Freddie Mac

[Alteration of Fed(eral Home Loan) M(ortgage) C(ompany).]

Type: Public
On the web: http://www.freddiemac.com
Employees: 5,012
Employee growth: 0.2%

Freddie Mac (officially the Federal Home Loan Mortgage Corporation) is a government-sponsored enterprise that, along with its sister agency the Federal National Mortgage Association (Fannie Mae), creates liquidity in the residential mortgage market by guaranteeing, purchasing, securitizing, and investing in home loans. The company buys conventional residential mortgages from mortgage bankers, mitigating risk and letting them provide mortgages to those who otherwise wouldn't qualify. It also provides assistance for affordable rental housing. In September 2008 the government seized the company, crippled by the mortgage crisis, in one of the largest government interventions in business since the Great Depression.

Key numbers for fiscal year ending December, 2008:
Sales: ($22,379.0)M
Net income: ($50,119.0)M

Officers:
CEO and Director: Charles Edgar (Ed) Haldeman Jr.
CFO: Ross J. Kari
SVP and CTO: Milton E. Moore

Incorporated: 1970 as Federal Home Loan Mortgage Corp.
NAIC: 522298 All Other Non-Depository Credit Intermediation; 522292 Real Estate Credit

Freddie Mac, a stockholder-owned corporation, is regulated by the U.S. government. Created to provide a continuous, reliable, and low-cost flow of credit to finance housing for the American people, the agency is a dominant player in the secondary mortgage market. Freddie Mac's primary business is to buy mortgages from lenders, package the mortgages into securities, then guarantee and sell the securities to investors. The quasi-government corporation's impact on the mortgage finance industry is immense and often draws fire from private sector competition.

The United States Congress created the charter for the Federal Home Loan Mortgage Corp. in 1970. Nicknamed Freddie Mac, the entity was charged with creating a national secondary market for conventional home mortgages. By doing so, Congress hoped to level out the disparity among regions of the nation in regard to availability of and interest rates on home mortgages. To get off the ground, Freddie Mac raised $100 million by selling nonvoting stock to the 12 Federal Home Loan Banks.

The federal government's interest in the housing market was not a new thing. The Federal National Mortgage Association, or Fannie Mae, was initially established by Congress, in 1938, to buy FHA-insured loans and support government-subsidized housing programs. Operating as a private, for-profit corporation beginning in 1968, Fannie Mae retained most of the mortgages it bought in its own portfolio. Freddie Mac, on the other hand, would not.

In 1971, Freddie Mac offered its first conventional mortgage security, the Mortgage Participation Certificate (PC). Freddie Mac bought mortgages from lenders, primarily savings and loan associations (S&Ls), and then bundled them together in the form of mortgage-backed securities that were sold to investors. The holders of the PCs--most often institutional investors--received monthly principal and interest payments based on the underlying mortgages.

According to Nation's Business, in 1970 about one-third of the country's mortgage loans of $35.6 billion were sold in the secondary market. Just a decade later, half of the nation's $133.8 billion in mortgage loans were resold. Freddie Mac, Fannie Mae, and the Government National Mortgage Association (Ginnie Mac), a HUD-administered agency that guaranteed Federal Housing Administration (FHA) and Veteran Administration (VA) mortgage-backed securities, dominated the secondary mortgage market.

Lenders traditionally made their profit from interest payments on the home mortgages in their portfolios. "But with the advent of financial deregulation and volatile interest rates, lenders often had to pay more for mortgage capital than the mortgages were yielding in interest," wrote Mary-Margaret Wantuck for Nation's Business in 1983. The secondary market let lenders sell the mortgages and related risks and, in turn, bring in more capital to lend to potential home buyers. The holders of mortgage-backed securities benefited as well, receiving returns exceeding many other investment products available in the 1970s and early 1980s.

Other players inhabited the secondary market. Conduits, or private participants, concentrated on buying mortgages that fell outside the realm of the quasi-government agencies Freddie Mac and Fannie Mae. The pair were subject to restrictions on the size of loans they could purchase: the upper limit was $108,300 in 1983.

But private competitors claimed they were forced to operate on an uneven playing field. Dennis Dammerman, vice-president and general manager of real estate financial services at General Electric Credit Corporation, told Wantuck that Freddie Mac and Fannie Mae had unfair advantages. "Their relationship with the Treasury enables them to sell securities at a yield significantly below that obtainable on the most highly rated private issue; their exemption from Securities and Exchange Commission registration requirements reduces their packaging costs drastically below the level achievable by private competitors. And when marketing mortgage-backed securities, Freddie has the advantage of being legally able to elevate its securities to the status of 'obligations issued by the United States.'"

In 1984, Freddie Mac topped the $100 billion mark for home financing. That same year the corporation distributed 15 million shares of participating, preferred nonvoting stock to individual member savings institutions around the country. Toward the end of the decade, Freddie Mac would begin preparing to offer its stock to the general public.

Financial guru Warren Buffett was high on Freddie Mac's prospects. In 1988, he told Fortune magazine, "Freddie Mac is a triple dip. You've got a low price/earnings ratio on a company with a terrific record. You've got growing earnings. And you have a stock that is bound to become much better known to equity investors."

Freddie Mac, along with Fannie Mae, continued to dominate the secondary mortgage market. The prospects for further growth looked promising, thanks in part to the S&L disaster. Beginning in 1990, savings banks and S&Ls would be required to hold bigger reserves against loan losses on ordinary mortgages as opposed to holdings of securitized mortgages, creating another economic incentive to deal in the secondary market.

According to Business Week, in a five-year period in the 1980s Freddie Mac had more than doubled its profits, reaching $381 million in 1988. In 1989, Freddie Mac's participating preferred stock, now listed on the New York Stock Exchange, was split and transformed into ordinary common shares. The Financial Institutions Reform Recovery and Enforcement Act established a new governing structure for Freddie Mac. In 1990, shareholders elected 13 directors; the president appointed five others.

In the early 1990s, as the economy struggled, the government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae, kept the supply of mortgage money flowing. The housing market benefited. Shareholders also did well. Freddie Mac earned $555 million in 1991. Return on equity was 24 percent. In addition, its stock price tripled during the year.

Competitors, on the other hand, harbored resentments. In addition to complaints garnered by the implied credit guarantee with the U.S. government, the GSEs' mortgage limits had outstripped the rise in cost in the housing market, according to Forbes. The upper limit on loans the GSEs could purchase was $202,000 in 1992 compared with $133,000 in 1986. Critics said this flew in the face of the GSEs' goal to help low- and moderate-income families attain housing. Furthermore, the GSEs quickly dominated markets they entered, and the pair were considering expanding in areas such as home equity lending and housing for the elderly. Thrifts and banks successfully lobbied the Bush administration to push for increased capital requirements on the GSEs and an increased percentage of loans in the low- and moderate-income sectors.

In 1993, Freddie Mac's cumulative mortgage finances topped the $1 trillion mark. Despite a 35 percent drop in loan volume the following year, earnings grew 25 percent to $983 million. A shift in the marketplace had Freddie Mac buying more of its own mortgage-backed securities to generate income. According to the American Banker, by year-end 1994, more than half of the mortgages being originated carried adjustable rates. Banks and thrifts typically held on to these or sold them to other depositories, thus leaving Freddie Mac out of the loop. In addition to upping the net interest earned on its portfolio assets, Freddie Mac had increased its income from guarantee fees on mortgage-backed securities. Freddie Mac's tight rein on administrative costs also helped the bottom line.

Freddie Mac launched an automated underwriting service, the Loan Prospector, in 1995. The system was designed with input from lenders, mortgage insurers, software vendors, and others in the industry to streamline the mortgage process and to reduce loan origination costs. The usage rate by lenders would climb quickly but draw fire from critics as well.

Some earlier criticism had been over Freddie Mac's funding of lower-cost housing. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act) required Freddie Mac to meet certain goals pertaining to such mortgages beginning in 1996. The U.S. Department of Housing and Urban Development (HUD) was the agency responsible for setting those goals. Freddie Mac said it surpassed the affordable housing goals set for the year, reporting that it had financed $48 billion in mortgages for low- and moderate-income families and in areas underserved by the housing finance system. In 1997, the Federal Home Loan Mortgage Corp. officially became Freddie Mac.

Norwest Mortgage Inc., the largest residential lender in the country, and Freddie Mac struck a groundbreaking deal in 1999. In addition to using each other's technologies to streamline the loan process, Norwest (which was to become part of Wells Fargo & Company through a landmark reverse merger) agreed to grant Freddie Mac exclusive rights to purchase nearly all of the loans it originated. On a side note, ex-Speaker of the House Newt Gingrich joined Freddie Mac as a consultant during 1999.

In 2000, HUD told the GSEs to increase their commitment to lower-end loans over the next decade, by a sum of $500 billion to a total of $2.4 trillion. The pair faced a range of penalties if they failed to reach the goals set--assuming economic conditions made them feasible. According to American Banker, HUD also was looking at the possibility that the GSEs' underwriting policies had resulted in discrimination against blacks. Scrutiny came from another direction as well in 2000. FM Watch, a coalition of financial services companies, launched a web page, Truth Watch, to report inconsistencies in messages from Fannie Mae and Freddie Mac directed at Congress and the public versus messages targeting Wall Street. The web page was part of a lobbying effort by FM Watch geared toward influencing policymakers considering increasing the level of oversight on Freddie Mac and Fannie Mae.

In October 2000, Freddie Mac announced six voluntary commitments relating to risk and capital management and information disclosure practices. They included monthly interest-rate disclosures, forward-looking credit risk sensitivity disclosures, and periodic issuance of publicly traded, externally rated subordinated debt. Although lauded by many on Capitol Hill, on both sides of the aisle, the effort did not put an end to GSE bashing, especially in the light of their ever expanding control of the secondary mortgage market. The pair would hold nearly one-third of the multifamily financing market by the end of the year.

Finally, the year 2000 marked Freddie Mac's 30th anniversary. The agency had quite a record: an unbroken string of profitable years during its three decades of operation; returns on common equity exceeding 20 percent for 19 consecutive years; and earnings per share growth at a compound rate of 19 percent annually over the past ten years.

Anticipating a housing expansion during the first decade of the 21st century, Freddie Mac in July 2001 announced plans to raise $2 trillion in funding. Favorable interest rates and a refinance boom had been already fueling the mortgage industry. With home ownership at an all-time high, Freddie Mac planned to capitalize on the positive trend. By increasing distribution of its Loan Prospector tools it hoped to capture even more of the market. Freddie Mac was exploring growing its subprime loans and was testing and adapting underwriting technology to grant mortgages in that segment of the market. Plans to draw in new investments from overseas, particularly the euro market, were already in the works.

The GSEs ruffled some feathers again in 2002 with their national advertising campaign. Critics said the GSEs, since they were not allowed to do business directly with the consumer, should not be targeting them in their advertising. The GSEs countered that their advertising was intended to educate consumers about the mortgage process. Advertisements made in trade magazines were geared toward product sales, and those in financial magazines were to draw investors. Freddie Mac also said it needed to counter the negative campaigns against GSEs and to inform stockholders of its activities.

While critics abounded, the GSEs were credited with helping to boost home ownership levels from 64 percent to 68 percent over the last decade, according to the Financial Times in November 2002. In addition, while other segments of the economy faltered in 2002, the U.S. housing market continued to flourish. The lowest interest rates in three decades and the attractiveness of real estate for investment purposes also helped to keep the market strong.

Freddie Mac and Fannie Mae themselves benefited from the charged market, ranking among the most profitable companies in the United States. Their stunning success led to yet another wave of concern by some over their influence on the housing market. "They warn that a failure could drag down a U.S. Banking system highly dependent on Fannie- and Freddie-issued bonds and that taxpayers would be on the hook for a bail-out that would dwarf the savings and loans scandal of the 1980s," wrote Paul Taylor in the Financial Times.

Concerns such as this led to an agreement under which Fannie Mae and Freddie Mac would register with the Securities and Exchange Commission for the first time. Additional calls for further restrictions were likely to come up before Congress down the line. Republicans, who gained ground in the 2002 national elections, had been among the sharpest critics of the GSEs.

Principal Competitors

Fannie Mae; Citigroup Inc.; American International Group, Inc.; FleetBoston Financial Corporation; Countrywide Financial Corporation.

Further Reading

Bergquist, Erick, "Heat Rising for Fannie, Freddie Over Loans to Poor," American Banker, March 3, 2000, p. 43.

Collins, Brian, "Fannie and Freddie Claim Rising Share of Multifamily Loan Market," National Mortgage News, June 18, 2001, p. 38.

Fernandez, Tommy, "Freddie Gets Ready for 10-Year Run," American Banker, July 5, 2001, p. 128.

------, "GSE's Mass-Market Ads Hit a Nerve with Lenders," American Banker, May 24, 2002, p. 100.

Fromson, Brett Duvall, "A Warm Tip from Warren Buffett: It's Time to Buy Freddie Macs," Fortune, December 19, 1988, pp. 33, 36.

Prakash, Snigdha, "Fannie, Freddie Profits Rise Despite Lending Slump," American Banker, January 20, 1995, p. 10.

Rudnitsky, Howard, and Matthew Schifrin, "Nice Work If You Can Get It," Forbes, May 11, 1992, pp. 138+.

Taylor, Paul, "In the Dream Business: U.S. Home Ownership," Financial Times, November 29, 2002, p. 3.

Wantuck, Mary-Margaret, "More Competition for Fannie and Freddie?," Nation's Business, November 1983, pp. 32+.

Weberman, Ben, "Uncle Sam's Deep Pockets," Forbes, September 23, 1985, pp. 166+.

Yang, Catherine, and David Zigas, "Freddie and Fannie Clean Up After the S&L Mess," Business Week, June 5, 1989, pp. 112-13.

— Kathleen Peippo

A stockholder-owned government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.

Also known as Freddie Mac.

Investopedia Says:
Freddie Mac has come under criticism because its ties to the U.S. government allows it to borrow money at interest rates lower than those available to other financial institutions. With this funding advantage it issues large amounts of debt (known in the market place as agency debt or agencies), and in turn purchases and holds a huge portfolio of mortgages known as its retained portfolio. Many people believe that the size of the retained portfolio poses a great deal of systematic risk to the entire U.S.

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An investor's fixed-income portfolio can easily beat the average bond fund. Learn how and why! Asset Allocation Within Fixed Income
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Ever considered investing in real estate? Read about the REIT and see if it's the investment for you. The REIT Way

Investor-owned corporation chartered by Congress in 1970 to create a secondary market for conventional mortgage loans-loans not backed or guaranteed by a government agency-and promote affordable home ownership. Freddie Mac purchases single-family and multifamily mortgage loans (called conforming loans) that have an original principal amount not greater than the conforming loan ceiling. An early pioneer in mortgage securitization, Freddie Mac issued the first conventional mortgage pass-through certificate (a type of mortgage security that pays monthly principal and interest payments from the underlying mortgage loan pool) in 1971 and the first Collateralized Mortgage Obligation in 1983.

Freddie Mac provides funding to mortgage lenders in two ways: it borrows money by selling debt securities, and it purchases mortgages and mortgage-backed securities; second, it guarantees investors against credit losses on securities backed by pools of conforming mortgages. These guaranteed mortgage-backed securities can be held as investments by financial institutions selling loans to Freddie Mac or sold to mortgage investors, including Freddie Mac itself. In return for guaranteeing the timely payment of principal and interest to investors owning mortgage-backed securities, Freddie Mac collects fees from mortgage-originating financial institutions.

Originally owned by the nation's savings and loan associations (then part of the Federal Home Loan Bank System), Freddie Mac became a public corporation in 1989, the year the savings and loan industry restructured under the Financial Institutions Recovery and Enforcement Act. The company's legal name is still the Federal Home Loan Mortgage Corporation, but it conducts business as Freddie Mac.

Nickname for Federal Home Loan Mortgage Corporation.

This article is about the Bank group. For the singer and boxer, see Freddie Mack.

Federal Home Loan Mortgage Corporation (Freddie Mac)

Type	Public (NYSE: FRE)
Founded	1970
Headquarters	Tysons Corner, Virginia, U.S.
Key people	Charles E. Haldeman CEO
Industry	Credit services
Products	Financial services
Revenue	US$ 43.104 billion (2007)
Operating income	US$ −5.977 billion (2007)
Net income	US$ −3.094 billion (2007)
Total assets	US$ 794.368 billion (2007)
Total equity	US$ 26.724 billion (2007)
Employees	5,281 (2008)
Website	FreddieMac.com

The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac (NYSE: FRE), is a government sponsored enterprise (GSE) of the United States federal government. Freddie Mac has its headquarters in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia.^[1][2]

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 mortgage lending and increases the money available for new home purchases. The name, "Freddie Mac", was an acronym of the company's full name that had been adopted officially for ease of identification (see "GSEs" below for other examples).

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".^[3][4][5]

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 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.^[6] 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.^[7]

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, plummeted to about one U.S. dollar on September 8, 2008 . The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.^[8]

Contents 1 History 2 Business 2.1 Conforming loans 2.2 Guarantees and subsidies 2.2.1 No actual guarantees 2.2.2 Assumed guarantees 2.2.3 Federal subsidies 2.3 Subprime adjustable rate loans 3 Company 3.1 Awards 3.2 Credit rating 3.3 Investigations 3.4 Government subsidies and bailout 3.5 Conservatorship 4 See also 5 Canadian equivalent 6 References 7 External links 7.1 GSEs 8 Further reading

History

From 1938 to 1968, the Federal National Mortgage Association (Fannie Mae) was the sole institution that bought mortgages from depository institutions, principally savings and loan associations, which encouraged more mortgage lending and effectively insured the value of mortgages by the US government. In 1968, Fannie Mae split into a private corporation and a publicly financed institution. The private corporation was still called Fannie Mae, and its charter continued to support the purchase of mortgages from savings and loan associations and other depository institutions, but without an explicit insurance policy that guaranteed the value of the mortgages. The publicly financed institution was named the Government National Mortgage Association (Ginnie Mae) and it explicitly guaranteed the repayments of securities backed by mortgages made to government employees or veterans (the mortgages themselves were also guaranteed by other government organizations). To provide competition for the newly private Fannie Mae and to further increase the availability of funds to finance mortgages and home ownership, Congress then established the Federal Home Loan Mortgage Corporation (Freddie Mac) as a private corporation through the Emergency Home Finance Act of 1970. The charter of Freddie Mac was essentially the same as Fannie Mae's newly private charter: to expand the secondary market for mortgages and mortgage backed securities by buying mortgages made by savings and loan associations and other depository institutions.

The Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1991 revised and standardized the regulation of both Fannie Mae and Freddie Mac. Prior to this act, Freddie Mac was owned by the Federal Home Loan Bank System and governed by the Federal Home Loan Bank Board, which was reorganized into the Office of Thrift Supervision by the Act. The Act severed Freddie Mac's ties to the Federal Home Loan Bank System, created an 18-member board of directors, and subjected it to HUD oversight.

In 1995, Freddie Mac began receiving affordable housing credit for buying subprime securities, and by 2004, HUD suggested the company was lagging behind and should "do more." ^[9]

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

This section may be slanted towards recent events. Please try to keep recent events in historical perspective. (August 2008)

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.^[10]

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. However most lenders don't follow OFHEO loan limits, so it is a meaningless number. OFHEO are completely ignored for more expensive areas. The conforming loan limit for 2009 used by lenders is $417,000 (much lower than OFHEO limits). 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 Window^{[citation needed]}(see also press release of the Fed^[11]), 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.^{[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."^[12] 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." ^[13] The Economist has referred to "[t]he implicit government guarantee"^[14] of FHLMC and FNMA.

The then-director of the Congressional Budget Office, Dan L. Crippen, testified 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. . . ."^[15]

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." ^[16]

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]

• Senior Long-Term Debt: AAA Aaa AAA
• Short-Term Debt A-1+ Prime-1 F-1+
• Subordinated Debt BBB+/Watch Positive Aa2 AA-
• Preferred Stock C Ca C/RR6
• Risk-To-The-Government NR (Not Rated) Not Applicable Not Applicable
• Bank Financial Strength Not Applicable E+ Not Applicable

Investigations

In 2003, Freddie Mac 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]

On April 18, 2006 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. Freddie Mac was accused of illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $1.7 million for federal candidates. 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. [5]

The neutrality of this article is disputed. Please see the discussion on the talk page. Please do not remove this message until the dispute is resolved. (October 2008)

Government subsidies and bailout

Officially, Freddie Mac is not given any backing, insurance, or statutory support by the US Government. Both Fannie Mae and Freddie Mac often benefited from an implied guarantee of fitness equivalent to truly federally-backed financial groups. Now Asian investors await that guarantee.^[17]

As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.^[18] 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.^[19] This event also renewed calls for stronger regulation of GSEs by the government.

President Bush recommended a significant regulatory overhaul of the housing finance industry in 2003, but many Democrats opposed his plan, fearing that tighter regulation could greatly reduce financing for low-income housing, both low- and high-risk.^[20] Bush opposed two other acts of legislation:^[21][22] Senate Bill S. 190, the Federal Housing Enterprise Regulatory Reform Act of 2005, which was introduced in the Senate on January 26, 2005, sponsored by Senator Chuck Hagel and co-sponsored by Senators Elizabeth Dole and John Sununu. S. 190 was discussed in the Senate Banking Committee on July 28, 2005, with the result: "Ordered to be reported with an amendment in the nature of a substitute favorably", meaning the bill was reported out of committee, yet not voted on.

On May 23, 2006, the Fannie Mae and Freddie Mac regulator, the Office of Federal Housing Enterprise Oversight, issued the results of a 27 month long investigation.^[23]

On May 25, 2006, Senator McCain joined as a co-sponsor to the Federal Housing Enterprise Regulatory Reform Act of 2005 (first put forward by Sen. Charles Hagel [R-NE])^[24] where he pointed out that Fannie Mae and Freddie Mac's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management".^[25] However, this regulation too met with opposition from both Democrats and Republicans.^[26]

Several Democrats who served as executives of Fannie Mae or Freddie Mac include Franklin Raines, former Budget Director for President Clinton and current Housing Policy advisor to Barack Obama, CEO from 1999 to 2004; James Johnson, former aide to Democratic Vice-President Walter Mondale and ex-head of Obama's Vice-Presidential Selection Committee, CEO from 1991 to 1998; and Jamie Gorelick, former Deputy Attorney General to President Clinton, and [6] from 1998 to 2003. In his position, Johnson earned an estimated $21 million; Raines earned an estimated $90 million; and Gorelick earned an estimated $26 million.^[27] All three top executives were also involved in mortgage-related financial scandals.^[28][29]

The top five recipients of campaign contributions from Freddie Mac and Fannie Mae during the 1989 - 2008 time period are Christopher Dodd, (D-CT) $133,900, John Kerry, (D-MA) $111,000, Barack Obama, (D-IL) $105,849, Hillary Clinton, (D-NY) $75,550, and Paul Kanjorski,(D-PA) $65,500.^[30]. John McCain received $21,550 from these GSEs in the 19-year timeframe, 1989-2008, .^[31] Freddie Mac also contributed $250,000 to the 2008 Republican National Convention in St. Paul, Minnesota according to FEC filings ^[32]. The organizers of the Democratic National Convention have not yet submitted their filings on how much they received from Freddie Mac and Fannie Mae (the latter of which tends more to support Democratic candidates).^[33]

Conservatorship

Main article: Federal takeover of Fannie Mae and Freddie Mac

Wikinews has related news: Freddie Mac and Fannie Mae placed into US 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.^[3][4] 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.^[34][35][36] 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.^{[5] [34][35][36]} 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.^[37][38][39] 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 Fannie Mae, and David M Moffett, former vice chairman of US Bancorp, will take over Freddie Mac. It is estimated that the liabilities of both companies could cost U.S. taxpayers tens of billions of dollars.

See also

• Derivative (finance)
• Government sponsored enterprise
• Mortgage GSE controversy
• Securitization
• USA Funds
• Agency Securities
• Mortgage
• Mortgage loan
• David Kellermann - late CFO of Freddie Mac

Canadian equivalent

The Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation owned by the Government of Canada. The Corporation was founded after World War II to provide housing for returning soldiers. It later built and/or funded urban renewal projects in Canada's cities. Today, its main function is providing mortgage insurance of residential mortgage loans to Canadian home buyers. This insurance protects mortgage lenders against mortgage defaults on mortgages of less than 20% down. Since 1954, one in three Canadian home buyers have made use of the insurance.

References

1. ^ "Tysons Corner CDP, Virginia." United States Census Bureau. Retrieved on May 7, 2009.
2. ^ "Contact Us." Freddie Mac. Retrieved on May 12, 2009.
3. ^ ^{a b} Lockhart, James B., III (2008-09-07). "Statement of FHFA Director James B. Lockhart". Federal Housing Finance Agency. http://www.ofheo.gov/newsroom.aspx?ID=456&q1=0&q2=0. Retrieved 2008-09-07. 
4. ^ ^{a b} "Fact Sheet: Questions and Answers on Conservatorship" (PDF). Federal Housing Finance Agency. 2008-09-07. http://www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf. Retrieved 2008-09-07. 
5. ^ ^{a b} Goldfarb, Zachary A.; David Cho and Binyamin Appelbaum (2008-09-07). "Treasury to Rescue Fannie and Freddie: Regulators Seek to Keep Firms' Troubles From Setting Off Wave of Bank Failures". Washington Post: pp. A01. http://www.washingtonpost.com/wp-dyn/content/article/2008/09/06/AR2008090602540.html?hpid=topnews. Retrieved 2008-09-07. 
6. ^ "Freddie Mac courts investors, Buffett passes". Associated Press via International Herald Tribune. August 22, 2008. http://www.iht.com/articles/ap/2008/08/22/business/NA-US-Mortgage-Giants-Crisis.php. Retrieved 2008-09-07. 
7. ^ Christie, Rebecca (September 7, 2008). "Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4)". Bloomberg. http://www.bloomberg.com/apps/news?pid=20601087&sid=ajcw4yxxPGJ8. Retrieved 2008-09-07. 
8. ^ Grynbaum, Michael and Jolly, David (September 8, 2008). "U.S. Takeover of Mortgage Giants Lifts Stock Markets". The New York Times (The New York Times Company). http://www.nytimes.com/2008/09/09/business/worldbusiness/09markets.html. Retrieved 2008-09-08. 
9. ^ Leonnig, Carol D. (June 10, 2008). "How HUD Mortgage Policy Fed The Crisis". Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. 
10. ^ Associated Press (2007-03-06). "Bernanke seeks stronger mortgage regulation". MSNBC. http://www.msnbc.msn.com/id/17485336/. 
11. ^ [1] Press release of the Fed.
12. ^ Freddie Mac Debt Securities: Freddie Notes FAQ
13. ^ Vernon L. Smith, "The Clinton Housing Bubble", Wall Street Journal, December 18, 2007, pA20
14. ^ The Economist, "Fannie and Freddie ride again", July 5, 2007
15. ^ "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"
16. ^ Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996
17. ^ Goodman, Wes and Shenn, Jody (February 20, 2009). "Fannie Mae Rescue Hindered as Asians Seek Guarantee (Update2)". Bloomberg. http://www.bloomberg.com/apps/news?pid=20601109&sid=azObP8_4deuI. Retrieved 2009-02-20. 
18. ^ Duhigg, Charles, "Loan-Agency Woes Swell From a Trickle to a Torrent", The New York Times, Friday, July 11, 2008
19. ^ Luhby, Tami, [2], CNN Money, Monday, July 14, 2008
20. ^ Labaton, Steven (2003-09-11). "New Agency Proposed to Oversee Freddie Mac and Fannie Mae". New York Times. http://www.nytimes.com/2003/09/11/business/new-agency-proposed-to-oversee-freddie-mac-and-fannie-mae.html?sec=&spon=&partner=permalink&exprod=permalink. Retrieved 2009-08-25. 
21. ^ Statement of Administration Policy: H.R. 1461
22. ^ Statement of Administration Policy: H.R. 1427
23. ^ "Report of the Special Examination of Fannie Mae May 2006" (PDF). Office of Federal Housing Enterprise Oversight. 2006-05. http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF. 
24. ^ govtrack.us
25. ^ govtrack.us, May 25, 2006
26. ^ Associated Press, Oct 20, 2008
27. ^ NationalPost, Jul 11, 2008
28. ^ The Washington Post, Apr 6, 2005
29. ^ The New York Times, Apr 19, 2008
30. ^ OpenSecrets.org
31. ^ OpenSecrets.org, Sep 11, 2008
32. ^ Yahoo! News
33. ^ http://news.yahoo.com/s/bloomberg/20081018/pl_bloomberg/axkxmxbffle Yahoo! News
34. ^ ^{a b} Hilzenrath, David S.; Zachary A. Goldfarb (2008-09-05). "Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say". Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html. Retrieved 2008-09-05. 
35. ^ ^{a b} Labaton, Stephen; Andres Ross Sorkin (2008-09-05). "U.S. Rescue Seen at Hand for 2 Mortgage Giants". New York Times. http://www.nytimes.com/2008/09/06/business/06fannie.html. Retrieved 2008-09-05. 
36. ^ ^{a b} Hilzenrath,, David S.; Neil Irwin, and Zachary A. Goldfarb (2008-09-06). "U.S. Nears Rescue Plan For Fannie And Freddie Deal Said to Involve Change of Leadership, Infusions of Capital". Washington Post: pp. A1. http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html. Retrieved 2008-09-06. 
37. ^ Herszenhorn, David (2008-07-27). "Congress Sends Housing Relief Bill to President". New York Times. http://www.nytimes.com/2008/07/27/washington/27housing.html. Retrieved 2008-09-06. 
38. ^ Herszenhorn, David M. (2008-07-31). "Bush Signs Sweeping Housing Bill". New York Times. http://www.nytimes.com/2008/07/31/business/31housing.html. Retrieved 2008-09-06. 
39. ^ 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: A bill to provide needed housing reform and for other purposes.
    White House pre-signing statement: 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.

External links

• Why the Mortgage Crisis Happened
• Official Website
• Freddie Mac Profile, BusinessWeek
• Freddie Mac Profile, FrontPage Magazine
• Freddie Mac Profile, New York Times

GSEs

• Fannie Mae
• Farmer Mac
• Ginnie Mae
• Sallie Mae

Further reading

• Barth, James R.; Brumbaugh, R. Dan, Jr. (1992). "Turmoil Among Depository Institutions: Implications for the U.S. Real Estate Market" (PDF). Housing Policy and Debate (Fannie Mae, Office of Housing Policy Research, Washington, DC) 3 (4). http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_0304_barth.pdf. 
• Labaton, Stephen; Weisman, Steven R. (2008-07-11). "U.S. Weighs Takeover of Two Mortgage Giants". New York Times. http://www.nytimes.com/2008/07/11/business/11fannie.html. 

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