Federal Home Loan Mortgage Corporation (FHLMC)

Definition

The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) that plays a critical role in the United States housing finance system. Freddie Mac purchases qualifying residential mortgages from approved lenders, repackages these loans into mortgage-backed securities (MBS), provides guarantees on these securities, and resells them in the secondary mortgage market. This process enhances liquidity, stability, and affordability in the U.S. housing market.

Since its creation in 1970, Freddie Mac has helped provide a continuous flow of funds to mortgage lenders, helping to ensure the availability of mortgage credit. On September 6, 2008, amidst the financial crisis, Freddie Mac was placed under conservatorship by the U.S. government, with the Federal Housing Finance Agency (FHFA) taking over its management. The U.S. government, through its conservatorship, owns approximately 80% of Freddie Mac’s stock, ensuring the stability and continuity of its operations.

Examples

Home Ownership Facilitation: A bank issues a mortgage to a homebuyer. Freddie Mac purchases this mortgage from the bank, packages it with other similar mortgages, and sells the resulting mortgage-backed security to investors. This transaction allows the bank to offload the loan from its balance sheet and use the proceeds to issue more mortgages.
Risk Mitigation for Lenders: By selling mortgages to Freddie Mac, lenders can reduce their exposure to default risk, since Freddie Mac’s guarantees protect investors from losses in the event of borrower default.
Investor Participation: Institutional investors can purchase Freddie Mac’s MBS in the open market, benefiting from the regular principal and interest payments secured by pooled residential mortgages.

Frequently Asked Questions

What is the primary function of Freddie Mac?

Freddie Mac buys qualifying residential mortgages from lenders, packages them into securities, guarantees them, and sells these securities in the secondary mortgage market. This helps maintain liquidity and stability in the housing finance system.

Who regulates Freddie Mac?

Freddie Mac is regulated by the Federal Housing Finance Agency (FHFA) since its placement under conservatorship on September 6, 2008.

How does Freddie Mac benefit homebuyers?

Freddie Mac’s operations help ensure that lenders have a steady stream of funds to issue new mortgages, keeping mortgage rates more stable and making homeownership more accessible.

What types of loans does Freddie Mac purchase?

Freddie Mac primarily purchases conventional conforming loans, which meet specific underwriting and size criteria set by the FHFA.

How does Freddie Mac provide guarantees?

Freddie Mac guarantees the timely payment of principal and interest on the mortgage-backed securities it issues, thereby offering protection to investors from borrower defaults.

Government-Sponsored Enterprise (GSE): A financial services corporation created by Congress to enhance the flow of credit to specific sectors of the economy, making them more efficient and transparent.
Mortgage-Backed Securities (MBS): Investment products composed of a bundle of home loans bought from the banks that issued them, providing a revenue stream through related mortgage payments.
Conservatorship: A legal status in which an entity (e.g., Freddie Mac) is placed under the control of an appointed conservator to stabilize its operations—FHFA acts in this capacity for Freddie Mac.
Federal Housing Finance Agency (FHFA): An independent federal agency that oversees the activities of Freddie Mac, Fannie Mae, and the Federal Home Loan Bank System.

Online Resources

Suggested Books for Further Studies

“The Chocolate Chip Cookie Imbroglio: The Saccharine Saga of Treasury vs. Fannie & Freddie” by Thomas H. Olsen
“Other People’s Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business” by Jennifer Taub
“The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” by The Financial Crisis Inquiry Commission

Fundamentals of Federal Home Loan Mortgage Corporation (FHLMC): Finance Basics Quiz

### What is another name for the Federal Home Loan Mortgage Corporation? - [ ] Genie - [x] Freddie Mac - [ ] Fannie Mae - [ ] Ginnie Mae > **Explanation:** The Federal Home Loan Mortgage Corporation is commonly known as Freddie Mac, a nickname derived from its acronym, FHLMC. ### What type of enterprise is Freddie Mac? - [x] Government-Sponsored Enterprise (GSE) - [ ] Private Corporation - [ ] Non-Profit Organization - [ ] Credit Union > **Explanation:** Freddie Mac is a government-sponsored enterprise (GSE) established by Congress to provide stability and liquidity to the housing finance system. ### What primary function does Freddie Mac serve for lenders? - [ ] Provides real estate services - [ ] Issues credit cards - [x] Purchases residential mortgages - [ ] Offers personal loans > **Explanation:** Freddie Mac purchases qualifying residential mortgages from lenders, thereby enhancing their liquidity and enabling them to issue more loans. ### How does Freddie Mac contribute to the housing market? - [ ] By building homes - [ ] By offering home renovation services - [x] By buying and securitizing mortgages - [ ] By acting as a real estate agent > **Explanation:** Freddie Mac contributes to the housing market primarily by buying and securitizing residential mortgages, which helps maintain liquidity and stability. ### Who regulates Freddie Mac? - [ ] Federal Reserve - [ ] Department of Housing and Urban Development (HUD) - [x] Federal Housing Finance Agency (FHFA) - [ ] Office of the Comptroller of the Currency (OCC) > **Explanation:** The Federal Housing Finance Agency (FHFA) regulates Freddie Mac, especially since it was placed under conservatorship in 2008. ### When was Freddie Mac placed under conservatorship? - [ ] 2007 - [ ] 2006 - [x] 2008 - [ ] 2009 > **Explanation:** Freddie Mac was placed under U.S. government conservatorship on September 6, 2008, amid the financial crisis. ### What type of securities does Freddie Mac issue? - [x] Mortgage-Backed Securities (MBS) - [ ] Corporate Bonds - [ ] Treasury Bonds - [ ] Municipal Bonds > **Explanation:** Freddie Mac issues Mortgage-Backed Securities (MBS), which are backed by pools of residential mortgages that it has repurchased from lenders. ### How did the conservatorship affect the ownership of Freddie Mac? - [ ] Increased private ownership - [ ] Maintained the same ownership structure - [x] Resulted in approximately 80% government ownership - [ ] Made it a completely private corporation > **Explanation:** The conservatorship resulted in the U.S. government owning approximately 80% of Freddie Mac's stock to stabilize its operations. ### What benefit does Freddie Mac's securitization process provide to lenders? - [x] Increased liquidity by offloading mortgage loans - [ ] Lower interest rates - [ ] Reduced operational costs - [ ] Higher credit ratings > **Explanation:** By securitizing and selling mortgage loans, Freddie Mac increases the liquidity available to lenders, allowing them to make new loans. ### What ensures the stability of Freddie Mac's issued securities? - [x] Guarantees on the timely payment of principal and interest - [ ] High private investment - [ ] Federal Reserve backing - [ ] International backing > **Explanation:** Freddie Mac provides guarantees on the timely payment of principal and interest on the mortgage-backed securities it issues, offering protection to investors from defaults.

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