Who is Freddie Mac and What Happened to Him?
I started writing this two-part series pre Hurricane Ike. With yesterday’s mega-bailout of AIG Insurance, it almost seems like old news. All this government intervention will affect the home industry both short-term and long-term.
Considering the complexity of the federal take over of Freddie Mac and Fannie Mae and it’s huge ramifications for Katy home buyers and our economy in general, I am reprinting articles from Wikipedia that explain these events as an understanding is critical.
This is a development that will impact all of us here in Katy, even if we are not buyers or sellers. Today, we will address Freddie Mac and next week I will publish an article on Fannie Mae. I hope these articles help you understand as they were helpful to me.
Reprinted from Wikipedia
“The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), commonly known asFreddie Mac was a privately-owned and run government sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation, authorized to make loans and loan guarantees.
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 mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. The name “Freddie Mac” is a creative acronym of the company’s full name that has 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. The action is “one of the most sweeping government interventions in private financial markets in decades”.
Moody’s gave Freddie Mac securities 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 rating that day to Baa3 high-yield junk bonds. As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US$ 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, on September 8, 2008 were worth about one U.S. dollar. On the same day the U.S dollar increased in value compared to yen and euros. The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.”
Stay tuned next week for an explanation of Fannie Mae!
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