Freddie Mac is a US based financial institution that is engrossed in the funding of residential mortgage loans. It was contracted by the US Congress in 1970. It began as a commercial lending institution whose primary mission was to alleviate the national residential mortgage market and to expand prospects for affordable rental housing and homeownership. The merger between Freddie Mac and Fannie Mae has been significant. The merger has aided the two companies to amalgamate some of the back office tasks and to create a single platform in which the corporation could package home loans into securities (freddiemac.com)
The Gramm-leach-Biley Act of 1999 adversely affected Freddie Mac. It made two changes to the collateral requirements of the Federal Home Loan Banks. It permitted the Federal Home Loan Banks to accept new classifications of responsible for stemming and expanded the purposes of advances to comprise loans to small institutions. The second act of the Gramm-Leach-Bliley Act of 1999 abolished the 30% collateral on capital restraint on non-housing real estate. This brought surge borrowing and lending which eventually led to the demise of Freddie Mac (U.S. Department of the Treasury. 2005)
There are three main events that led to the downfall of Freddie Mac. First, government sponsorship pressured Freddie Mac to encourage affordable housing. Second, government backing permitted Freddie Mac to accumulate much-advanced level of debt. Finally, Freddie Mac was careless because of the existence of commission-based structures that supported increased mortgage origination. Freddie Mac was directly involved in sub-prime lending. Both the Bush and Clinton administration pushed the company to promote more subprime loans even to low-income homebuyers (Tung, et al. 2012).
During the ‘housing bubble’, when the market was steadily growing, Freddie Mac began to take on excessive risks in terms of mortgage and business loans. When the price of assets began to drop, it became increasingly arduous to sell a house. This led the bank to increase the interest rates on sub-prime borrowers. Eventually, the value of mortgage-backed securities began to plummet, and the rate of foreclosures and delinquencies started to escalate. Freddie Mac became conservative and commenced to accumulate reserves. This played a huge role in the demise of the company (Frame, 2008).
The principal actors in the demise of Freddie Mac were the government, CEOs of Freddie Mac and Wall Street. The government sponsorship pressured Freddie Mac to encourage affordable housing and increase subprime lending. The CEOs of Freddie Mac participated in the greed game in a bid to earn more money and dominance. Finally, Wall Street can be directly attributed to the escalation of the housing bubble throughout the country. The desire to accrue profit encouraged greed and caused bankers to desert judicious risk management (Tung, et al. 2012).
The future of Freddie Mac looks stable. The US Treasury is primed to deliver additional funding that is needed to sustain an affirmative net worth through the Senior Preferred Stock Purchase Agreement. Government funding was necessary to save the institution. The funding of Freddie Mac by the US Treasury has helped borrowers restore confidence in Freddie Mac. Consequently, the funding has alleviated the systemic threat that had previously contributed directly to the demise of the company(Frame, 2008).
Bailing out of Freddie Mac would benefit the institution since it would play a big role in assuring the market about the creditworthiness of one of the largest mortgage lenders. The government bailout of Freddie Mac had an immediate positive bearing on the shareholder of Freddie Mac. This was also expected to reduce bankruptcy. Bailing out of Freddie Mac compromised moral hazard. The factors, which preceded the demise of Freddie Mac, were simply insulated to prevent system risk that may have led to collapsing of total financial system (Frame, 2008).
There are several measures that could have been put in place by regulators to avoid the demise of Freddie Mac. These include: discouraging the promotion of subprime lending; regulation of financial innovation; curtail risky management practices that promote greed; deter securitization; deter the lending of loans and mortgages to high-risk lenders. In the future, such demises can be prevented by: creating macro-prudential regulatory systems that will be responsible to stem out systemic risk. Creating permanent supervisory board to review and reform financial institutions in a bid to curtail maximization of short-term profits; the creating permanent political electorate to regulate the financial institutions (Bernstein, 2008)
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Bibliography
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Frame, W. Scott. 2008. “The 2008 Federal Intervention to Stabilize Fannie Mae and Freddie
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Freddie Mac Company Profile http://www.freddiemac.com/corporate/company_profile/
Tung, Hoang, and Anna D. Martin. 2012. “The Impact of the Bailout of Fannie Mae and Freddie
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