Freddie Mac Wiki

[edit] History From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage Association (Fannie Mae), which had up until then been a government agency. In 1968, to help balance the federal budget, part of Fannie Mae was converted into a private corporation. To provide competition in the secondary mortgage market, and to prevent Fannie Mae from continuing to have a monopoly, Congress chartered Freddie Mac as a private corporation to compete in this same market.

[edit] Business Freddie Mac's primary method for making money is by charging a guarantee fee on loans that they have 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, due to 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 recently passed HR 1427 (Federal Housing Finance Reform Act of 2007) which would consolidate oversight for Freddie, Fannie, and the Federal Home Loan Banks into a single regulator.

[1]

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[edit] Conforming loans The GSEs are only allowed to buy conforming loans, which limits secondary market competition for non-conforming loans. OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the non-conforming loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent, but can be more due to credit market conditions). The conforming loan limit is 50 percent higher in high-cost areas such 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 Speculation that the US government would bail out an insolvent Freddie Mac is a hypothesis that has never been tested.

[edit] Explicit 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."

[1] 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] Implicit guarantees There is a wide perception 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."

[2] The Economist has referred to "

[t]he implicit government guarantee"

[3] of FHLMC and FNMA.

[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."

[4]

[edit] Subprime adjustable rate loans Freddie Mac announced on February 27, 2007 that they will buy subprime adjustable rate mortgages only if the borrowers qualify for the maximum rate of the loan, not just the initial low introductory (known as 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.

[edit] Credit rating See

[3] 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

[edit] Sub Prime Credit Loss 2007 As reported on 11 December 2007, Freddie Mac will suffer a credit hit of $12 billion as a result of a cooldown in subprime mortgage payments in the United States.

[4] Richard F. Syron, chief executive of the company, told investors that 'credit losses would total approximately between $10bn and $12bn' and as a result of the news Freddie Mac share prices slid more than 5% due to speculation.

[edit] 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.

[5] 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.

[6] On April. 18, 2006 home loan giant Freddie Mac has agreed to pay a record $3.8 million fine to settle allegations it made illegal campaign contributions.

[7]

[edit] References ^ 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

[edit] See also Derivative (finance) Government sponsored enterprise Mortgage GSE controversy Securitization

[edit] GSEs Fannie Mae Farmer Mac Ginnie Mae Sallie Mae

[edit] External links Freddie Mac Home Page Yahoo! - Freddie Mac Company Profile The Freddie Mac stock chart Retrieved from "http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation" Categories: Companies listed on the New York Stock Exchange | Companies based in McLean, Virginia | Real estate | Affordable housing | United States government sponsored enterprise