Freddie Mac

Definition

Freddie Mac (Federal Home Loan Mortgage Corporation)

Freddie Mac, or the Federal Home Loan Mortgage Corporation (FHLMC), is a public government-sponsored enterprise (GSE) established in 1970 to expand the secondary market for mortgages in the United States. It does this by purchasing mortgages from lenders and either holding them in its portfolio or packaging the loans into mortgage-backed securities (MBS) that are then sold to investors. This process provides lenders with capital to create more loans, helping to ensure a continuous flow of mortgage funds to Americans.

Examples

Mortgage-Backed Securities (MBS): Freddie Mac purchases a pool of mortgage loans from a bank, packages them into a MBS, and then sells these securities to investors. This process gives the bank money to issue more loans.
Home Loan Funding: By buying large volumes of home loans from small banks, Freddie Mac helps these institutions manage risk better and ensures they have cash on hand to keep lending to potential homeowners.

Frequently Asked Questions (FAQs)

What is the primary role of Freddie Mac?

Freddie Mac’s primary role is to increase the availability of mortgage funds for lenders to lend out to potential homebuyers, which helps stabilize the housing market.

How does Freddie Mac differ from Fannie Mae?

Both Freddie Mac and Fannie Mae serve similar purposes, but they work with different institutions; Freddie Mac mainly works with smaller banks known as thrift banks while Fannie Mae primarily buys mortgages from larger, commercial banks.

Is Freddie Mac a government agency?

Freddie Mac is a government-sponsored enterprise (GSE), which means it is a privately-owned corporation chartered by Congress to promote a public good, specifically residential mortgage markets.

How does Freddie Mac impact mortgage rates?

By purchasing mortgages and packaging them into securities, Freddie Mac helps to create a liquid secondary market that can stabilize or even lower mortgage rates available to homebuyers.

What kinds of loans does Freddie Mac buy?

Freddie Mac purchases conforming loans, which are loans that meet specific underwriting guidelines and dollar limits set by Freddie Mac and Fannie Mae.

Can Freddie Mac influence the housing market?

Yes, by ensuring a steady flow of capital into the housing finance system, Freddie Mac helps to keep mortgage markets liquid and stable, which can affect prices and availability of housing.

Fannie Mae (Federal National Mortgage Association)

Another GSE like Freddie Mac that buys and securitizes mortgages but primarily deals with commercial banks.

Ginnie Mae (Government National Mortgage Association)

A government-owned corporation that guarantees the timely payment of principal and interest on MBS issued by approved lenders.

Mortgage-Backed Securities (MBS)

A type of investment that is secured by a mortgage or collection of mortgages.

Secondary Mortgage Market

A marketplace where existing home loans are bought and sold between lenders and investors.

Conforming Loan

A mortgage that meets the eligibility requirements set by Fannie Mae and Freddie Mac.

Online References

Freddie Mac Official Website: Freddie Mac
Federal Housing Finance Agency: FHFA
U.S. Securities and Exchange Commission: SEC

Suggested Books for Further Studies

“The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream” by Timothy Howard
“Financial Shock: Global Panic and Government Bailouts–How We Got Here and What Must Be Done to Fix It” by Mark Zandi
“The Panic of 2008: Like Runaway Horses” by Donald Rapp
“Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare” by Oonagh McDonald

Fundamentals of Freddie Mac: Real Estate Finance Basics Quiz

### What is the primary role of Freddie Mac? - [x] To increase the availability of mortgage funds for lenders. - [ ] To directly offer home loans to buyers. - [ ] To build and sell residential properties. - [ ] To regulate commercial banks. > **Explanation:** Freddie Mac’s primary role is to purchase mortgages from lenders, thus providing them with the capital needed to offer more home loans. This helps to support a robust and accessible mortgage market. ### How does Freddie Mac differ from Fannie Mae? - [ ] Fannie Mae and Freddie Mac serve the same institutions. - [x] Freddie Mac mainly works with smaller thrift banks. - [ ] Freddie Mac and Fannie Mae are the same entity. - [ ] Freddie Mac focuses on commercial properties. > **Explanation:** While both serve similar functions, Freddie Mac predominantly works with smaller thrift banks, whereas Fannie Mae usually deals with larger, commercial banks. ### Is Freddie Mac a government agency? - [ ] Yes, it is fully government-owned. - [ ] No, it is a private real estate company. - [x] No, it is a government-sponsored enterprise (GSE). - [ ] Yes, it is a part of the U.S. Department of Housing. > **Explanation:** Freddie Mac is a government-sponsored enterprise, meaning it is a privately-owned corporation chartered by Congress to promote public policy via the mortgage market. ### What types of loans does Freddie Mac usually buy? - [x] Conforming loans. - [ ] Only jumbo loans. - [ ] Only subprime loans. - [ ] Only adjustable-rate mortgages. > **Explanation:** Freddie Mac buys conforming loans, which adhere to established guidelines and dollar limits set by Freddie Mac and Fannie Mae. ### How does Freddie Mac affect mortgage rates? - [ ] By setting them directly. - [ ] By reducing property taxes. - [x] By purchasing mortgages and creating a secondary market. - [ ] By providing direct subsidies to homeowners. > **Explanation:** Freddie Mac affects mortgage rates indirectly by purchasing loans, which creates liquidity in the mortgage market and can help to stabilize or reduce rates. ### What kind of market does Freddie Mac create liquidity for? - [x] The secondary mortgage market. - [ ] The new home construction market. - [ ] The stock market. - [ ] The commercial real estate market. > **Explanation:** Freddie Mac creates liquidity in the secondary mortgage market by purchasing loans from lenders and repackaging them as Mortgage-Backed Securities. ### What must a loan meet to be considered conforming? - [ ] Must be issued by a commercial bank. - [ ] Must have a fixed interest rate. - [x] Must meet specific underwriting guidelines. - [ ] Must be guaranteed by the government. > **Explanation:** Conforming loans adhere to specific guidelines and dollar limits set by Fannie Mae and Freddie Mac. ### Who does Freddie Mac primarily work with? - [ ] Only commercial banks. - [x] Smaller thrift institutions. - [ ] Investment banks. - [ ] Credit unions. > **Explanation:** Freddie Mac primarily works with smaller thrift institutions while Fannie Mae mostly deals with larger, commercial banks. ### Which entity guarantees timely payment on MBS issued by approved lenders? - [ ] Fannie Mae - [x] Ginnie Mae - [ ] Freddie Mac - [ ] SEC > **Explanation:** Ginnie Mae guarantees the timely payment of principal and interest on Mortgage-Backed Securities issued by approved lenders. ### When established? - [x] 1970 - [ ] 1980 - [ ] 1960 - [ ] 1990 > **Explanation:** Freddie Mac was established in 1970 as part of efforts to stabilize and standardize the mortgage markets.

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