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The Business of Freddie Mac and Fannie Mae

By Maryan Chilinguerian
washingtonpost.com Staff Writer
Wednesday, July 9, 2003; 5:56 PM


Congress chartered the Federal National Mortgage Association, known as Fannie Mae, in 1968 and the Federal Home Loan Mortgage Corp., or Freddie Mac, in 1970 to bring stability to the U.S. mortgage marketplace. Up until that time, the home mortgage industry was characterized by regional variations in interest rates and lending criteria that made it difficult for some consumers to obtain home loans. Because of their special relationship with the government, they are called government-sponsored enterprises, or GSEs.

By buying mortgages from lending institutions, Fannie Mae and Freddie Mac pump more dollars into the housing market. In addition, the two institutions are mandated to buy a specified share of mortgages from low-income, moderate-income and central-city homebuyers. Purchasing these types of mortgages encourages lenders to make loans to these target consumers, thus supporting goals set by Congress to expand home ownership. Together, Fannie and Freddie provide almost half of the mortgage market's cash.

(Linda Spillers -- AP)

Special Report: Freddie Mac
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In 1992, Congress, concerned about the growth of Fannie and Freddie and the potential for disruption in the housing market should one of them run into financial trouble, created the Office of Federal Housing Enterprise Oversight to regulate the two companies. OFHEO, as it's known, has broad responsibility to make sure Fannie and Freddie operate in a safe manner.

The arcane financial dealings of Freddie Mac and larger sister Fannie Mae are not regulated the same as other financial institutions or even other publicly traded companies. OFHEO is not a part of the Federal Reserve or the Treasury Department, which regulates banks and savings and loans, but instead is a part of the Department of Housing and Urban Development. Also, Fannie and Freddie do not have to follow Securities and Exchange Commission disclosure rules, though they are both stockholder-owned public companies. In the wake of financial scandals at Enron and several other major public companies, Fannie and Freddie volunteered to begin filing financial statements with the Securities and Exchange Commission, but they continue to be exempt from disclosing information on debt and mortgage-backed securities sold to investors.

The fact that Fannie and Freddie are exempt from some rules has drawn much criticism. Competitors and watchdog groups say the two companies enjoy unfair advantages, such as an ability to borrow from the U.S. Treasury, and implied federal government guarantee of their debt, and exemptions from some state and local taxes.

The Business

Both Freddie Mac and Fannie Mae raise cash to buy mortgages from banks, savings and loans and mortgage companies by selling bonds to investors. Both institutions keep some of the mortgages in their portfolios, while the rest are pooled together as mortgage-backed securities for sale to investors.

A perception that the two government-sponsored enterprises would receive a federal bailout if they ran into financial trouble is a contributing factor in their success on Wall Street. Each firm has a back-up credit line with the U.S. Treasury for $2.25 billion. Earlier this year, William Poole, president of the St. Louis Federal Reserve Bank, said that amount is "far too small to deal with a crisis in the GSE debt market." Still, many believe that if faced with a financial crisis at Fannie or Freddie, the federal government would intervene.

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