In 1970, Freddie Mac was founded as a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress. Its purpose and ideals were high: It sought to keep money flowing to mortgage lenders. It supported the American Dream of homeownership for average Americans. It was designed to operate through purchasing , guaranteeing and securitizing mortgages to form mortgage-backed securities.

Freddie’s Risky Business:  Put simply, the government rescued Freddie Mac and Fannie Mae in September 2008 after they endured enormous losses on risky mortgages.

Freddie’s Work:  The U.S. government allows Freddie Mac to borrow money at “interest rates lower than those available to other financial institutions.” This advantage allowed it to issues large amounts of debt, called “agency debt” or “agencies.” (You can read more statistics here.)

Freddie’s Riches:  Freddie Mac buys and holds a “huge portfolio of mortgages known as its retained portfolio.” The very enormity of the retained portfolio has alarmed some Americans. “Many people believe that the size of the retained portfolio poses a great deal of systematic risk to the entire U.S.”

The Big Portfolio:  “Twenty-eight percent of the company’s holdings are home loans issued between 2005 and 2008, which accounted for 88 percent of its losses in the first six months of the year.” Freddie and Fannie own or guarantee about half of all U.S. mortgages. That indicates nearly 31 million home loans, which adds up to be worth more than $5 trillion.  (For more information, click here.)

The Big Bail-Out:  American taxpayers have spent about $188 billion dollars to bail out Freddie Mac as well as Fannie Mae. Plus, it could cost up to $200 billion more by 2014. Yet Freddie Mac posted a net income of $1.2 billion for the second quarter of this year.

The Second Quarter 2012 Profit:  The company said that the second quarter’s gain was caused by the decrease in the amount of money it was required to set aside to cover potential losses on mortgages. They further explained that their second quarter gain was based on the improvements in the housing market. (Click here for more of their commentary.)

Freddie’s Future:  Mitt Romney’s selection of Paul Ryan has given us some insights into how a Republican Administration would proceed in reforming these government-sponsored enterprises. In short,the Ryan Plan champions a “complete wind-down of Fannie Mae and Freddie Mac and an end to their bailouts.” Such a budget would “privatize the business of government-owned housing giants, Fannie Mae and Freddie Mac, so they no longer expose taxpayers to trillions of dollars’ worth of risk.”  You can discover more about the Ryan “Plan For Posperity” by clicking here.

Just like any other form of natural or sociological life, financial institutions evolve and change, adapt or die, as time moves forward. What the future will bring to Freddie and Fannie is currently draped in mystery, one of the many mysteries faced by American citizens in this election year.

Palm State Mortgage claims that one point, however, is not mysterious:  It  is still a good time to invest in a home. The rates are good, and they are not likely to get any better.  Thank you for visiting us today, and we hope you make reading our blog a wonderful habit. We invite you to share our information on your social network and help us spread  financial news to all your friends.