Freddie Mac

Definition

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) created in 1970 to expand the secondary mortgage market in the United States. By purchasing mortgages on the secondary market, it provides liquidity, stability, and affordability to the housing market, playing a crucial role during the housing bubble and financial crisis by influencing mortgage lending practices and housing prices.

5 Must Know Facts For Your Next Test

1. Freddie Mac was established in response to the need for a more liquid mortgage market, promoting home ownership by making mortgages more accessible.
2. The GSE plays a significant role in setting mortgage lending standards and has been linked to increased demand for housing during the pre-crisis period.
3. Freddie Mac faced significant losses during the financial crisis, requiring a federal bailout in 2008 as part of broader efforts to stabilize the housing market.
4. The entity's operations led to an increase in risky lending practices, as financial institutions sought profits through the origination of subprime loans and mortgage-backed securities.
5. The government conservatorship of Freddie Mac began in 2008 and has continued to shape its operations and impact on the housing finance system.

Review Questions

• How did Freddie Mac's operations contribute to the growth of risky lending practices leading up to the financial crisis?
  • Freddie Mac's role in purchasing mortgages on the secondary market encouraged lenders to originate more loans, including riskier subprime mortgages. As Freddie Mac provided liquidity and security for these loans, lenders became incentivized to offer higher-risk loans without fully considering borrowers' creditworthiness. This practice contributed significantly to the housing bubble and increased defaults when housing prices began to decline.
• Discuss the implications of Freddie Mac's federal bailout during the financial crisis for future housing policies.
  • The federal bailout of Freddie Mac in 2008 highlighted the risks associated with government-sponsored enterprises operating in the mortgage market. This intervention raised questions about the need for reform in housing finance policies, leading to discussions on how to better regulate GSEs and ensure they do not contribute to future financial instability. The bailout also demonstrated the importance of maintaining liquidity in the housing market while balancing risk management practices.
• Evaluate the long-term effects of Freddie Mac's involvement in the secondary mortgage market on American home ownership rates.
  • Freddie Mac's involvement has generally promoted home ownership by increasing access to mortgage financing, particularly for low- and moderate-income households. However, its actions prior to the financial crisis also underscored how excessive risk-taking can lead to broader economic consequences. Long-term effects include an ongoing debate about the balance between facilitating home ownership and ensuring responsible lending practices, which continues to influence housing policy discussions today.

Related terms

Fannie Mae: Fannie Mae, or the Federal National Mortgage Association, is another government-sponsored enterprise that, like Freddie Mac, buys mortgages on the secondary market to support home financing.

Mortgage-Backed Securities (MBS): Mortgage-Backed Securities are investment products that are secured by a pool of mortgages; they became prominent in the financial markets during the housing bubble.

Subprime Mortgages: Subprime Mortgages are loans offered to borrowers with lower credit ratings, often featuring higher interest rates and terms that contributed to the housing crisis.