Definition and Explanation
The Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac, is a government-sponsored enterprise (GSE) created in 1970. Its main purpose is to expand the secondary market for mortgages in the U.S. by purchasing mortgages from lenders, which provides these lenders with capital to issue more loans. This secondary market activity helps increase the availability of money for home loans and supports mortgage lenders in making homeownership more accessible and affordable for Americans.
Freddie Mac buys conforming and non-conforming mortgages and pools them to issue mortgage-backed securities (MBS). These securities are then sold to investors, offering them returns and diversifying the risk associated with individual mortgage loans. The backing by Freddie Mac lends credibility to these securities, aiding in market stability.
Key Functions
- Liquidity: By purchasing mortgages, Freddie Mac ensures that lenders have sufficient capital to fund new loans.
- Stability: Freddie Mac plays a crucial role in stabilizing the mortgage market by maintaining market confidence and consistent lending practices.
- Affordability: Freddie Mac’s activities help to keep interest rates low, making borrowing more affordable for homebuyers.
Examples
Example 1: Conforming Loans Purchase
Freddie Mac buys a pool of conforming loans from a local credit union. By selling these loans, the credit union receives the capital required to offer new mortgages to other borrowers, thereby aiding community growth.
Example 2: Mortgage-Backed Securities (MBS)
Freddie Mac bundles various purchased loans into an MBS and sells it to an institutional investor. The investor benefits from a more stable, diversified investment, while Freddie Mac uses the funds to buy additional mortgages from loan originators.
Frequently Asked Questions (FAQs)
What is the primary purpose of Freddie Mac?
Freddie Mac’s primary purpose is to provide liquidity, stability, and affordability to the U.S. mortgage market by purchasing mortgages from lenders, pooling them, and selling them as mortgage-backed securities.
How does Freddie Mac differ from Fannie Mae?
Freddie Mac and Fannie Mae serve similar purposes but target different parts of the market. Freddie Mac primarily purchases mortgages from smaller banks, known as thrift institutions, whereas Fannie Mae predominantly deals with larger banks.
Is Freddie Mac a government agency?
Freddie Mac is a government-sponsored enterprise (GSE) but not a government agency. It operates with certain government privileges but is publicly traded and privately owned.
How does Freddie Mac impact interest rates?
By purchasing mortgages and pooling them into securities, Freddie Mac increases the funds available for lenders, which helps keep interest rates lower than they might otherwise be.
Who can invest in Freddie Mac securities?
Both institutional and individual investors can invest in Freddie Mac’s mortgage-backed securities, making it a tool for risk management and income generation.
Related Terms
Government-Sponsored Enterprise (GSE)
A financial services corporation created by the United States Congress to enhance the flow of credit to targeted sectors of the economy. Freddie Mac and Fannie Mae are examples of GSEs in housing finance.
Mortgage-Backed Security (MBS)
A type of asset-backed security secured by a collection or pool of mortgage loans. Investors in MBS receive periodic payments derived from the principal and interest payments made by the borrowers.
Conforming Loan
A mortgage that meets the standard underwriting criteria of Freddie Mac and Fannie Mae and can be sold to these entities in the secondary market.
Secondary Mortgage Market
The market where existing mortgages and mortgage-backed securities are bought and sold. Freddie Mac operates primarily in this market.
Online Resources
References
- “Understanding Freddie Mac,” Freddie Mac PDF document
- “Secondary Mortgage Market,” Investopedia, URL
- “Government-Sponsored Enterprise,” Wikipedia, URL
Suggested Books for Further Study
- “The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream” by Timothy Howard
- “The Big Short: Inside the Doomsday Machine” by Michael Lewis
- “All the Devils Are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera
- “American Securitization Forum Field Guide: The Basics of Securitization” by PDF/ASF
