Freddie Mac — Federal Home Loan Mortgage Corp. (FHLMC)

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What is Freddie Mac — Federal Home Loan Mortgage Corp. (FHLMC)?

The Federal Home Loan Mortgage Corp. (FHLMC) is a shareholder-owned government-sponsored enterprise (GSE) established by Congress in 1970 to keep money flowing to mortgage lenders, who in turn support homeownership and finance. rental housing for middle-income Americans. The FHLMC, colloquially known as Freddie Mac, buys, guarantees and securitizes home loans and is a mainstay of the secondary mortgage market.

Key points to remember

  • Freddie Mac is the officially recognized nickname for the Federal Home Loan Mortgage Corp. (FHLMC).
  • Freddie Mac is a shareholder-owned government sponsored business (GSE) licensed by Congress in 1970 to support home ownership for middle-income Americans.
  • Freddie Mac’s role is to buy a large number of loans from mortgage lenders, then combine them and sell them as mortgage-backed securities.
  • Fannie Mae and Freddie Mac are both publicly traded GSEs. The main difference between them is that Fannie Mae buys mortgages from large retail or commercial banks, while Freddie Mac gets his loans from smaller banks.
  • Some have argued that the unchecked growth of Fannie Mae and Freddie Mac was the main driver of the 2008 credit crunch which turned into the Great Recession.

Freddie Mac Story

Freddie Mac was created when Congress passed the Emergency Home Finance Act in 1970. A wholly-owned subsidiary of the Federal Home Loan Bank System (FHLBS), it was an attempt to reduce interest rate risk for associations of savings and credit and small banks. In 1989, under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Freddie Mac underwent a reorganization. It became a public company, with shares that could be traded on the New York Stock Exchange.

In 2008, during the financial crisis triggered by the subprime mortgage collapse, the US government, particularly the Federal Housing Finance Agency, took over Freddie Mac. Although it is gradually evolving towards independence, it remains under federal supervision.

What is Freddie Mac doing?

Freddie Mac was created to improve the flow of credit to different parts of the economy. With a similar GSE, Fannie Mae, he is a key player in the secondary mortgage market.

Freddie Mac does not create or manage mortgages himself. Rather, it buys home loans from banks and other commercial mortgage lenders (giving these institutions funds that they can then use to finance more loans and mortgages). These loans must meet certain standards set by Freddie Mac.

After purchasing a large number of these mortgages, Freddie Mac either holds them in his own portfolio or combines them and sells them as Mortgage Backed Securities (MBS) to investors looking for a steady income stream. Either way, it “insures” these mortgages, that is, it guarantees the timely payment of principal and interest on the loans. As a result, securities issued by Freddie Mac tend to be very liquid and have a credit rating close to that of US Treasuries.

62%

The percentage of all US mortgage arrangements (i.e. new loans) securitized and guaranteed by Freddie Mac and his sister company, Fannie Mae, as of mid-2020.

Freddie Mac live review

Freddie Mac has come under criticism because his ties to the US government allow him to borrow money at lower interest rates than available to other financial institutions. With this financing advantage, it issues large amounts of debt (known in the market as “agency debt” or “agencies”), and in turn buys and holds a huge portfolio of mortgages known as name of “retained portfolio”.

Some people believe that the size of the retained portfolio combined with the complexity of mortgage risk management poses a great systematic risk to the US economy. Critics have argued that the uncontrolled growth of Freddie Mac and Fannie Mae led to the 2008 credit crunch that plunged the United States into the Great Recession. (In response, business advocates argue that while Freddie and Fannie made bad business decisions and held insufficient capital during the housing bubble, their portfolios made up only a tiny fraction of total subprime loans.)

The moratorium on single-family foreclosures of Fannie Mae and Freddie Mac, put in place due to the economic crisis of 2020, ended on July 31, 2021. However, real estate evictions are suspended until September 30 and their forbearance programs continue. Mortgage owners can register and suspend payments for up to one year; those who were enrolled by February 28, 2021 may be eligible for up to 18 months. Other borrowers may be eligible for a loan modification.

Freddie Mac vs. Fannie Mae

Fannie Mae (Federal National Mortgage Association or FNMA) was formed in 1938 as part of an amendment to the National Housing Act. It was considered an agency of the federal government and its role was to act as a secondary mortgage market that could buy, hold or sell loans insured by the Federal Housing Administration. Fannie Mae ceased to be an agency of the federal government and became a private-public corporation under the Charter Act of 1954.

Fannie Mae and Freddie Mac are very similar. Both are publicly traded companies that were created to serve a public mission. The main difference between the two is the source of the mortgages they buy. Fannie Mae buys mortgages from large retail or commercial banks, while Freddie Mac obtains his loans from smaller banks, often referred to as “savings banks” or “savings and loan associations,” which focus on the provision of banking services to communities.


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