Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013

by Carol J. Loomis

Freddie Mac helps make the American dream of owning a house a reality. Chartered by Congress in 1970, the company buys residential mortgages from lenders, guarantees the mortgages against default, packages them as securities, and sells them to investors, including many S&Ls. From 1970 through 1987, the market for conventional residential mortgages grew at a compound annual rate of more than 13% and never at less than 5.5% a year. Not bad, but what makes the business outstanding is the paucity of competition. Fannie Mae is the only other major player; the chief difference between them is that Freddie resells virtually all its mortgages, while Fannie holds onto a substantial amount of them. Together, Freddie and Fannie control 90% of the market. Says Buffett: “It’s the next best thing to a monopoly.” The future of the Freddie-Fannie family duopoly looks encouraging. The market could expand for years to come. So far only 33% of conventional residential mortgages are securitized, leaving plenty of room for growth.