following article, adapted from a note distributed to clients, he reviews the Federal Home Loan Mortgage Corp.'s recent investor conference in New York. Freddie Mac focused on two themes at the conference: credit quality and retained portfolio growth. As credit concerns have been foremost on the minds of investors of late, we believe that Freddie Mac was quite smart in addressing the concerns directly. And it was clearly a good move for the government-sponsored enterprise to accentuate the positive: surging portfolio growth, which is its engine of earnings growth. Management underscored a position similar to ours, discussed in previous notes, that the divergence of credit costs between Freddie Mac and Fannie Mae results from the current peaking in chargeoffs on the pre-1992 (largely California) book of business. While the particular book of business accounts for just over 20% of the current total, it is now contributing approximately 80% of the credit losses. However, going forward this book should become less of a burden as both balances and loss rates trail off, and as portfolio growth diminishes in relative importance. Credit problems related to the pre-1992 situation should also be reduced by the successful implementation of the loss mitigation program, which the company began to emphasize in 1993. Loss mitigation involves both the restructuring of loans and the preselling of properties, which are heading into the foreclosure process. When properly implemented these programs, management stated, can reduce economic losses by almost 80% in the case of restructurings and 40% in property presales. On a reported earnings (accounting) basis, however, they tend to accelerate loss recognition. Thus, the higher loss rates being reported currently should be offset by significantly improved future credit costs. As for the retained (mortgage investment) portfolio, we have long expected 45% growth - a more than $30 billion increase - this year. And next year we expect the company to add an additional $20 billion to $30 billion to its retained portfolio, with the lower number occurring in the unlikely (as we see it) scenario of sharply rising interest rates. These are in line with management's projections at the conference. With strong portfolio growth looming on the horizon in 1996, and credit costs becoming less of a drag, the big question in our minds is how much of a jump might earnings take, beginning in next year's second half and into 1997. In our view, the company may then have a difficult time keeping earnings growth down to the mid-teen rate that it targets. If such a scenario does occur, we suspect that this conservatively managed agency will dampen down earnings by investing in the future, rather than experience a big boost in reported earnings.

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