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Freddie Mac is a shareholder-owned corporation whose people are dedicated to improving the quality of life by making the American dream of decent, accessible housing a reality. We accomplish this mission by linking Main Street to Wall Street--purchasing, securitizing and investing in home mortgages, and ultimately providing homeowners and renters with lower housing costs and better access to home financing. Since our inception, Freddie Mac has achieved more than 30 consecutive years of profitability and financed one out of every six homes in America.
Freddie Mac, a stockholder-owned corporation, is regulated by the U.S. government. Created to provide a continuous, reliable, and low-cost flow of credit to finance housing for the American people, the agency is a dominant player in the secondary mortgage market. Freddie Mac's primary business is to buy mortgages from lenders, package the mortgages into securities, then guarantee and sell the securities to investors. The quasi-government corporation's impact on the mortgage finance industry is immense and often draws fire from private sector competition.
Fueling Single Family Home Ownership: 1970s to Mid-1980s
The United States Congress created the charter for the Federal Home Loan Mortgage Corp. in 1970. Nicknamed Freddie Mac, the entity was charged with creating a national secondary market for conventional home mortgages. By doing so, Congress hoped to level out the disparity among regions of the nation in regard to availability of and interest rates on home mortgages. To get off the ground, Freddie Mac raised $100 million by selling nonvoting stock to the 12 Federal Home Loan Banks.
The federal government's interest in the housing market was not a new thing. The Federal National Mortgage Association, or Fannie Mae, was initially established by Congress, in 1938, to buy FHA-insured loans and support government-subsidized housing programs. Operating as a private, for-profit corporation beginning in 1968, Fannie Mae retained most of the mortgages it bought in its own portfolio. Freddie Mac, on the other hand, would not.
In 1971, Freddie Mac offered its first conventional mortgage security, the Mortgage Participation Certificate (PC). Freddie Mac bought mortgages from lenders, primarily savings and loan associations (S&Ls), and then bundled them together in the form of mortgage-backed securities that were sold to investors. The holders of the PCs--most often institutional investors--received monthly principal and interest payments based on the underlying mortgages.
According to Nation's Business, in 1970 about one-third of the country's mortgage loans of $35.6 billion were sold in the secondary market. Just a decade later, half of the nation's $133.8 billion in mortgage loans were resold. Freddie Mac, Fannie Mae, and the Government National Mortgage Association (Ginnie Mac), a HUD-administered agency that guaranteed Federal Housing Administration (FHA) and Veteran Administration (VA) mortgage-backed securities, dominated the secondary mortgage market.
Lenders traditionally made their profit from interest payments on the home mortgages in their portfolios. "But with the advent of financial deregulation and volatile interest rates, lenders often had to pay more for mortgage capital than the mortgages were yielding in interest," wrote Mary-Margaret Wantuck for Nation's Business in 1983. The secondary market let lenders sell the mortgages and related risks and, in turn, bring in more capital to lend to potential home buyers. The holders of mortgage-backed securities benefited as well, receiving returns exceeding many other investment products available in the 1970s and early 1980s.
Other players inhabited the secondary market. Conduits, or private participants, concentrated on buying mortgages that fell outside the realm of the quasi-government agencies Freddie Mac and Fannie Mae. The pair were subject to restrictions on the size of loans they could purchase: the upper limit was $108,300 in 1983.
But private competitors claimed they were forced to operate on an uneven playing field. Dennis Dammerman, vice-president and general manager of real estate financial services at General Electric Credit Corporation, told Wantuck that Freddie Mac and Fannie Mae had unfair advantages. "Their relationship with the Treasury enables them to sell securities at a yield significantly below that obtainable on the most highly rated private issue; their exemption from Securities and Exchange Commission registration requirements reduces their packaging costs drastically below the level achievable by private competitors. And when marketing mortgage-backed securities, Freddie has the advantage of being legally able to elevate its securities to the status of 'obligations issued by the United States.'"
In 1984, Freddie Mac topped the $100 billion mark for home financing. That same year the corporation distributed 15 million shares of participating, preferred nonvoting stock to individual member savings institutions around the country. Toward the end of the decade, Freddie Mac would begin preparing to offer its stock to the general public.
Open Market: Late 1980s to Mid-1990s
Financial guru Warren Buffett was high on Freddie Mac's prospects. In 1988, he told Fortune magazine, "Freddie Mac is a triple dip. You've got a low price/earnings ratio on a company with a terrific record. You've got growing earnings. And you have a stock that is bound to become much better known to equity investors."
Freddie Mac, along with Fannie Mae, continued to dominate the secondary mortgage market. The prospects for further growth looked promising, thanks in part to the S&L disaster. Beginning in 1990, savings banks and S&Ls would be required to hold bigger reserves against loan losses on ordinary mortgages as opposed to holdings of securitized mortgages, creating another economic incentive to deal in the secondary market.
According to Business Week, in a five-year period in the 1980s Freddie Mac had more than doubled its profits, reaching $381 million in 1988. In 1989, Freddie Mac's participating preferred stock, now listed on the New York Stock Exchange, was split and transformed into ordinary common shares. The Financial Institutions Reform Recovery and Enforcement Act established a new governing structure for Freddie Mac. In 1990, shareholders elected 13 directors; the president appointed five others.
In the early 1990s, as the economy struggled, the government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae, kept the supply of mortgage money flowing. The housing market benefited. Shareholders also did well. Freddie Mac earned $555 million in 1991. Return on equity was 24 percent. In addition, its stock price tripled during the year.
Competitors, on the other hand, harbored resentments. In addition to complaints garnered by the implied credit guarantee with the U.S. government, the GSEs' mortgage limits had outstripped the rise in cost in the housing market, according to Forbes. The upper limit on loans the GSEs could purchase was $202,000 in 1992 compared with $133,000 in 1986. Critics said this flew in the face of the GSEs' goal to help low- and moderate-income families attain housing. Furthermore, the GSEs quickly dominated markets they entered, and the pair were considering expanding in areas such as home equity lending and housing for the elderly. Thrifts and banks successfully lobbied the Bush administration to push for increased capital requirements on the GSEs and an increased percentage of loans in the low- and moderate-income sectors.
In 1993, Freddie Mac's cumulative mortgage finances topped the $1 trillion mark. Despite a 35 percent drop in loan volume the following year, earnings grew 25 percent to $983 million. A shift in the marketplace had Freddie Mac buying more of its own mortgage-backed securities to generate income. According to the American Banker, by year-end 1994, more than half of the mortgages being originated carried adjustable rates. Banks and thrifts typically held on to these or sold them to other depositories, thus leaving Freddie Mac out of the loop. In addition to upping the net interest earned on its portfolio assets, Freddie Mac had increased its income from guarantee fees on mortgage-backed securities. Freddie Mac's tight rein on administrative costs also helped the bottom line.
In the Cross Hairs: Late 1990s
Freddie Mac launched an automated underwriting service, the Loan Prospector, in 1995. The system was designed with input from lenders, mortgage insurers, software vendors, and others in the industry to streamline the mortgage process and to reduce loan origination costs. The usage rate by lenders would climb quickly but draw fire from critics as well.
Some earlier criticism had been over Freddie Mac's funding of lower-cost housing. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act) required Freddie Mac to meet certain goals pertaining to such mortgages beginning in 1996. The U.S. Department of Housing and Urban Development (HUD) was the agency responsible for setting those goals. Freddie Mac said it surpassed the affordable housing goals set for the year, reporting that it had financed $48 billion in mortgages for low- and moderate-income families and in areas underserved by the housing finance system. In 1997, the Federal Home Loan Mortgage Corp. officially became Freddie Mac.
Norwest Mortgage Inc., the largest residential lender in the country, and Freddie Mac struck a groundbreaking deal in 1999. In addition to using each other's technologies to streamline the loan process, Norwest (which was to become part of Wells Fargo & Company through a landmark reverse merger) agreed to grant Freddie Mac exclusive rights to purchase nearly all of the loans it originated. On a side note, ex-Speaker of the House Newt Gingrich joined Freddie Mac as a consultant during 1999.
In 2000, HUD told the GSEs to increase their commitment to lower-end loans over the next decade, by a sum of $500 billion to a total of $2.4 trillion. The pair faced a range of penalties if they failed to reach the goals set--assuming economic conditions made them feasible. According to American Banker, HUD also was looking at the possibility that the GSEs' underwriting policies had resulted in discrimination against blacks. Scrutiny came from another direction as well in 2000. FM Watch, a coalition of financial services companies, launched a web page, Truth Watch, to report inconsistencies in messages from Fannie Mae and Freddie Mac directed at Congress and the public versus messages targeting Wall Street. The web page was part of a lobbying effort by FM Watch geared toward influencing policymakers considering increasing the level of oversight on Freddie Mac and Fannie Mae.
In October 2000, Freddie Mac announced six voluntary commitments relating to risk and capital management and information disclosure practices. They included monthly interest-rate disclosures, forward-looking credit risk sensitivity disclosures, and periodic issuance of publicly traded, externally rated subordinated debt. Although lauded by many on Capitol Hill, on both sides of the aisle, the effort did not put an end to GSE bashing, especially in the light of their ever expanding control of the secondary mortgage market. The pair would hold nearly one-third of the multifamily financing market by the end of the year.
Finally, the year 2000 marked Freddie Mac's 30th anniversary. The agency had quite a record: an unbroken string of profitable years during its three decades of operation; returns on common equity exceeding 20 percent for 19 consecutive years; and earnings per share growth at a compound rate of 19 percent annually over the past ten years.
Planning Ahead: 2001 and Beyond
Anticipating a housing expansion during the first decade of the 21st century, Freddie Mac in July 2001 announced plans to raise $2 trillion in funding. Favorable interest rates and a refinance boom had been already fueling the mortgage industry. With home ownership at an all-time high, Freddie Mac planned to capitalize on the positive trend. By increasing distribution of its Loan Prospector tools it hoped to capture even more of the market. Freddie Mac was exploring growing its subprime loans and was testing and adapting underwriting technology to grant mortgages in that segment of the market. Plans to draw in new investments from overseas, particularly the euro market, were already in the works.
The GSEs ruffled some feathers again in 2002 with their national advertising campaign. Critics said the GSEs, since they were not allowed to do business directly with the consumer, should not be targeting them in their advertising. The GSEs countered that their advertising was intended to educate consumers about the mortgage process. Advertisements made in trade magazines were geared toward product sales, and those in financial magazines were to draw investors. Freddie Mac also said it needed to counter the negative campaigns against GSEs and to inform stockholders of its activities.
While critics abounded, the GSEs were credited with helping to boost home ownership levels from 64 percent to 68 percent over the last decade, according to the Financial Times in November 2002. In addition, while other segments of the economy faltered in 2002, the U.S. housing market continued to flourish. The lowest interest rates in three decades and the attractiveness of real estate for investment purposes also helped to keep the market strong.
Freddie Mac and Fannie Mae themselves benefited from the charged market, ranking among the most profitable companies in the United States. Their stunning success led to yet another wave of concern by some over their influence on the housing market. "They warn that a failure could drag down a U.S. Banking system highly dependent on Fannie- and Freddie-issued bonds and that taxpayers would be on the hook for a bail-out that would dwarf the savings and loans scandal of the 1980s," wrote Paul Taylor in the Financial Times.
Concerns such as this led to an agreement under which Fannie Mae and Freddie Mac would register with the Securities and Exchange Commission for the first time. Additional calls for further restrictions were likely to come up before Congress down the line. Republicans, who gained ground in the 2002 national elections, had been among the sharpest critics of the GSEs.
Principal Competitors: Fannie Mae; Citigroup Inc.; American International Group, Inc.; FleetBoston Financial Corporation; Countrywide Financial Corporation.
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