The Federal Home Loan Mortgage Corp. (Freddie Mac): An In-Depth Exploration
Freddie Mac is a stockholder-owned, government-sponsored enterprise (GSE) established by Congress in 1970. The goal was to maintain a steady flow of money to mortgage lenders, promoting homeownership and rental housing for middle-income Americans.
Freddie Mac buys, guarantees, and securitizes home loans, thereby playing a crucial role in the secondary mortgage market.
Key Insights
- Freddie Mac is a stockholder-owned, government-sponsored enterprise (GSE).
- It aims to support homeownership for middle-income Americans.
- Freddie Mac purchases loans from mortgage lenders, pools them, and sells them as mortgage-backed securities (MBS).
- Fannie Mae and Freddie Mac are both publicly traded GSEs, with distinct lending focuses.
- Fannie Mae mainly buys loans from major banks, while Freddie Mac purchases from smaller banks.
The Historical Evolution of Freddie Mac
Freddie Mac’s foundation was laid with the passing of the Emergency Home Finance Act in 1970, as part of the Federal Home Loan Bank System. This initiative sought to reduce interest rate risks for savings and loan associations as well as smaller banks.
In 1989, Freddie Mac reorganized under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), transforming into a publicly traded company listed on the New York Stock Exchange.
During the 2008 financial crisis, the Federal Housing Finance Agency took over Freddie Mac. Despite steps toward independence, Freddie Mac remains under federal conservatorship.
The Mechanics Behind Freddie Mac
Freddie Mac exists to enhance the flow of credit across various economic sectors. Unlike mortgage originators, it buys loans from banks and other lending institutions, providing them with the liquidity needed to fund more mortgages.
These purchased loans must meet Freddie Mac’s rigorous standards. Freddie Mac can either hold these loans in its portfolio or bundle them into MBS, offering them to investors. By guaranteeing timely payment of these securities, Freddie Mac ensures they maintain high liquidity and credit ratings, nearly on par with U.S. Treasuries.
Criticisms and Controversies
Freddie Mac faces criticism due to its government ties, which allow it to borrow at lower rates than private banks. This accessibility facilitates extensive debt issuance—known as “agency debt”—utilized in purchasing a substantial retained mortgage portfolio.
Some argue that unchecked expansions of Freddie Mac contributed to the 2008 credit crisis and subsequent Great Recession. Defenders claim that Freddie Mac’s involvement in subprime loans was minimal but acknowledge poor decision-making and capital shortfalls during the housing bubble.
Comparing Freddie Mac with Fannie Mae
Established in 1938 as an amendment to the National Housing Act, Fannie Mae served as a federal agency before converting to a private-public corporation. Both entities share a similar mission but differ in their sources of mortgage acquisitions:
- Fannie Mae: buys from major retail and commercial banks.
- Freddie Mac: focuses on smaller banks, often called “thrift banks” or “savings and loan associations.”
Frequently Asked Questions
How challenging is it to get a Freddie Mac loan?
Getting a Freddie Mac-backed loan requires meeting specific lender criteria, such as income and credit score. Pre-qualification letters can indicate loan eligibility but do not guarantee approval.
Is a down payment necessary for a Freddie Mac loan?
Yes, Freddie Mac loans often require a down payment. However, if eligible, you might secure a loan with as little as 3% down.
Does Freddie Mac offer a 3% down payment program?
Yes, through the HomeOne program, qualified individuals can procure a loan with just a 3% down payment. This is available for first-time buyers and also supports cash-out refinancing options for properties such as single-family homes, townhomes, and condos.
Concluding Thoughts
Freddie Mac plays a pivotal role in the housing market by backing loans and encouraging lenders to offer mortgages. Though not directly lending money, Freddie Mac’s guarantee underscores the importance of meeting specific standards to qualify for a mortgage under its umbrella.
Related Terms: Fannie Mae, mortgage-backed securities, secondary mortgage market, home loans, thrift banks, savings and loan associations.
References
- Federal Housing Finance Agency. “Fannie Mae and Freddie Mac”.
- Congressional Research Service. “Fannie Mae’s and Freddie Mac’s Financial Status: Frequently Asked Questions”.
- The Urban Institute. “Declining Agency MBS Liquidity Is Not All about Financial Regulation: Liquidity in the Agency MBS Market”. Page 2.
- Center for American Progress. “7 Things You Need to Know About Fannie Mae and Freddie Mac”.
- Freddie Mac. “Applying for a Home Loan”.
- Freddie Mac. “HomeOne”.
