Freddie Mac (Federal Home Loan Mortgage Corporation)

Overview

Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation (FHLMC), plays a significant role in the U.S. housing market by purchasing residential mortgage loans from lenders and packaging them into mortgage-backed securities. This function provides liquidity, stability, and affordability within the housing finance system. Established as a counter to Fannie Mae, Freddie Mac’s mission and operations are closely aligned with its counterpart.

Examples

Local Bank Transactions: When a local bank, such as ABC Savings and Loan Association, needs to free up capital to offer more mortgages, it sells a portion of its existing home loans to Freddie Mac. Consequently, the bank has more funds available to issue new loans to home buyers.
Mortgage-Backed Securities (MBS): Freddie Mac purchases a portfolio of residential mortgages and pools them together. The organization then issues securities backed by these loans, which are sold to investors. These MBS spreads the risk associated with mortgage lending and provides a steady stream of capital back to lenders.

Frequently Asked Questions

1. What is the main purpose of Freddie Mac? Freddie Mac’s main purpose is to provide liquidity, stability, and affordability to the housing market by purchasing residential mortgage loans, thereby replenishing the funds available for lending.

2. How is Freddie Mac different from Fannie Mae? Originally, the primary distinction was the market in which they operated, with Freddie Mac focusing on savings and loan associations and Fannie Mae on commercial banks. Today, both have similar roles and operations in the secondary mortgage market, with minimal differences.

3. What does it mean that Freddie Mac is in conservatorship? In 2008, due to the financial crisis, Freddie Mac was placed under the conservatorship of the Federal Housing Finance Agency (FHFA). This means the FHFA oversees and directs Freddie Mac’s operations to ensure its financial stability.

4. How does Freddie Mac impact the economy? Freddie Mac provides essential liquidity to the mortgage market, helping keep interest rates low and making homeownership more affordable across the country. By ensuring a steady flow of capital, it stabilizes the housing market and supports economic growth.

5. Is Freddie Mac still traded on the New York Stock Exchange (NYSE)? No, Freddie Mac was delisted from the NYSE in June 2010 following its placement into conservatorship in 2008.

Fannie Mae: Another government-sponsored enterprise (GSE) that purchases mortgage loans in the secondary market to provide liquidity and capital to mortgage lenders.
Mortgage-Backed Securities (MBS): Securities that are backed by a bundle of mortgage loans purchased from lenders by entities like Freddie Mac.
Secondary Mortgage Market: A marketplace where existing mortgage loans and MBS are bought and sold, providing liquidity to originators of loans.
Conservatorship: A legal status where an entity is placed under the control of a conservator, usually due to financial instability.
Federal Housing Finance Agency (FHFA): The regulatory agency overseeing Freddie Mac, Fannie Mae, and other housing finance entities.

Online Resources

References

“Freddie Mac Annual Report,” Freddie Mac.
“FHFA Annual Reports and Analysis,” Federal Housing Finance Agency.
“The Financial Crisis Inquiry Report,” National Commission on the Causes of the Financial and Economic Crisis in the United States.
“Securitization FAQs,” U.S. Securities and Exchange Commission.

Suggested Books for Further Studies

“The Big Short: Inside the Doomsday Machine” by Michael Lewis
- A detailed account of the financial crisis, including the roles of Fannie Mae and Freddie Mac.
“Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi
- Provides overarching insights into mortgage-backed securities and their impacts on financial markets.
“On the Brink: Inside the Race to Stop the Collapse of the Global Financial System” by Henry M. Paulson Jr.
- Contains perspectives on the financial crisis, specifically focusing on governmental efforts to stabilize the economy.
“Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves” by Andrew Ross Sorkin
- Chronicles the 2008 financial crisis and the measures taken to mitigate its effects, including the conservatorship of Freddie Mac.

Real Estate Basics: Freddie Mac Fundamentals Quiz

### What is the primary role of Freddie Mac? - [x] To provide liquidity, stability, and affordability to the housing market by purchasing residential mortgage loans. - [ ] To issue home loans directly to consumers. - [ ] To regulate home prices in the housing market. - [ ] To build homes across the United States. > **Explanation:** Freddie Mac’s primary role is to support the secondary mortgage market by buying residential mortgage loans from lenders, ensuring there is sufficient capital in the mortgage market. ### Why would a local bank sell mortgage loans to Freddie Mac? - [ ] To reduce their mortgage rates. - [x] To free up capital for new loans. - [ ] To evade regulatory scrutiny. - [ ] To increase customer deposits. > **Explanation:** Local banks sell mortgage loans to Freddie Mac to free up capital, allowing them to issue new loans. ### Which organization oversees Freddie Mac’s operations? - [ ] U.S. Department of Housing and Urban Development (HUD) - [x] Federal Housing Finance Agency (FHFA) - [ ] Federal Reserve - [ ] U.S. Treasury > **Explanation:** The Federal Housing Finance Agency (FHFA) oversees Freddie Mac's operations, ensuring its financial stability. ### When was Freddie Mac placed into conservatorship? - [ ] 2010 - [ ] 2007 - [ ] 2012 - [x] 2008 > **Explanation:** Freddie Mac was placed into conservatorship in 2008 during the financial crisis to stabilize its operations. ### What does conservatorship entail for Freddie Mac? - [ ] Complete dissolution of the corporation. - [ ] Total privatization of Freddie Mac. - [x] Control and oversight by a government conservator (FHFA). - [ ] Expansion of housing finance operations. > **Explanation:** Conservatorship means that FHFA oversees and directs Freddie Mac's operations for financial stability and housing market support. ### Is Freddie Mac still listed on the New York Stock Exchange? - [ ] Yes, it continues to trade actively. - [ ] No, it was never listed there. - [x] No, it was delisted in June 2010. - [ ] Yes, but only as preferred stock. > **Explanation:** Freddie Mac was delisted from the New York Stock Exchange in June 2010. ### What type of securities does Freddie Mac issue based on pooled mortgage loans? - [ ] Corporate Bonds - [ ] Treasury Securities - [x] Mortgage-Backed Securities (MBS) - [ ] Equity Shares > **Explanation:** Freddie Mac issues Mortgage-Backed Securities (MBS) based on pooled mortgage loans they purchase. ### Which term defines Freddie Mac's role in the housing market? - [ ] Broker - [ ] Developer - [ ] Primary Lender - [x] Secondary Lender > **Explanation:** Freddie Mac acts as a secondary lender, purchasing loans from primary lenders to provide liquidity. ### Initially, Freddie Mac focused on buying loans from which types of associations? - [ ] Commercial banks - [x] Federally chartered savings and loan associations - [ ] Real estate investment trusts (REITs) - [ ] Private lenders > **Explanation:** Freddie Mac was created to buy loans from federally chartered savings and loan associations. ### Why is Freddie Mac important for the housing market? - [ ] It sets federal interest rates. - [ ] It builds affordable housing projects. - [x] It ensures steady flow of capital to mortgage lenders. - [ ] It offers insurance for mortgage loans. > **Explanation:** Freddie Mac ensures a steady flow of capital to mortgage lenders, which is vital for sustaining the housing market.