Freddie Mac

Freddie Mac: The Heartbeat of the American Housing Market

Imagine a world where mortgages were hard to come by, and home ownership seemed like an unattainable dream for many. Enter Freddie Mac, the Federal Home Loan Mortgage Corporation, established in 1970 with the sole purpose of expanding the secondary market for mortgages. This government-sponsored enterprise (GSE) has since become a cornerstone of the American housing landscape, playing a pivotal role in making homeownership a reality for millions.

The Birth and Evolution of Freddie Mac

Freddie Mac was created to provide competition against Fannie Mae, which had been the sole institution buying mortgages from depository institutions since 1938. The company’s charter underwent significant revisions in 1989 through the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), severing its ties with the Federal Home Loan Bank System.

From its inception to the late 2000s, Freddie Mac has seen its share of challenges. In 1995, it began receiving affordable housing credit for buying subprime securities, a move that would later come under scrutiny during the mortgage crisis. By 2004, HUD suggested the company should do more to support affordable housing.

The Mortgage Crisis and Conservatorship

On September 7, 2008, Freddie Mac was placed under conservatorship by the Federal Housing Finance Agency (FHFA) following a significant government intervention. This move came at a time when the company’s stock had plummeted in value due to the mortgage crisis. However, as the housing market and economy began to recover, so did Freddie Mac’s fortunes.

The company now boasts $3.208 trillion in assets under management and is ranked No. 45 on the 2023 Fortune 500 list of largest US corporations by total revenue. Despite its size and influence, many investors still believe that FHLMC securities are implicitly backed by some sort of federal guarantee.

Freddie Mac’s Role in the Housing Market

Freddie Mac makes money by charging a guarantee fee on loans it has purchased and securitized into mortgage-backed security (MBS) bonds. The GSEs are allowed to buy only conforming loans, which limits secondary market demand for non-conforming loans.

The Office of Federal Housing Enterprise Oversight (OFHEO) sets the limit of the size of a conforming loan in response to mean home price changes. Above this limit, a mortgage is considered a jumbo loan. Freddie Mac states its securities do not carry any government guarantee; however, many investors believe otherwise.

Regulation and Controversies

The mortgage crisis from late 2007 led to a decline in underwriting standards due to competition between GSEs and private securitizers for loans. This resulted in financial institutions offering riskier mortgages, shifting toward private-label mortgage-backed securities distribution.

As a result, the number of borrowers with poor credit who couldn’t pay their mortgages increased, causing a surge in home foreclosures and home price depreciation. The GSEs’ losses grew, leading to significant declines in share prices by July 2008.

The PMMS: A Weekly Snapshot

Freddie Mac publishes the Primary Mortgage Market Survey (PMMS), a weekly national average of mortgage rates that tracks a constant borrower profile for conventional, conforming home purchase loans. The PMMS began in April 1971 with the 30-year fixed-rate average and has since expanded to include other types of mortgages.

Leadership at Freddie Mac has seen many changes over the years, with notable CEOs including Philip R. Brinkerhoff, Kenneth J. Thygerson, Leland C. Brendsel, and more recently, David M. Brickman and Michael T. Hutchins.

Awards and Investigations

Freddie Mac has received numerous awards for its commitment to diversity and working mothers. However, the company has also faced significant scrutiny over the years. In 2003, it revealed that it had understated earnings by almost $5 billion, one of the largest corporate restatements in U.S. history.

Investigations into Freddie Mac’s practices have uncovered ties to politicians and financial scandals. The company has contributed significant sums to political campaigns, raising questions about the influence of money in politics.

The Future of Freddie Mac

As we look towards the future, it is clear that Freddie Mac will continue to play a crucial role in shaping the American housing market. The challenges and controversies surrounding the company serve as reminders of the complex interplay between government, finance, and public policy.

Freddie Mac, like a steady heartbeat, continues to pulse through the veins of the American economy. Its journey is one of both triumph and struggle, reflecting the broader narrative of housing finance in the United States.