Definition
Freddie Mac, also known as Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise in the United States. It was established in 1970 to expand the secondary mortgage market, thereby increasing the supply of money available for home loans. Freddie Mac purchases mortgages, bundles them into mortgage-backed securities (MBS), and sells them to investors on the open market.
Phonetic
The phonetics of the keyword “Freddie Mac” would be: “Freh-dee Mak”
Key Takeaways
- Freddie Mac is a Government-Sponsored Enterprise: Short for Federal Home Loan Mortgage Corporation, Freddie Mac was created by the U.S. Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing.
- Role in Homeownership and Rental Housing: Freddie Mac buys mortgages from lenders, packages them into securities and sells those securities to investors. This ensures a steady supply of mortgage funds for consumers. They also invest in mortgage loans and mortgage-related securities.
- Regulation by Federal Housing Finance Agency: Freddie Mac, along with its counterpart Fannie Mae, is regulated by the Federal Housing Finance Agency (FHFA). They are held to strict capital and other regulatory standards in their operations.
Importance
Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is an important entity in the finance sector because it plays a significant role in the U.S. housing market. It is a Government-Sponsored Enterprise (GSE) that buys mortgages from lenders, combines them into mortgage-backed securities, and sells them to investors. By doing so, it provides a steady stream of funding for banks and other lenders, which boosts the availability and affordability of home loans for buyers. This process is central to the ‘secondary mortgage market’ , which helps stabilize the mortgage industry. So, the role of Freddie Mac is crucial in creating liquidity, stability, and affordability in the U.S. residential mortgage market.
Explanation
Freddie Mac, officially known as Federal Home Loan Mortgage Corporation (FHLMC), was created by Congress in 1970 to provide stability, liquidity, and affordability to the U.S. housing market. The primary purpose of Freddie Mac is to keep money flowing to lenders, enable low to moderate income families to own or rent a home, and stabilize residential mortgage markets in times of financial crisis. It purchases mortgage loans from banks and other mortgage lenders, packages those loans into mortgage-backed securities (MBS), and sells them to investors on the open market.By buying mortgages from banks and lending institutions, Freddie Mac provides them with the cash to fund more home loans, fostering a continuous availability of credit for home buyers. Freddie Mac’s actions aim to stimulate homeownership, making homes more accessible and affordable to American families. When housing markets are in distress, Freddie Mac plays a crucial stabilizing role by providing a source of constant mortgage capital. It’s essential to note that while Freddie Mac has an important role in the U.S. housing finance system, it does not originate loans directly to consumers, but instead operates in the secondary mortgage market.
Examples
1. Home Purchase: Consider an individual who goes to a bank seeking a mortgage to buy their first home. The bank approves and furnishes the mortgage. Once the mortgage is set up, the bank can sell this mortgage to Freddie Mac. Freddie Mac buys these mortgages from banks to keep the banks liquid and capable of issuing more mortgages. 2. Low-income Housing Financing: A real estate developer looking to build a low-income apartment complex might have difficulties securing a standard loan due to the perceived risk. Freddie Mac can step in and provide the necessary financing through their targeted affordable housing program, enabling the development and making housing accessible for low-income families.3. Refinancing a Mortgage: If a home-owner wants to take advantage of lower interest rates, they might choose to refinance their mortgage. Their current mortgage might be owned by Freddie Mac, which has specific guidelines about refinancing that the homeowner and lending bank would need to follow. If the homeowner meets these criteria, a new loan can replace the old one, ideally with a lower interest rate or better terms, saving them money in the long run.
Frequently Asked Questions(FAQ)
What is Freddie Mac?
Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise (GSE) that purchases, guarantees, and securitizes home loans, enabling lenders to offer mortgage funding to homebuyers.
What is the purpose of Freddie Mac?
Freddie Mac’s primary purpose is to provide a reliable source of mortgage funding for homebuyers, which aids in the stability and liquidity of the U.S. housing market.
How does Freddie Mac operate?
Freddie Mac operates by purchasing mortgages on the secondary mortgage market, pooling them, and selling these as mortgage-backed securities to investors on the open market.
Who owns Freddie Mac?
Freddie Mac is a publicly traded company owned by shareholders. However, it was put under a conservatorship of the U.S. federal government in 2008 amidst the financial crisis.
Why is Freddie Mac important to the finance industry?
Freddie Mac plays a vital role in the U.S. finance industry by making homeownership accessible to more people by guaranteeing mortgages and thus, enhancing the reliability and liquidity of mortgage markets.
How does Freddie Mac influence mortgage rates?
Freddie Mac influences mortgage rates indirectly by buying and selling mortgage-backed securities. This activity impacts supply and demand within the market, affecting the interest rates on mortgages offered by lenders.
How is Freddie Mac related to Fannie Mae?
Both Freddie Mac and Fannie Mae are government-sponsored enterprises with essentially the same objective – to expand the secondary market for mortgages. While Freddie Mac buys mortgages from smaller ‘thrift’ banks, Fannie Mae purchases mortgages from larger commercial banks.
What happens if Freddie Mac goes bankrupt?
In theory, if Freddie Mac goes bankrupt, it would tremendously shock the real estate market. However, given its role in the U.S. housing market, the federal government stepped in to prevent this in 2008 and would likely do the same again if necessary.
Can individuals invest in Freddie Mac?
Individuals can indirectly invest in Freddie Mac through the purchase of its mortgage-backed securities or directly by buying its publicly traded common stock. However, these investments should be carefully considered for their risks and potential returns.
Related Finance Terms
- Mortgage-Backed Securities (MBS)
- Federal Home Loan Mortgage Corporation (FHLMC)
- Government-Sponsored Enterprise (GSE)
- Conventional Loan
- Secondary Mortgage Market
