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Executives: Jeffrey Markowitz - Senior Vice President, External Relations and Corporate Communications Don Layton - Chief Executive Officer Jim MacKey - Chief Financial Officer Bill McDavid - General Counsel

Analysts: Joe Light - Bloomberg News Bonnie Sinnock - SourceMedia

Operator: Good day, ladies and gentlemen. And welcome to Freddie Mac First Quarter Financial Results Media Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce Senior Vice President, Mr. Jeff Markowitz. Please go ahead, sir.

Jeffrey Markowitz: Good morning, everyone, and thank you for joining us for a discussion of Freddie Mac’s first quarter 2018 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’d like to point out that during the 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 the factors can be found in the Company’s quarterly Form 10-Q filed today. Freddie Mac’s executives may also discuss non-GAAP financial measures. For more information about these measures, please see our earnings press release and related materials, which are posted on the Investor Relations section of our website at 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 rebroadcasted or transcribed. With that, I turn the call over to Don Layton, Freddie Mac’s CEO.

Don Layton: Good morning. And thank you for joining us to discuss our first quarter financial results. We always appreciate the opportunity to talk with you each quarter and answer your questions. There are two overarching themes from this quarter's results which I have chosen to highlight, increased earnings stability and innovation. For increased earnings stability, I'll discuss some of the contributors to this increased stability of the earnings of the current business model and the ways we're working to enhance that stability. For innovation, I'll highlight how we're introducing a steady-stream of real improvements by all three business lines to fulfill our mission by making the housing finance system work better for borrowers, for lenders, for investors and of course, for the tax payers who support us. Now I'll turn to our financial results. First quarter net and comprehensive income were strong at $2.9 billion and $2.2 billion respectively. In conservatorship we focus on comprehensive income that's the $2.2 billion number. For a couple of reasons this quarter provides the clearest view in quite a while of our earnings capacity. First, unlike in the past few quarters there were no significant items that noticeably impacted our results up or down. Second, legacy asset disposition and market spreads tightening together had only a small aggregate effect on our bottom line, each contributing up gains of about $200 million after tax. Finally, thanks to the successful implementation of hedge accounting, the very large increase in interest rates during the quarter to your treasuries went up by 38 basis points, please remember had only a small impact reducing earnings by about $160 million. Previously that increase would have produced a very significant swing in our earnings. Netted out these three market sensitive items, asset dispositions, market spreads and interest rate impact produced a roughly a modest $200 million gain. So ignoring significant items and adjusting for the tax rate, we have a pattern of more stable earnings for about a year now. I do want to note the increase in our earnings generation capacity is due to the recent reduction in income tax rate. We saw a 5% growth in our guarantee book, which means we're fully participating in mortgage market growth with our totals approaching $2.1 trillion. That includes 3% growth in the much larger single family guarantee book and 30% growth in the multi-family book. Continuing our tremendous success story in that smaller albeit still very large market that’s multi-family. Financially and also in terms of risk management, the greatest innovation of all going under Freddie Mac is we believe credit risk transfer. Beyond [ph] reducing legacy assets to shrink taxpayer exposure to our risks, we are building a fundamentally different guarantor business model for the future. In this new and more capital efficient business model, Freddie Mac acts primarily as a conduit for credit risk, rather than the traditional historic buy and hold risk owner, where we ended up with inordinately [ph] large and concentrated risk in a single asset class. This transformation is largely complete here for the multi-family business, where we have transferred to investors a large majority on credit risk, a 90% of the total outstanding multi-family guaranty portfolio. In fact, today these days we generally reduce by approximately 90% the model capital required for credit risk on each quarter's new originations. In single family which got started later and which is so much larger, we have transferred a significant portion of credit risk on 39% of the total outstanding single family guarantee portfolio, up nearly 30% a year ago. We generally reduced by approximately 60% the model capital required for credit risk under their new origination. I would note that our measurement of credit risk reduction by how much our model capital required for credit risk is reduced is based on our internal models which are aligned with the conservatorship capital framework from the FHFA and which in turn is generally consistent with the 2017 Dodd-Frank stress test severely adverse scenario. These credit risk transfers are also very cost efficient, allowing us to access relatively low cost capital to absorb mortgage credit risk. Additionally, the investors in CRT are initials for credit risk transfer are mostly broadly diversified throughout the financial system, reducing systemic risk concentration as well. It's a win all around. It's also a core part of our business model now far from the pilot stage was in single family in 2013. Freddie Mac is accurately regarded as the pioneer for the CRT development, a wide variety of ways and is really gratifying to see others following in our footsteps. Now I'll discuss each of these three lines of business. In the in the first quarter, single family first, in the first quarter we funded more than 282,000 single family loans contributing to the growth of our single family investment guarantee portfolio, which now stands at over $1.8 trillion. That growth is no accident. It's the result of competing fiercely for our customers business. And we're supporting the single family market responsibly. Our single family serious delinquency rate is down to 97 basis points, without the impact of the recent hurricanes its at 75 basis points, which is at the high end of the range broadly considered normal prior to the financial crisis. Equally important, our single family team continues to innovate to re-imagine the mortgage experience for lenders. For example, we're consistently improving loan adviser suite, our end to end technology solution for lenders that lowers their costs and gives them greater purchased certainty. Take our automated collateral evaluation feature, known as ACE, which provides lenders with an automated alternative to a conventional appraisal for a modest portion of loans. With ACE lender save time and money, with the borrower able to benefit as a result. The cost of an appraisal which we estimate averages around $500 per loan is avoided for starters. Lenders also receive immediate representation and warranty relief that is relevant to the transaction. The percentage of loans we buy which are utilizing ACE continues to grow as more lenders see its advantages. We are estimating that over time it will account for between 10% to 15% of new loans funded through loan product advisor, that's our fund and loan decisioning tool used by lenders. Another important way we're innovating to create a better housing finance system is through our work with the FHFA and the industry to create a new Uniform Mortgage Backed Security or UMBS, more commonly known as the single security. FHFA recently announced the first UMBS will be issued in June of next year, which means forward trading should begin late in the first quarter of 2019. In other words, just under a year from now. In a few weeks ago, U.S. Treasury publicly reiterated its strong support for the effort. This work will pave the way for a combined $3.5 trillion market of TBA UMBS. This effort is designed to bring additional liquidity and stability to the mortgage market, another win for lenders, investors, families and the taxpayer. Turning to multi-family, the apartment house financing market remains very vibrant with solid fundamentals of high occupancy rates and reasonable rent growth, as well as good transaction flow. In the first quarter, we once again demonstrated that our outstanding business model enables us to bring liquidity to just about every segment of that market. The numbers bear this out. Comprehensive income was $404 million for the first quarter with new business volume of $13 billion, funding over 150,000 multi-family rental units. As I said the guaranteed portfolio grew by 30% year-over-year and now stands at $213 billion. And we're supporting the market responsibly, thanks to our prudent underwriting and exceptional business model, our delinquency rate remains near zero at just two basis points. Our multifamily team also continues to innovate to create a better housing finance system. There is the completely reformed approach to transferring rather than holding credit risk as I already explained. As another example, we continue to build on the success of our small balance loan program that we begin 2014. This is important because due to the relative affordability SBL, that small balance loan, SBL properties are a major source of workforce housing. In fact, since launching the program we financed over 6700 small balance loans accounting for over a quarter of a million apartments, 84% of those loans have been affordable to families earning 80% of less of area median income. That's the sweet spot for affordable housing for the average working family. And the program is growing rapidly, up 76% in new volume [ph] from 2016 to 2017 alone. It's another great innovation success story. Now let's go to capital markets, the third business line. It has a very significant milestone this quarter, by officially reducing the size of the mortgage related investment portfolio, we have brought it down to $241 billion. That's below the preferred stock purchase agreement. 2018 year end cap of $250 billion, that's down by the way from a peak of $867 billion in 2009, a decline of over 70%. And as I said in the past, we will shrink that portfolio a bit more to maintain a 10% buffer below the $250 billion cap. And I should also note that historically capital markets generated most of the company's profits. Well this will bounce around quarterly with all the usual ups and downs, over the last two quarters to guarantee businesses produced most of the profits and we see this trend generally continuing as the guarantee businesses grow and the investment portfolios matures into the post-financial crisis era. Our capital markets team has impressive track record of creating new and innovative structures and initiatives to serve investors and to modernize the mortgage markets. For example, we continue to conduct innovative senior subordinate securitizations of re-performing loans, known as RPLs, those are loans that upon going into the fall we brought on to our books from the MBS in which they - were previously included, given that we guarantee their credit quality. Those loans are now performing again, usually have to be modified. These transactions enable Freddie Mac to efficiently distribute credit risk and market risk on these loans to investors. We securitized $1.8 billion re-performing loans in the first quarter alone, bringing the cumulative total to a $11 billion since the senior sub securitization program began in 2016. This brings me to the final part of my remarks, and it's the one that's important to understanding the fundamentals of our business. As we continue on our journey to build a better housing finance system, we're also naturally building a better Freddie Mac. A big part of that is creating a business model that is significantly less volatile in terms of earnings and in terms of capital needs, notwithstanding events in the broader financial mortgage markets. I will highlight three key aspects to this effort. First, interest rate risk, in conservatorship it is not appropriate to take significant discretionary interest rate risk, so we don't. As revealed by our near-zero duration gap has disclosed each month. But as we have discussed in the past, our previous approach to GAAP [ph] accounting could be unfriendly to the situation, showing large gains and losses due to the non-symmetric accounting treatment of the balance sheet items being hedged versus the accounting treatment of the hedges themselves. So we have worked hard to get more symmetric treatment via hedge accounting, which was complicated and time consuming, but we've done it. This was demonstrated just this past quarter when the large move up in interest rates did not cause a big distortion in earnings. Second, as the housing GSE we are exposed to heavily concentrated mortgage risk, which can generate its own volatility through loan losses and write-downs when the mortgage asset class is under stress. While many thought this high concentration of mortgage risk was just the inevitable and unavoidable by-product of being a monoline housing GSE, we have shown the way forward. In multi-family, we are already in a good place. We transfer a large majority of our long term exposure to credit risk, to private investors. In single family as we do more CRT on the annual flows over the next few years we will substantially reduce our risk to how much house prices change and because we calculate the cost of CRT- because we calculate that the cost of CRT compares favorably to the cost of capital associated with the classic buy and hold risk model, its definitely a winning strategy. And third, we have aggressively reduced legacy assets. When I arrived in 2012, I recall U.S. Treasury officials telling me to my surprise that we had sold zero of such legacy assets, relying completely upon natural runoff and write-downs to meet the portfolio reduction requirements of the support agreement from them. Well no more. We pioneered several key transaction types, securitising re-performing loans into traditional MBS, selling non-performing loans with appropriate protections, packaging, disposing of RPLs, re-performing loans, so that not only are we below the $250 - $250 billion retained portfolio limit, but more than half of that portfolio is made up of liquid, non-legacy assets. That makes it much more stable and less prone to sporadic large losses. And of course, these programs are built on top of the core business model to GSEs generating its revenues mostly tied to the outstanding book of our guarantees, whether - by then just the new volumes done each quarter in year. That in itself creates a more stable base for our revenues and profits. Let me conclude by saying, that I'm proud of the work we've done this quarter. We've produced solid results for tax payers and we innovated to create a better housing finance system. With that, I look forward to your questions.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Joe Light with Bloomberg News. Your line is now open.

Joe Light: Hi. Thanks for taking the question. I was wondering if you could talk about the new 3% down product home when [ph] is why you introduced it, how you're sort of protecting yourself and taxpayers under the new products. And I guess what sort of volume you might expect from the [indiscernible] big product or relatively small products or what?

Don Layton: First, good morning, Joe. Nice that you’re always the traditional first question. As you recall several years ago, we were requested by the FHFAs conservator to offer a 97% product, although they always qualified it as with proper safety and soundness. So it's got lots of good credit protections to help balance the fact that the LTV is very high. There were two markets for this. One, intended [ph] market was more the lower middle income affordable market and the other market was - we were focused on was first time homebuyers. By introducing this product which is aimed at first time homebuyers, we are now going to have won 97% product aimed at them and the older product aimed more specifically at LMI borrowers. So each could be customized, that is the main strategic [indiscernible] what's going on. As was true for the original product there are only so many loans that have a quality credit despite high LTV. So our expectations of volumes of these is targeted and relatively modest, but it will go where it goes, as credit goes.

Joe Light: So was the old product not working for the first time homebuyers, I guess why did you find the need to make the changes that you did?

Don Layton: Just normal evolution of being more targeted.

Joe Light: Okay. Thanks.

Don Layton: You know, treat that as one of the little innovations that was always looking to do better.

Joe Light: Thanks.

Don Layton: Okay.

Operator: [Operator Instructions] And our next question comes from the line of Bonnie Sinnock with SourceMedia. Your line is now open.

Bonnie Sinnock: Hi. Thanks for taking the question. I wondered, if you could tell me, you mentioned kind of the target for ACEs products and I wondered if you could tell me what it is currently?

Don Layton: I don't think we disclose what it is currently, but we've only been at this for a short period of time, so you can assume it's only a modest fraction of the targeted percentage at this time.

Bonnie Sinnock: Okay. All right. Thank you.

Operator: Thank you. And I'm showing no further questions at this time. So with that said, I’d like to turn the conference back over to management for closing remarks.

Don Layton: Okay. Thank you all for listening. As we said, we think we're doing a great job here, innovating and working to create a better company and a better housing finance system. And we look forward to talking to you next quarter. Good morning.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a wonderful day.