Freddie Mac, a publicly traded company that operates under a federal charter, is the nation’s second-largest mortgage buyer. Along with its larger rival, Fannie Mae, Freddie Mac was taken over by the federal government on Sept. 8, 2008, as it faced steepening losses, new questions about its accounting and a flight by investors.
Freddie Mac and Fannie Mae buy mortgages from lending institutions and then either holds them in investment portfolios or resells them as mortgage-backed securities to investors. The two companies play a vital role in providing financing for the housing markets.
As the housing market soured, both companies reported steep losses. But the mortgage meltdown also made the companies more important. When the credit markets seized up, Fannie and Freddie regained their central role in mortgage finance after losing significant market share to investment banks during the housing boom. They issued most of mortgage securities sold in the first half of 2008, after investors lost confidence in deals put together by big investment banks.
In February 2008, federal regulators announced that they were easing some restrictions on lending by Fannie and Freddie. Then on March 19, the federal government announced that it was easing those restrictions in an effort to calm the turmoil afflicting the mortgage markets. Officials said the change could allow the two companies to invest $200 billion more in mortgages.
But on July 13, even as top officials continued to insist that the companies had adequate cash to weather the current financial storm, the Bush administration asked Congress to approve a sweeping rescue package that would empower officials to inject billions of federal dollars into the companies through investments and loans.
And the government did just that in early September, when the Treasury secretary, Henry M. Paulson Jr., announced the takeover of Fannie and Freddie after advisers poring over the companies’ books concluded that Freddie’s accounting methods had overstated its capital cushion. The move to place the companies into a conservatorship also grew out of concern among foreign investors that the companies’ debt might not be repaid.
The rescue represented an extraordinary federal intervention in private enterprise and could become one of the most expensive in history. The plan commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost. It also eliminates dividend payments while protecting the principal and interest payments on the debt, now held by foreign central banks, financial institutions, pension funds and others. Eventually, under the plan, both companies will shrink their portfolios. In addition, the government plans to buy significant amounts of their mortgage-backed securities on the open market.
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