Federal Home Loan Mortgage Corporation

Sharon McHale – Vice President-Corporate Communications and Marketing Don Layton – Chief Executive Officer Jim Mackey – Executive Vice President and Chief Financial Officer

Joe Light – The Wall Street Journal Jody Shenn – Bloomberg News

Thank you. Good morning and thank you for joining us as we discuss Freddie Mac’s second quarter 2015 financial results.

We’re 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 would like to point out that during fiscal 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 expectation. A description of these factors can be found in the Company’s 10-Q report filed today.

As a company in conservative shift Freddie Mac’s commentary 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 will have the ability to ask questions, this call is being recorded and a replay will be made available on Freddie Mac’s website later today. With that, I will turn the call over to Don Layton, Freddie Mac’s Chief Executive Officer.

Good morning and thanks for joining us for a discussion of second quarter results everyone. Today, I’ll focus my remarks on two areas: first, financial results and second our progress on our two key corporate objectives, building a better Freddie Mac and building a stronger mortgage finance system under FHFA guidance.

Before I dive into the numbers, let me briefly characterize the quarter. Our second quarter earnings were significantly better than our first quarter results.

We had a very good underlying earnings again this quarter, but unlike several previous quarters, we were positively impacted by the strong performance of many market sensitive components of our business. This volatility is mostly related to the timing of the accounting recognition of revenues, which I sometimes refer to as accounting noise and not the fundamental economics of the business.

As I’ve said in the last few quarter, while our results continue to be materially impacted by this noise, the operating fundamentals of our three business lines are strong and improving. Segment earnings are up, purchase volumes are up, and the risk profiles are significantly better.

I’ll share some of those highlights with you in a moment. With that backdrop, let me move right into financial results.

We had a very good quarter reporting net income of $4.2 billion and comprehensive income of $3.9 billion, which as you know, is the more important measure for us while in conservative shift. Our results reflected strong operating earnings and we are also helped by two positive market sensitive items.

First, we estimated that our comprehensive income benefited by approximately $1.5 billion, from higher interest rates and a steeper yield curve during the quarter. This was primarily as a result of our divertive mark-to-market gains.

Remember, we hedge the interest rate risk on mortgage loans and other assets in our balance sheet with derivatives. You mark our derivatives to market, but we do not mark-to-market all of the hedged assets and hence there is an accounting mismatch.

Year-to-date our derivative marks were positive but they have been highly evolved quarter-to-quarter to reflect major interest rate moves. This $1.5 billion is the noise associated with the timing of the recognition of revenues in GAAP.

We explain this as being noise whether it goes against us as it did in the prior few quarters and also when it goes for us as it did this quarter. Second, we estimate our comprehensive income also benefited by $700 million this quarter as spreads improved – as current spreads improved on our mark-to-market mortgage assets.

While the spread-related income tends to be volatile, it is not accounting [indiscernible] it’s just a very market sensitive part of our current business model. Now getting back to the non-market sensitive items, net interest income which includes the guarantee fees on our single family business continues to be the biggest driver of our results, increasing to $4.0 billion in the second quarter.

This increase was the result of both, one, high prepayments, which resulted in acceleration in income of certain fees which absent those prepayments would have been deferred in mortgage accounting. And two, the impact of higher single family g-fees, guarantee fees are new loans working their way into our portfolio over the years.

Single family g-fees now account for over 40% of our net interest income and are becoming a growing revenue source, helping to offset the expected shrinkage of the retain portfolio’s net interest income. In addition, as part of our continued focus on reducing legacy risk, we reclassified additional non-performing seriously delinquent loans to help for sale versus help for investment.

In the first half we similarly reclassified $8 billion of such loans. This reflects our intent to continue to sell non-performing loans as they are usually called.

Note that, while our decision to sell non-performing loans, make sense from an economic standpoint, it does result in another type of noise within our income statement as the GAAP geography, of various revenue and expense items, changes. However, it has only had a wealthy [ph] small net impact on our earnings so far.

Putting altogether our continued strong operating performance is enabling us to return further dividends to tax payers. We will be returning an additional $3.9 billion to tax payers in the third quarter where as the second quarter’s results.

Bringing our cumulative total dividends paid to the U.S. Treasury to $96.5 billion or about $25 billion more than we have received in gross cumulatively.

I’ll switch gears now and update you on our progress to build the better Freddie Mac. In particular, our progress in reducing risk in our ongoing business activities is one of the most important things that we’re doing in conservatorship.

And we’re doing it in a way that is good for tax payers, good for the financial system as a whole and also consistent with what many calls [ph] you make proposals for the future systems of housing finance. We’re doing this of course by creating new asset classes to transfer large amounts of mortgage credit risk to the private market and doing so, in a taxpayer friendly manner.

I’m proud to say that we were the first to market the most successful structures that do this. They are the key deals from multifamily, stacker bonds for single family and also our ACIS reinsurance transactions for single family.

Our innovative – innovation credit risk transfer continues to be recognized by the investment industry, even internationally. Our credit risk efforts were recently highlighted by international financing review in a special report, while Global Capital Magazine named our STACR debt notes RMBS deal of the year in the second quarter.

We are continuing to lead and innovate with credit risk transfer initiatives, introducing new products and features to make our existing programs even more effective in transferring risk. It’s a multiyear endeavor and with more exciting things to come.

Innovation is also visible in a way we are responsibly winding down the retained investment portfolio. As you know, our focus is on reducing less liquid assets, which are mainly impaired mortgage asset.

We sold another $4.3 billion of such assets in the second quarter, which included $900 million of non-performing that is NPL sales. There is currently a strong market for such impaired assets and we’re working hard to take advantage of it, in a way that balances, taxpayer interest, with borrower needs and neighborhood stability.

As an example, our NPL sales have requirements for investors to prioritize non-foreclosure resolutions. As another example in the second quarter we introduced an extended timeline NPL offering, which over time could be used by small investors, including community-based organizations, to secure funds to participate in our auctions.

In total, since the end of 2012, our less liquid assets totals have decreased $135 billion. Results of all this is that our target reduction of our less liquid assets, coupled with our work that help struggling borrowers through modifications and other foreclosure alternatives, have significantly reduced legacy single-family credit risk.

In fact, our single-family serious delinquency rate of 1.53%, down from 2.07% in just the last 12 months, is at the lowest level in almost seven years and has been true for some time now the delinquency rate in the multifamily business is near zero. Let me now turn to what we’re doing to better support our customers and the market.

Freddie Mac has its most important mission to help families in America buy, refinance and rent affordable homes. We continue to deliver on that mission, funding one in four home loans and financing more than 170,000 units of multifamily housing all in the second quarter.

And we continue to work to expand access to affordable housing. In the single-family business this means responsibly expanding access to mortgage credit.

As I said last quarter, there is no silver bullet to the full utilization of our credit box, but we continue to do more under FHFA guidance to responsibly support our customers and home buyers. We’ve increased our focus on underserved, home buyers and communities.

We have a new executive heading up single-family’s effort to strengthen affordable lending opportunities. This includes as, but one example, new initiatives to help keep housing finance agencies, fund mortgages for underserved borrowers with our 3% down Home Possible Advantage mortgage.

Also, our single-family customers are noticing our renewed focus and are competing aggressively for their business, volumes are increasing, and so are the measures of customer satisfactions, which are reaching all-time highs. Turning now to our work to serve the rental community, which has long been largely focused on affordable and workforce housing.

We continue to be a very selective [ph] player in this market, our volume was up 31% from the first quarter in a very strong market, nearly 90% of the rentals refinanced in the second quarter were affordable to families earning up to the area of median income, a standard industry measure which we employ. As you know, there is high demand for quality affordable rentals now and we’re focused on helping to fund now.

For example, I’m happy to report that our new program for small balance loans, which fund smaller rental properties, continues to gain traction, financing nearly nine times the volume in the second quarter than we did in the first as we get going. We’re also helping to preserve existing low-income rental housing.

As one example, in the second quarter, we refinanced the Harbor Point community in Boston, which is more than 400 units of workforce housing. And importantly, we’re funding the vast majority of these multifamily loans without significant risk to the tax payers to our well-known TVO program [ph].

Finally, just a few words on our work with the FHFA and the industry to build the stronger housing finance system. Important on this front in the second quarter was the FHFA progress report on the development of the single security, a significant milestone in defining the structure and processes necessary to successfully transition from today’s market to the more efficient single security market.

It was a major document to those involved. We also made further inroads improving the industry’s infrastructure, including finalizing capital standards for private mortgage insurers and issuing eligibility requirements for seller servicers, again on their FHFA guidance.

With that let me wrap up by saying we had a strong first half of the year and already have significant momentum heading into the second half. I continue to feel good about our progress and our efforts to build a better Freddie Mac and a better mortgage finance system.

I’ll open up – now to your questions. Thank you for listening.

Hi thanks for taking the question. I had a question about the 97% LTV products and since this is the first full quarter when you had that available, are you guys seeing any – and I know that you are not including numbers in your rental release surrounding that.

Are you seeing any significant demand for that product to early December, or how would you catch that?

Hey, the product was – actually went live in terms of accepting loans during the most of March, so you’re correct, the second quarter is a reversible quarter. It had a good start from virtually a zero base.

So numbers moving up nicely, the reason is that disclosed is there still way below any kind of level of made to reality [ph]. It’s a very small percentage.

It is unclear to us how large percentage we will ever get, we’re just going to be watching and working on it with the FHFA.

Okay, got it. So you think the expectation was less than 1%.

Is that a fair characterization so far?

I’m not aware we ever put out an expectation like that.

That was FHFA’s expectation, I think, when they announced back in October or something like that.

Then you have to talk to them.

Okay, thanks.

Yes, I want to ask about the competition issue. I guess just want to see, what you might be saying about that in particular the fact that, I guess, the bill that is out there might, more severely handicap your ability to pay people down the food chain.

How important is it to pay people enough money?

I’m going to give you two types of answers one has Sharon, indicated given conservative shift we don’t comment on public policy things as they close observe the scene, I will mention that bill that was passed only applies to the two CEOs, so I got to explain your comment further down the food chain.

Great, also I want to just ask, where do you see the single security progress being at this point in time.

Good, the single security is obviously being heavily quarter backed by the FHFA, they introduced it, I’m trying to – I’m looking at remember sometime last year in terms of formal. People work to the public, they took comments from the public, they took them in.

We in Fannie are working obviously with them and then they put their new document out to help clarify and answer the bulk of the questions that came in both through the formal comment period and their and our and Fannie’s outreach to the industry. Meanwhile, in terms of operational things the common security solution joint venture, as well as the two companies are doing all the development programming work and operational work to get the CSP going or where the single security would be working – would be channeled through it.

The multi year effort progress is nice, the FHFA is doing more outreach on specific progress reports, and we just like to let them do those kinds of announcements, when it comes to specifics.

Great, thanks so much for your time.

All right, fine, then thank you everyone for listening kindly. Again, it was an excellent quarter part of that was the market sensitive items, which will go up and down with as rates and credit spreads move.

But behind that we believe we’re doing an excellent job in building a better company and working through the FHFA to build a fair housing finance system. Thank you.