The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) established to extend the secondary mortgage market in the United States. Freddie Mac buys mortgages from lenders, guarantees them, and then combines them into mortgage-backed securities (MBS) that are sold to investors. This process provides liquidity, stability, and affordability to the housing market by ensuring that lenders have a steady supply of funds to issue new home loans.
Historical Context
Freddie Mac was created in 1970 in response to a growing need for liquidity in the mortgage market. The aim was to support homeownership for more Americans by ensuring that mortgage lenders had enough funds to continue offering loans. The organization was established as part of an effort to stabilize the housing market and promote affordability in the post-Great Depression era.
Functions of Freddie Mac
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Purchasing Mortgages: Freddie Mac buys mortgage loans from various lenders, including commercial banks, credit unions, and savings institutions.
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Securitization: The purchased loans are then pooled and converted into mortgage-backed securities (MBS). These securities are sold to investors, transferring the mortgage risk from the lender to the investor.
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Guaranteeing Mortgages: Freddie Mac guarantees the timely payment of principal and interest on the MBS, mitigating the risk for investors and ensuring the reliability of these securities.
Benefits and Impact
Freddie Mac’s operations have several key benefits:
- Liquidity: By buying mortgages, Freddie Mac provides lenders with the necessary funds to continue issuing new loans.
- Stability: The guarantee provided by Freddie Mac ensures a steady flow of mortgage funds, which stabilizes the housing market.
- Affordability: By increasing the availability of mortgage credit, Freddie Mac helps make homeownership more accessible and affordable.
Comparison with Fannie Mae
Freddie Mac is often mentioned alongside Fannie Mae (the Federal National Mortgage Association). Both are GSEs with similar missions but operate slightly differently:
- Fannie Mae tends to buy loans from larger, commercial banks, while Freddie Mac often purchases from smaller banks and lenders.
- Both entities ultimately serve to securitize mortgages and provide liquidity to the housing market but target different segments of the mortgage origination market.
Related Terms
- Government-Sponsored Enterprise (GSE): A financial services corporation created by the United States Congress to enhance the flow of credit to specific sectors of the economy.
- Mortgage-Backed Security (MBS): An investment that is secured by a collection of mortgages purchased by a government agency or investment bank.
- Securitization: The process of pooling various types of contractual debt like mortgages and selling their related cash flows to third-party investors as securities.
FAQs
How does Freddie Mac differ from a traditional bank?
What is the relationship between Freddie Mac and the U.S. government?
How does Freddie Mac impact homebuyers?
References
- Federal Housing Finance Agency (FHFA). “About Freddie Mac”. [FHFA Website]
- Freddie Mac. “Our History”. [Freddie Mac Official Website]
- U.S. Department of Housing and Urban Development (HUD). “Understanding the Secondary Mortgage Market”. [HUD Website]
Summary
Freddie Mac (the Federal Home Loan Mortgage Corp.) is a key player in the U.S. housing market, promoting stability, liquidity, and affordability through its operations in the secondary mortgage market. By purchasing, securitizing, and guaranteeing home loans, Freddie Mac ensures a consistent and reliable flow of mortgage credit, significantly contributing to broader homeownership opportunities.
