Freddie Mac
The Federal Home Loan Mortgage Corp. (FHLMC) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders, which in turn supports homeownership and rental housing for middle-income Americans.
The FHLMC, familiarly known as Freddie Mac, purchases, guarantees, and securitizes home loans and is a mainstay of the secondary mortgage market.
What is Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) owned by shareholders. It was chartered by the U.S. Congress in 1970 to provide funding support to mortgage lenders, thereby promoting homeownership and rental housing for middle-income Americans.
Origin
Freddie Mac was established in 1970 to increase liquidity in the mortgage market by purchasing, guaranteeing, and securitizing home loans. Its creation was aimed at addressing the funding shortages in the housing market at the time and providing more homeownership opportunities for middle-income families.
Categories and Characteristics
Freddie Mac's main business types include:
- Loan Purchase: Freddie Mac purchases mortgages from lending institutions, typically those that meet its standards for qualified loans.
- Loan Guarantee: Freddie Mac provides guarantees for these loans, ensuring that investors are paid even if borrowers default.
- Loan Securitization: Freddie Mac packages these loans into mortgage-backed securities (MBS) and sells them in the market to raise more funds for purchasing new loans.
Freddie Mac's characteristics include providing liquidity, lowering loan interest rates, and promoting housing market stability.
Specific Cases
Case 1: A bank provides a 30-year fixed-rate mortgage to a middle-income family. To recoup its funds, the bank sells this mortgage to Freddie Mac. Freddie Mac then packages this loan with other similar loans into MBS and sells them in the market. This process allows the bank to obtain new funds to continue offering loans to other families.
Case 2: During the 2008 financial crisis, Freddie Mac's guarantee and securitization business was severely impacted. To stabilize the market, the U.S. government bailed out Freddie Mac, ensuring it continued to provide liquidity to the housing market. This action helped stabilize the market and prevented a broader financial collapse.
Common Questions
Question 1: What is the difference between Freddie Mac and Fannie Mae?
Answer: Both Freddie Mac and Fannie Mae are government-sponsored enterprises. The main difference lies in their establishment times and business models. Fannie Mae was established in 1938 and primarily provides liquidity by purchasing loans and issuing MBS, while Freddie Mac, established in 1970, also offers guarantee services in addition to purchasing and securitizing loans.
Question 2: Is investing in Freddie Mac's MBS risky?
Answer: Investing in Freddie Mac's MBS carries certain risks, mainly interest rate risk and credit risk. Although Freddie Mac provides guarantees, investors may still face losses under extreme market conditions.
