Finance in the News: Freddie Mac

September 30, 2008 · Posted in Finance 

Freddie Mac is the nickname given to the Federal Home Loan Mortgage Company (FHLMC). Created in 1970, Freddie Mac was a government sponsored enterprise (GSE) authorized to make loans and loan guarantees by the United States federal government. Prior to 1968, the secondary mortgage market in the US had been monopolized by the Federal National Mortgage Association (otherwise known as Fannie Mae). Fannie Mae was a government organization at the time, and in order to end Fannie Mae’s monopoly, Freddie Mac was made a private corporation. “Freddie Mac” as a nickname is sort of a creative application of the acronym for the organization’s name, and was adopted officially because it’s much easier to use.

Freddie Mac was created to expand the secondary market for mortgages in the United States. It bought mortgages on the secondary market, and then pooled them and sold them on the open market to investors as mortgage backed securities. This market increases the amount of money available to use for mortgage lending, and it also increases the amount of money available for the purchase of new homes.

The primary way Freddie Mac makes money is by charging a guarantee fee on those loans that it has purchased and turned into mortgage backed security bonds (MBS). Purchasers of MBS from Freddie Mac let Freddie Mac keep the fee in exchange for assuming the credit risk. Basically, in exchange for Freddie Mac’s guarantee that the interest as well as the principal on the loan will be paid back regardless of whether or not the borrower actually pays the loan back. During the subprime mortgage crisis of 2007, this method landed Freddie Mac in dire straits.

In 2008, in a move that’s been hailed as “one of the most sweeping government interventions in private financial markets in decades,” the Federal Housing Finance Agency (FHFA) put Freddie Mac, along with Fannie Mae, under the conservatorship of the FHFA. The initial investment in this federal takeover has the Treasury contracted to acquire $1 billion in Freddie Mac senior preferred stock, paying at the rate of 10% per year. The total investment can rise and cap off at $100 billion.

Those owning Freddie Mac debt can end up protected as a result of the takeover, along with the Asian banks that had increased their holdings in these bonds. Home loan interest rates may also go down, but shares of Freddie Mac stock as of September 8th, 2008 were only worth about one dollar USD.


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