Freddie Mac (FHLMC)

Freddie Mac, is a
Government Sponsored Enterprise

The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), known as Freddie Mac, 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.

Freddie Mac Logo
Freddie Mac Logo

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 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 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".

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. 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.

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.

On April 22, 2009, David Kellermann, the CFO for the company, was found dead in his basement of an apparent suicide.

History

Real Estate Finance ArticlesFrom 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." 

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.

On Wednesday, April 22, 2009, Freddie Mac's Acting CFO, David Kellermann, was found dead of an apparent suicide in his Northern Virginia home.

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.

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 (see also 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.

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." 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."  The Economist has referred to "the implicit government guarantee" 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. . . ."

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." 

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

  • 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.  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.

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.

As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. 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. 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. Bush opposed two other acts of legislation:  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. 

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) 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".  However, this regulation too met with opposition from both Democrats and Republicans.

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 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. All three top executives were also involved in mortgage-related financial scandals.' John McCain received $21,550 from these GSEs in the 19-year timeframe, 1989-2008, . Freddie Mac also contributed $250,000 to the 2008 Republican National Convention in St. Paul, Minnesota according to FEC filings. 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..

Conservatorship

Main article: Federal takeover of Fannie Mae and Freddie Mac

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. 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. 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.

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