A nice summation on the Freddie Mac situation in WSJ. Giving a minor problem scenario and a much worst scenario.
<<IN TRANSLATION
Are There Cracks In Freddie's Foundation?
Freddie Mac, the mortgage company that has been a model of stability on Wall Street, now finds itself on somewhat shaky ground.
The company's stock was hit hard on Monday when it was announced that its three top executives would step down amid a continuing accounting inquiry. That's unsettling news because any substantive troubles at Freddie Mac could undermine the strength of the $6.6 trillion U.S. mortgage market, which has held up an otherwise wobbly U.S. economy for the past three years.
Freddie Mac, created by the government but now owned by shareholders, buys home mortgages from banks and mortgage lenders, enabling the institutions to make more loans to consumers. Freddie Mac keeps the mortgages itself or packages them together as collateral for bonds sold to investors.
Like Fannie Mae, which is its larger sibling, Freddie Mac operates under a government charter, meaning it is a government-sponsored, or quasigovernmental, entity. These are exempt from some taxes and don't have the stringent reporting requirements of other private companies. And they have a line of credit with the Treasury Department. But their assets aren't guaranteed by the government, and they otherwise operate like a publicly traded company.
Freddie Mac's mortgage buying, and efforts to standardize the lending process, have helped make it easier and cheaper for consumers to obtain mortgages.
So, does Freddie Mac's predicament threaten homeowners? For the moment, probably not. But it's worth watching what comes next.
Freddie Mac and Fannie Mae continue to operate normally, buying up mortgages and keeping the market running. There have been few signs that lenders or investors are refraining from working with the company.
If these companies' problems start snowballing, though, the housing market, which represents about 11% of the nation's gross domestic product, could have problems if lenders become more wary of making mortgage loans.
The problem so far seems to be an issue of how Freddie Mac accounted for its earnings. Unlike companies such as Enron or WorldCom, Freddie doesn't appear to have inflated its earnings; if anything, it held them down.
The question is whether this was designed to make earnings higher down the road.
"In some instances we weren't in compliance" with generally accepted accounting principles, says a Freddie Mac spokesman. "We intend to fix it and get it right."
If the problems ultimately are found to have stemmed from inappropriate accounting, the company likely will continue to keep providing the lubrication to keep the mortgage market running smoothly.
But if it turns out the company isn't as profitable or safe as it has portrayed itself, investors will be less likely to buy Freddie Mac's debt, hurting the company's ability to buy more mortgages.
That could make it harder for lenders to find a good price when they want to sell their mortgage loans, putting upward pressure on rates and perhaps sparking doubts in the white-hot housing market.
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