Annual earnings fell to $2.62 billion, or $3.78 a share, after payment of preferred dividends from $4.6 billion, or $6.68 a share, in 2003.

The company blamed its shrinking profit on a $4.48 billion loss from derivatives, financial contracts used to protect its mortgage assets against fluctuating interest rates, but Freddie Mac said derivatives continue to be an effective tool for managing risk.

Freddie Mac, which buys mortgages from lenders and resells them as securities to investors, said net interest income dropped 4 percent to $9.14 billion from $9.5 billion in 2003.

A non-interest loss of $3.04 billion widened from $244 million a year earlier, impacted primarily by its derivative loss, which compares with gains of $39 million in 2003 and $5.3 billion in 2002. Excluding management and guarantee income, the non-interest loss widened to $4.4 billion from $1.9 billion, the company said.

Freddie Mac said the fair value of net assets attributable to shareholders, net of tax, climbed 17 percent to $26.7 billion.

The company added that it ended 2004 with an estimated $3.5 billion of capital in excess of the target surplus level set by its regulator. The Office of Federal Housing Enterprise Oversight said later Thursday that Freddie Mac's core capital of about $34.9 billion topped the minimum requirement by $10.77 billion.

Administrative expenses expanded to $1.55 billion from $1.18 billion as the company spent more on repairing its bookkeeping following a 2003 scandal that revealed nearly $5 billion in understated profits from 2000 to 2002. Freddie Mac, which has delayed nearly all of its earnings reports since late 2002, said it hopes to return to timely reporting by the end of this year.

Freddie Mac and Fannie Mae, its sister lending company which is also entangled in major accounting troubles, are facing the possibility of tougher oversight as lawmakers discuss legislation that would give OFHEO more control over the two.

While the company said it supports legislative reform, it warned that such measures could adversely affect its financial condition and operating results in the coming years, as well as the ability to meet its mission of increasing home-ownership. Freddie Mac said it financed homes for more than 3.7 million families in 2004.

"We very much want Congress to pass the sound bill this year," Chairman and Chief Executive Richard F. Syron said on a conference call. "We wanted it to be a sound bill that is consistent with our objectives and needs of our shareholders, and we are working hard to facilitate that outcome."

Looking forward, Freddie Mac is projecting "materially" lower net interest income in 2005 because of tighter interest margins on its existing portfolio and lower nominal margins on floating-rate mortgage-related security purchases.

That decline, however, is expected to be offset significantly by smaller non-interest losses, based on current forward rates, the company said.

Analysts currently predict a 2005 profit of $6.72 per share. Freddie Mac said it plans to report this year's results by the end of January 2006.