Tuesday, May 30, 2006

Freddie Mac's Accounting Maze

Freddie Mac (FRE) is a shareholder-owned, government-sponsored enterprise that provides stability in the 2ndary market for residential mortgages. It purchases and securitizes conventional residential mortgages from mortgage-lending institutions. Freddie Mac is one of 3 major sources of secondary-market funding for conventional mortgages and has financed one out of every six homes in the United States.

The stock will drop numbers (for 2005, that is) a little later today. In a word, the stock's not for us, at least not now anyways.

Accounting and internal control issues continue to weigh on the firm, even as the underlying economics of the mortgage category remain appealing. Mortgage debt outstanding has grown steadily as 40-year-low interest rates increased borrowing and contributed to higher home prices. This macro milieu has created a sizable demand for Freddie Mac's services, whose wide moat 'tis the stuff dreams are made of.

Too bad for all the political and regulatory turbulence -- we'd like to get to know this stock better. Turnaround situations (Tyco, for instance) can be real sweet moneymakers on Wall Street. And Freddie's new management has already started making moves, cleaning up shop and sending investors a vote of confidence in its own future by hiking its dividend even as analysts scramble to understand a balance sheet that resembles Minotaur's labyrinth.

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