Freddie Mac (Federal Home Loan Mortgage Corporation)

Definition

Freddie Mac (Federal Home Loan Mortgage Corporation): Commonly known by its nickname, “Freddie Mac,” this government-sponsored enterprise is tasked with purchasing mortgages from lenders, pooling them, and selling them as mortgage-backed securities to investors. Established by Congress in 1970, Freddie Mac’s primary mission is to provide liquidity, stability, and affordability to the housing market.

How Freddie Mac Works

Freddie Mac operates in the secondary mortgage market where it buys mortgages from lenders, freeing up their capital to make new loans. This helps keep credit available and housing accessible across diverse demographics and regions.

Importance

Freddie Mac contributes to nationwide access to affordable homeownership and rental housing. By providing a steady flow of capital to mortgage lenders, Freddie Mac helps to promote homeownership even during economic downturns.

Examples

Single-Family Loans
- A bank issues a mortgage to a homebuyer and then sells the loan to Freddie Mac. Freddie Mac pools this with other similar loans and sells shares of this pool to investors as a mortgage-backed security.
Refinancing Options
- Freddie Mac offers several programs to help homeowners refinance their existing mortgages, making monthly payments more affordable or cashing out equity.
Affordable Rental Programs
- Freddie Mac’s Multifamily business ensures a continuous flow of capital to rental property markets, promoting investment in and availability of affordable rental housing.

Frequently Asked Questions

What is Freddie Mac’s primary function?

Freddie Mac’s primary function is to buy, pool, and resell mortgages as mortgage-backed securities, providing liquidity and stability to the mortgage market.

How does Freddie Mac improve loan availability?

By purchasing mortgages from lenders, Freddie Mac frees up their capital, enabling them to issue more loans to borrowers, thus ensuring more widespread availability of mortgage loans.

Is Freddie Mac a government agency?

No, Freddie Mac is a government-sponsored enterprise (GSE). While it was chartered by the federal government and enjoys certain benefits, it operates as a private corporation.

What types of loans do Freddie Mac purchase?

Freddie Mac principally buys conforming loans, which are loans that meet its underwriting standards, including maximum loan amounts, borrower credit scores, and down payment requirements.

Fannie Mae (FNMA): Another GSE similar to Freddie Mac, also involved in purchasing and securitizing mortgage loans.
Mortgage-Backed Security (MBS): A type of asset-backed security secured by a collection of mortgages.
Government-Sponsored Enterprise (GSE): Federally created entities aimed at increasing credit flow in certain market sectors, like housing.
Secondary Mortgage Market: The marketplace where mortgage loans and related securities are bought and sold.
Conforming Loan: A mortgage conforming to Freddie Mac and Fannie Mae guidelines.

Online Resources

References

Suggested Books for Further Studies

“The Mortgage Market Guide: Understanding Freddie Mac and Fannie Mae” by John M. Beck
“Securitization: Structuring and Investment Analysis” by Charles Austin Stone and Anne Zissu
“Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher

Real Estate Basics: Freddie Mac Fundamentals Quiz

### When was Freddie Mac established? - [ ] 1950 - [ ] 1960 - [x] 1970 - [ ] 1980 > **Explanation:** Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, was established in 1970 to expand the secondary mortgage market in the United States. ### Is Freddie Mac a government agency? - [ ] Yes - [x] No - [ ] It varies by year - [ ] Only during emergencies > **Explanation:** Freddie Mac is a government-sponsored enterprise (GSE) but operates as a private corporation, not as a direct government agency. ### What type of market does Freddie Mac operate in? - [ ] Primary Housing Market - [x] Secondary Mortgage Market - [ ] Industrial Market - [ ] International Market > **Explanation:** Freddie Mac operates in the secondary mortgage market, buying mortgages from primary lenders and pooling them into mortgage-backed securities. ### What kind of loans does Freddie Mac primarily purchase? - [x] Conforming Loans - [ ] Non-Conforming Loans - [ ] Payday Loans - [ ] Personal Loans > **Explanation:** Freddie Mac primarily purchases conforming loans, which meet strict underwriting standards established by Freddie Mac. ### Which type of security is primarily associated with Freddie Mac's activities? - [ ] Corporate Bonds - [x] Mortgage-Backed Securities (MBS) - [ ] Treasury Bills - [ ] Municipal Bonds > **Explanation:** Freddie Mac purchases mortgages, pools them, and then sells them as Mortgage-Backed Securities (MBS) to investors. ### How does Freddie Mac support the housing market? - [ ] By issuing loans directly to buyers - [ ] By selling real estate - [x] By providing liquidity and stability - [ ] By constructing homes > **Explanation:** Freddie Mac supports the housing market by providing liquidity and stability, making mortgage credit more available and affordable. ### What was the main purpose of establishing Freddie Mac? - [x] To expand the national secondary mortgage market - [ ] To regulate housing prices - [ ] To offer loans at lower rates - [ ] To develop urban areas > **Explanation:** Freddie Mac was established in 1970 to expand the secondary mortgage market and promote homeownership by ensuring a constant flow of capital to mortgage lenders. ### How does Freddie Mac help rental property markets? - [x] By promoting investment in affordable rental housing - [ ] By directly managing rental properties - [ ] By offering tax breaks to landlords - [ ] By building rental units > **Explanation:** Freddie Mac’s Multifamily business ensures continuous capital flow to rental property markets, creating and maintaining affordable rental housing options. ### In what form does Freddie Mac sell mortgages? - [ ] Individual Loans - [ ] Common Stocks - [x] Mortgage-Backed Securities - [ ] REIT Shares > **Explanation:** Freddie Mac pools purchased mortgages to create Mortgage-Backed Securities (MBS), which are then offered to investors. ### Can Freddie Mac’s guidelines impact the approval of a mortgage? - [x] Yes - [ ] No - [ ] Only for certain lenders - [ ] It depends on the state > **Explanation:** Freddie Mac’s guidelines heavily influence mortgage approval since conforming loans must meet these standards to be purchasable by Freddie Mac.