Freddie Mac is based in Tysons Corner, Virginia, and is a government-sponsored enterprise that is owned by the United States government. Freddie Mac is the name given to the Federal Home Loan Mortgage Corporation when was established in 1970 under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks.
In 1989, Freddie Mac was reorganized and turned into a shareholder-owned company as part of the Financial Institutions Reform, Recovery, and Enforcement Act.
BACKGROUND ON FREDDIE MAC
Freddie Mac’s charter is quite similar to Fannie Mae’s in that it expands the secondary market for mortgages and MBSs by buying loans made by banks, savings and loans, and other lending institutions. But unlike Fannie Mae, which buys mortgages from major retail and commercial banks, Freddie Mac buys its loans from smaller banks, such as thrift banks, that focus on providing banking services to communities.
In 1970, the FHLMC was established to develop a larger secondary mortgage market in the US. Freddie Mac acquires mortgages from the secondary market, pools them, and sells the mortgages as mortgage-backed securities on the open market via Fannie Mae. Having a secondary mortgage market may help with lending and the availability of funds for both mortgage lending and house buying needs. The business ‘Freddie Mac’ has a brand name that was developed to be recognizable by potential clients.
Fannie Mae and Freddie Mac were placed under the control of the Federal Housing Finance Agency (FHFA) after its regulator, James B. Lockhart III, announced his conservatorship in September 2008.
IMPORTANCE OF FREDDIE MAC
Since the US Department of the Treasury has begun an investment of up to a hundred billion dollars billion in Freddie Mac preferred stock at a rate of ten percent a year, a significant portion of the US Treasury Department’s portfolio consists of the Freddie Mac preferred stock. Shares of Freddie Mac fell from about USD 1 to USD 0.50 in September 2008, and they were delisted in June 2010 when the Federal Housing Finance Agency ordered the stock exchanges to remove them. Treasury debt was expected to rise in 2008, thus bond yields climbed. Freddie Mac saw its profits return with the housing market and economy rebounding.
HISTORY OF FREDDIE MAC
The Federal National Mortgage Association (Fannie Mae) was the primary organization that purchased mortgages from banks, which stimulated the lending industry and allowed the US government to back the value of loans with its implicit support. Fannie Mae was separated into a privately-owned and publicly-funded company in 1968. Fannie Mae was a private corporation and retained its charter to purchase mortgages from banks and savings and loans.
However, this meant that Fannie Mae no longer had a dedicated insurance policy, so its support of mortgages was solely based on the financial security of the banks and savings and loans rather than government guarantees. The company in question, known as the Government National Mortgage Association (Ginnie Mae), gave assurances to those who had mortgages, issued on behalf of federal workers or veterans, who wanted to use them as collateral (the mortgages themselves were also guaranteed by other government organizations).
Since there was now a new private company, Freddie Mac, in place to compete with Fannie Mae, Congress needed to pass the Emergency Home Finance Act of 1970 to put Freddie Mac in place as a private business to expand the quality of mortgage financing available. Their respective charters were the same: to increase the secondary mortgage market by purchasing residential mortgages from banks and savings and loan organizations. When Freddie Mac was established, it was under the jurisdiction of the Federal Home Loan Bank Board and the Federal Home Loan Bank System, and it was privately held.
Fannie Mae and Freddie Mac’s regulation was updated in 1989 when the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (often known as FIRREA) was passed. It completely disconnected Freddie Mac from the Federal Home Loan Bank System. The Federal Home Loan Bank Board (FHLBB) was then completely disbanded and has been replaced by many other organizations. The dissolution of the Federal Home Loan Bank Board meant that now, a new independent body named the Federal Housing Finance Board (FHFB) would be established to supervise the twelve Federal Home Loan Banks (also called district banks).
ISSUES THAT FREDDIE MAC HAS FACED
The US Department of Housing and Urban Development (HUD) alerted Freddie Mac in 2004 that it was not doing enough to compete, claiming the firm was late to respond to changing markets and was stuck with a ‘historical lack of diversity in its credit rating assessment. This was especially relevant insofar as Fannie Mae and Freddie Mac are publicly held financial institutions that were created by Acts of Congress to fulfill a public mission. The entities were specifically created to see that the secondary mortgage market was given an additional boost of liquidity and stability in order to ensure that low-and-moderate income households and neighborhoods had more access to mortgage credit. Their federal charters provide important competitive advantages that, taken together, long implied U.S. taxpayer support of their financial obligations.
The U.S. federal government placed Freddie Mac under conservatorship on September 7th, 2000.
HOW DOES FREDDIE MAC EARN ITS PROFITS
Freddie Mac earns the majority of its profits from fees on mortgage-backed securities, or MBS, where fees are paid by loan borrowers. Freddie Mac investors are offering to take on the credit risk, allowing Freddie Mac to retain the credit enhancement charge. So Freddie Mac’s guarantee ensures that the borrower’s principal and interest will be repaid, regardless of whether or not the borrower repays the loan. This MBS has been very popular among investors due to Freddie Mac’s financial guarantee and may be sold in the TBA market since it is an Agency MBS.
Government-Sponsored Enterprises are permitted to purchase only conforming loans, thereby putting a lid on demand for non-conforming loans in the secondary market. Non-conforming loans are more difficult to sell since fewer buyers compete for them, which is because a poor match between supply and demand causes a bigger fee for the customer. FHFA is currently in charge of yearly adjustments to conforming loan limits, which respond to the October to October shift in the national average house price.
MAJOR DRAWBACKS OF FREDDIE MAC
Freddie Mac has released a statement assuring that any securities the organization issues will not be guaranteed by the US government, and are not debts or liabilities of the US government or any agency or instrumentality of the US government. The Federal Home Loan Mortgage Corporation (FHLMC) and FHLMC securities are neither supported nor covered by the US government. No government guarantees repayments on FHLMC instruments. It is clearly spelled out in the laws governing GSEs, which are published in their securities, and in GSE communications released to the public.
At this point, it should be known that the influence of the federal government is not directly on the FHLMC, wherein the corporation itself receives little immediate aid. Most of the assistance it receives is through government subsidies.
FREDDIE MAC AND THE MORTGAGE CRISIS OF 2008
Mortgage originators that distributed more and more of their loans via private-label MBS were no longer under the watchful eye of the GSEs since they were removed from the GSEs’ supervision. Mortgage originators gained influence, while the GSEs lost it, thanks to rivalry between the GSEs and private securitizers over mortgage loans. A precipitous drop in underwriting standards resulted, which led to the financial catastrophe.
Since there was little risk, securitizers were more likely to securitize riskier loans. Private securitizers did not, and they may only keep a little slice of risk. A re-financing boom, led by very low-interest rates, resulted in exceptional financial institution profits from 2001 to 2003. Financial institutions attempted to retain their high profits levels in response to rising interest rates by making their mortgages riskier and shifting towards private label MBS distribution.
The degree of profit is directly correlated with the amount of business done. Consequently, in order to boost profit, the bank expanded its borrower pool, including people with worse credit ratings and new product offerings the GSEs would not (originally) securitize. Thus, the change in mortgages from conventional fixed-rate mortgages to atypical adjustable-rate mortgages, accompanied by a worsening in underwriting standards, corresponds with the departure from GSE securitization and the ascent of private-label securities.
Since the expansion of private-label securities pushed the GSEs to reduce their underwriting requirements, upsetting their private owners, the GSEs tried to increase their market share again. Shareholder pressure prompted the GSEs to compete with private-label securities for market share, and they did so by loosening underwriting requirements to ensure they wouldn’t lose their guarantee business. Nevertheless, while the government-run FHA/Ginnie Mae has maintained its criteria and therefore lost market share,
Many of these house foreclosures were triggered by low interest-rate loans taken out by borrowers with bad credit who saw an opportunity in low mortgage rates, only to find themselves unable to afford their payments later. As house values dropped, the significant increase in foreclosures, already high inventory, and more stringent lending practices reduced borrower access to mortgages.
Due to the decline in house values, the GSEs have started experiencing increasing losses, since the bulk of mortgages in the US is backed by them. ‘Fannie Mae and Freddie Mac play a vital role in the US home financing system,’ the government told the market in July 2008, trying to calm their concerns. The Treasury Department and the Federal Reserve acted to help give the companies confidence, such as the Treasury’s removal of the ban on their purchasing the GSEs’ stock, which gave the two companies access to Federal Reserve low-interest loans and allowed the Federal Reserve to loan funds to the GSEs. Even though a lot of work was done, by August 2008, Fannie Mae and Freddie Mac’s shares had both fallen more than 90 percent in one year.
THE CONSERVATORSHIP OF FREDDIE MAC
James B. Lockhart III, director of the Federal Housing Finance Agency (FHFA), said on September 7, 2008, that he was placing Fannie Mae and Freddie Mac under the control of the FHFA because of his concerns about their finances. FHFA has publicly declared that the Fannie Mae liquidation is not in the works.
The federal government will put the companies under conservatorship, remove the current CEO and board, elect a new board, and issue new shares to the federal government. Shareholders prior to the conservatorship will see a substantial reduction in their holdings due to the fact that they will want to protect the values of both corporate debt and mortgage-backed securities.
The United States Treasury has the ability to invest in Fannie Mae and Freddie Mac by taking on more debt only up to the amount that the federal government may lawfully take on. To account for the Treasury needing the ability to sustain the federal home lending banks, the overall national debt limit was raised to ten trillion dollars after July 30th, 2008, legislation that provided more regulatory power over Fannie Mae and Freddie Mac.
The US government seized ownership of Fannie Mae and Freddie Mac on September 7th, 2008. It was decided to fire Fannie Mae’s and Freddie Mac’s CEOs, Daniel Mudd and Richard Syron. Former Vice Chairmen of Merrill Lynch, Herbert M. Allison, and US Bancorp, David M. Moffett, respectively, have assumed control of Fannie Mae and Freddie Mac.
The Budget and Accounting Transparency Act was presented to the United States House of Representatives on May 8TH, 2013 by Representative Scott Garrett. Fannie Mae and Freddie Mac, two government credit programs, may benefit from the legislation. The law forces the federal budget to account for government direct loans and loan guarantees using methods from the Financial Accounting Standards Board.
Changes to the law would imply that Fannie Mae and Freddie Mac’s debt would count as part of the national debt rather than be evaluated separately and that their debt would be included in the budget. The federal budget would just handle these programs differently, without altering the programs themselves. This legislation aims to make more accurate the accounting of several programs in the government budget.
HOW TO SERVE LEGAL PAPERS ON FREDDIE MAC
Freddie Mac comes under Virginia Process Service guidelines and is specifically classified under the SIC Code 6111 for Federal And Federally Sponsored Credit Agencies. SIC Code 6111 – Federal and Federally-Sponsored Credit Agencies is a final level code of the ‘Finance, Insurance, Real Estate Division.
Fannie Mae retains its business address for accepting Virginia Process Service. Its Primary address falls in Mclean, Virginia, with its mailing address corresponding with the same to ensure Virginia Process Service. The entity also has a phone number in order to ensure Virginia Process Service is done easier.
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“Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction, and skillful execution; it represents the wise choice of many alternatives” – Foster, William A
1. Seidman, Harold. ‘Government-Sponsored Enterprise in the United States.’ The New Political Economy: The Public Use of the Private Sector, 1975, pp. 83–108., doi:10.1007/978-1-349-02042-3_4.
2. Freddie Mac is the 41st-largest company in the United States in terms of annual revenue, with assets under management of $2.063 trillion.
3. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) Pub.L. 101–73 103 Stat. 183
4. ‘Get Started Here:’ Conservatorship | Federal Housing Finance Agency, www.fhfa.gov/Conservatorship.
5. ‘ One of the most extensive government interventions in private financial markets in decades
Moody’s gave Freddie Mac’s preferred stock an investment-grade credit 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 rating on that day to Baa3, the lowest investment-grade rating. Freddie’s senior debt credit rating remains Aaa/AAA from each of the major rating agencies: Moody’s, S&P, and Fitch.
6. Gertler, Mark, and Simon Gilchrist. ‘What Happened: Financial Factors in the Great Recession.’ JSTOR, 1 July 2018, www.jstor.org/stable/10.2307/26473063?refreqid=search-gateway.
7. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA Pub.L. 101–73 103 Stat. 183 is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s.
It established the Resolution Trust Corporation to close hundreds of insolvent thrifts and provided funds to pay out insurance to their depositors. It transferred thrift regulatory authority from the Federal Home Loan Bank Board to the Office of Thrift Supervision.
8. The board, which consisted of 18 members, was established and given HUD supervision (HUD)
9. ‘Credit Ratings.’ Freddie Mac, www.freddiemac.com/investors/credit-ratings.html.
10. ‘Treasury to Rescue Fannie and Freddie.’ The Washington Post, WP Company, 7 Sept. 2008, www.washingtonpost.com/wp-dyn/content/article/2008/09/06/AR2008090602540.html.
11. U.S. House of Representatives, Committee on Oversight and Government Reform. 2009. ‘The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008.’ Press release. Washington, DC: U.S. House of Representatives, Committee on Oversight and Government Reform.
12. A mortgage becomes a jumbo loan when it is over the maximum allowable limit. The maximum permissible loan value in high-cost states like Alaska, Hawaii, Guam, and the US Virgin Islands (the territories) is increased by as much as 50 percent; in the case of properties with two to four units, a similar higher maximum is provided. To deal with the current crisis in housing, alterations to these restrictions were put in place.
13. 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, 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’
14. 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’
15. Budget and Accounting Transparency Act of 2014 (H.R. 1872; 113th Congress)
16. The Standard Industrial Classification is a system for classifying industries by a four-digit code. Established in the United States in 1937, it is used by government agencies to classify industry areas.
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