Freddie Mac—Federal Home Loan Mortgage Corporation (FHLMC)

What is Freddie Mac—Federal Home Loan Mortgage Corp. (FHLMC)?

The Federal Home Loan Mortgage Corp. (FHLMC) is a shareholder-owned company, government-sponsored enterprise (GSE) approved by Congress in 1970 to keep money flowing to mortgage lenders, which in turn supports home ownership and rental housing for middle-income Americans. The FHLMC, colloquially known as Freddie Mac, purchases, warrants and secured home loans and is a mainstay of the secondary mortgage market.

Key points to remember

  • Freddie Mac is the officially recognized nickname of the Federal Home Loan Mortgage Corp. (FHLMC).
  • Freddie Mac is a shareholder-owned, government-sponsored company (GSE) chartered by Congress in 1970 to support home ownership for middle-income Americans.
  • Freddie Mac’s role is to buy a large number of loans from mortgage lenders, then combine them and sell them as mortgage-backed securities.
  • Both Fannie Mae and Freddie Mac are publicly traded GSEs. The main difference between them is that Fannie Mae purchases mortgages from large retail or commercial banks, while Freddie Mac obtains its loans from smaller banks.
  • Some have argued that the runaway growth of Fannie Mae and Freddie Mac was the main driver of what led to the 2008 credit crisis that turned into the Great Recession.

Freddie Mac’s Story

Freddie Mac was created when Congress passed the Emergency Home Finance Act in 1970. A wholly owned subsidiary of the Federal Home Lending System (FHLBS), it represented an attempt to reduce interest rate risk for savings and credit associations and small banks. In 1989, under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), Freddie Mac has undergone a reorganization. It became a public company, with shares that can be traded on the New York Stock Exchange.

In 2008, during the financial crisis triggered by the collapse of subprime mortgagesthe US government – more specifically, the Federal Housing Finance Agency– resumed Freddie Mac. Although it is gradually transitioning to independence, it remains under federal jurisdiction.

What does Freddie Mac do?

Freddie Mac was created to improve the flow of credit to different parts of the economy. With a similar ESG, Fannie Maeit is a key player in the secondary mortgage market.

Freddie Mac does not originate or service residential mortgages itself. Instead, it buys home loans from banks and other commercial mortgage lenders (giving those institutions funds they can then use to fund more loans and mortgages). These loans must meet certain standards set by Freddie Mac.

After purchasing many of these mortgages, Freddie Mac either holds them in his own portfolio or combines them and sells them as mortgage-backed securities (MBS) investors looking for a steady stream of income. In all cases, it “insures” these mortgages, that is, it guarantees the timely payment of principal and interest on loans. As a result, securities issued by Freddie Mac tend to be highly liquid and have a credit rating close to that of US Treasuries.

62%

The percentage of all US mortgages (i.e. new loans) securitized and guaranteed by Freddie Mac and its sister company, Fannie Mae, as of mid-2020.

Freddie Mac review

Freddie Mac has come under criticism because his ties to the US government allow him to borrow money at lower interest rates than other financial institutions. Using this funding advantage, it issues large amounts of debt (known in the market as “agency debt” or “agencies”), and in turn buys and holds a huge wallet of mortgage loans known as the “custodial portfolio”.

Some people believe that the size of the retained portfolio combined with the complexities of managing mortgage risk poses a lot of problems systematic risk to the American economy. Critics have argued that the unchecked growth of Freddie Mac and Fannie Mae brought to 2008 credit crisis which plunged the United States into Great Recession. (In response, corporate advocates argue that although Freddie and Fannie made poor business decisions and held insufficient capital during the housing bubble, their portfolios accounted for only a tiny fraction of total subprime loans.)

The moratorium on single-family foreclosures of Fannie Mae and Freddie Mac, put in place due to the 2020 economic crisis, ended on July 31, 2021. However, real estate evictions are on hold until September 30 and their forbearance programs continue. Homeowners with mortgages can sign up and suspend payments for up to a year; those who were enrolled on February 28, 2021 may qualify for up to 18 months. Other borrowers may qualify for loan modification.

Freddie Mac vs. Fannie Mae

Fannie Mae (Federal National Mortgage Association or FNMA) was formed in 1938 as part of an amendment to the National Housing Law. It was considered an agency of the federal government, and its role was to act as a secondary mortgage market that could buy, hold, or sell Federal Housing Administration-insured loans. Fannie Mae ceased to be an agency of the federal government and became a private-public corporation under the Charter Act of 1954.

Fannie Mae and Freddie Mac are very similar. Both are publicly traded companies that have been licensed to serve a public mission. The main difference between the two lies in the source of the mortgages they purchase. Fannie Mae purchases mortgages from large retail or commercial banks, while Freddie Mac obtains its loans from smaller banks, often referred to as “savings banksor “savings and credit associations”, that focus on providing banking services to communities.

Priscilla C. Carnegie