Everything about Freddie Mac totally explained
The
Federal Home Loan Mortgage Corporation ("
FHLMC"), commonly known as
Freddie Mac, is a
government-sponsored enterprise (GSE) of the
United States Government. As a GSE, it's a stockholder-owned corporation authorized to make loans and loan guarantees. The FHLMC was created in
1970 to expand the
secondary market for
mortgages. 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 helps to replenish the supply of lendable money for mortgages and ensures that money continues to be 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 for making money is by charging a guarantee fee on loans that they've 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're 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.
(External Link
) (External Link).
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
Speculation that the US government would bail out an insolvent Freddie Mac is a hypothesis that has never been tested.
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." 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.
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." The Economist has referred to "[t]he implicit government guarantee" 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."
Subprime adjustable rate loans
Freddie Mac announced on
February 27,
2007 that it'll 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.
Credit rating
See
(External Link)
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.
(External Link) 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.
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.
(External Link)
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.
(External Link)
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.
(External Link)
References
Further Information
Get more info on 'Freddie Mac'.
|
External Link Exchanges
Do you know how hard it is to get a link from a large encyclopaedia? Well we're different and will prove it. To get a link from us just add the following HTML to your site on a relevant page:
<a href="http://federal_home_loan_mortgage_corporation.totallyexplained.com">Federal Home Loan Mortgage Corporation Totally Explained</a>
Then simply click through this link from your web page. Our crawlers will verify your link, extract the title of your web page and instantly add a link back to it. If you like you can remove the words Totally Explained and embed the link in article text.
As long as your link remains in place, we'll keep our link to you right here. Please play fair - our crawlers are watching. Your site must be closely related to this one's topic. Any kind of spamming, dubious practises or removing the link will result in your link from us being dropped and, potentially, your whole site being banned. |
