Executives: Sharon McHale - VP, Corporate Communications Don Layton - CEO Jim Mackey - CFO

Analysts: Joe Light - Bloomberg News Denny Gulino - Market News International

Operator: Good morning, ladies and gentlemen. Welcome to the Freddie Mac 2016 Financial Results Media Call. Today’s conference is being recorded. I will now turn the call over to Sharon McHale, VP, Corporate Communications. Please go ahead.

Sharon McHale: Thank you. Good morning, everyone, and thank you for joining us for a discussion of Freddie Mac’s 2016 financial results. We are joined today by the Company’s Chief Executive Officer, Don Layton; Chief Financial Officer, Jim Mackey; and General Counsel, Bill McDavid. Before we begin, we’d like to point out that during this call, Freddie Mac’s executives may make forward-looking statements, which are based upon a set of assumptions about the Company’s key business drivers and other factors. Changes in these factors could cause the Company’s actual results to vary materially from its expectations. A description of these factors can be found in the Company’s annual report on Form 10-K filed today. Freddie Mac’s executives may also discuss non-GAAP financial measure. For more information about these measures, please see our earnings release and related materials which are posted on the Investor Relations section of our website, freddiemac.com. Our commentary today will be limited to business and market topics. As you know, we are not able to comment on the development of public policy or legislation concerning Freddie Mac. As a reminder, this is a call for the media and only they can ask questions. This call is being recorded and a replay will be made available on Freddie Mac’s website shortly. We ask that this call not be again rebroadcasted or transcribed. With that, I’ll now turn the call over to Don Layton, Chief Executive Officer of Freddie Mac.

Don Layton: Good morning, everyone, and thank you for joining us as we discuss our 2016 financial results and other highlights of the year. Before I jump into those topics, I want to make a quick observation. I joined Freddie Mac nearly five years ago now, it was a much different Company then. Over the intervening years, we have been working hard to transform the Company. I should note that transforming it to run well on behalf of the tax payers who support us while in conservatorship is little different than if we have been doing it for shareholders outside of conservatorship. Today, Freddie Mac is indeed a transformed Company. We are now competitive in almost every way. The guarantee businesses are flourishing and growing as new products and capabilities are helping customers do business with us. We are more effectively delivering on our community mission to better serve the nation’s home buyers and renters including underserved markets. And we are becoming really effective at managing our risk, in particular by being the leading innovator in both credit risk transfer and also the cost efficient reduction of legacy assets. This in turn has significantly reduced tax payer exposure to our mortgage risks. We’re very proud of this transformation. You can see the impact of this work reflected in our financial results, which I will turn to now. This morning, I will primarily highlight full year 2016 results, touching only secondarily on fourth quarter results. First, Freddie Mac reported net income of $7.8 billion for 2016 and comprehensive income, which is the more important measure for us while in conservatorship, of $7.1 billion. For the fourth quarter, these figures were respectively $4.8 billion and $3.9 billion. With a net worth of $5.1 billion at year-end, we are scheduled to return $4.5 billion to tax payers in March. That will leave us with a net worth of $600 million, which is the 2017 allowed capital buffer as specified in the PSPA that is the Preferred Stock Purchase Agreement, which is the U.S. treasury agreement which supports us. This would bring the total pay to treasury to nearly $106 billion, about $35 billion more than we have received in draws. Net interest income which does include single-family guarantee fees was robust at $14.4 billion and was driven mostly by higher single-family guarantee revenue on our growing book of business. This growth continues to roughly replace the income lost from the mandated reduction of our retained investment portfolio. I want to note that contractual guarantee fee income, which is the base guarantee fee we receive on a monthly basis and does not include fees we receive on an upfront basis, is expected to continue to increase over the long term as guarantee fees are higher on new business than on the average mortgage running off. Turning now to the retained investment portfolio, it declined nearly $50 billion in 2016 and a $298 billion is getting close to the $250 billion cap set forth in the PSPA. This is thanks significantly to our work to efficiently reduce less liquid assets, something I’ll talk about more in a few minutes. I will now focus on our results and what we are calling an adjusted basis. These non-GAAP measures are simply a valuable way to understand the economics and activities of the underlying businesses, and we are finding them increasingly useful in managing the businesses and explaining our results. Adjusted guarantee fee income, which is the guarantee revenues generated from both our single-family and multifamily businesses, was $6.6 billion in 2016, up $1.1 billion or 20% from 2015, driven by three things. First, the increased size of the guarantee book which was up 5% in 2016; second, average single-family G fees were up by about 5 basis points; and third, upfront fees charged on our single-family guarantee book came in faster than originally expected as loan liquidations, which are driven of course by the high rate of prepayments lately, increased during 2016. Adjusted net interest income, which is the interest spread generated from our investment activities, was $3.5 billion, a decline of roughly $1.5 billion from the prior year, reflecting the mandated reduction in our retain portfolio and also higher cost to hedge our mortgage prepayment risk during 2016. I want to point out that while we saw significant quarterly variability of our earnings such as caused by the $2.3 billion after-tax market-related gain we had in the fourth quarter just passed, these market related items have a relatively modest net impact of just $400 million after tax gain on our full-year results. It was a similarly small annual loss of $500 million from these items in 2015. In other words then, we have significant quarterly variability but only modest annual variability. While we continue to manage our business on an economic basis, we have also taken actions to reduce our GAAP earnings variability as we have discussed with you during previous calls. Toward that end, earlier during this first quarter of 2017, we adopted hedge counting for certain mortgage loans which are classified for accounting purposes as held for investment. This is expected to reduce a significant portion of the measurement differences between the Company’s GAAP financial results and the actual business economics. Thus, our expectation is that quarterly income variability from movements in interest rates will be noticeably less going forward. But, it’s also important to note that we cannot completely eliminate all earnings variability; it is inherent in our business model just as it is for large financial institutions, generally. To sum up, we had another year of very solid financial performance in 2016, reflecting our strong business fundamentals. I will now discuss these fundamentals along three dimensions, business volumes; credit quality; and tax payer risk. First up, business volume. The guarantee businesses are more competitive than ever with lots of momentum driven by new products and services and have very much improved overall level of competitiveness. You can see this reflected in the growth of our guarantee books, which as I mentioned, grew 5% in 2016 over the previous year. In single-family, the larger of the two, our book of business grew by 53 billion or just over 3% with purchase volumes up 12% over the prior year. We provided nearly $400 billion of financing to home buyers in 2016, funding nearly 1.7 million homes. Last year, we really ramped up our efforts in expanding access to affordable credit, especially for underserved borrowers. This included test-and-learn pilots with several lender partners; it included expanding our relationships with state housing finance agency; and also continuing to enhance our product offerings. Our emphasis on responsible access to credit is bearing fruit. As an example, our percentage of funding for first time home buyers versus others, a critical focus of this effort, was the highest in 10 years. Going back to the single-family business overall, we are maintaining our laser focus on customer service and are proud that customers satisfaction levels continue to be very high, much higher than several years ago. Looking forward, given the increase in market interest rates towards the end of 2016, we expect 2017 to be more purchase money oriented -- purchase mortgage oriented and less refinancing oriented. We will be focusing on working with our lending customers to help them succeed in this changed market. I’ll now turn to the multifamily business, which hit another record last year with purchase volumes of almost 57 billion, up 20% from 2015’s then record volumes. For the second straight year, we were the country’s top volume multifamily lender. Our multifamily guarantee portfolio grew by more than 30% in 2016 to nearly $160 billion. The multifamily business in 2016 continued its long-standing focus and emphasis on workforce housing. Approximately 90% of last year’s buying supported working families earning at or below 100% of their area median income. Additionally, we are strongly growing the untapped asset category, as it’s called, to help increasingly meet the needs of markets identified by the FHFA as underserved. This includes among other things funding 3.7 billion of small balance loans, about 60% more than we funded the prior year, and $1 billion of manufactured housing community loans. Second, let me turn now to credit quality. Simply put, overall corporate-wide credit quality is the best it’s been in nearly a decade. The single-family delinquency rate was an even 1.00% at year-end, down 32 basis points from the end of 2015 and down more than 300 basis points from its peak during the financial crisis. We expect to break the double-digit barrier and meaning in a good way that is heading lower soon. [Ph] The core single-family book defined as those loans [ph] starting in 2009 is now 73% of the portfolio, up from 66% just a year ago. The series delinquency rate on this book is just 20 basis points, reflecting a reasonable credit box but importantly also a very favorable rising house price environment. HARP and other relief refi loans account for another 15% of the portfolio, leaving just 12% for the legacy book with a significantly higher rate of credit losses. And of course multifamily delinquency rates remained here zero, let me repeat that, near zero. Our direct, that is non-delegated underwriting business model, has certainly been delivering the credit quality goods. And third, let me spend a few minutes on tax payer exposure to our risk. As I said, our business model is now significantly less risky for tax payers. This is primarily due to the overall housing market improving but also importantly due to our work to reduce aggressively, legacy assets and also due to our industry recognized leadership in reengineering the guarantee businesses to heavily employee credit risk transfer and evolve away from historic buy and hold business model. Innovation is at the heart of both of these efforts. First, as I think you know, we’ve been disposing of non-performing loans since 2013 have been leading the market in employing innovative structures to reduce our exposure to seriously delinquent, non-performing and re-performing loans in an economically efficient manner. Last year was no exception; we introduced two new structures to securitize re-performing loans. By year-end, less liquid assets, the focus of these efforts, were down nearly $92 billion since we began this work. Second -- this doesn’t include ongoing maturities, of course. Second, our credit risk transfer program which applies to new mortgage flows also continued to evolve. In single-family, we economically and efficiently transferred significant amount of risk on more than $215 billion of single-family mortgages last year than more than $600 billion since we began the program in 2013. Our loss protection for tax payers and single-family loans at year-end was $25 billion and growing. And on the multifamily side, our business model through which we layoff the vast majority of credit risk, is far superior for tax payers versus the traditional buy and hold approach of most other investors. In 2016, we issued an unprecedented $51 billion of multifamily securities of which almost all involve the transfer of first lost credit risk to private capital. Virtually all multifamily loans we are purchasing are thus coming onto our books at fairly de minimis residual risk to tax payers. Since 2009, in fact, we transferred the significant majority of risk on nearly $180 billion of multifamily loans. Through our leadership and credit risk transfer, we are fundamentally transforming how the residential mortgage markets are funded. And as the number of investors in these risk transfer transactions grow, we are able to disperse credit risk ever more widely. That’s good for reducing systemic concentration risk in the global financial markets as well. Also, as I said at the very beginning of my comments, managing these risks well on behalf of the tax payer in conservatorship is heavily the same thing as managing them well as if we had traditional shareholders outside of conservatorship. In other words, good and smart risk management is at the core of what we do. With that, I will wrap up by saying that we feel very good about our performance last year. We are proud of the transformation we’ve undergone as a Company and the changes that are not only driving our performance but also enabling us to more effectively deliver on our community mission, improving access to affordable housing for home buyers and renters nationwide. Let me now open it up to your questions.

Operator: [Operator Instructions] Will take our first questions from Joe Light with Bloomberg News.

Joe Light: So, you said a couple of times that the way you are managing the Company is that conservatorship is mostly similar to how you would manage it if you had -- if you are managing on behalf of shareholders. Can you talk about the ways in which managing for shareholders versus tax payers would be different? I mean, are there any significant differences here?

Don Layton: Well, first, good morning, Joe. Quickly coming to mind, I would not have many. First of all, when it comes to expense management, we want to be efficient. That would be true -- that’s true for both. In risk management, we are doing it true for both, credit risk transfer, which is the biggest thing going on. The economics we use to drive that process fundamentally treats the tax payers similar to how you treat shareholders with the cost of capital. The only things worth mentioning would be conservatorship constraints where the specific things were told to do and how to do them. For example the conservatorship is currently in control of pricing of many activities in the single-family business. If we were not in a conservatorship that would either be on a fee market basis or some other basis.

Joe Light: Right. So, with the current risk transfer in particular, you are saying if you were managing this as a private company on behalf of shareholders, you would be doing just as much credit risk transfer at the prices you are getting as you are now?

Don Layton: Yes. Credit risk transfer, as we’ve invented it, has at its core, economics about how much risk we transfer and how much revenue we give up to do so. And the math is the same for saying when I give up that revenue, am I giving up too much revenue to get rid of risk on behalf of shareholders is the same math we use for the tax payer. You don’t want to give up too much revenue or that would be unfair to tax payers. So, the answer is, very similar. My associates here pointed out that because we are conservatorship, we don’t have that much focus on quarterly earnings or EPS or those things, we focus more on fundamentals. If we were outside of conservatorship, we would probably be more focused on accounting earnings.

Joe Light: Thank you.

Operator: [Operator Instructions] We will take our next question from Denny Gulino with Market News International.

Denny Gulino: Hi, thanks. Just, could you repeat what you said about the payments, the treasury in March? I didn’t catch that.

Don Layton: Alright, let me go find it. We calculate that as of December 31; we had a net worth of $5.1 billion. We are scheduled to return $4.5 billion of that; the timing would be late in March and that would leave us with the net worth of $600 million, which is the specified capital buffer we are allowed to have under the PSPA during 2017.

Denny Gulino: Okay. I didn’t see that in the release at all. Is that somewhere buried down there?

Don Layton: I am sure it’s in there somewhere.

Sharon McHale: The subhead mentions the total payment, Denny. And then…

Don Layton: We will find it for you separately.

Jim Mackey: Front page mentions the scheduled payment and then the actual amount is in the body of the page.

Denny Gulino: And does that -- that’s for the full year or just for the fourth quarter?

Don Layton: No. These payments are made quarterly; so, it’s based upon quarterly income.

Jim Mackey: Yes. Page 14 of the press release.

Don Layton: End of every quarter, you look at your net worth to make the calculation.

Denny Gulino: Got you, page 14. Okay, thanks a lot.

Operator: [Operator Instructions] We will take our next question from [Lauren Willert from POLITICO]. [Ph]

Unidentified Analyst: Hi, guys. So, Mr. Layton, you said that the Company has become more competitive in the five years you’ve been here. Who are you competing against?

Don Layton: In the single-family business, the largest and most obvious competitor is Fannie Mae but clearly we also are competing as a secondary market player also at some sense with the FHA/VA channel as well since loan originators often compare all three channels for selling the mortgages off. And the multifamily business -- multifamily, of course there is Fannie as well but there are loads of banks and insurance companies compete for a multifamily, meaning apartment house mortgages. So that’s a much more vibrant business in terms of competition.

Unidentified Analyst: Is Freddie at advantaged against those banks and insurance companies?

Don Layton: Freddie and Fannie are both advantaged and disadvantaged depending on how you look at things. I will tell you though, the biggest advantage would be if we decided to do a buy and hold model because in conservatorship, it’s not clear what return we need to earn that risk. But by lying off the vast majority of credit risk, we are putting ourselves back on much more the normal commercial basis because we are paying away to regular private market investors to absorb that credit risk. So, I would say, our business model, it’s very little government advantaged and much more just a good business model with people executing very well.

Operator: It appears there are no further questions at this time. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Don Layton: Thanks again for joining us this morning. We will continue to work to ensure that Freddie Mac remains the strong competitive and tax payer exposure efficient Company it has now become. 2017 is already off to a good start, and I look forward to updating you on our progress in innovating for the industry and helping our customers responsibly reach more borrowers and renters. Good morning.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.