The Federal Home Loan Mortgage Corporation (FHLMC), generally known as Freddie Mac, is a government-sponsored corporation operating in the diversified financial services sector. The company was founded in 1950 ad is based in Tyson Corner, Virginia. Freddie Mac is the second leading company in the US based on revenue in diversified financial services; In 2019, the company posted a revenue of $75.13 billion (Norrestad, 2020). Freddie Mac primarily operates in the secondary mortgage market; it buys mortgages, resells them as securities, and assumes credit risk. The company has an essential role in the housing market as the US housing market is mainly based on mortgages. The company had provided essential support to the renters and the homeowners when they needed it most in the difficult global crisis. The company has provided 700,000 homeowners support during a worldwide pandemic and offered relief options for forbearance and post-forbearance (Freddie Mac, 2020). Porter’s five forces analysis is a valuable tool to assess the business and financial risk Freddie Mac is exposed to in the global financial services sector.
Competitive Rivalry in the Market
The financial services sector is highly competitive globally, and the same scenario persists in the US. US-based financial services companies dominate globally, and there is a significant consumer market in the US. Freddie Mac has a massive role in the US mortgage and housing market due to its long-standing presence and customer relations. Its primary competitors are Fidelity National Financials (FNF), Fannie Mae, and Ocwen Financial. Freddie Mac is ranked 41st in the Fortune 500 companies; it has reported $75.1 billion with a 2.1% change year-on-year and profit of $7.2 billion. The company’s total ten years annualized return on investment is 7.4% (Fortune, 2021). FNF has reported revenue and profit of $10.7 billion and $1.4 billion (Fortune, 2021). In 2020, Fannie Mae earned revenue of $120.3 billion with an increase of 0.2% (Fortune, 2021), and Ocwen Financial earned the payment of $2.1 billion (Fortune, 2021).
Threat of Substitutes
The threat of substitutes is high when there are better alternatives available, they offer better terms and services, and there are many options available for users. The threat of substitutes is moderate in the diversified financial services sector. The US diversified financial services sector is being towards digital innovation due to the changing preferences of the consumers. Millennials’ shifting preference away from traditional services will continue to be the driving force in the consumer lending market (RSM, 2021). The new players in the market are trying to push the more prominent institutes to dent their market share. Despite these efforts, there are no natural substitutes available for consumers in lending markets, and therefore the threat remains low.
The Threat of New Entrants
The threat of new entrants is perceived to be high when the industry is less capital intensive, relaxed regulatory environment, and potential for growth in the market. However, as with any industry financial services industry has its limitations. It is capital intensive, and there is considerable capital required at the inception and then to remain afloat. The high capital requirement of capital-intensive industries acts as a deterrent for new entrants (Eaton & Lipsey, 1980). Another deterrent is the regulatory framework; there is a strict compliance framework, which increases the compliance cost burden to an unbearable level for the firms starting. Finally, there are established incumbents with established business channels, and the market is already saturated. Therefore, the threat of new entrants remains low.
Bargaining Power of Buyers
The buyers’ bargaining power is directly proportional to the importance of buyer to the business, buyers’ concentration, switching cost, and available options for the buyers. The buyers for the products on offer are government institutes, retail mortgage buyers, and securities buyers. Government institutes have higher bargaining power because they hold the regulatory gravel and can impact the business negatively. Retail buyers’ have options to choose from when they seek mortgage but there is a high switching cost when a person is committed to an institute. High switching cost binds consumer with the service provider and makes the exit difficult (Aydin et al., 2005). Buyers’ are scattered and not concentrated as a group, so overall, buyers’ bargaining power, especially in house-lending space, remains moderate.
Bargaining Power of Suppliers
The bargaining power of the suppliers depends upon underlying factors such as suppliers’ products, suppliers’ concentration, the buyers’ reliance on the supplier, and the nature of the product. The primary sources of inflows are from retail customers those buy mortgages, other are the institutes those sell these mortgages and finally the human resources. The retail buyers know their importance for the business and therefore are mindful of their value. But retail buyers have moderate barraging power due to lack of concentration and high associated exit cost. The institutes have somewhat more bargaining power because of the required risk premium and the option to sell to other businesses. When suppliers are aware of their importance to the business and can sell their products to anyone else, it reduces customers’ importance for the supplier (Reichenbachs, 2017). Human resources are more in supply than there are vacancies. Overall, buyers have moderate bargaining power.
References
Aydin, S., Özer, G., & Arasil, Ö. (2005). Customer loyalty and the effect of switching costs as a moderator variable: A case in the Turkish mobile phone market. Marketing intelligence & planning.
Eaton, B. C., & Lipsey, R. G. (1980). Exit barriers are entry barriers: The durability of capital as a barrier to entry. The Bell Journal of Economics, 721-729.
Fortune. (2021). Fannie Mae. Available at: https://fortune.com/company/fannie-mae/fortune500/
Fortune. (2021). Fidelity National Financial. Available at: https://fortune.com/company/fidelity-national-financial/fortune500/
Fortune. (2021). Freddie Mac. Available at: https://fortune.com/company/freddie-mac/fortune500/
Fortune. (2021). Ocwen Financial. Available at: https://fortune.com/fortune500/2015/ocwen-financial/
Freddie Mac. (2020). About. Company. Helping Families Keep Their Homes. Available at: http://www.freddiemac.com/about/company/#support
Norrestad, F. (2020). Leading diversified financial service companies in the US 2019, by revenue. Statista. Available at: https://www.statista.com/statistics/185510/leading-us-diversified-financial-service-companies/
Reichenbachs, M., Schiele, H., & Hoffmann, P. (2017). Strategic supply risk: exploring the risks deriving from a buying firm being of low importance for its suppliers. International Journal of Risk Assessment and Management, 20(4), 350-373.
RSM. (2021). Financial services industry outlook. Insight Article, volume 7, Spring 2021. Available at: https://rsmus.com/what-we-do/industries/financial-services/industry-outlook-financial-services.html#asset