Freddie Mac

Definition

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) that was created to expand the secondary mortgage market in the United States. It does this by purchasing mortgages from lenders, providing them with liquidity to fund new loans, and ultimately making homeownership more accessible and affordable for Americans. Freddie Mac plays a vital role in stabilizing the housing market, particularly during economic downturns, by ensuring that mortgage funds remain available.

5 Must Know Facts For Your Next Test

1. Freddie Mac was established in 1970 to support the U.S. housing market by increasing the availability of mortgage funds and stabilizing home financing.
2. The GSE helps lower interest rates for borrowers by providing liquidity to lenders, allowing them to offer more competitive mortgage products.
3. Freddie Mac plays a crucial role in the housing finance system by purchasing loans from lenders, which in turn helps to free up capital for more lending.
4. During financial crises, such as the 2008 recession, Freddie Mac's role became even more critical as it supported the market through its mortgage purchase programs.
5. Freddie Mac also focuses on promoting affordable housing initiatives and works with various stakeholders to improve access to homeownership for underserved populations.

Review Questions

• How does Freddie Mac influence the primary mortgage market and contribute to homeownership accessibility?
  • Freddie Mac influences the primary mortgage market by purchasing loans from lenders, which provides them with immediate cash flow. This liquidity allows lenders to make additional loans, thereby increasing the number of available mortgages. By stabilizing the secondary mortgage market, Freddie Mac makes it easier for consumers to access financing options, which in turn promotes homeownership among a broader range of individuals.
• Discuss the relationship between Freddie Mac and economic stability during financial downturns. How does its function as a GSE impact this?
  • Freddie Mac serves as a crucial stabilizing force during financial downturns by ensuring that funds are available for mortgages. When economic conditions worsen and private lending may decrease, Freddie Mac steps in to purchase mortgages, maintaining liquidity in the housing market. This intervention not only helps prevent significant declines in home prices but also supports overall economic stability by encouraging continued investment in housing during tough times.
• Evaluate the effectiveness of Freddie Mac’s initiatives aimed at promoting affordable housing and its impact on underserved communities.
  • Evaluating Freddie Mac's effectiveness in promoting affordable housing involves analyzing its various programs designed for low-to-moderate-income borrowers. Initiatives like targeted loan products and partnerships with nonprofit organizations aim to improve access to homeownership for underserved communities. The impact can be significant; however, challenges remain in ensuring these efforts translate into sustainable homeownership outcomes. Ongoing assessments of its programs can help determine how well they meet the needs of these populations and adapt strategies accordingly.

Related terms

Fannie Mae:

Fannie Mae, or the Federal National Mortgage Association, is another government-sponsored enterprise that operates similarly to Freddie Mac, focusing on buying and securitizing mortgages to enhance the availability of affordable housing.

Secondary Mortgage Market: This is a marketplace where existing mortgage loans are bought and sold, allowing lenders to remove loans from their balance sheets and use the proceeds to issue new mortgages.

Mortgage-Backed Securities (MBS): These are investment products created by pooling together a group of mortgages and selling shares of that pool to investors, which helps to spread risk and provide a steady income stream.