What Is Freddie Mac?
Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise (GSE) that plays a critical role in the U.S. housing finance system. Its primary mission is to provide liquidity, stability, and affordability to the mortgage market by purchasing mortgage loans from lenders.83, 84 This process allows lenders, such as banks and credit unions, to replenish their funds and make new loans to homebuyers and renters, effectively supporting the flow of mortgage money throughout the country.82 Freddie Mac does not originate mortgage loans or lend money directly to borrowers.80, 81 As a key player in the secondary mortgage market, Freddie Mac, along with Fannie Mae, helps to ensure a consistent and reliable supply of mortgage capital.79
History and Origin
Freddie Mac was created by Congress in 1970 through the Emergency Home Finance Act of 1970.78 This legislation aimed to provide competition for Fannie Mae, which had been privatized in 1968, and further enhance the availability of funds for mortgage financing.76, 77 Its establishment was intended to help thrifts manage interest rate risk and stimulate the development of a nationwide secondary market for conventional residential mortgages.74, 75
In response to the severe deterioration in the housing markets and the broader financial crisis of 2008, Freddie Mac, along with Fannie Mae, was placed into conservatorship by the Federal Housing Finance Agency (FHFA) on September 6, 2008.72, 73 This government intervention aimed to stabilize the entities and allow them to continue their crucial role in maintaining the secondary mortgage market.71 The FHFA, which was established by the Housing and Economic Recovery Act of 2008 (HERA), acts as the conservator, with full powers to control Freddie Mac's assets and operations.69, 70
Key Takeaways
- Freddie Mac is a government-sponsored enterprise (GSE) that supports the U.S. housing finance system.68
- It provides liquidity, stability, and affordability to the mortgage market by purchasing loans from lenders.66, 67
- Freddie Mac does not directly originate mortgages; instead, it operates in the secondary mortgage market.64, 65
- The company was established in 1970 by the Emergency Home Finance Act.63
- Freddie Mac was placed into conservatorship by the Federal Housing Finance Agency (FHFA) in September 2008 during the financial crisis.62
Interpreting Freddie Mac
Freddie Mac's role in the housing finance system is largely interpreted through its impact on the availability and affordability of mortgage loans. By purchasing mortgages from primary lenders, Freddie Mac enables these lenders to originate more loans, thus increasing the overall supply of mortgage credit in the market.60, 61 This mechanism helps ensure that funds are consistently available for new home purchases and refinancings, even during periods when the direct lending market might otherwise contract.58, 59
Furthermore, Freddie Mac's activities contribute to more uniform interest rates and lending standards across the country.56, 57 Because lenders can sell their loans to Freddie Mac, they adhere to its guidelines, which helps standardize mortgage products and terms.55 This standardization also facilitates the creation of mortgage-backed securities (MBS), which are then sold to investors, further enhancing market liquidity.53, 54
Hypothetical Example
Consider a small community bank in a rural area that has originated several home loans to local residents. If the bank held onto all these loans, its ability to offer new mortgages would be limited by its capital and deposit base. However, by selling a pool of these mortgages to Freddie Mac, the bank receives cash in return.51, 52
For instance, the bank sells $5 million worth of mortgages to Freddie Mac. Freddie Mac then pools these mortgages with others and packages them into mortgage-backed securities, which it sells to institutional investors. This infusion of $5 million in cash allows the community bank to originate new mortgages for other qualified borrowers in its area, continuing to support local homeownership and the housing market. Without Freddie Mac's function in the secondary market, the bank might quickly exhaust its funds, restricting mortgage availability.
Practical Applications
Freddie Mac's operations have several practical applications in the financial and housing sectors:
- Enhancing Liquidity: By buying mortgages from originators, Freddie Mac ensures a continuous flow of funds for new lending, supporting the overall mortgage market.49, 50
- Stabilizing Housing Finance: Freddie Mac contributes to the stability of the housing finance system by providing a reliable source of capital, particularly in varying economic conditions.47, 48
- Promoting Affordability: Freddie Mac is committed to promoting affordable housing.45, 46 It works towards this mission by setting affordable housing goals, contributing to national affordable housing funds, and developing programs that expand access to homeownership and affordable rental opportunities for low- and moderate-income families and underserved communities.42, 43, 44 For example, Freddie Mac has introduced programs like "HeritageOne" to provide financing options for single-family properties on tribal lands.41
- Facilitating Securitization: Freddie Mac pools purchased mortgages into mortgage-backed securities (MBS), which are sold to global capital markets.40 This transfers interest rate risk and liquidity risk to third-party investors, broadening the investment base for housing.38, 39
Limitations and Criticisms
Despite its essential role, Freddie Mac has faced limitations and criticisms, particularly concerning its government-sponsored nature and its exposure to systemic risk. As a GSE, there's a perceived implicit government guarantee for its debt, which some argue gives it an unfair advantage over private companies and may encourage excessive risk-taking, as losses could be socialized.36, 37 This concern was notably amplified during the 2008 financial crisis, which led to Freddie Mac's conservatorship.35
Critics also highlight the potential for Freddie Mac's large investment portfolios to contribute to systemic risk within the financial system.34 While Freddie Mac and Fannie Mae's charters were intended to increase liquidity and promote access to mortgage credit, their significant market presence and interconnectedness with other financial institutions mean that their financial health can have broad implications.32, 33 Some analysis suggests that even a mild downturn could have led to their failure, and concerns persist about the sufficiency of their capital to absorb potential future losses.29, 30, 31 The Federal Housing Finance Agency (FHFA) regulates Freddie Mac for prudential safety and soundness and has established capital requirements to increase its resiliency to severe financial downturns.26, 27, 28
Freddie Mac vs. Fannie Mae
Freddie Mac and Fannie Mae are both government-sponsored enterprises (GSEs) with similar missions to provide liquidity, stability, and affordability to the U.S. housing market.24, 25 They both achieve this by purchasing conventional mortgage loans from lenders and packaging them into mortgage-backed securities to sell to investors.21, 22, 23
The primary difference often cited between the two lies in the types of lenders from which they traditionally purchase mortgages. Fannie Mae tends to buy loans from larger commercial banks and mortgage lenders, while Freddie Mac typically acquires loans from smaller banks and credit unions.18, 19, 20 Despite this historical distinction, both play a crucial role in ensuring a steady flow of capital to the broader housing market. Their loan programs and underwriting guidelines, while largely similar for conforming loans, can have subtle differences that might affect a borrower's qualification depending on their specific circumstances.16, 17 Both entities operate under the oversight and conservatorship of the Federal Housing Finance Agency (FHFA).14, 15
FAQs
What is Freddie Mac's main purpose?
Freddie Mac's main purpose is to provide liquidity, stability, and affordability to the U.S. housing market by purchasing mortgage loans from primary lenders.12, 13 This allows lenders to free up capital and make more new loans.11
Does Freddie Mac lend money directly to homebuyers?
No, Freddie Mac does not lend money directly to homebuyers.9, 10 Instead, it operates in the secondary mortgage market by purchasing existing mortgages from lenders.7, 8
What happened to Freddie Mac in 2008?
In September 2008, during the financial crisis, Freddie Mac was placed into conservatorship by the Federal Housing Finance Agency (FHFA).6 This action was taken to stabilize the company and the broader housing market due to significant losses.4, 5
How does Freddie Mac make money?
Freddie Mac generates revenue primarily through fees charged for guaranteeing the timely payment of interest and principal on the mortgage-backed securities it issues.3 It also earns income from its investment portfolio of mortgages and MBS.2
What is a "conforming loan" in relation to Freddie Mac?
A conforming loan is a mortgage loan that meets the specific guidelines set by Freddie Mac and Fannie Mae, making it eligible for purchase by these GSEs. These guidelines typically relate to loan limits, borrower creditworthiness, and debt-to-income ratios.1