What does the brouhaha at home mortgage giant Freddie Mac really mean for home buyers, refinancers, REALTORS® and home builders around the country?

Could the unfolding accounting scandal underway at the country's second biggest source of mortgage money hurt individual consumers at some point? Should real estate professionals be worried?

At the moment, the only prudent answer to these questions is this: It's too early to say for sure, but the odds are that Freddie Mac's problems will not have significant short-term effects on the national housing market. In the long term, they could trigger changes in the company's charter with the federal government, and that, in turn, could have unpredictable effects on the overall housing market.

Freddie Mac -- legally it is the Federal Home Loan Mortgage Corporation—may not be a household word, but it is a global financial giant. Chartered by Congress in 1970 as a public-purpose private corporation, Freddie (along with sibling rival Fannie Mae) exists solely to provide liquidity to the American mortgage market. It buys billions of dollars worth of mortgages from originating lenders every month, then repackages them into bonds for resale to investors in the capital markets. It places a guarantee on those bonds, assuring investors of the timely payment of principal and interest from the underlying mortgages, even if the loans are in default.

Freddie's portfolio is larger than the entire economies of some countries--$1.3 trillion worth of loans, roughly $600 billion of which Freddie owns outright itself. Like Fannie Mae, Freddie has a continuing tie to the federal Treasury - a $2.5 billion line of credit it can call upon should it ever have difficulty raising capital or paying debts. Most investors assume Freddie and Fannie are "too big to fail" - that is, the federal government would intervene and backstop the corporations rather than allow either of them fail.

Freddie's and Fannie's operations - though criticized by some private banks and insurance companies as government-chartered duopolies - generally are viewed as having had huge positive effects on the home mortgage market during the last three decades. Not only have they deepened the pool of capital available for mortgages , they have also standardized the American home loan and lowered mortgage rates charged to consumers.

Based on reports to date and discussions with sources at the firm, the scandal at Freddie Mac does not appear to involve the sort of massive fraud or corporate subsidiary shell games such as occurred at Enron Corp. or Worldcom. Rather, the issue appears to focus on how the corporation's top leadership - president David Glenn in particular - responded to an ongoing accounting investigation into its reporting of its holdings of "derivatives" - complex financial "hedging" instruments - in its portfolio.

For reasons that have not yet become public, not only was Glenn fired by Freddie's board of directors, but longtime CEO Leland Brendsel the company's chief financial officer also resigned. A new board, along with new CEO Gregory Parseghian, pledged last Friday in full-page advertisements in national newspapers, to put the company back on an even keel.

What's the potential downside of all this? What's the worst-case scenario? A financial meltdown by Freddie Mac would indeed trigger vast problems not only in the American mortgage market but in the global bond markets as well since European and Asian investors own large quantities of Freddie Mac mortgage-backed securities.

But nothing in the facts currently available suggest anything remotely resembling a financial failure is likely at Freddie Mac. Somewhat more likely, however, is tighter oversight of both Fannie and Freddie by Congress and federal regulators. Theoretically that could raise costs for both corporations and indirectly raise home mortgage interest rates charged consumers slightly.

Also possible - but not in the immediate cards - is the eventual de-federalization of both companies . In other words, both Freddie and Fannie would be spun off the federal books, and the Treasury line of credit - and presumptive federal guarantee - would be severed. In that scenario, both corporations would raise money and conduct business just as private mortgage bankers or commercial banks currently do. But even that eventuality could only occur after a bruising fight on Capitol Hill. Both companies have many friends - and campaign donation recipients - sitting in Congress.

So, in sum: For the moment, there is no need for concern among realty market players. Freddie and Fannie are still doing what they've done for three decades. And the odds are they'll keep doing it for the long term.

Published: June 16, 2003

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.