November 27, 2002
Freddie Mac's SHIP Sails Over the Stormy Seas of the Bear Market
by William Baue
The Socially Responsible Housing Investment Program (SHIP) run by Freddie Mac earns positive
returns while supporting low-income housing.
Investors are seeking ways to diversify their portfolios to squeeze returns from the current bear
market. Social investors are no exception. Some fixed income vehicles are generating returns that
rival or beat equity investments. One such vehicle that has been performing well while also
supporting social equity is the Socially Responsible Housing Investment Program (SHIP) administered
by the Securities Sales & Trade Group (SS&TG) at Freddie Mac (ticker: FRE).
"SHIP provides socially responsible investors with prudent fixed income investment
opportunities to support affordable housing nationwide or in specific geographic areas of
interest," said SS&TG Director of National Business Development Andrew Kelman.
which focuses exclusively on the mortgage securities market, is the single largest buyer of
new-issue Freddie Mac securities from the mortgage banking community. Congress established Freddie
Mac's predecessor, the Federal Home Loan Mortgage Corporation, in 1970. The corporation went
public in 1988, and the name officially changed to Freddie Mac in 1997. The unique status of
Freddie Mac is a selling point to investors.
"SHIP investments are backed by the full
faith and credit of Freddie Mac, chartered by the federal government and a Fortune 500 company with
solid financials," said Mr. Kelman.
SHIP offers two products: collateralized mortgage
obligations (CMOs) and mortgage-backed securities (MBSs), also known as mortgage pass-though
securities. The low-income housing mortgages are funded from the pool of invested SHIP money, and
these fixed income vehicles repay investors a set interest rate. For example, a 6.5 percent
security will make monthly payments from the 6.5 percent annual interest rate, guaranteed.
Interest income decreases over the bond's duration in terms of absolute dollars paid to investors,
as borrower repayment reduces the principal. CMOs are multiclass bonds that offer investors
increased flexibility to select the desired bond duration.
Besides interest payments,
investors reap the additional benefit of any mortgage prepayments, which "pass through" directly to
the investors as returns on top of interest payments.
"Both our SHIP Collateralized
Mortgage Obligation (CMO) and pass-through products provide added value due to the slow prepay
characteristics of the underlying mortgages," Mr. Kelman told SocialFunds.com. "Thus, yields are
likely to be comparable to securities backed by mortgages that were not made to low income
SHIP investors received positive net returns on top of interest payments during
the third quarter of 2002 on both CMOs (.366 percent) and MBSs (2.87 percent). As there is no
management fee, these statistics represent actual net returns to investors. Year-to-date returns
at the end of the third quarter amounted to 4.85 percent for CMOs and 8.81 percent for MBSs. Such
attractive returns are available to institutional investors and retail investors alike.
"Traditionally, institutional investors have participated in SHIP through a direct relationship
with Freddie Mac," said Mr. Kelman. "Retail investors can have their brokers and investment
advisors contact Freddie Mac to arrange purchase of SHIP investments."
In addition to
benefiting investors financially, SHIP products benefit low-income individuals and families, who
often suffer financially from their reduced economic status.
"Too often, borrowers in low
income areas who may have excellent credit nevertheless wind up with subprime mortgages and pay
higher interest rates than they should," explained Mr. Kelman. "SHIP creates incentives for loan
originators to find these borrowers (before they get subprime mortgages) and provide them with the
low interest rate mortgages that their credit history entitles them to."