Freddie Mac

From Wikipedia, the free encyclopedia

Jump to: navigation, search
Federal Home Loan Mortgage Corporation (Freddie Mac)
Type Public (NYSEFRE)
Founded 1970
Headquarters McLean, Virginia
Key people John Koskinen
(Interim 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)

The Federal Home Loan Mortgage Corporation (FHLMC) (NYSEFRE), known as Freddie Mac, is a government sponsored enterprise (GSE) of the United States federal government

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", 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).

On September 8, 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".[1][2][3]

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.[4] 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.[5]

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.[6]


[edit] 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." [7]

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.

[edit] 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.[8]

[edit] 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 then 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.

[edit] 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[9]), 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]

[edit] 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."[10] 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.

[edit] 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." [11] The Economist has referred to "[t]he implicit government guarantee"[12] 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. . . ."[13]

[edit] 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." [14]

[edit] 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.

[edit] Company

[edit] 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.

[edit] Credit rating

See [3]

[edit] 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]

[edit] 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. Now Asian investors await that guarantee.[15]

As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.[16] 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.[17] This event also renewed calls for stronger regulation of GSEs by the government.

Bush recommended a significant regulatory overhaul of the housing finance industry in 2003, but many Democrats opposed it fearing that tighter regulation could greatly reduce financing for low-income housing, both low and high risk. [18]

Bush opposed two other House Bills: [19] [20] Senate Bill S-190 Federal Housing Enterprise Regulatory Reform Act of 2005 was introduced in the Senate on Jan 26, 2005, sponsored by Hagel and co-sponsored by Dole and 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". The bill died in a Republican controlled committee and never came to the floor of the Senate or back to the Senate Banking Committee for reconsideration.

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. [21]

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])[22] 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". [23] However, this regulation too met with opposition from both Democrats and Republicans. [24] Note that McCain did not co-sponsor the more recent Federal Housing Enterprise Regulatory Reform Act of 2007.[25]

The Democrats who served as top Fannie Mae or Freddie Mac executives include Franklin Raines, former Clinton Budget Director 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 Clinton Deputy Attorney General, Vice-Chair from 1998 to 2003. In their positions, Johnson earned an estimated $21 million; Raines earned an estimated $90 million; while Gorelick earned an estimated $26 million.[26] All three top executives were also involved in mortgage-related financial scandals.[27] [28]

John McCain received $21,550 from these GSEs in the 19-year, 1989-2008, timeframe.[29] In addition, various Republican committees, of which the McCain campaign was one, received a total of $169,000 in campaign contributions directly from lobbyists, directors and officers of Freddie Mac and Fannie Mae ([dubious ].[30] Freddie Mac also contributed $250,000 to the 2008 Republican National Convention in St. Paul, Minnesota according to FEC filings [31]. 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).Yahoo! News No news stories that we are aware of have reported to total contributions of Fanny and Freddie to Democratic Committees. 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.[32].

[edit] 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.[1][2] 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.[33][34][35] 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.[3] [33][34][35] 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.[36][37][38] 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.

[edit] References

  1. ^ a b Lockhart, James B., III (2008-09-07). "Statement of FHFA Director James B. Lockhart". Federal Housing Finance Agency. Retrieved on 2008-09-07. 
  2. ^ a b "Fact Sheet: Questions and Answers on Conservatorship" (PDF). Federal Housing Finance Agency. 2008-09-07. Retrieved on 2008-09-07. 
  3. ^ 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. Retrieved on 2008-09-07. 
  4. ^ "Freddie Mac courts investors, Buffett passes". Associated Press via International Herald Tribune. August 22, 2008. Retrieved on 2008-09-07. 
  5. ^ Christie, Rebecca (September 7, 2008). "Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4)". Bloomberg. Retrieved on 2008-09-07. 
  6. ^ 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). Retrieved on 2008-09-08. 
  7. ^ Leonnig, Carol D. (June 10, 2008). "How HUD Mortgage Policy Fed The Crisis". Washington Post. 
  8. ^ Associated Press (2007-03-06). "Bernanke seeks stronger mortgage regulation". MSNBC. 
  9. ^ [1] Press release of the Fed.
  10. ^ Freddie Mac Debt Securities: Freddie Notes FAQ
  11. ^ Vernon L. Smith, "The Clinton Housing Bubble", Wall Street Journal, December 18, 2007, pA20
  12. ^ The Economist, "Fannie and Freddie ride again", July 5, 2007
  13. ^ "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"
  14. ^ Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996
  15. ^ Goodman, Wes and Shenn, Jody (February 20, 2009). "Fannie Mae Rescue Hindered as Asians Seek Guarantee (Update2)". Bloomberg. Retrieved on 2009-02-20. 
  16. ^ Duhigg, Charles, "Loan-Agency Woes Swell From a Trickle to a Torrent", The New York Times, Friday, July 11, 2008
  17. ^ Luhby, Tami, [2], CNN Money, Monday, July 14, 2008
  18. ^ Stephen Labaton, The New York Times, Sep 11, 2003
  19. ^ Statement of Administration Policy: H.R. 1461
  20. ^ Statement of Administration Policy: H.R. 1427
  21. ^ "Report of the Special Examination of Fannie Mae May 2006" (PDF). Office of Federal Housing Enterprise Oversight. 2006-05. 
  22. ^
  23. ^, May 25, 2006
  24. ^ Associated Press, Oct 20, 2008
  25. ^, S. 1100--110th Congress (2007)
  26. ^ NationalPost, Jul 11, 2008
  27. ^ The Washington Post, Apr 6, 2005
  28. ^ The New York Times, Apr 19, 2008
  29. ^, Sep 11, 2008
  30. ^ The New York Times, Sep 9, 2008
  31. ^ Yahoo! News
  32. ^
  33. ^ 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. Retrieved on 2008-09-05. 
  34. ^ a b Labaton, Stephen; Andres Ross Sorkin (2008-09-05). "U.S. Rescue Seen at Hand for 2 Mortgage Giants". New York Times. Retrieved on 2008-09-05. 
  35. ^ 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. Retrieved on 2008-09-06. 
  36. ^ Herszenhorn, David (2008-07-27). "Congress Sends Housing Relief Bill to President". New York Times. Retrieved on 2008-09-06. 
  37. ^ Herszenhorn, David M. (2008-07-31). "Bush Signs Sweeping Housing Bill". New York Times. Retrieved on 2008-09-06. 
  38. ^ 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.

[edit] See also

[edit] External links

[edit] GSEs

[edit] Further reading

Personal tools