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Freddie Mac: What you Must Know

Freddie Mac: What you Must Know

What is Freddie Mac?
• Freddie Mac, which is short for the Federal Home Loan Mortgage Corporation, is a government sponsored enterprise responsible for expanding the secondary market for mortgages in the United States. Headquartered in the Tyson’s Corner CRP in Fairfax County, Virginia, Freddie Mac buys mortgages on the secondary market and subsequently packages them, to flip as mortgage-backed securities to investors on the open market.
• This packaging and selling of mortgage-backed securities increases the supply of money available for mortgage lending and thus increases the ability for a prospective homeowner (particularly low to medium income families) to obtain financing. 
Quick Facts about Freddie Mac:
• Freddie Mac was created in 1970 to bring liquidity to the secondary markets. 
• The current chairman and CEO of Freddie Mac is Charles Haldeman
• In 2009 Freddie Mac possesses revenue of over $14 bullion and a negative operating income of $22 billion. In addition to the negative operating income, Freddie Mac suffered from a negative net income of $21.5 billion and negative total assets amounting to over $840 billion. 
• Freddie Mac currently employs over 5,300 workers
History of Freddie Mac:
• From the late 1930s to the late 1960s, the Federal National Mortgage Association (better known as Fannie Mae) was the only enterprise that bought mortgages from banks and savings and loans institutions to encourage more mortgage lending and effectively insure the value of mortgages through government backing. IN 1968, however, Fannie Mae underwent a split; the enterprise formed a private corporation (present day Fannie Mae) and publicly financed institution (Ginnie Mae). 
• To provide competition for the newly privatized Fannie Mae and to increase the availability of mortgages and home ownership, Congress established Freddie Mac as a private corporation through the Emergency Home Finance Act of 1970
• The charter of Freddie Mac was essentially the same as Fannie Mae’s: Freddie Mac aimed at expanding the secondary market for mortgage backed securities and mortgages by purchasing mortgages from savings and loans institutions and other depository businesses.
How does Freddie Mac make money?
• Freddie Mac makes a profit by charging fees on loans that it purchases and securitizes into mortgage-backed securities. Purchasers of Freddie Mac mortgage-backed securities pay the company a fee in exchange for assuming the credit risk that Freddie Mac guarantees—the corporation guarantees that the principal and interest on the MBS will be paid back in full regardless of whether the home owner defaults on his or her payments. 
• As a result of this guarantee and because of the size of Freddie Mac’s holdings the company suffered an enormous loss during the economic collapse of 2008. Because the assets were guaranteed, Freddie Mac had to pay-off widespread defaults. 
• As a result of this catastrophe and the fact that Freddie Mac controlled nearly a quarter of the $12 million dollar mortgage market, the United States federal government was forced to bail the defunct company out of economic turmoil.

The Story Behind Lehman Brothers

The Story Behind Lehman Brothers

What is Lehman Brothers?


• Lehman Brothers was a global financial services firm that declared bankruptcy in the wake of the 2008 financial crisis. Before the economy experienced a precipitous drop, Lehman brothers was the fourth largest investment bank in the United States. Primarily focused on investment banking, fixed-income and equity sales, market research, investment management, private banking, trading and private equity, Lehman Brothers went insolvent as a result of overexposure to toxic real estate holdings. 
• In September of 2008, Lehman Brothers, led by CEO Dick Fuld, filed for Chapter 11 bankruptcy protection. The former investment giant was forced into liquidation following a severe devaluation of the firm’s assets by credit rating agencies and the subsequent mass exodus of clients. The filing, as a result of the firm’s assets under management, marked the largest bankruptcy in United States history. 
Specifics Surrounding the Lehman Brothers Collapse:
• In August of 2007, Lehman Brothers was forced to close its primary subprime lending branch, BNC Mortgage, as a result of poor economic conditions in the real estate sector. In the following year, Lehman faced an unprecedented loss when the firm decided to hold its substantial position in low-rated mortgage tranches and subprime sectors. Although the firm stopped lending, its exposure in the preceding years was simply too great—Lehman Brothers reported losses of $2.8 billion in the second fiscal quarter of 2008. 
• In the first half of 2008, Lehman Brother’s stock plummeted by almost 75% of its value as the credit market tightened in response to the bursting of the real estate bubble. The stock continued to fall; Lehman announced a loss of nearly $4 billion in September of 2008. During this time, Lehman Brothers was doing its best to find a buyer of the firm’s toxic portfolio and investment banking branch. Although companies such as Barclays and investors from Asia were interested, an agreement to purchase Lehman Brothers was never affirmed. 
The Lehman Brother’s Bankruptcy Case:
• Amidst talks with Bank of America and Barclays concerning the possible purchase of Lehman Brothers, Timothy Geithner, president of the Federal Reserve Bank of New York, called a meeting regarding the future of Lehman and the possibility of an emergency liquidation of the firm’s assets on September 13th of 2008. 
• Around midnight on September 15th of 2008, Lehman Brothers announced it would file for Chapter 11 bankruptcy protection, citing a bank debt of $613 billion, bond debts of $155 billion and assets worth approximately $639 billion. A group of banks and Wall Street firms agreed to provide financial assistance and capital for an orderly liquidation of Lehman Brothers and in turn, the Federal Reserve, agreed to swap lower-quality assets in exchange for loans from the United States Federal Government.
 
• On September 16th of 2008, Barclays announced that they would acquire a portion of Lehman for $1.75 billion, including the majority of Lehman’s North America Operations. 

Sallie Mae: A Brief Summary

Sallie Mae: A Brief Summary

What is Sallie Mae?


• Also known as the SLM Corporation, Sallie Mae is a publicly traded U.S. corporation whose operations originate in the service and collection of student loans. Sallie Mae currently manages over $180 billion worth of debt (primarily student loans) from over 10 million borrowers. 
• Sallie Mae provides federally guaranteed student loans in accordance with the guidelines implemented in the Federal Family Education Loan Program. Presently; however, the company provides private student loans. 
Basic Facts Regarding Sallie Mae:
• Sallie Mae was founded in 1972 as a government-sponsored enterprise. The organization went private with its operations in 1997; the privatization process was completed in 2004 when the United States Congress terminated its federal charter and thus eliminating its ties to the government.
• Sallie Mae’s headquarters are currently located in Newark, Delaware (the company moved to Delaware in 2011 from Washington D.C.)
• Anthony Terracciano is the current Chairman of Sallie Mae, while Albert Lord is the acting CEO of the organization. 
• Sallie Mae offers the following products to the American public: Government-backed student loans, private student loans, loans for students in K-12 and college savings plans
• Sallie Mae currently operates with 8,000 employees; the organization’s website is located at the following address: www.salliemae.com
The Art of the Student Loan:
• Sallie Mae offers loans to those individuals who can’t afford mounting education costs. Although the mission seems altruistic, the loans serve as an investment vehicle.  
• The average cost of tuition per year in America, for a four year college is nearing 30,000 dollars. Times this figure by four and you have an amount that is regarded as exorbitant for the majority of American families. As a result of these costs, a number of American families undertake loans from Sallie Mae. Now these loans are not of the subprime variety; they are attached with reasonable repayment plans that feature a lengthy schedule and low interest rates. That being said, given the importance of higher education and the mounting costs, the demand for student loans is perpetual. 
Social responsibilities of the Organization:
• Sallie Mae sponsors numerous charitable organizations, including the Sallie Mae Fund. This subsidiary aims to increase access to higher education for American students through the support and establishment of numerous government-backed programs. The Sallie Mae fund prepares families and students for college and provides scholarship funding for low-income and “first in the family: students. 
• Since 2001, the organization has awarded over $10 million in student scholarships to help over 4,000 students attend college. 

Fannie Mae: A Brief Guide

Fannie Mae: A Brief Guide

What is Fannie Mae?


• Fannie Mae, which is short for, The Federal National Mortgage Association, was established in 1938 by the United Congress as a Government Sponsored Enterprise (although it is publicly traded). 
• Fannie Mae is responsible for maintaining a secondary market for home mortgages; the government sponsored enterprise attempts to achieve this by ensuring that mortgages who meet a specific criteria can be traded among investment banks and lending institutions. 
• Fannie Mae, as a result of their mission statement, packages mortgages in the form of mortgage-backed securities, which in turn, allows lenders to reinvest their assets into more lending models. This system effectively increases the number of lenders in the mortgage market through the reduction and reliance of thrifts. 
• Fannie Mae is headquartered in Washington D.C and is currently run by Mike Williams, the firm’s Chief Executive Officer. In 2009 Fannie Mae had revenue of $29.1 billion, a net income of -$72 billion and -$869 billion of total assets. 
What does Fannie Mae do?
• Fannie Mae is the largest source of home financing in the United States of America. The enterprise is charged, by Congress, with providing stability and liquidity in the secondary mortgage market, through the issuance of secondary market assistance relating to mortgages for low and moderate-income families and by promoting access to mortgage loans. 
• In essence, Fannie Mae purchases mortgages directly from lenders, such as depository institutions or investment banks, and holds these loans in a portfolio or issues them as mortgage-backed securities. 
• As stated before, Fannie Mae is a privately owned corporation; however, they enjoy a status as a congressionally authorized, government-sponsored enterprise, which effectively empowers them with certain privileges including being exempt from paying local and state property taxes (Fannie Mae is required to pay property taxes however). Furthermore, Fannie Mae utilizes, as a result of their classification a 2 and a quarter billion dollar standing line credit from the United States Treasury Department.
Fannie Mae and the Mortgage Crisis:
• One of Fannie Mae’s primary goals is to extend mortgages to low or middle-income families. During the housing boom of the 2000’s Americans were over-extending themselves by spending beyond their means. Unfortunately Fannie Mae, during this time consumption and overuse of credit, did not stray from their mission of providing 30-year-fixed mortgages, with a low down payment, to unworthy applicants.
• The growth of private securitization and the decrease of regulation resulted in the oversupply of underpriced housing loans. This ultimately led to an increasing number of borrowers, with poor credit scores, who were unable to pay their mortgages. As a result, home prices decreased significantly and the credit market dried up. These two factors imposed heavy losses on GSEs such as Fannie Mae. 
• Despite numerous efforts on the part of the Federal Government to re-instill confidence in Fannie Mae, the entity’s stock plummeted more than 90% from its on-year prior level. As a result of its “too big to fail status”; however, the Federal government bailed Fannie Mae out—the bailout of both Fannie Mae and Freddie Mac is estimated to cost taxpayers between $250 and $360 billion dollars.