Freddie Mac


Freddie Mac

Infobox_Company
company_name = Federal Home Loan Mortgage Corporation (Freddie Mac)
company_
company_type = Public (nyse|FRE)
company_slogan = We Make Home Possible
foundation = 1970
location = McLean, Virginia
key_people = David M. Moffett
(CEO)
num_employees = 5,281 ("2008")
products = Financial services
homepage = [http://www.freddiemac.com/ FreddieMac.com]
industry = Credit services
market c
US$ 270 million ("2008")
revenue = US$ 43.104 Billion ("2007")
operating_income = US$ -5.977 Billion ("2007")
net_income = US$ -3.094 Billion ("2007")
assets = US$ 794.368 Billion ("2007")
equity = US$ 26.724 Billion ("2007")

The Federal Home Loan Mortgage Corporation (FHLMC) (nyse|FRE), commonly known as Freddie Mac, is a stockholder-owned corporation chartered by Congress in 1970 as a government sponsored enterprise (GSE) in order to expand the secondary mortgage market in the United States. Freddie Mac, along with Fannie Mae, buys home loans from mortgage lenders and either holds them in its own investment portfolio or securitizes them into mortgage backed securities (MBS) which can then be sold to investors. When Freddie Mac creates an MBS, it guarantees that investors will receive timely principal and interest payments regardless of what happens to the underlying mortgages. The name, "Freddie Mac", was a creative acronym of the company's full name that had been adopted officially for ease of identification (see "GSEs" below for other examples).Fact|date=October 2008

On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action has been described as "one of the most sweeping government interventions in private financial markets in decades". [ ] ] ] As of 2008, the Federal National Mortgage Association (Fannie Mae) and the Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.Duhigg, Charles, [http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink "Loan-Agency Woes Swell From a Trickle to a Torrent"] , The New York Times, Friday, July 11, 2008]

Moody's gave Freddie Mac's preferred stock an investment grade rating of A1 until August 22, 2008 when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody's changed the credit rating on rating that day to Baa3, the lowest investment grade credit rating. Freddie's senior debt credit rating remains Aaa/AAA from each of the major ratings agencies Moody's, S&P, and Fitch. ] As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US$ 100 billion. [cite news|author=Christie, Rebecca|title=Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4)|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=ajcw4yxxPGJ8|date=September 7, 2008|publisher=Bloomberg|accessdate=2008-09-07]

Home loan interest rates may go down as a result, and owners of Freddie Mac debt and the Asian central banks who had increased their holdings in these bonds may be protected. Shares of Freddie Mac stock, however, on September 8, 2008 were worth about one U.S. dollar. On the same day the U.S dollar increased in value compared to yen and euros. The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt. [ cite news|author=Grynbaum, Michael and Jolly, David|title=U.S. Takeover of Mortgage Giants Lifts Stock Markets|url=http://www.nytimes.com/2008/09/09/business/worldbusiness/09markets.html|date=September 8, 2008|work=The New York Times|publisher=The New York Times Company|accessdate=2008-09-08]

History

From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage Association (Fannie Mae), which was a government agency during that period. In 1968, to help balance the federal budget, part of Fannie Mae was converted to a private corporation. To provide competition in the secondary mortgage market, and to end Fannie Mae's monopoly, Congress chartered Freddie Mac as a private corporation.

The Emergency Home Finance Act of 1970 created Freddie Mac. The goal was to create a secondary market for conventional mortgages, as indicated in the Fannie Mae charter. [http://www.fanniemae.com/aboutfm/charter.jhtml]

The Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1989 revised and standardized the regulatory mechanisms for both Fannie Mae and Freddie Mac. Prior to that, Freddie Mac was owned by the Federal Home Loan Bank System and its member thrifts and governed by the Federal Home Loan Bank Board which was later reorganized into the Office of Thrift Supervision. FIRREA severed Freddie Mac's ties to the Federal Home Loan Bank System, created an 18-member board of directors to run Freddie Mac, and subjected it to HUD oversight.

In 1995, Freddie Mac began receiving affordable housing credit for buying subprime securities. [cite news|url=http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html| title=How HUD Mortgage Policy Fed The Crisis|first=Carol D. |last=Leonnig|date= June 10, 2008|publisher=Washington Post]

Freddie Mac was put under a conservatorship of the U.S. Federal government on Sunday, September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac.

Business

Freddie Mac's primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.

Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, because of the size of their holdings and the widespread perception that they are government backed. Freddie Mac is currently regulated by the U.S. Department of Housing and Urban Development (HUD) and its Office of Federal Housing Enterprise Oversight (OFHEO). The United States House of Representatives passed HR 1427 ("Federal Housing Finance Reform Act of 2007") to consolidate oversight for Freddie, Fannie, and the Federal Home Loan Banks into a single regulator. [cite web
url = http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm
title = Testimony of Chairman Alan Greenspan
first = Alan
last = Greenspan
publisher = Federal Reserve
date = 2004-02-24
] [cite web
url = http://www.msnbc.msn.com/id/17485336/
title = Bernanke seeks stronger mortgage regulation
date = 2007-03-06
author = Associated Press
publisher = MSNBC
]

Conforming loans

The GSEs are allowed to buy only conforming loans, which limits secondary market competition for non-conforming loans. The law of supply and demand accordingly renders the non-conforming loan harder to sell (fewer competing buyers); thus it would cost the consumer more (typically 1/4 to 1/2 of a percentage point, and sometimes more, depending on credit market conditions). OFHEO annually sets the limit of the size of a conforming loan in response to the October to October change in mean home price. Above that conforming loan limit, a mortgage is considered a non-conforming jumbo loan. The conforming loan limit is 50 percent higher in such high-cost areas as Alaska, Hawaii, Guam and the US Virgin Islands, and is also higher for 2-4 unit properties on a graduating scale.

Guarantees and subsidies

In mid July 2008 there was widespread speculation that the US government would move to provide Freddie Mac with additional guarantees of capital, because of widespread instability in the financial markets and public perceptions of looming insolvency. On Sunday July 13 The Secretary of the Treasury announced that the US government would seek legal permission to invest in Freddie Mac, which it later obtained as part of a Congressional housing bill. In addition, the Federal Reserve offered Freddie access to its emergency borrowing facility, the Discount WindowFact|date=July 2008(see also press release of the Fed [ [http://www.federalreserve.gov/newsevents/press/other/20080713a.htm] Press release of the Fed.] ), a resource traditionally reserved for banks. While, many are calling this move tantamount to a bailout, the Treasury has not yet invested in Freddie Mac and has in fact announced that it has no plans to do so; rather, the Congressional permission constituted a last-resort.Fact|date=August 2008

No actual guarantees

The FHLMC states, "securities, including any interest..., are not guaranteed by, and are not debts or obligations of, the United States or any agency or instrumentality of the United States other than Freddie Mac." [ [http://www.freddiemac.com/debt/products/faq_fnotes.html Freddie Mac Debt Securities: Freddie Notes FAQ ] ] The FHLMC and FHLMC securities are not funded or protected by the US Government. FHLMC securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in public communications issued by the FHLMC.

Assumed guarantees

There is a wide belief that FHLMC securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA "implicitly taxpayer-backed agencies." [Vernon L. Smith, "The Clinton Housing Bubble", Wall Street Journal, December 18, 2007, pA20] The Economist has referred to " [t] he implicit government guarantee" [The Economist, "Fannie and Freddie ride again", July 5, 2007] of FHLMC and FNMA.

The then-director of the Congressional Budget Office, Dan L. Crippen, testifed before Congress in 2001, that the "debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee. . . ." [ [http://www.cbo.gov/doc.cfm?index=2839&type=0 "CBO TESTIMONY Statement of Dan L. Crippen Director, Federal Subsidies for the Housing GSEs before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Committee on Financial Services U.S. House of Representatives, May 23, 2001"] ]

Federal subsidies

The FHLMC receives no direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes, "There have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises... Government-sponsored enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5 billion annually." [Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996]

ubprime adjustable rate loans

Freddie Mac announced on February 27, 2007 that it will buy a subprime adjustable rate mortgage only if the borrower qualifies for the "maximum" rate of the loan, rather than merely a low introductory (so-called "teaser") rate. [citation needed]

Company

Awards

Freddie Mac was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine.

Freddie Mac was ranked number 50 in Fortune 500's 2007 rankings.

Freddie Mac was ranked 20 in Forbes' Global 2,000 public companies rankings for 2008.

Credit rating

See [http://www.freddiemac.com/investors/credit_reports.html]
*Senior Long-Term Debt: AAA Aaa AAA
*Short-Term Debt A-1+ Prime-1 F-1+
*Subordinated Debt AA- Aa2 AA-
*Preferred Stock AA- Aa3 AA- Watch Negative
*Risk-To-The-Government AA- Not Applicable Not Applicable
*Bank Financial Strength Not Applicable A- Not Applicable

Investigations

In 2003, the company revealed that it had understated earnings by almost $5 billion, one of the largest corporate restatements in U.S. history. As a result, in November, it was fined $125 million--an amount called "peanuts" by Forbes. [http://www.forbes.com/2003/12/11/cx_aw_1211freddie.html]

A 200-page report issued by Office of Federal Housing Enterprise Oversight indicated that the company's records were manipulated to meet Wall Street earnings expectations. The firm signed a consent order promising to improve internal controls and corporate governance. [http://www.forbes.com/2003/12/11/cx_aw_1211freddie.html]

On April 18, 2006 home loan giant Freddie Mac was fined $3.8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions. Much of the illegal fund raising benefited members of the House Financial Services Committee, a panel whose decisions can affect Freddie Mac. Notably, Freddie Mac held more than 40 fundraisers for House Financial Services Chairman Michael Oxley, R-Ohio. [http://www.msnbc.msn.com/id/12373488/from/RSS/]

Government subsidies and bailout

Officially, Freddie Mac is not given any backing, insurance, or statutory support by the US Government. Unofficially, it has long been assumed that the corporation, along with its sister GSE, the Federal National Mortgage Association (Fannie Mae), were "too big to fail". Both companies often benefited from an implied guarantee of fitness equivalent to truly federally-backed financial groups.

As of 2008, the Federal National Mortgage Association and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.Duhigg, Charles, [http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink "Loan-Agency Woes Swell From a Trickle to a Torrent"] , The New York Times, Friday, July 11, 2008] This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July of that year, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing the Treasury Department to own stock.Luhby, Tami, [http://money.cnn.com/2008/07/13/news/economy/fannie_freddie_sunday/index.htm?postversion=2008071405] , CNN Money, Monday, July 14, 2008] This event also renewed calls for stronger regulation of GSEs by the government.

Conservatorship

On September 7, 2008, Federal Housing Finance Agency (FHFA) Director James B. Lockhart III announced pursuant to the financial analysis, assessments and statutory authority of the FHFA, he had placed Fannie Mae and Freddie Mac under the conservatorship of the FHFA. FHFA has stated that there are no plans to liquidate the company. [] ] The announcement followed reports two days earlier that the Federal government was planning to take over Fannie Mae and Freddie Mac and had met with their CEOs on short notice. cite news | first= David S. | last= Hilzenrath | coauthors= Zachary A. Goldfarb | title= Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say | date= 2008-09-05 | publisher= | url = http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html | work = Washington Post | pages = | accessdate = 2008-09-05 ] cite news | first = Stephen | last = Labaton | coauthors= Andres Ross Sorkin | title= U.S. Rescue Seen at Hand for 2 Mortgage Giants
date= 2008-09-05 | publisher= | url = http://www.nytimes.com/2008/09/06/business/06fannie.html | work = New York Times | pages = | accessdate =2008-09-05
] cite news | first= David S. | last= Hilzenrath, | coauthors= Neil Irwin, and Zachary A. Goldfarb | title= U.S. Nears Rescue Plan For Fannie And Freddie Deal Said to Involve Change of Leadership, Infusions of Capital | date= 2008-09-06 | publisher= | url = http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html | work = Washington Post | pages = A1 | accessdate = 2008-09-06 ] Under the reported plan, the federal government, via the FHFA, would place the two firms into conservatorship, and for each entity, dismiss the chief executive officer, and dismiss the present board of directors and elect a new board of directors, and cause to be issued new common stock to the federal government. The value of the common stock to pre-conservatorship holders would be greatly diminished, in the effort to maintain the value of company debt and of mortgage-backed securities. ] The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008 law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling by US$800 billion, to a total of US$ 10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks.cite news | first= David | last= Herszenhorn | coauthors= | title= Congress Sends Housing Relief Bill to President
date= 2008-07-27 | publisher= | url = http://www.nytimes.com/2008/07/27/washington/27housing.html
work = New York Times | pages = | accessdate = 2008-09-06
] ] [ See HR 3221, signed into law as Public Law 110-289: "A bill to provide needed housing reform and for other purposes."
Access to Legislative History: Library of Congress THOMAS: [http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03221: A bill to provide needed housing reform and for other purposes.]
White House pre-signing statement: [http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr3221-h.pdf Statement of Administration Policy: H.R. 3221 – Housing and Economic Recovery Act of 2008 ] (July 23, 2008 ). Executive office of the President, Office of Management and Budget, Washington DC.
] On September 7, 2008, the U.S. Government took control of both Fannie Mae and Freddie Mac. Daniel Mudd, CEO of Fannie Mae and Richard Syron, CEO of Freddie Mac have been replaced. Herbert M. Allison former vice chairman of Merrill Lynch will take over for Fannie Mae, and David M Moffett, former vice chairman of US Bancorp, will take over for Freddie Mac. It is estimated that the liabilities of both companies could cost U.S. taxpayers tens of billions of dollars.

References

ee also

*Derivative (finance)
*Government sponsored enterprise
*Mortgage GSE controversy
*Securitization
*USA Funds
*Agency Securities
*Mortgage
*Mortgage loan

External links

* [http://www.freddiemac.com/ Official Website]
* [http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=FRE Freddie Mac Profile] , "BusinessWeek"
* [http://www.discoverthenetworks.org/funderProfile.asp?fndid=5196 Freddie Mac Profile] , FrontPage Magazine
* [http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org Freddie Mac Profile] , "New York Times"

GSEs

* Fannie Mae
* Farmer Mac
* Ginnie Mae
* Sallie Mae

Further reading

*cite journal |last=Barth |first=James R. |authorlink= |coauthors=Brumbaugh, R. Dan, Jr. |year=1992 |month= |title=Turmoil Among Depository Institutions: Implications for the U.S. Real Estate Market |journal=Housing Policy and Debate |volume=3 |issue=4 |pages= |id= |url=http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_0304_barth.pdf |publisher=Fannie Mae, Office of Housing Policy Research, Washington, DC |quote=
*cite news |first=Stephen |last=Labaton |authorlink= |coauthors=Weisman, Steven R. |title=U.S. Weighs Takeover of Two Mortgage Giants |url=http://www.nytimes.com/2008/07/11/business/11fannie.html |work=New York Times |publisher= |date=2008-07-11 |accessdate=


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