The Federal Home Loan Mortgage Corporation ("FHLMC") NYSE: FRE, commonly known as Freddie Mac, is a Government sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation authorized to make loans and loan guarantees. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. The name "Freddie Mac" is a creative acronym of the company's full name that has been adopted officially for ease of identification (see "GSEs" below for other examples).
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.
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.[1] [2]
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 buy some of Freddie Mac's stock and extend to it the full lending power of the Federal Reserve bank of NYcitation needed(see also press release of the Fed[3]). Private banks currently have access to this resource. Nonetheless, many are calling this move tantamount to a bailout.citation needed
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."[4] 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." [5] The Economist has referred to "[t]he implicit government guarantee"[6] of FHLMC and FNMA.
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." [7]
Subprime 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.
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 [3]
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. [4]
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. [5]
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.[6]
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.[8] 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.[9] This event also renewed calls for stronger regulation of GSEs by the government.
References
- ^ Greenspan, Alan (2004-02-24). "Testimony of Chairman Alan Greenspan". Federal Reserve.
- ^ Associated Press (2007-03-06). "Bernanke seeks stronger mortgage regulation". MSNBC.
- ^ [1] Press release of the Fed.
- ^ Freddie Mac Debt Securities: Freddie Notes FAQ
- ^ Vernon L. Smith, "The Clinton Housing Bubble", Wall Street Journal, December 18, 2007, pA20
- ^ The Economist, "Fannie and Freddie ride again", July 5, 2007
- ^ Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996
- ^ Duhigg, Charles, "Loan-Agency Woes Swell From a Trickle to a Torrent", The New York Times, Friday, July 11, 2008
- ^ Luhby, Tami, [2], CNN Money, Monday, July 14, 2008
See also
GSEs
Further reading
- Labaton, Stephen, Weisman, Steven R., "U.S. Weighs Takeover of Two Mortgage Giants", The New York Times, Friday, July 11, 2008.
- Barth, James R., Brumbaugh, R. Dan, Jr., "Turmoil Among Depository Institutions: Implications for the U.S. Real Estate Market", in Housing Policy and Debate (journal), Volume 3, Issue 4, 1992, published by Fannie Mae, Office of Housing Policy Research, Washington, D.C.
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