Overview of Freddie Mac
Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation (FHLMC), serves as a cornerstone in the U.S. secondary mortgage market. Established through a congressional charter in 1970, its primary mission is to stabilize the mortgage market and foster homeownership and rental housing opportunities for middle-income Americans. By purchasing and securitizing mortgages, Freddie Mac ensures a continuous flow of funds to mortgage lenders, enhancing their ability to lend to homebuyers.
Historical Background
Initiated by the U.S. government’s Emergency Home Finance Act in 1970, Freddie Mac was set up to alleviate the tight grip on liquidity faced by smaller banks by transferring the interest rate risk prevalent in the mortgage industry during that time. Since the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, it reshaped into a publicly traded entity, increasing its footprint in the financial markets. However, the 2008 financial crisis saw Freddie Mac entering federal conservatorship, a status it’s been navigating toward resolution.
Functional Mechanics of Freddie Mac
Unlike primary lenders, Freddie Mac does not originate home loans. Instead, it buys mortgages from various lenders, which must meet its stringent criteria. On securing a significant number of these mortgages, Freddie Mac either integrates them into its portfolio or pools them to form mortgage-backed securities (MBS), which are subsequently sold to investors. These securities, given Freddie Mac’s quasi-governmental status, are considered low-risk investments akin to U.S. Treasuries, offering investors a reliable income stream.
Critiques and Controversies
Freddie Mac has not been devoid of criticism, especially highlighted by its role in the 2008 financial crisis where its extensive portfolio of mortgage debts was scrutinized. Critics often point to the inherent conflicts in its dual role of profit-seeking shareholder accountability versus public mission fulfillment. The institution’s ability to borrow under government-suggested favorable interest rates has also sparked debates on market distortions and risk-taking behaviors.
Freddie Mac vs. Fannie Mae
While both Freddie Mac and Fannie Mae amplify the secondary mortgage market’s liquidity, their approaches diverge slightly in sourcing loans. Fannie Mae primarily purchases from major commercial banks, whereas Freddie Mac targets loans from smaller regional banks. Despite this, their combined impact on the national housing market is substantial, facilitating wide-reaching effects on homeownership rates and housing market stability.
Related Terms
- Mortgage-Backed Securities (MBS): Pooled mortgages bundled into securities that provide investors with interest income.
- Government-Sponsored Enterprise (GSE): A quasi-governmental entity established to enhance the flow of credit to specific sectors of the economy.
- Secondary Mortgage Market: Where home loans and servicing rights are bought and sold between lenders and investors.
Recommended Reading
- “The Mortgage Wars” by Timothy Howard - Insight into the inside battles and the overall shaping of U.S. housing finance.
- “Too Big to Fail” by Andrew Ross Sorkin - A detailed account of the 2008 financial crisis, featuring significant engagements of entities like Freddie Mac.
Freddie Mac plays a pivotal role in the American dream of homeownership, blending public missions with private operations to stabilize and stimulate the U.S. housing market. Whether as an investor in MBS or a participant in the housing industry, understanding Freddie Mac’s influence is crucial for navigating the complexities of real estate finance.
