The US Housing Market Crisis and Its Aftermath

The US Housing Market Crisis and Its Aftermath Asian Development Bank November 16, 2009

Table of Contents Section I II III IV V US Economy and the Housing Market Freddie Mac Overview Business Activities Debt Securities Mortgage Securities Page 2 17 23 28 35 Nothing in this document constitutes (i) an offer to sell or the solicitation of an offer to buy any securities; or (ii) an offer to provide or the solicitation of an offer to provide any services. Freddie Mac makes no representation or warranty as to whether any information contained in this document is correct. No information contained in this documents has been independently verified. The distribution of this document in certain jurisdictions may be restricted by law. For more information about Freddie Mac and its business, please see the company s filings with the Securities and Exchange Commission, including the company s Annual Report on Form 10-K for the year ended December 31, 2008, which are available on the Investor Relations page of the company s Web site at www.freddiemac.com/investors and the Securities and Exchange Commission s Web site at www.sec.gov. 1

U.S. Economy and the Housing Market

U.S. nominal house prices have declined sharply Annual national house price growth Percent 16 14 12 10 8 6 4.7%: 1952-2008 Average Growth Rate 4 2 0-2 -4 - Recession Year -6 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Note: Growth rates for 1952 to 2008 are calculated using the annual average of certain third party and Freddie Mac indices. Sources: E. H. Boeckh and Associates, Bureau of Labor Statistics, U.S. Census Bureau and Freddie Mac. 3

45 States and Washington, DC had home price declines from June 2008 to June 2009 1 United States 8.3% -2.3-11.4-13.1-10.7-28.5-11.6-13.5-22.7-14.5-6.1-4.6 0.4-3.8 4.6-1.1-1.9 1.8-0.5 0.1 0.4-7.5-3.8-6.1-5.2-6.5-2.1-8.2-0.2-4.2-7.6-4.7 RI 11.4-5.3-7.1-2.2-11.4 CT 6.8-1.9-2.6-8.3 DC 5.5-1.9-2.7-4.9-5.4-5.4-8.5-3.2-3.3-1.2-18.7 >= 0% -4 to 0% -8 to -4% -12 to -8% < -12% 1 National home prices use the internal Freddie Mac index, which is value-weighted based on Freddie Mac s single-family portfolio. The state index is a monthly series; annual growth rates are calculated as a 12-month change. Source: Freddie Mac. 4

National home prices have experienced a cumulative decline of 16.8% since June 2006 1 Percent (%) 6 4.6 4.5 4 2 2.3 2.5 1.6 2.6 2.4 1.3 1.2 2.0 0.5 0.7 3.2 0 (2) (4) (0.6) (1.2) (0.1) (2.0) (2.8) (3.0) (4.1) (1.7) (6) (8) 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 (6.8) 1 National home prices use the internal Freddie Mac Index, which is value-weighted based on Freddie Mac s single-family portfolio. The U.S. index is a monthly series; quarterly growth rates are calculated as a 3-month change based on the final month of each quarter. Cumulative decline of 16.8% calculated as a cumulative compound growth rate. Source: Freddie Mac. 5

U.S. unemployment rate rose to 9.8% in September, the highest in more than 26 years Unemployment Rate (Percent) 11 Nov-Dec 1982: 10.8% Forecast 2009Q4: 10.0% 9 7 5 3 April 2000: 3.8% 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Sources: U.S. Department of Labor, Freddie Mac National Recession 6

Single-family mortgage debt in relation to total value of housing stock $ Trillions 25 20 Value of Housing Stock 1 15 $9.4 Trillion 10 5 Home Equity $7.9 Trillion (2001) $10.5 Trillion 0 Single-family Mortgage Debt 2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1 Value of Housing Stock: Federal Reserve Board s Flow of Funds Accounts, June 11, 2009, Table B.100 (line #50). Note this figure includes homes with and without underlying mortgages. Home equity is the difference between the value of the housing stock and the amount of single-family mortgage debt. 2 Single-family Mortgage Debt Outstanding: Federal Reserve Board s Flow of Funds Accounts, June 11, 2009, Table B.100 (line #33). Source: Federal Reserve Board s Flow of Funds Accounts. Data as of March 31, 2009. 7

Low interest rates and falling home prices have increased housing affordability Index 180 150 NAR Affordability Index (left scale) 30-year Fixed Mortgage Rate (right scale) Percent 18.0 14.5 120 11.0 90 7.5 60 Index = 100 means median income buys median priced home 4.0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: National Association of Realtors Composite Housing Affordability Index (% of median priced home affordable on median income with conventional mortgage and 20% down); Freddie Mac Primary Mortgage Market Survey 8

Numbers in Thousands 1,000 900 800 700 600 500 400 300 200 100 0-100 A large inventory overhang remains within the housing market Annual Data 1996 2000 2004 Excess unsold homes for sale Quarterly Data Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 2005 2006 2007 2008 2009 Note: The excess unsold homes were estimated based on the average vacancy rate from 1996Q1 to 2005Q4 (1.7%). Source: Bureau of Census. 9

Single-family building hit a record in 2005, but has fallen to lowest level since 1945 One-Family Housing Starts (thousands of units, SAAR) 1,800 1,500 Recession Third Quarter 2005 record: 1.75 million units Forecast 1,200 900 600 300 First Quarter 2009: 0.36 million units 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 1955 1952 1949 1946 Sources: Bureau of Census (SAAR), Freddie Mac 2009 10

Higher refinances expected to increase mortgage originations in 2009 Total single-family mortgage originations $ Billions 4,000 Refinance Originations Home Purchase Originations 3,000 2,000 1,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Est. 2009 Est. Source: U.S. Department of Housing and Urban Development and Federal Financial Institutions Examination Council. 2008 and 2009 data based on the October 2009 forecast of Freddie Mac s Office of the Chief Economist. 11

Subprime and Alt-A volume quintupled 2001 to 2006, then fell from 2006 to 2008 2.5% 7.2% 7.9% 5.2% 2.7% 14.4% 33.2% 1.5% 20.0% 7.7% 57.1% 13.4% 20.1% 2.8% 62.0% 20.1% 16.1% 6.5% Single-family Originations 2001 $2.2 trillion 2006 $3.0 trillion 2008 $1.5 trillion Subprime and Alt-A $0.2 trillion $1.0 trillion $0.1 trillion Conventional, Conforming Prime Jumbo Prime Subprime Alt-A FHA & VA Home Equity Loans Source: Inside Mortgage Finance (by dollar amount). 12

Private-label issuance grew and declined rapidly 13

Private label securities comprise 13% of loans outstanding but over a third of problem loans Number of First Mortgages Outstanding (in millions) Bank and Thrift Portfolios 17% Private Label Securities 13% FHA & VA 12% Freddie Mac 23% Fannie Mae 34% Other Portfolio 1% Private Label Securities Fannie Mae Banks & Thrifts FHA & VA Freddie Mac Seriously Delinquent Mortgages (in millions) 0.36 Other Portfolio 477 0.42 0.63 0.72 1.47 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Total: 53 Million Total: 4.2 Million Sources: FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, HUD, First American CoreLogic (LoanPerformance). Note: Data as of June 30, 2009. Seriously Delinquent loans were at least 90 days delinquent or in foreclosure. Components may not sum to 100% because of rounding. Freddie Mac and Fannie Mae figures include whole loans held in portfolio and in guaranteed securities outstanding. 14

Spreads on mortgage backed securities widened dramatically 15

Freddie Mac Overview

Congress created Freddie Mac to provide stability, liquidity, and affordability to the U.S. residential mortgage market U.S. Residential Mortgage Market Mortgage Securitization Freddie Mac Mortgage Investments Mortgage-backed Securities Global Capital Markets Debt Securities A primary purpose is to provide stability in the secondary market for home mortgages including mortgages securing housing for low and moderate income families. This can be accomplished through both portfolio purchasing and selling activities, as well as through the securitization of home mortgages. 1 1 House of Representatives report on FIRREA, No. 54, 101 st Congress, 1 st Session, Part 3 at 2 (1989). 17

Freddie Mac is a central part of the U.S. housing market $ Trillions 18 16 14 U.S. Residential Mortgage Debt Outstanding 2008 $ Trillions FRE/FNM Total Portfolio 5.3 FRE/FNM Eligible 10.4 Total US Residential Mortgages 11.9 $16.7 12 $11.2 $12.0 $11.9 $11.7 $11.9 10 $10.1 8 6 $5.5 4 2 $2.9 $3.7 0 1990 1995 2000 2005 2006 2007 2008 2009 Est. 2010 Est. 2015 Est. FRE/FNM Total Portfolio Total U.S. Residential Mortgages FRE/FNM Eligible Sources: Freddie Mac Total Portfolio: Monthly Volume Summary, January 2009; Fannie Mae Total Portfolio: Monthly Summary, January 2009, Book of Business ; Total US Residential MDO: Federal Reserve Board s Flow of Funds Accounts, September 17, 2009. The MDO forecasts for 2009 and 2010 are based on the October 2009 forecast of Freddie Mac s Chief Economist. The forecasted figure for 2015 is from the Homeownership Alliance, based on an 8.25% annual growth rate, and assumes a constant FHA & VA share of MDO; to prepare the 2015 FRE/FNM Eligible MDO estimate, we net out an assumed 15% jumbo share of single-family conventional MDO. 18

Conservatorship The Director of the Federal Housing Finance Agency (FHFA) has placed Freddie Mac and Fannie Mae in conservatorship in order to restore the balance between the GSEs safety and soundness and mission FHFA is the Conservator for both GSEs» The Conservator assumed all powers of the Boards, management and shareholders» FHFA reconstituted our board of directors and executive management» FHFA stated that the GSEs will continue business as usual during the conservatorship FHFA has indicated that the goals of the conservatorship include:» Restoring confidence in the GSEs» Enhancing the GSEs capacity to fulfill their missions» Mitigating the systemic risk that has contributed to market instability FHFA has indicated that a GSE s conservatorship will end when the Director determines that FHFA s plan to restore the GSE to a safe and solvent condition has been completed 19

GSE-related government actions Treasury actions:» Entered into a Senior Preferred Stock Purchase Agreement with each GSE Each Agreement provides a commitment for an indefinite time period for a maximum amount of $200 billion for each GSE Freddie Mac has received a total of $50.7 billion Paid dividends of $1.7 billion in cash on the senior preferred stock The corresponding annual cash dividends payable to Treasury are $5.2 billion, which exceeds our annual historical earnings in most periods» Created a GSE Credit Facility Short-term credit facility is available to Freddie Mac, Fannie Mae and the Federal Home Loan Banks at LIBOR + 50 basis points As of June 30, 2009, we had not borrowed funds using the credit facility which is set to expire on December 31, 2009» Implemented an MBS Purchase Program Purchased $176.0 billion of GSE mortgage-backed securities as of September 30, 2009 Program will expire on December 31, 2009 The Fed resumed purchases of Agency securities for its System Open Market Account (SOMA) for the first time since 1981» Fed may purchase up to $200 billion in Agency debt securities, and had purchased a total of $14.5 billion of Agency discount notes and $139.8 billion of Agency long-term debt securities as of October 16, 2009» Fed may purchase up to $1.25 trillion of Agency MBS, and had purchased $941.0 billion 1 of Agency MBS as of October 16, 2009» Fed announced it will gradually slow the pace of purchases under the program and anticipates that these purchases will be executed by the end of the first quarter of 2010 1 Represents the amount purchased net of sales. 20

Making Home Affordable Program On February 18, 2009, President Obama announced the Making Home Affordable (MHA) Program designed to help in the housing recovery, promote liquidity and housing affordability, expand our foreclosure prevention efforts and set market standards. Key components of the plan are:» Home Affordable Refinance gives eligible homeowners with loans owned or guaranteed by Freddie Mac or Fannie Mae an opportunity to refinance into more affordable monthly payments» Home Affordable Modification Program (HAMP) commits U.S. government, Freddie Mac and Fannie Mae funds to avoid foreclosure and keep eligible homeowners in their homes 21

Business Activities

UPB $ Billions 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 $1,317 Our credit guarantee business has accounted for most of our growth $1,415 $1,506 Total mortgage portfolio $1,685 1 1 1 2002 2003 2004 2005 2006 2007 2008 2009 Outstanding Guaranteed PCs and Structured Securities $1,827 Mortgage-related Investments Portfolio (PCs & Structured Securities) $2,103 $2,207 $2,243 $784 $1,459 $403 $381 $1,862 Mortgage-related Investments Portfolio (Non-Freddie Mac Mortgage-Related Securities & Mortgage Loans) 1 Includes PCs and Structured Securities Freddie Mac held in connection with PC market-making and support activities accomplished through the Securities Sales & Trading Group business unit and the Money Manager program. These programs ceased in the fourth quarter of 2004. Source: Freddie Mac. Figures for 2009 are subject to change. 2009 data as of September 30, 2009. 23

Serious delinquencies continue to rise 24

Mortgage-related investments portfolio growth depends on market conditions and is subject to growth cap 1 UPB $ Billions 90 70 50 $70 Mortgage-related investments portfolio growth $84 $78 $57 30 10 $7 -$6 $17-10 -30 -$21 2002 2003 2004 2005 2006 2007 2008 2009 YTD 1 Under FHFA regulation and the Senior Preferred Stock Purchase Agreement with Treasury, our mortgage-related investments portfolio may not exceed $900 billion as of December 31, 2009 and then must decline by 10% per year thereafter until it reaches $250 billion. The first of the annual 10% portfolio reductions is effective on December 31, 2010 and will be calculated relative to the actual balance of our mortgage-related investments portfolio on December 31, 2009. The Purchase Agreement also limits the amount of indebtedness we may incur. Note: Data represents net growth of the mortgage-related investments portfolio based on unpaid principal balances. Source: Freddie Mac. Data as of September 30, 2009. Figures for 2009 are subject to change. 25

Interest-rate risk measures Average monthly PMVS-Level Average monthly duration gap $ Millions Months 600 500 400 300 200 100 0 $395 $394 $354 Sep 08 Oct 08 Nov 08 $260 Dec 08 $102 Jan 09 $447 $429 $493 Feb 09 Mar 09 Apr 09 $570 $577 $556 $549 $566 May June July 09 09 09 Aug 09 Sep 09 6 5 4 3 2 1 0-1 -2-3 -4-5 -6 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May June July 09 09 09 Aug 09 Sep 09 Source: Freddie Mac. Figures provided for 2009 are subject to change. 26

Freddie Mac Global Debt Securities

Freddie Mac s suite of debt products $ Billions 1,000 Debt securities outstanding 900 800 700 600 500 400 300 200 100 4 255 <1 137 204 228 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Short-term Debt Callable Debt MTN Bullet Debt Subordinated Debt US$ Reference Notes Reference Notes Note: All figures represent face amounts in USD billions based on trade date. These figures could differ significantly from proceeds, amortized principal amount and book value figures, particularly for zero-coupon securities. Source: Freddie Mac. 2009 data as of September 30, 2009. 28

Debt maturity profile $ Billions 250 200 $102 150. 100 $126 50 $123 0 $27 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020+ Long-term Short-term Note: Outstanding balance using par amounts. Source: Freddie Mac. Data as of September 30, 2009. 29

Debt maturity profile by quarter $ Billions 180 160 140 120 100 80 60 40 20 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 Long-term Short-term Note: Outstanding balance using par amounts. Source: Freddie Mac. Data as of September 30, 2009. 30

Increased domestic institutional investor demand has offset decreased foreign demand for our Reference Notes securities Geographic region Investor type 100% 80% Other North America 100% 80% Insurance & Pension Bank Other 60% 60% Investment Manager 40% Europe 40% 20% 20% Asia 0% 2003 2004 2005 2006 2007 2008 2009 Central Bank 0% 2003 2004 2005 2006 2007 2008 2009 Note: Data reflects 6-month moving average of orders placed in our US$ Reference Notes securities syndicated bond offerings. Source: Freddie Mac. Data as of September 30, 2009. 31

Fed purchases of Agency debt Purchases by maturity date $ Millions 40,000 35,000 30,000 25,000 $24,642 $35,828 $ Millions Total Discount Notes $ 14,500 Term Debt 139,841 $ 154,341 20,000 15,000 10,000 5,000 0 $9,823 $4,707 $17,479 $15,734 $15,108 $4,121 $14,500 $8,782 $1,538 $62 $485 $1,061 $309 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2029 2030 2031 2032 $162 Discount Notes Term Debt Source: Federal Reserve Bank of New York. Data as of October 16, 2009. 32

Fed purchases of Agency term debt by GSE Purchases by maturity date $ Millions 40,000 35,000 30,000 $ Millions Total FRE $ 53,231 FNM 56,801 FHLB 29,809 $ 139,841 25,000 20,000 15,000 10,000 5,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2029 2030 2031 2032 FRE FNM FHLB Source: Federal Reserve Bank of New York. Data as of October 16, 2009. 33

Freddie Mac Mortgage Securities

U.S. mortgage securities are the largest fixed-income sector Outstanding public and private bond market debt $34.3 Trillion Municipal ($2.7) 8% Treasury ($6.9) 20% 1 Agency Debt ($3.0) 9% 2 Corporate Debt ($6.8) 20% 4 Money Market ($3.4) 10% Asset-Backed ($2.5) 7% MBS ($8.9) 26% 5 4 3 1 Interest-bearing marketable public debt. 2 Includes Freddie Mac, Fannie Mae, Federal Home Loan Banks, Tennessee Valley Authority and Farm Credit System. 3 MBS include Ginnie Mae, Fannie Mae and Freddie Mac mortgage-backed securities and CMOs, CMBS and private-label MBS/CMOs. 4 Securities Industry and Financial Markets Association estimates. Includes Auto, Credit Card, Home Equity Loans, Manufacturing, Student Loan and Other. CDOs of ABS are included. 5 Includes commercial paper, bankers acceptances and large time deposits. Note: Percentages may not add up to 100% due to rounding. Source: Securities Industry and Financial Markets Association as of June 30, 2009. 35

Demand for Agency mortgage securities $ Billions 250 200 150 100 50 0-50 -100 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Comm Bank PT Comm Bank CMO Freddie Fannie Foreign FHLB Treasury Fed Source: Federal Reserve Board; Freddie Mac and Fannie Mae Monthly Volume Summaries, Treasury International Capital Data, Federal Home Loan Banks, US Treasury Department, Federal Reserve Bank of New York. Data as of October 23, 2009. 36

Freddie Mac s mortgage securities products $ Billions 1,800 Mortgage securities products outstanding 1,600 1,400 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q 2009 Source: Freddie Mac. Data as of September 30, 2009. REMICs Reference REMIC T-deals/WLR Strips PCs 37

Fed purchases of Agency MBS by GSE Gross purchases by coupon $ Millions 450,000 400,000 350,000 $ Millions FRE FNM GNMA Total 30-year $ 384,807 $ 861,122 $ 87,434 $ 1,333,363 15-year 22,600 9,642-32,242 Other 1,703 350-2,053 Gross Purchases $ 409,110 $ 871,114 $ 87,434 $ 1,367,658 300,000 250,000 200,000 150,000 100,000 50,000 0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 3.5 4.0 4.5 5.0 5.5 4.0 4.5 5.0 30-year 15-year Other FRE FNM GNMA Note: Sales of agency MBS, including sales associated with dollar rolls, by investment managers acting as agents for the System Open Market Account (SOMA) have totaled $426,633 million. Source: Federal Reserve Bank of New York. Data as of October 14, 2009. 38

Freddie Mac obligations Freddie Mac s securities are obligations of Freddie Mac only. The securities, including any interest or return of discount on the securities, are not guaranteed by and are not debts or obligations of the United States or any federal agency or instrumentality other than Freddie Mac. No offer or solicitation of securities This presentation includes information related to, or referenced in the offering documentation for, certain Freddie Mac securities, including offering circulars and related supplements and agreements. Freddie Mac securities may not be eligible for offer or sale in certain jurisdictions or to certain persons. This information is provided for your general information only, is current only as of its specified date and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information does not constitute a sufficient basis for making a decision with respect to the purchase or sale of any security. All information regarding or relating to Freddie Mac securities is qualified in its entirety by the relevant offering circular and any related supplements. Investors should review the relevant offering circular and any related supplements before making a decision with respect to the purchase or sale of any security. In addition, before purchasing any security, please consult your legal and financial advisors for information about and analysis of the security, its risks and its suitability as an investment in your particular circumstances. Forward-looking statements Safe Harbor Statements Freddie Mac's presentations may contain forward-looking statements pertaining to Freddie Mac s business and future business plans, liquidity, capital management, economic and market conditions and trends, market share, credit losses and credit-related expenses, returns on investments, results of operations and/or financial condition. Management's expectations for the company s future necessarily involve a number of assumptions, judgments and estimates, and various factors, including changes in market conditions, liquidity, mortgage-to-debt OAS, credit outlook, actions taken by FHFA, the Federal Reserve and Treasury, and the impacts of newly enacted legislation or regulations and new or amended accounting standards, could cause actual results to differ materially from these expectations. These assumptions, judgments, estimates and factors are discussed in the company s filings with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2008, which are available on the Investor Relations page of the company s Web site at www.freddiemac.com/investors and the SEC s Web site at www.sec.gov. The company undertakes no obligation to update forward-looking statements it makes to reflect events or circumstances after the date of this presentation or to reflect the occurrence of unanticipated events. 2009 by Freddie Mac. No part of this document may be duplicated, reproduced, distributed or displayed in public in any manner or by any means without the written permission of Freddie Mac.