The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly chartered, government-sponsored enterprise (GSE) that operates in the secondary mortgage market. It plays a pivotal role in ensuring liquidity, stability, and affordability in the U.S. housing market by purchasing qualifying residential mortgages from lenders, packaging them into mortgage-backed securities (MBS), guaranteeing those securities, and selling them to investors.
Responsibilities and Functions
Purchasing Mortgages
Freddie Mac buys mortgages that meet certain criteria from qualifying lenders. This process increases the lenders’ ability to offer more loans, thereby supporting the housing market.
Packaging and Securitization
These purchased mortgages are bundled into new securities, specifically MBS, which are backed by the pooled mortgages. These securities are then issued and sold on the open market.
Providing Guarantees
Freddie Mac provides guarantees to protect investors against losses resulting from homeowner defaults on the underlying mortgages. This enhances the appeal and security of the investment.
Reselling Securities
By reselling the MBS to investors, Freddie Mac helps to inject capital into the mortgage market, ensuring continued liquidity and availability of home loans.
Historical Context
Formation and Evolution
Freddie Mac was established in 1970 to expand the secondary market for mortgages in the United States. Its creation was aimed at fostering a stable and affordable housing finance system by ensuring a steady flow of mortgage funds for residential mortgage lenders.
Government Conservatorship
On September 6, 2008, amid the financial crisis, Freddie Mac was placed under conservatorship by the Federal Housing Finance Agency (FHFA). The U.S. government assumed an 80% ownership stake in its stock, and the FHFA began to oversee its operations to preserve its financial integrity and support the housing market.
Structure and Oversight
Federal Housing Finance Agency (FHFA)
The FHFA is the regulatory body that ensures Freddie Mac operates safely and soundly, meeting its public mission while maintaining financial stability.
Government Ownership
Under conservatorship, the U.S. government maintains significant control over Freddie Mac, ensuring that its activities align with broader economic and policy objectives.
Applicability and Significance
Impact on Housing Market
Freddie Mac significantly impacts the U.S. housing market by facilitating the availability of mortgage capital. Its activities promote homeownership opportunities for a broader range of Americans.
Influence on Investors
The guarantee provided by Freddie Mac makes MBS a more secure investment, attracting a wide array of investors, including pension funds and global financial institutions.
Related Terms
- Government-Sponsored Enterprise (GSE): GSEs are financial services corporations created by the U.S. Congress to enhance the flow of credit to specific sectors. Other examples include Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association).
- Mortgage-Backed Securities (MBS): Securities that are backed by a pool of mortgages. Investors receive periodic payments derived from the principal and interest payments made by homeowners.
- Conservatorship: A legal status wherein a government entity steps in to manage a troubled organization to restore its health and stability.
Frequently Asked Questions (FAQs)
How does Freddie Mac differ from Fannie Mae?
While Freddie Mac and Fannie Mae serve similar functions in the secondary mortgage market, they purchase loans from different sources. Fannie Mae primarily buys loans from larger commercial banks, while Freddie Mac often deals with smaller banks, thrifts, and credit unions.
What is the role of the FHFA in Freddie Mac’s operations?
The FHFA oversees Freddie Mac’s activities, ensuring it operates in a safe and sound manner and fulfills its mission without jeopardizing financial stability.
Why was Freddie Mac placed under conservatorship?
During the 2008 financial crisis, the U.S. government placed Freddie Mac under conservatorship to stabilize the financial system and prevent further economic deterioration, providing vital support to the housing market.
Summary
The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, is a cornerstone of the U.S. housing finance system. As a government-sponsored enterprise, it ensures the liquidity, stability, and affordability of mortgage funds through its activities in the secondary mortgage market. Placed under conservatorship in 2008, Freddie Mac continues to play a crucial role under the supervision of the FHFA, adapting to changing economic conditions while striving to meet its public mission effectively.
By understanding the functions, history, and significance of Freddie Mac, stakeholders can appreciate its vital contributions to the housing market and broader economy.
