Federal Home Loan Mortgage Corporation (Freddie Mac)

Definition

Freddie Mac is a government-sponsored enterprise (GSE) established in 1970 to provide liquidity, stability, and affordability to the U.S. housing market by purchasing and guaranteeing mortgages. Its primary role is to facilitate the availability of home financing by buying mortgages from lenders, allowing those lenders to reinvest the funds into more loans. This process helps make homeownership more accessible to a larger segment of the population and supports federal housing programs aimed at promoting affordable housing.

5 Must Know Facts For Your Next Test

1. Freddie Mac was created during a period of economic uncertainty in the housing market, aiming to reduce the risk associated with lending and encourage banks to extend more credit for home purchases.
2. Freddie Mac plays a crucial role in the secondary mortgage market by buying loans from lenders and either holding them in its portfolio or packaging them into mortgage-backed securities for investors.
3. The presence of Freddie Mac in the housing market helps stabilize mortgage interest rates and enhances competition among lenders, which can lead to better terms for borrowers.
4. Freddie Mac has a focus on affordable housing initiatives, including programs specifically designed to assist low- and moderate-income families with accessing home loans.
5. During the 2008 financial crisis, Freddie Mac faced significant financial difficulties and was placed under conservatorship by the Federal Housing Finance Agency (FHFA) to stabilize its operations and support the housing market.

Review Questions

• How does Freddie Mac contribute to liquidity in the housing market, and what impact does this have on homeownership?
  • Freddie Mac contributes to liquidity in the housing market by purchasing mortgages from lenders, which provides those lenders with fresh capital to issue new loans. This cycle enhances the availability of funds for potential homebuyers, ultimately making it easier for individuals and families to obtain financing for home purchases. By facilitating a steady flow of capital within the housing market, Freddie Mac plays a vital role in increasing access to homeownership for diverse populations.
• Evaluate the relationship between Freddie Mac and the secondary mortgage market. How does this relationship influence mortgage-backed securities?
  • Freddie Mac operates within the secondary mortgage market by purchasing existing mortgages from lenders, which allows those lenders to free up resources for new loans. By packaging these mortgages into mortgage-backed securities (MBS), Freddie Mac creates investment products that provide returns based on the underlying mortgage payments. This relationship not only helps ensure that capital continues flowing into the housing market but also attracts investors looking for relatively stable returns, thus bolstering overall confidence in mortgage finance.
• Assess the implications of Freddie Mac's conservatorship during the 2008 financial crisis on federal housing policies moving forward.
  • The conservatorship of Freddie Mac during the 2008 financial crisis highlighted significant vulnerabilities within both the GSE itself and the broader housing finance system. As Freddie Mac required government intervention for stabilization, it led to increased scrutiny of federal housing policies and prompted discussions about reforming how GSEs operate. This scenario pushed policymakers to consider new frameworks for ensuring that such institutions can better withstand economic downturns while continuing their mission of promoting affordable housing and stability in the mortgage market.

Related terms

Government-Sponsored Enterprise (GSE): A financial services corporation created by Congress to enhance the flow of credit to specific sectors of the economy, including housing, education, and agriculture.

Mortgage-Backed Securities (MBS): Investment products created by pooling a group of mortgages together and selling shares of that pool to investors, with Freddie Mac playing a crucial role in this market.

Fannie Mae: The Federal National Mortgage Association (Fannie Mae) is another GSE that works alongside Freddie Mac to support mortgage markets and promote homeownership.