Federal Home Loan Mortgage Corporation
Encyclopedia
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac , is a public government sponsored enterprise (GSE), headquartered in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia
.
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 a mortgage-backed security
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", is 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".
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% per 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, and dropped a further 50% on June 16, 2010, when the Federal Housing Finance Agency ordered the stocks delisted. In 2008, the yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.
(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 of 1989
("FIRREA") 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 oversight by the U.S. Department of Housing and Urban Development (HUD).
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.
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 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.
s, 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 the conforming loan limit, a mortgage is considered a 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.
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."
housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." (HUD 2002 Annual Housing Activities Report) Then in 2003-2004, the subprime mortgage crisis
began. The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks.
As mortgage originators began to distribute more and more of their loans through private label MBS, GSEs lost the ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis.
Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. Often, banks would offload this risk to insurance companies or other counterparties through credit default swaps, making their actual risk exposures extremely difficult for investors and creditors to discern.
The shift toward riskier mortgages and private label MBS distribution occurred as financial institution
s sought to maintain earnings levels that had been elevated during 2001-2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages
(FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in the start of a sharp deterioration in mortgage underwriting standards. The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share.
The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages - particularly with adjustable rate mortgages (ARM), caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The US Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels.
On Oct 21, 2010 FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost taxpayers $224–360 billion in total, with over $150 billion already provided.
.
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.
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 2008, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The US 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 reported out of the Senate Banking Committee on July 28, 2005, but never voted on by the full Senate.
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 [R-NE]) 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 executives of Fannie Mae or Freddie Mac include Kenneth Duberstein, former Chief of Staff to President Reagan, advisor to John McCain's Presidential Campaign in 2000, and President George W. Bush's transition team leader (Fannie Mae board member 1998-2007); Franklin Raines, former Budget Director for President Clinton, CEO from 1999 to 2004—statements about his role as an advisor to the Obama presidential campaign have been determined to be false; 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 Vice-Chairman 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. Three of these four top executives were also involved in mortgage-related financial scandals.
The top 10 recipients of campaign contributions from Freddie Mac and Fannie Mae during the 1989 to 2008 time period include 5 Republicans and 5 Democrats. Top recipients of PAC money from these organizations include Roy Blunt (R-MO) $78,500 (total including individuals' contributions $96,950), Robert Bennett (R-UT) $71,499 (total $107,999), Spencer Bachus (R-AL) $70,500 (total $103,300), and Kit Bond (R-MO) $95,400 (total $64,000). The following Democrats received mostly individual contributions from employees, rather than PAC money: Christopher Dodd, (D-CT) $116,900 (but also $48,000 from the PACs), John Kerry, (D-MA) $109,000 ($2,000 from PACs), Barack Obama, (D-IL) $120,349 (only $6,000 from the PACs), Hillary Clinton, (D-NY) $68,050 (only $8,000 from PACs). John McCain received $21,550 from these GSEs during this time, mostly individual money. 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.
On Oct 21, 2010 government estimates revealed that the bailout of Fredie Mac and Fannie Mae will likely cost taxpayers $154 billion.
(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, the present board of directors, 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.
Fairfax County, Virginia
Fairfax County is a county in Virginia, in the United States. Per the 2010 Census, the population of the county is 1,081,726, making it the most populous jurisdiction in the Commonwealth of Virginia, with 13.5% of Virginia's population...
.
The FHLMC was created in 1970 to expand the secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
for mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
to investors on the open market. This secondary mortgage market
Secondary mortgage market
The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans. The mortgage lender, commercial banks, or specialized firm will group together many loans and sell grouped loans as securities called collateralized mortgage obligations ....
increases the supply of money available for mortgage lending and increases the money available for new home purchases. The name, "Freddie Mac", is an acronym
Acronym and initialism
Acronyms and initialisms are abbreviations formed from the initial components in a phrase or a word. These components may be individual letters or parts of words . There is no universal agreement on the precise definition of the various terms , nor on written usage...
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
Federal Housing Finance Agency
The Federal Housing Finance Agency is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board , the Office of Federal Housing Enterprise Oversight , and the U.S...
(FHFA) director James B. Lockhart III
James B. Lockhart III
James B. Lockhart III assumed the position of Vice Chairman of WL Ross & Co. LLC in September 2009. WL Ross manages $9 billion of private equity investments, a hedge fund and a Mortgage Recovery Fund. It is a subsidiary of Invesco, a Fortune 500 investment management firm...
announced he had put Fannie Mae and Freddie Mac under the conservatorship
Conservatorship
Conservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac
Federal takeover of Fannie Mae and Freddie Mac
The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one financial event among many in the ongoing subprime mortgage crisis.On September 6, 2008,...
). The action has been described as "one of the most sweeping government interventions in private financial markets in decades".
Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
gave Freddie Mac's preferred stock an investment grade rating of A1 until August 22, 2008, when Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody's changed the credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
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
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10% per 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
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
on September 8, 2008, and dropped a further 50% on June 16, 2010, when the Federal Housing Finance Agency ordered the stocks delisted. In 2008, the yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.
History
From 1938 to 1968, the Federal National Mortgage AssociationFederal National Mortgage Association
The Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968...
(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
Government National Mortgage Association
The Government National Mortgage Association , or Ginnie Mae, was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development , Ginnie Mae’s mission is to expand affordable housing in the U.S. by...
(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 of 1989
Financial Institutions Reform, Recovery and Enforcement Act of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 , , is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s....
("FIRREA") 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
Federal Home Loan Bank Board
The Federal Home Loan Bank Board was a board created by the Federal Home Loan Bank Act of 1932 that created and oversaw the Federal Home Loan Banks also created by the act. It was superseded by the Federal Housing Finance Board and the Office of Thrift Supervision in the Financial Institutions...
, 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 oversight by the U.S. Department of Housing and Urban Development (HUD).
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
Conservatorship
Conservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
of the U.S. Federal government on Sunday, September 7, 2008.
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 securityMortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
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
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
and Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
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 HUD and its Office of Federal Housing Enterprise Oversight
Office of Federal Housing Enterprise Oversight
The Office of Federal Housing Enterprise Oversight was an agency within the Department of Housing and Urban Development. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises—the Federal National Mortgage Association and the...
(OFHEO). The United States House of Representatives
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
passed HR 1427 (Federal Housing Finance Reform Act of 2007) to consolidate oversight for Freddie, Fannie, and the Federal Home Loan Banks
Federal Home Loan Banks
The Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending...
into a single regulator.
Conforming loans
The GSEs are allowed to buy only conforming loanConforming loan
In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.In general, any loan which does not meet guidelines is a non-conforming loan...
s, 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 the conforming loan limit, a mortgage is considered a jumbo loan. The conforming loan limit is 50 percent higher in such high-cost areas as Alaska
Alaska
Alaska is the largest state in the United States by area. It is situated in the northwest extremity of the North American continent, with Canada to the east, the Arctic Ocean to the north, and the Pacific Ocean to the west and south, with Russia further west across the Bering Strait...
, Hawaii
Hawaii
Hawaii is the newest of the 50 U.S. states , and is the only U.S. state made up entirely of islands. It is the northernmost island group in Polynesia, occupying most of an archipelago in the central Pacific Ocean, southwest of the continental United States, southeast of Japan, and northeast of...
, Guam
Guam
Guam is an organized, unincorporated territory of the United States located in the western Pacific Ocean. It is one of five U.S. territories with an established civilian government. Guam is listed as one of 16 Non-Self-Governing Territories by the Special Committee on Decolonization of the United...
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 widespread 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
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
, 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."
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.The mortgage crisis from late 2007
Following their mission to meet federal Housing and Urban Development (HUD)United States Department of Housing and Urban Development
The United States Department of Housing and Urban Development, also known as HUD, is a Cabinet department in the Executive branch of the United States federal government...
housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." (HUD 2002 Annual Housing Activities Report) Then in 2003-2004, the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
began. The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks.
As mortgage originators began to distribute more and more of their loans through private label MBS, GSEs lost the ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis.
Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. Often, banks would offload this risk to insurance companies or other counterparties through credit default swaps, making their actual risk exposures extremely difficult for investors and creditors to discern.
The shift toward riskier mortgages and private label MBS distribution occurred as financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s sought to maintain earnings levels that had been elevated during 2001-2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages
Fixed rate mortgage
A fixed-rate mortgage is a mortgage loan first developed by the Federal Housing Administration where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float." Other forms of mortgage loan include interest only...
(FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in the start of a sharp deterioration in mortgage underwriting standards. The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share.
The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages - particularly with adjustable rate mortgages (ARM), caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The US Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels.
On Oct 21, 2010 FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost taxpayers $224–360 billion in total, with over $150 billion already provided.
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 FortuneFortune (magazine)Fortune is a global business magazine published by Time Inc. Founded by Henry Luce in 1930, the publishing business, consisting of Time, Life, Fortune, and Sports Illustrated, grew to become Time Warner. In turn, AOL grew as it acquired Time Warner in 2000 when Time Warner was the world's largest...
500's 2007 rankings. - Freddie Mac was ranked 20 in Forbes' Global 2,000 public companies rankings for 2008.
Credit rating
See http://www.freddiemac.com/investors/credit_reports.html- Senior Long-Term Debt: AAA Aaa AAA
- Short-Term Debt A-1+ Prime-1 F-1+
- Subordinated DebtSubordinated debtIn finance, subordinated debt is debt which ranks after other debts should a company fall into receivership or bankruptcy....
BBB+/Watch Positive Aa2 AA- - Preferred StockPreferred stockPreferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
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 ForbesForbes
Forbes is an American publishing and media company. Its flagship publication, the Forbes magazine, is published biweekly. Its primary competitors in the national business magazine category are Fortune, which is also published biweekly, and Business Week...
.
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
Both Fannie Mae and Freddie Mac often benefited from an implied guarantee of fitness equivalent to truly federally-backed financial groups.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
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
of that year. Ultimately, in July 2008, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The US 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 reported out of the Senate Banking Committee on July 28, 2005, but never voted on by the full Senate.
On May 23, 2006, the Fannie Mae and Freddie Mac regulator, the Office of Federal Housing Enterprise Oversight
Office of Federal Housing Enterprise Oversight
The Office of Federal Housing Enterprise Oversight was an agency within the Department of Housing and Urban Development. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises—the Federal National Mortgage Association and the...
, 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 [R-NE]) 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 executives of Fannie Mae or Freddie Mac include Kenneth Duberstein, former Chief of Staff to President Reagan, advisor to John McCain's Presidential Campaign in 2000, and President George W. Bush's transition team leader (Fannie Mae board member 1998-2007); Franklin Raines, former Budget Director for President Clinton, CEO from 1999 to 2004—statements about his role as an advisor to the Obama presidential campaign have been determined to be false; 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 Vice-Chairman 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. Three of these four top executives were also involved in mortgage-related financial scandals.
The top 10 recipients of campaign contributions from Freddie Mac and Fannie Mae during the 1989 to 2008 time period include 5 Republicans and 5 Democrats. Top recipients of PAC money from these organizations include Roy Blunt (R-MO) $78,500 (total including individuals' contributions $96,950), Robert Bennett (R-UT) $71,499 (total $107,999), Spencer Bachus (R-AL) $70,500 (total $103,300), and Kit Bond (R-MO) $95,400 (total $64,000). The following Democrats received mostly individual contributions from employees, rather than PAC money: Christopher Dodd, (D-CT) $116,900 (but also $48,000 from the PACs), John Kerry, (D-MA) $109,000 ($2,000 from PACs), Barack Obama, (D-IL) $120,349 (only $6,000 from the PACs), Hillary Clinton, (D-NY) $68,050 (only $8,000 from PACs). John McCain received $21,550 from these GSEs during this time, mostly individual money. 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.
On Oct 21, 2010 government estimates revealed that the bailout of Fredie Mac and Fannie Mae will likely cost taxpayers $154 billion.
Conservatorship
On September 7, 2008, Federal Housing Finance AgencyFederal Housing Finance Agency
The Federal Housing Finance Agency is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board , the Office of Federal Housing Enterprise Oversight , and the U.S...
(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, the present board of directors, 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
Herbert M. Allison
Herbert M. Allison, Jr. is currently conducting a review of loans to energy companies, on behalf of the Obama administration. Mr. Allison served as Assistant Secretary of the Treasury for Financial Stability of the United States having been confirmed by the Senate onJune 19, 2009. He left the...
former vice chairman of Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
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
- Fannie Mae
- Ginnie Mae
- Farmer Mac
- Farm Credit SystemFarm Credit SystemThe Farm Credit System is a federally chartered network of cooperatives and related service organizations that lends to agricultural producers, rural homeowners, farm-related businesses, and agricultural, aquatic, and public utility cooperatives in the United States...
- Sallie Mae
- Derivative (finance)Derivative (finance)A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
- Government sponsored enterprise
- Mortgage GSE controversy
- SecuritizationSecuritizationSecuritization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
- USA FundsUSA FundsUnited Student Aid Funds or USA Funds is a nonprofit corporation that works to enhance postsecondary-education preparedness, access and success by providing and supporting financial and other valued services...
- Agency SecuritiesAgency SecuritiesAgency securities are specific securities that are issued by either Ginnie Mae, Fannie Mae, Freddie Mac or the Federal Home Loan Banks.These securities are backed by mortgage loans, and due to their creation from these particular corporations that are sponsored by the U.S. government, they enjoy...
- Mortgage law
- Mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
- David KellermannDavid KellermannDavid B. Kellermann was the acting chief financial officer of Freddie Mac in early 2009.-Early life:Kellermann graduated from George Washington University with a master's degree in finance after a B.S. in Political Science and Accounting from the University of Michigan. His childhood was spent in...
- late CFO of Freddie Mac - Canada Mortgage and Housing CorporationCanada Mortgage and Housing CorporationCanada Mortgage and Housing Corporation is a Crown corporation, owned by the Government of Canada, founded after World War II to provide housing for returning soldiers...
External links
- Freddie Mac Profile, BusinessWeekBusinessWeekBloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...
- Freddie Mac Profile, New York Times
- Why the Mortgage Crisis Happened (broken link)