Federal Home Loan Mortgage Corporation Valuation

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Federal Home Loan Mortgage Corporation - Valuation

• Darrin Scilley
• Drew Corwin

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Business Description

• Guarantee
• Package mortgages and sell to investors
• Guarantee principal and interest
• Investments
• Holdings include MBS and mortgage loans
• Held to maturity

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Freddie Mac Since 12/06
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Terms of Government Assistance

• Conservatorship
• FHFA has full power over assets and operations
• Treasury ensuring FRE meets debt obligations
• Appointed David Moffit as CEO
• Funding Mechanisms
• GSE Credit Facility
• MBS Purchase Program
• Senior Preferred Stock Purchase Agreement
• Warrant Summary
• 79.9 shares outstanding on date of exercise
• Exercise price of 0.00001 with 20 year maturity

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Guarantee Business Overview

• Securitize new and recently issued loans
• Mostly single family
• Charge management and guarantee fee
• Management fee covers servicing fee
• Income generated through guarantee fee
• Only insure full payment of interest and
  principal
• No insurance of prepayment risks

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Products

• All MBS
• Normal pass through
• Fixed rate
• ARM
• Structured credit
• IO strips
• PO strips
• CMOs

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Guarantee Portfolio Size

• 1.8 Trillion
• Guarantee Fee of 18 BP
• Mostly Prime and Alt-A
• Some credit enhancement

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Loan to Value Breakdown
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Guarantee Income 2001-Present
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Guarantee Side Stress Test

• Alt-A MBS makes up 10 of the guarantee
  portfolio
• Contributes 2/3 of the loss

billion
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Investment Business

• 830 Billion portfolio
• 760 Billion MBS
• 70 Billion cash cash equivalents
• 835 Billion debt
• 40 short term
• 60 long term

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Investment Portfolio Breakdown
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Investment Income 2001-Present
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Investment Portfolio Stress Test

• Mark to market loss of 30 Billion in AOCI
• Current impairments total 897 Million
• Max stress test losses Sub-Prime
• 2.169 Billion
• 50-70 defaults, 65 severity
• Max stress test losses Alt-A
• 1.862 Billion
• 15-60 defaults, 50 severity

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Valuation Assumptions

• Public Company
• Almost doubling of Guarantee fees
• Crisis ending around 2010
• Incorporated all market value losses and
  additional 24 Billion in guarantee side
  write-offs

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Projection Mechanics

• Investment Side A spread to Treasury basis
• MBS at 86bps
• Cash at swap spread
• Short term debt at 25bps
• Long term debt at 55bps
• Guarantee Side
• Growing portfolio at 6
• Increasing fees to 33bps

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Results

• Equity Method of DCF
• 22 per share before warrants
• 80 dilution would give 4.40 per share
• Recommendation

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Other Outcomes

• Public Utility
• Split FRE and FNM into smaller agencies
• Government Agency
• Structural Change FRE FNM dissolves

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Thank you - Q A

• Darrin Scilley
• Hugh.scilley_at_colorado.edu
• [phone]

• Drew Corwin
• Andrew.corwin_at_colorado.edu
• [phone]