management and loss mitigation. Third was strengthening the capabilities and market acceptance of Loan Prospector. Fourth was improving their business processes. Over the course of the year, they made significant progress in each of these areas.

PORTFOLIO GROWTH. They continued to grow their retained portfolio at a strong pace and in an opportunistic fashion. The portfolio grew by 29% for the year with growth concentrated in the first and the fourth quarters, when investment returns were most attractive.

CREDIT LOSSES AND MANAGEMENT. In their second priority area, credit losses stabilized as expected, reflecting the cumulative impact of significant improvements in underwriting and loss mitigation over the past several years. They are now entering a period in which better underwritten, higher quality book years will increasingly drive credit results. In addition, an increasing proportion of non-performing loans is being resolved through foreclosure alternatives which produce much lower loss rates than foreclosures. As a result, they expect their credit expenses to decline in absolute dollars each year through the year 2000. They expect the decline to be gradual in 1997, then accelerate in subsequent years. Over this period, they expect credit expenses as a percent of their total mortgage portfolio to decline by half from the current level of about 10 basis points to about 5 basis points.

LOAN PROSPECTOR. Over the course of 1996, Freddie Mac's Loan Prospector established a firm position as the leading automated underwriting product on the market. By year end, they had lenders representing about 50% of the industry's origination capacity signed on as Loan Prospector customers. By the end of 1996, the monthly volume processed through the system was surpassing their goals. Late in the year, they launched a second generation of the system which handles a broader range of mortgage products and provides enhanced collateral evaluation capabilities and online access to mortgage insurers. They expect the success of Loan Prospector to result in meaningful improvements in their market position and credit performance over the next several years. They have found extraordinary enthusiasm for their system amont small lenders, but among large lenders as well. In fact, their system works best for those lenders who are determined to re-engineer and redesign their processes and they think it is quite hopeful that some of the larger institutions are determining that redesign is appropriate at this point because Loan Prospector works best and has its greatest value for lenders who are looking to redesign those processes. The fees that it will generate are attractive and become even more attractive as Loan Prospector is used not only for the evaluation of loans that they invest their capital in, but other loans as well. They don't expect fees to be really material in 1997 because the fees are relatively small compared to other revenues and those fees are being used in part to reduce capitalized value of some of the development. It will be 1998 or 1999 before we will start to see the effect of fee activity.

IMPROVING BUSINESS PROCESSES. They continue to sharpen their business processes. To support the next phase of growth in the retained portfolio, they strengthened their interstate risk management framework and information infrastructure underlying it. In the servicing area, they made significant advances in the management of non-performing loans and REO. They established exclusive performance benchmarks, feedback mechanisms, and incentive programs, all designed to shorten timelines and reduce credit losses. And they applied new technology to develop proprietary tools that will make servicers more efficient and more effective.

CAPITAL MANAGEMENT. They continued to actively manage their capital structure to reduce their cost of capital and produce attractive returns to common shareholders. In 1996, they repurchased over $500 million of common stock and issued a comparable amount in preferred stock at a considerably lower cost. As a result of their sound capital management process, both the size of their capital base and its composition are well suited to the amount and nature of the risks they manage.

1997 PRIORITIES. For 1997, their priority areas largely reflect the continuation or completion of efforts currently underway. This includes continuing to build on the momentum enjoyed by Loan Prospector as the industry's leading automated underwriting service, broadening its capabilities and deepening its market penetration. It also includes continuing to grow and maintain the retained portfolio in a disciplined and opportunistic way and continuing to introduce improved processes and tools into the system including a streamlined process for the delivery of loans to Freddie Mac and vastly improved tools for services to manage delinquent loans. They are not satisfied with having their total mortgage portfolio grow at the same pace as mortgage indebtedness. They want to continue to penetrate the market. The GSE share of originations is not where they would like to see it. Part of the effort behind their improvement in their processes is to continue to strengthen secondary market execution compared to other executions. Their explicit goal is to grow more quickly than mortgage indebtedness is growing.

RISK-BASED PRICING AND SUB-PRIME LENDING. They think there is growing recognition that one of the driving forces in all financial services now is a finer understanding of risks and costs and pricing that reflects these risks and costs. They think that done right, risk-based pricing can benefit the market by providing among other things finer gradations of price rather than the kind of pricing you see now. But, they think it's going to happen slowly. They are learning more and more about the character of risk. You don't turn an industry like this around quickly. They expect the movement to risk-based pricing to be gradual. On the B and C market, it continues to be the case that what is characterized as B and C represents two distinct phenomena. One is credit quality and certainly they don't intend to lower the credit quality of the loans they invest it. The other is simply distribution channel. There are, they are convinced, borrowers who are now served by B and C lenders and pay B and C rates whose credit quality is in fact deserving of A quality rates.

GROWTH RATES FOR THE KEY DRIVERS OF EARNINGS. Their total mortgage portfolio finished the year at $611 billion, up 8% for the year. The retained portfolio entered the year at $138 billion, up 29%. Year-end total PCs were $554 billion, up 8%. Total revenues on the nominal (not fully tax-equivalent) basis grew 13% for the full year and 7% fourth quarter over fourth quarter. Credit expenses were up 12% year over year and up only 1% in Q4 this year versus Q4 last year. Earnings per share grew by 16% for the year and 13% for the quarter.

HOUSING TAX CREDIT PARTNERSHIPS. This line represents costs associated with investments Freddie Mac makes in partnerships that rehabilitate and manage low-income housing projects. These partnerships typically generate operating losses but produce tax credits. The net of the cost shown and the tax credits that are incorporated result in an attractive return for Freddie Mac on these investments. Prior to this quarter, the costs shown were netted into other income. They have begun to report these costs as a separate line item because they have reached a magnitude where they would be material enough to distort the other income line and because they are expected to grow during the coming years.

PURCHASES AND PC ISSUANCES. This line reflects their total new business volume for the full year. New business volume totalled $128 billion, their third highest annual volume behind only the refinance boom years of 1992 and 1993. The liquidation rate declined to 12% during the fourth quarter but averaged 15% through the full year. This reflected primarily strong refinance activity in the first half of the year but there was one other factory affecting the liquidation rate that may not be immediately obvious. That is the sizeable cohort of 15-year mortgages they bought in 1992 and 1993. These mortgages amortize much more quickly than the 30-year product, particularly mortgages with low coupons, as these are. The total mortgage portfolio grew at a 7% annualized rate in the fourth quarter and an 8% rate for the year. With a 15% liquidation rate, that represents strong performance to produce that kind of growth. The net changes in the retained portfolio balance and the pipeline of forward purchases represent retained portfolio growth of about $8 billion for the quarter and $29 billion for the full year. They saw periods of attractive spreads in the fourth quarter, particularly in the month of November, when mortgage to Treasury spreads widened as a result of a bond market rally that brought the yield on the 10-year Treasury down by about 50 basis points. On the debt side, spreads between their callable debt and Treasuries were stable to slightly improved during the quarter. Retained portfolio investment opportunities are currently somewhat scarce and people should expect to see slower asset growth when they release their January monthly numbers. With the yield on the 10-year Treasuries backing up by about 50 basis points since early December, mortgage to Treasury spreads have tightened. The $800 million in forward purchases represents the smallest pipeline they have had in quite some time. However, over the past few years investment opportunities have varied from quarter to quarter or even month to month. Unless market conditions change dramatically, they would expect to be able to find sufficient opportunities to generate retained portfolio growth in the $20-30 billion range for 1997.

PORTFOLIO ACTIVITY. The two highlights are strong growth in earning assets and a stable margin in the fourth quarter as expected. Total interest-earning assets were up 31% year over year and 28% quarter over quarter. Looking at the components of earning assets, average short-term investments remained flat year over year, so all of the growth in earning assets was in the retained mortgage portfolio. Net interest yield on a fully taxable equivalent basis was unchanged from third quarter to fourth quarter at 100 basis points as expected. For the full year, net interest yield declined by ten basis points reflecting, among other things, the maturities of high spread mortgage investments booked in 1993. Net interest income in dollars on a fully taxable equivalent basis was up 19% for the full year and 9% fourth quarter over fourth quarter. The average total PCs outstanding were up 8% quarter over quarter as well as year over year. In the fourth quarter the average guaranteed fee rate continued its pattern of declining by about a tenth of a basis point per quarter. The guaranteed fee rate on new business improved noticeably in 1996 and is converging with the rate on run-offs. However, unless market conditions change dramatically, they should continue to see a modest decline in the average guaranteed fee rate on the portfolio for several more quarters simply due to turnover and repricing. One factor that could affect the trend in guaranteed fees in 1997 is the volume of business they do with pooled insurance. The mortgage insurance companies are offering pooled insurance policies with terms Freddie Mac finds attractive. With pooled insurance, they reduce the guaranteed fees they charge to lenders, reduce their expected credit losses by an even larger amount, and earn a higher return on equity. They view the availability of pooled insurance at current pricing as an opportunity that is probably not sustainable, but an opportunity to engage in transactions that enhance returns for their shareholders. All else equal, the impact of these insurance deals on reported income would be a modest reduction in guarantee fee income up front, more than offset by a larger reduction in their loan loss provision and REO expense a few years down the road. Based on the range of potential transactions of pooled insurance, the impact on 1997 earnings per share would not be significant.

NET INTEREST YIELD ANALYSIS. Net interest yield on a fully taxable equivalent basis was 100 basis points in the quarter, unchanged from last quarter. As usual, there are several moving parts that affect margin, but they focused on two key drivers this quarter. First, there was about $1.2 billion in debt issued in 1993 with an average rate of 4.70% that matured during the quarter and this obviously put downward pressure on margin. Secondly, they had a favorable shift in the mix of their earning assets. Looking at the changes from the third quarter to the fourth quarter, short-term liquidity investments declined both in absolute dollars and as a percent of total earning assets. The market is very sensitive to the mix of earning assets since mortgage spreads are much wider than the spreads on liquidity investments. In 1997, unless interest rates move by sufficient amounts to cause them to rebalance their funding materially, or unless they make any significant changes in their investment strategy, they would expect net interest yield to remain within a reasonably narrow range around the second half 1996 level.

CREDIT QUALITY INDICATORS. The credit results continue to reflect the seasoning of the large, very high quality 1992 and 1993 books of business and are very much in line with their expectations. These results support their confidence regarding improving credit results over the next several years. Single family at risk delinquencies were 58 basis points at the end of November, up one basis point from last quarter. Looking at the composition of delinquencies by book year, book years 1992 and later now account for over 40% of delinquencies and this is a positive indicator of future price/performance because these more recent book years have much stronger equity positions. Looking at the REO inventory roll-forward, REO acquisitions remain high in the fourth quarter and the inventory level increased. The pace of acquisitions reflects seasoning of the 1992 and 1993 book years, which accounted for about one third of REO acquisitions in the quarter. The dollar balance of REO was virtually unchanged for the year as a reduction on the multi-family side essentially offset the increase in the single-family side. Single family charge-offs were down this quarter, both compared to the third quarter and to a year ago. While REO acquisitions remain high, the average dollar loss per acquisition is declining and this reflects the acquisition of more properties from the 1992 and 1993 book years. For the full year, single family charge-offs increased by only 7%. On the multi-family side there was a blip up in charge-offs in the fourth quarter to $9 million. Much of this increase was attributable to one property located in a factory town where the factory was closed. This $9 million charge-off amount does not represent a sustainable run rate. Credit losses relative to the total mortgage portfolio declined both quarter over quarter and year over year.

HOUSE PRICE APPRECIATION RATES AND GENERAL ECONOMIC CONDITIONS IN CALIFORNIA. For the third quarter, which is the latest data available, their home price index showed nationwide home values rising at a 1.7% annualized rate. Over the past 12 months, home prices rose an average of 3.7% nationwide. There does continue to be a fair amount of variability in house price appreciation rates across different regions of the country. The Mountain and North Central regions continue to be very strong with appreciation rates in the 5-6% range. New England and the Pacific region continue to show some weakness. House prices in both regions declined at about a 2% annualized rate in the third quarter, although in both regions prices have increased modestly over the past 12 months. The California economy continues to show some signs of real strength. In October, the state unemployment rate fell below 7% for the first time since 1990. Personal income growth was strong and consumer confidence indices remain high. They think it is natural to expect an increase in average loan-to-value ratios when you find the kind of decline in house prices that have been seen in California. They think it was surprising, and distinctive about California prior to 1991, was how low the loan-to-value ratios were. Largely it's the result of the build-up of equity and the fact that people had gone through a great deal of house price appreciation. With a cumulative 30% decline, they think it's not unexpected to see an increase in loan-to-value ratios and they manage those high loan-to-value ratios in California now the way they do in other parts of the country.

NON-INTEREST EXPENSE ANALYSIS. Single family REO operations expense was down both compared to last quarter and compared to a year ago. The level of selling and foreclosure expenses has been fairly constant for several quarters and this reflects the continued high level of REO in-flows from the 1992 and 1993 book years. In recent quarters they continue to see modestly lower holding period writedowns and disposition losses and they continue to reduce the average REO holding period. In fact, over the course of 1996, they reduced their inventory of aged properties (properties they have held for more than a year) by about half. Administrative expenses picked up in the fourth quarter and this reflects primarily some year-end clean up items and this is a pattern that has been typical in recent years.

SUMMARY OF EQUITY. There were two preferred stock issuances completed in 1996 for a total of $527 million. They repurchased $321 million of common stock in the quarter and $535 million for the full year. Over the course of 1996, the combination of preferred stock issuance and common share repurchases had the effect of almost a dollar-for-dollar substitution of preferred for common. This was really more of a coincidence rather than a reflection of their intent. They issued the first preferred in the second quarter because retained portfolio growth was running at a very rapid pace and if it continued at that pace they would need additional capital. Growth, in fact, did subsequently slow down and they deployed the preferred to repurchase common shares. They issued the second preferred in November to capitalize on low rates and pre-refund a portion of the $560 million in preferred that they expect to call this coming June. With this pre-refunding, they locked in about a 180 basis point savings on almost $300 million of preferred stock. At year end, preferred stock accounted for 20% of total equity and this preferred stock does make a meaningful contribution to shareholder value. The average dividend rate on their outstanding preferred is 6.71%, which is well below the required returns on their common stock. Based on the range of expected growth both on the retained and sold portfolios in 1997, they would expect to continue common share repurchases this year.

MORTGAGE-BACKED SECURITIES PRICING. They have been focused on insuring that their mortgage-backed security receives its full and fair price in market trading. It certainly was well-traded during the period of 1992 and 1993 when they were really focused on improving their execution. In 1994 and 1995 when mortgages were out of favor, there was really a drought of liquidity in the mortgage market and the pricing of their mortgage-backed securities compared to Fannie Mae MBS suffered as a result. They have seen a real comeback in 1996 and especially over the latter part of 1996 with their mortgage-backed securities today trading at a 5/32 - 5.5/32 advantage over a comparable Fannie Mae mortgage-backed securities and they are quite pleased with this result. This result does reflect a number of things they have been doing to attract investors to the Freddie Mac securities including awarding a certain amount of funds to fund managers who would invest that money in PCs and really analyze and understand value in the PC market. They expect to continue this program and to extend it further as they see continuing interest in managed mortgage money.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.