Definition and Purpose
The Federal Home Loan Mortgage Corporation (FHLMC), commonly referred to as Freddie Mac, is a government-sponsored enterprise (GSE) established to expand the secondary market for mortgages in the United States. Like its counterpart, the Federal National Mortgage Association (FNMA or Fannie Mae), Freddie Mac helps to stabilize the mortgage market and increase affordable housing opportunities by purchasing residential mortgages from lenders, pooling them, and selling them as mortgage-backed securities (MBS) to investors.
Historical Context
Freddie Mac was created in 1970 under the Emergency Home Finance Act, in response to growing concerns about the availability and stability of mortgage funding. The aim was to increase liquidity in the mortgage market, ensuring that lenders would have a continuous supply of funds to issue new mortgages.
Role in the Mortgage Market
Primary vs. Secondary Market
- Primary Mortgage Market: This market involves lenders (banks, credit unions) providing loans directly to borrowers.
- Secondary Mortgage Market: Here, entities like Freddie Mac buy mortgages from primary lenders. This purchasing guarantees that lenders have enough capital to continue lending to new borrowers.
Mortgage-Backed Securities (MBS)
Freddie Mac packages the purchased mortgages into MBS, which are then sold to investors. These securities are instruments that represent claims on the cash flow from pools of mortgage loans, providing investors with regular interest payments.
Impact and Significance
Liquidity and Stability
By buying loans from lenders, Freddie Mac increases liquidity, allowing more borrowers to access home loans. This process results in more stable and predictable mortgage interest rates, facilitating better financial planning for homeowners.
Affordability and Availability
Freddie Mac’s activities contribute to making homeownership more accessible and affordable by ensuring a steady flow of capital into the housing market.
Comparisons and Related Terms
FHLMC vs. FNMA
Both Freddie Mac and Fannie Mae serve similar purposes in expanding liquidity and stability in the mortgage market, but they operate independently and buy mortgages from different networks of lenders. Freddie Mac primarily deals with smaller banks and thrifts, while Fannie Mae works more with larger, commercial banks.
Government-Sponsored Enterprises (GSEs)
Freddie Mac and Fannie Mae are part of the broader category of GSEs, which are privately held financial institutions created by Congress to enhance credit flow to specific sectors, such as housing.
FAQs
What Does Freddie Mac Do?
How Does Freddie Mac Affect Mortgage Rates?
Who Oversees Freddie Mac?
References
- Federal Housing Finance Agency (FHFA). “About Fannie Mae & Freddie Mac.” FHFA.gov
- U.S. Department of Housing and Urban Development (HUD). “Freddie Mac.” HUD.gov
Summary
Freddie Mac plays an essential role in the U.S. housing market by purchasing mortgages from lenders, securitizing them, and selling them as MBS to investors. This activity helps ensure liquidity, stability, and availability of funding for home loans. Alongside its counterpart, Fannie Mae, Freddie Mac is crucial for maintaining the health and accessibility of the housing finance system in the United States.
