Freddie Mac

Definition

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) that provides liquidity, stability, and affordability to the U.S. housing market by purchasing mortgages on the secondary market and securitizing them. This process helps to ensure that more people can access home financing, ultimately supporting homeownership and making housing more affordable across the country.

5 Must Know Facts For Your Next Test

1. Freddie Mac was created in 1970 to expand the secondary mortgage market and provide more stable and affordable housing options.
2. It plays a crucial role in providing liquidity to lenders by buying mortgages, which allows those lenders to offer more loans to homebuyers.
3. Freddie Mac offers various mortgage products aimed at different segments of the market, including low-income families and first-time homebuyers.
4. During the 2008 financial crisis, Freddie Mac faced significant challenges due to exposure to high-risk loans, leading to a government conservatorship.
5. The entity supports affordable housing initiatives and has programs specifically designed to help underserved populations access homeownership.

Review Questions

• How does Freddie Mac contribute to making homeownership more accessible for average Americans?
  • Freddie Mac enhances access to homeownership by purchasing mortgages from lenders and securitizing them, which provides liquidity in the housing market. This process enables lenders to free up capital so they can offer additional loans. By promoting the availability of diverse mortgage products, especially for low-income families and first-time buyers, Freddie Mac plays a vital role in increasing homeownership rates across the country.
• Evaluate the impact of Freddie Mac's operations on affordability within the housing market.
  • Freddie Mac significantly impacts affordability in the housing market by stabilizing mortgage rates and increasing competition among lenders. By purchasing loans and transforming them into mortgage-backed securities, it creates a steady supply of funds for new mortgages. This action leads to lower interest rates for borrowers and helps ensure that financing is available even during economic downturns, ultimately making housing more affordable for many Americans.
• Assess the implications of Freddie Mac's conservatorship post-2008 financial crisis on its operations and the broader mortgage market.
  • The conservatorship of Freddie Mac following the 2008 financial crisis had profound implications for its operations and the broader mortgage market. Under government control, Freddie Mac shifted focus toward stabilizing its financial position and minimizing risks associated with high-risk lending. This shift led to more stringent underwriting standards and a greater emphasis on affordable housing initiatives. The actions taken during this period also reinforced the role of GSEs in maintaining stability in the mortgage market during times of economic uncertainty.

Related terms

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

Mortgage-Backed Securities (MBS): MBS are investment products that are secured by a collection of mortgages, allowing investors to receive payments based on the cash flows generated by those mortgages.

Fannie Mae:

Fannie Mae, or the Federal National Mortgage Association, is another GSE that works alongside Freddie Mac in the secondary mortgage market to enhance homeownership opportunities.