Freddie Mac’s mortgage losses to hit bottom by end of 2008

As long as the housing market begins to recover, Freddie Mac’s losses from the mortgage crisis may reach their lowest point by the end of the current year.

Freddie Mac, which is considered to be the second largest mortgage finance company, announced that it would expect to see some inflection in housing during the fourth quarter of the year. Mac’s CEO, Richard Syron, stated that credit losses - $2 billion in the third quarter – may bottom out before the end of 2008.

Fannie Mae and Freddie Mac were forced to sell $13 billion in preferred stock in 2007 and seek other measures to bolster capital. Investors were thus given a reason to think if the companies had taken too much risk in their mortgage portfolios. The companies guarantee about 40 percent of the residential mortgage market in the USA evaluated at $11.5 trillion.

The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) of the United States Government. As a GSE, 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 United States. 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 helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name "Freddie Mac" is a creative acronym-portmanteau of the company's full name that has been adopted officially for ease of identification (see "Companies" below for other examples).

Freddie Mac's primary method for making money is by charging a guarantee fee on loans that they have purchased and securitized into Mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.

Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, due to the size of their holdings and the widespread perception that they are government backed. Freddie Mac is currently regulated by the U.S. Department of Housing and Urban Development (HUD) and its Office of Federal Housing Enterprise Oversight (OFHEO). The United States House of Representatives recently passed HR 1427 (Federal Housing Finance Reform Act of 2007) which would consolidate oversight for Freddie, Fannie, and the Federal Home Loan Banks into a single regulator.

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