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August 15, 2002
Some Cracks in Freddie Mac's Otherwise Solid Social and Fiscal Reputation
    by William Baue

Freddie Mac's profile appears picture-perfect from a social and fiscal perspective, but recent disclosures have tainted this image somewhat.

Immediately after the September 11 attacks, Freddie Mac (ticker: FRE), the federally chartered residential mortgage backer, donated $10 million to a "Peace of Mind" plan designed to prevent borrowers affected by the tragedy from losing their homes. Such conscientious charity characterizes the government sponsored enterprise (GSE), which donated approximately $20 million in total through the Freddie Mac Foundation in fiscal year 2001. However, this favorite holding of social investors has come under criticism recently for reports that seem inconsistent with its socially responsible reputation.

"Freddie came into existence to achieve a goal the market couldn't: broad-based home ownership," said Kyle Johnson, Director of Index Services at KLD Research and Analytics, a leading provider of SRI research.

In 1970, Congress established the Federal Home Loan Mortgage Corporation (which officially changed its name to Freddie Mac in 1997) to stabilize the nation's mortgage markets and expand opportunities for homeownership and rental housing. At first only thrifts were allowed to hold its stock, but it went public in 1988.

Freddie Mac hit its 52-week low of $52.60 on July 24, and it reached its one-year high of $71.25 on November 7, 2001. At yesterday's closing, it was trading at $63.88. Freddie Mac stock has found its way into many socially responsible investment (SRI) portfolios.

"We think social investors find Freddie Mac attractive for several reasons," Mr. Johnson told "First, its mission to provide a secondary market for mortgages for low-to-moderate income households is, if well-executed, beneficial to these economically less-advantaged groups."

Freddie Mac's other social strengths include its defined benefit pension plan and its 401(k) savings plan, through which it matches 100 percent of employee contributions for up to 6 percent of their base compensation. It offers excellent family benefits as well, with six to eight weeks of paid maternity leave, generous adoption assistance, and flexible work arrangements such as job sharing and flextime. Freddie Mac explicitly bars employee discrimination based on sexual orientation, and offers employees' domestic partners healthcare benefits.

"However, KLD thinks social investors might be concerned by the HUD's August 2001 assessment that the company was not 'leading the market' by improving lending for affordable housing in most multifamily market segments," said Mr. Johnson.

The U.S. Department of Housing and Urban Development study cited empirical evidence of Freddie Mac's aversion to purchasing loans that affected minorities. Specifically, Freddie Mac lagged behind in purchasing loans on multifamily units owned predominantly by minorities and in areas with concentrated minority populations. HUD wondered aloud about the potential adverse impact of these practices. Special interest groups and community development organizations questioned whether Freddie Mac was failing to fulfill its mission of developing the housing market for all.

"In addition, the company has been the subject of EEOC [Equal Employment Opportunity Commission] complaints alleging that the company allowed a 'racially offensive work environment,'" said Mr. Johnson. "It appears to KLD that these problems are behind it. The company has instituted new procedures (diversity training, an employee hotline, complaint box, etc.) in an effort to prevent discriminatory practices going forward. In February 2002, Freddie Mac told KLD that its last communication with the EEOC about an investigation into its practices was in the Spring of 2001."

Critics have also raised fiscal concerns about Freddie Mac as well.

"Industry groups have criticized Freddie Mac's growth in market share because they believe Freddie grows its business with the unfair advantage of the financial support of the U.S. Treasury," said Mr. Johnson. "Many in the financial industry believe the Treasury will bail out Freddie if it ran into financial trouble. This, in turn, allows Freddie to borrow funds at a lower rate, since the implied backing of the government makes them less risky."

As a GSE, Freddie Mac does indeed enjoy certain benefits, such as lower interest rates and exemption from state and local taxes. Some argue that this puts Freddie Mac at an unfair advantage.

"KLD is aware of the industry concerns, but in terms of its social analysis of the company, we need more evidence that the company is anti-competitive," said Mr. Johnson. "While the issues of excessive growth and 'mission creep' have been raised by the lending industry and the Wall Street Journal, KLD believes that Freddie is still following its charter, and therefore it serves an important social need."


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