Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise (GSE) created to expand the secondary mortgage market in the United States.
Historical Context
Freddie Mac was established in 1970 and became a publicly traded company in 1989. It was founded as a part of a governmental initiative to provide liquidity, stability, and affordability to the mortgage market. The aim was to help increase the availability of affordable housing.
Functions and Operations
Freddie Mac purchases mortgages from lenders, thus providing them with capital to originate more loans. These purchases are then bundled and sold as mortgage-backed securities (MBS) to investors on the open market. This process is crucial for maintaining liquidity in the housing finance system.
Key Functions
- Liquidity: By purchasing mortgages from lenders, Freddie Mac ensures banks have enough capital to continue issuing new home loans.
- Stability: Through its operations, Freddie Mac helps stabilize the mortgage market.
- Affordability: The GSE helps to lower the cost of borrowing, making homeownership more attainable.
Mortgage-Backed Securities (MBS)
Freddie Mac issues MBS, which are investments backed by the mortgage payments of homeowners. These securities are an essential component of the broader financial market.
Comparison with Fannie Mae
Freddie Mac is often compared to its counterpart, Fannie Mae (Federal National Mortgage Association), another GSE with similar functions. While Fannie Mae buys mortgages from larger commercial banks, Freddie Mac primarily deals with smaller banks known as thrifts.
Special Considerations
Freddie Mac operates under a charter from Congress with a mission to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing.
Financial Health and Regulation
The Federal Housing Finance Agency (FHFA) is the principal regulatory body overseeing Freddie Mac. During the 2008 financial crisis, the U.S. government placed Freddie Mac into conservatorship to prevent its collapse.
Examples and Real-World Impact
Freddie Mac’s actions have long-lasting impacts on the housing market, impacting everything from interest rates to the availability of credit. For instance, its initiatives can make borrowing more affordable and accessible to diverse demographics.
FAQs
What does Freddie Mac stand for?
How does Freddie Mac affect mortgage rates?
Who regulates Freddie Mac?
Related Terms
- Fannie Mae: Similar GSE responsible for providing a stable source of funding for residential mortgages.
- Mortgage-Backed Securities (MBS): Investments secured by mortgages bought by Freddie Mac and packaged for investors.
- Secondary Mortgage Market: The marketplace where existing mortgages are bought and sold.
References
- “Freddie Mac.” Federal Home Loan Mortgage Corporation, https://www.freddiemac.com.
- “Federal Housing Finance Agency.” FHFA, https://www.fhfa.gov.
- “Historical Timeline.” Freddie Mac Historical Overview, https://www.freddiemac.com/about/historical.html.
Summary
Freddie Mac, or the Federal Home Loan Mortgage Corporation, is a cornerstone in the U.S. housing finance system. By providing liquidity and stability to the mortgage market, and making homeownership more attainable, Freddie Mac plays a pivotal role in the nation’s financial ecosystem.
