A letter from: Gold Perspective. Mortgage Funding. Mark Hanson

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1 Mortgage Funding Gold Perspective A letter from: Mark Hanson Vice President of Mortgage Funding Over the past 18 months, Freddie Mac has addressed marketplace concerns regarding our prepayment speeds and commitment to improving the price and performance of our Gold PC securities. One strategy in making the prepayment experience of our mortgages more reflective of the total mortgage marketplace has been to diversify our lender base. In 2002, nearly one-half of all of Freddie Mac s 30-year fixed rate issuance came from two sellers. During 2003, those two sellers relative contribution began to shrink. Through August 2004, these two sellers account for approximately one-third of Freddie Mac s total 30-year fixed-rate issuance. We continue to diversify our lender base and purchase a more representative mix of business from lenders. Another implemented strategy involves enhancements to Freddie Mac s MultiLender Swap program. The changes enable Freddie Mac to create Giant PCs by combining Gold PCs backed by mortgages purchased under our Cash program with Gold PCs backed by mortgages purchased under the MultiLender Swap program. This capability will expand and enhance our MultiLender Swap program by providing large, liquid and more predictable Giant PCs in exchange for conventional 15- and 30-year mortgages. To ensure transparency, and as part of our ongoing review of mortgage PC disclosure practices, we also began providing enhanced disclosure for all ARM PCs, as well as enhanced breakout disclosure for our PCs, beginning July 1, These enhancements will assist in deriving prepayment speeds across the whole PC universe Guarantor, MultiLender Swap, and Cash. A tutorial on how to use this information to calculate prepayment speeds can be found inside this issue of Gold Perspective. We believe in the TBA market. A strong TBA market is central to Freddie Mac s mission and to the company s success. Freddie Mac is committed to maintaining continuous, reliable bids for loans. To provide a positive investor experience for our mortgage-backed securities, our issuance programs must promote securities that are large, liquid, transparent, and more predictable. We included an updated PC Prefix Guide inside. Call Investor Inquiry at (800) if you would like additional copies. Please let me know if there are any topics you would like to see covered in future issues. IN THIS ISSUE How to Measure Prepayment Speed by Applying Enhanced Breakout Seller/Servicer Disclosure Seller Diversity: An Illustration Volumes and Performance 2004 PC Prefix Guide Fall 2004

2 How to Measure Prepayment Speed by Applying Enhanced Breakout Seller/Servicer Disclosure By Sam Li, Financial Analyst Manager, Mortgage Funding Beginning July 1, 2004, Freddie Mac began providing enhanced breakout disclosure for its PCs on its website, including seller name, the Weighted Average Coupon (WAC), Weighted Average Remaining Maturity (WARM), and Weighted Average Loan Age (WALA), as well as the high and low ranges in the breakout files for the loans associated with each seller. Prior to the implementation of this disclosure, market practices calculated prepayment speeds using Guarantor only information. This new disclosure removes this limitation by opening the door to the entire Freddie Mac universe (Guarantor, MultiLender Swap, and Cash). Since this disclosure became available in July 2004, investors began using the data to calculate prepayment speeds in August This article illustrates some examples on how the new disclosure can be used by investors to estimate prepayment speeds on Freddie Mac s entire universe. The Bond Market Association s Uniform Practices/Standard Formulas (refer to SF-11 of second edition) states that, For certain security types historical and projected prepayments should be calculated on the basis of the most detailed pool information available for the underlying mortgages. With Freddie Mac s enhanced seller disclosure, it is now possible to calculate prepayments below the pool level. First, let s compare a sample pool s calculated prepayment speed using the pool level information available prior to July 2004 with the same sample using the enhanced disclosure available July Example 1: Consider a Freddie Mac Gold 6.0% pass-through pool issued January 1, 2003 with three sellers in that pool with the following characteristics Pool Seller A Seller B Seller C Original Face $ 4,000,000 $ 1,000,000 $ 1,000,000 $ 2,000,000 Original WARM /1/2004 Pool UPB/Seller Percentage 3,600, % 22.00% 52.00% 7/1/2004 WAC /1/2004 WARM /1/2004 Pool UPB/Seller Percentage 3,500, % 21.75% 51.75% 8/1/2004 WAC /1/2004 WARM Using the Unpaid Principal Balance (UPB), WAC and WARM from the July 1, 2004 factor, the 1-month scheduled balance can be calculated for the next factor date using the following formula: Next Month Scheduled UPB = UPB x (WARM 1) 1 (1 + WAC/1200) 1 (1 + WAC/1200) (WARM) 1 Applying this formula to either pool level or seller level information, we could estimate the 1-month scheduled UPB: Pool Seller A Seller B Seller C $ 3,596, $ 935, $ 791, $ 1,870, The sum of the three sellers scheduled UPB is $3,596,192.84, $2.75 less than the pool level calculation virtually no difference from the 1-month Conditional Prepayment Rate (CPR) result. Let s consider a bigger pool, with the assumption that the proportion of each seller s contribution in that pool is the same. Since both Actual UPB and 1-month Scheduled UPB are proportionally higher, they cancel out, as depicted in the following CPR calculation: 1-Month CPR = 100 x [1 ( 12 Actual UPB ) ] 2 In summary, the prepayment calculation has little impact when using enhanced seller breakout information, assuming a typical dispersion of the seller characteristics distribution. Example 2: Consider three Freddie Mac Gold 6.0% pass-through pools issued in January 2003 with the same three sellers in each pool having the following characteristics Pool Number Factor Date UPB WAC WARM Pool 1 7/1/2004 $ 2,000, Pool 2 7/1/2004 3,000, Pool 3 7/1/2004 5,000, Fall 2004

3 And their seller breakout information is described below: Pool Number Seller Factor Date UPB Percentage WAC WARM Pool 1 Seller A 7/1/ % Pool 1 Seller B 7/1/ % Pool 1 Seller C 7/1/ % Pool 2 Seller A 7/1/ % Pool 2 Seller B 7/1/ % Pool 2 Seller C 7/1/ % Pool 3 Seller A 7/1/ % Pool 3 Seller B 7/1/ % Pool 3 Seller C 7/1/ % We can calculate 1-month Scheduled UPB by using either the seller breakout and percentage information or the pool level information as shown in the following: Pool Number Seller Factor Date UPB Percentage Actual UPB With Seller Breakout With Pool Level Info Pool 1 Seller A 8/1/ % $ 686, $ 699, $ 699, Pool 1 Seller B 8/1/ % 407, , , Pool 1 Seller C 8/1/ % 895, , , Pool 2 Seller A 8/1/ % 1,580, ,648, ,648, Pool 2 Seller B 8/1/ % 304, , , Pool 2 Seller C 8/1/ % 1,015, ,048, ,048, Pool 3 Seller A 8/1/ % 495, , , Pool 3 Seller B 8/1/ % 3,712, ,745, ,745, Pool 3 Seller C 8/1/ % 742, , , According to formula (1), these 1-month Scheduled UPBs are different because the sellers WAC and WARM are different from the WAC and WARM of the pool. When summed to the seller level across three pools then: Seller A 8/1/2004 $ 2,847, $ 2,846, $ Seller B 8/1/2004 4,445, ,445, Seller C 8/1/2004 2,696, ,696, (313.53) You can see with similar pool size, as in the first example, the scheduled UPB differences are much greater. Using the following UPB at 8/1/2004 factor date for these three pools: Pool Number Factor Date UPB Pool 1 8/1/2004 $ 1,990,000 Pool 2 8/1/2004 2,900,000 Pool 3 8/1/2004 4,950,000 We can also compare the corresponding 1-month CPR differences: 1-Month CPR Seller A 8/1/ % 30.43% 0.06% Seller B 8/1/ % 5.29% 0.02% Seller C 8/1/ % 17.91% -0.11% Let us now take a look at an example with three larger pools: Example 3: Consider three Freddie Mac Gold 6.0% pass-through pools issued in January 2003 with the following information Pool Number Factor Date UPB WAC WARM Pool 1 7/1/2004 $ 200,000, Pool 2 7/1/ ,000, Pool 3 7/1/ ,000,

4 The seller breakout information is shown below: Pool Number Seller Factor Date UPB Percentage WAC WARM Pool 1 Seller A 7/1/ % Pool 1 Seller B 7/1/ % Pool 1 Pool 1 Seller < 1%UPB 7/1/ % Pool 2 Seller A 7/1/ % Pool 2 Seller B 7/1/ % Pool 2 Pool 2 Seller < 1%UPB 7/1/ % Pool 3 Seller A 7/1/ % Pool 3 Seller B 7/1/ % Pool 3 Pool 3 Seller < 1%UPB 7/1/ % (... denotes sellers other than A and B with UPB > = 1% of the pool in pools 1, 2 and 3 ) We can again calculate the 1-month Scheduled UPB for sellers A and B by using either seller breakout and percentage information or pool level information as shown in the following: Pool Number Seller Factor Date UPB Percentage Actual UPB With Seller Breakout With Pool Level Info Pool 1 Seller A 8/1/ % $ 67,275, $ 69,927, $ 69,925, Pool 1 Seller B 8/1/ % 39,390, ,950, ,957, Pool 2 Seller A 8/1/ % 22,910, ,975, ,974, Pool 2 Seller B 8/1/ % 16,037, ,980, ,983, Pool 3 Seller A 8/1/ % 36,456, ,459, ,458, Pool 3 Seller B 8/1/ % 22,344, ,473, ,475, If we sum them up to the seller level across three pools then we have: Seller A 8/1/2004 $ 131,362, $ 131,358, $ 3, Seller B 8/1/ ,404, ,415, (11,502.68) Using the following UPB at 8/1/2004 factor date for these three pools: Pool Number Factor Date UPB Pool 1 8/1/2004 $ 195,000,000 Pool 2 8/1/ ,000,000 Pool 3 8/1/ ,000,000 We can compare the 1-month CPR difference as follows: 1-Month CPR Seller A 8/1/ % 35.53% 0.02% Seller B 8/1/ % 9.43% -0.16% The CPR differences are quite similar to those of the smaller pools case in the second example above. In these last two examples, the enhanced seller distribution information slightly improves the scheduled balance estimation, and one could see that the more dispersion of the seller distribution within and across the pools, the better the improvement would become. This expected outcome would apply to cases involving both small and large pools. Gold Perspective

5 2002 Freddie Mac 30-Year Fixed Rate PC Issuance 51% Other Sellers/ Cash 49% Sellers A&B Seller Diversity: An Illustration By Pavan Chatlani Senior Financial Analyst, Mortgage Funding 2003 Freddie Mac 30-Year Fixed Rate PC Issuance To continue efforts that promote a more representative loan composition, Freddie Mac continues to diversify its seller mix. These pie charts follow the composition of Sellers A&B (defined as the top two Freddie Mac sellers by volume in 2002) through 2003 and into 2004, and compare their volume to the Other Sellers and Cash. 54% Other Sellers/ Cash 46% Sellers A&B In 2002, nearly one-half of all Freddie Mac s 30-year fixed-rate issuance came from Sellers A&B. During 2003, Sellers A&B s contribution began to shrink. Other Sellers began entering the mix Freddie Mac 30-Year Fixed Rate PC Issuance 66% Other Sellers/ Cash 34% Sellers A&B The seller mix changed significantly during the first eight months of Sellers A&B now account for approximately one-third of Freddie Mac s total 30-year fixed-rate issuance, and the Other Sellers and Cash account for two-thirds of the issuance. (Through August 2004)

6 Volumes & Performance Total Freddie Mac Structured Product Volume 2004 ($Millions) Structured Month Giant PCs REMICs Passthroughs Strips Total Jan $3,687,834 $11,422,518 $500,000 $2,000,000 $17,630,352 Feb 8,589,383 15,335,542 1,631, ,556,859 March 1,169,355 20,402,661 1,452, ,024,338 April 2,276,968 26,286,735 1,441, ,004,954 May 1,820,368 15,440,289 1,299, ,560,013 June 1,404,666 15,029,411 1,741, ,175,932 July 5,984,064 18,086, , ,520,414 August 4,612,306 19,427, ,039,851 Total YTD $29,544,944 $ ,051 $8,516,717 $2,000,000 $181,512,713 Total Mortgage Portfolio ($Millions) [1] [2] New Net Annualized Business Increase/ Ending Annualized Liquidation Purchases Liquidations [3] (Decrease) Balance Growth Rate Rate [4] YTD ,864 (737,074) 97,790 1,414, % 54.6% Jan 2004 $36,916 ($24,975) $11,941 $1,426, % 20.9% Feb 33,808 (31,094) 2,714 1,429, % 26.1% Mar 43,055 (40,486) 2,569 1,431, % 33.9% Apr 48,299 (50,862) (2,563) 1,429,060 (2.1%) 42.0% May 50,671 (38,745) 11,926 1,440, % 32.5% June 53,283 (33,617) 19,666 1,460, % 28.0% July 44,758 (28,935) 15,823 1,476, % 23.7% YTD 2004 $310,790 ($248,714) $62,076 $1,476, % 30.0% Total PCs Issued ($Millions) [1] [5] [6] Net PC Increase/ Ending Annualized Structured Issuances Liquidations [7] (Decrease) Balance Growth Rate Securitizations [8] YTD 2003 $713,787 ($642,343) $71,444 $1,162, % $298,118 Jan 2004 $31,653 ($19,570) $12,083 $1,174, % $13,943 Feb 26,368 (26,583) (215) 1,173,936 (0.2%) 16,967 Mar 32,651 (34,996) (2,345) 1,171,591 (2.4%) 21,855 Apr 38,219 (43,050) (4,831) 1,166,760 (4.9%) 27,728 May 41,778 (31,208) 10,570 1,177, % 16,740 June 39,022 (26,647) 12,375 1,189, % 16,771 July 30,709 (21,592) 9,117 1,198, % 19,652 YTD 2004 $240,400 ($203,646) $36,754 $1,198, % $133,656 Footnotes: [1] Ending balances and activity are based on unpaid principal balances and exclude mortgage loans and mortgage-related securities traded, but not yet settled. [2] Total mortgage portfolio is defined as Total PCs issued plus the sum of mortgage loans and non- Freddie Mac mortgage-related securities. [3] Includes sales of non-freddie Mac mortgagerelated securities. [4] The calculation of annualized liquidation rates for the total mortgage portfolio excludes the effect of sales of non-freddie Mac mortgage-related securities. [5] Represents PCs and Structured Securities backed by non-freddie Mac mortgage-related securities and other credit guarantees of mortgage loans held by third parties. [6] Includes housing authority bonds (approximately $6 billion as of July, 31, 2004) that were issued by third parties to fund the origination of multifamily mortgage loans and for which Freddie Mac provided a credit guarantee. [7] Represents liquidations on all PCs and Structured Securities backed by non-freddie Mac mortgagerelated securities and other credit guarantees of mortgage loans held by third parties. Includes prepayment activity and delinquent mortgage loans and balloon reset mortgage loans purchased out of PC pools. [8] Includes activity related to multi-class Structured Securities, primarily REMICs as well as interestonly and principal-only stripped securities and other Structured Securities backed by non- Freddie Mac mortgage-related securities. These amounts exclude resecuritizations of PCs into single-class securities. Editorial Board: Mark Hanson Vice President, Mortgage Funding Robert Burns, CFA Director, External Investments & Communications Mike Dawson, CFA Vice President, Multiclass Issuance Mark Pettit Vice President, Securities Strategy & Policy Holly Sitzmann Director, Marketing Communications For Additional Information: Contact Holly Sitzmann at (571) or at Holly_Sitzmann@freddiemac.com Gold Perspective is not an offer to sell any Freddie Mac securities. Offers for any given security are made only through applicable offering circulars and related supplements, which incorporate Freddie Mac s information statement and related supplements by Freddie Mac. Information from this document may be used with proper attribution. Alteration of this document is strictly prohibited. Fall 2004 Gold Perspective