Freddie Mac

Definition

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise that provides liquidity, stability, and affordability to the U.S. housing market. It buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors. This process helps to lower the cost of borrowing for homebuyers and plays a vital role in the overall financing of real estate transactions.

5 Must Know Facts For Your Next Test

1. Freddie Mac was created in 1970 to expand the secondary mortgage market and improve access to home financing for low- and moderate-income families.
2. Freddie Mac plays a critical role in ensuring that lenders have enough funds to issue new mortgages by purchasing existing loans from them.
3. The company contributes to the stability of the housing market by providing a steady stream of funding, especially during economic downturns.
4. Freddie Mac primarily focuses on conventional loans, which are not insured or guaranteed by the government, unlike FHA or VA loans.
5. The performance of Freddie Mac's mortgage-backed securities is closely tied to the overall health of the U.S. economy and housing market.

Review Questions

• How does Freddie Mac contribute to the stability of the U.S. housing market?
  • Freddie Mac contributes to the stability of the U.S. housing market by providing liquidity through the purchase of existing mortgages from lenders. This process enables lenders to have a continuous flow of capital, allowing them to issue new loans. By creating mortgage-backed securities from these loans, Freddie Mac ensures a reliable source of funding for home purchases, especially during economic downturns when credit might otherwise tighten.
• Discuss how Freddie Mac interacts with lenders and investors in the secondary mortgage market.
  • Freddie Mac interacts with lenders by purchasing mortgages they originate, which helps those lenders maintain liquidity and reduces their risk exposure. Once Freddie Mac acquires these mortgages, it pools them together and sells them as mortgage-backed securities to investors in the capital markets. This creates an investment opportunity for institutional and individual investors while providing lenders with immediate funds to continue issuing new loans.
• Evaluate the potential risks associated with Freddie Mac's operations and their impact on the real estate investment landscape.
  • The operations of Freddie Mac carry potential risks such as market volatility and credit risk associated with the mortgages they purchase. If there is a downturn in the housing market or an increase in mortgage defaults, it can lead to significant financial losses for Freddie Mac. This, in turn, affects its ability to provide liquidity in the mortgage market, potentially raising borrowing costs for homebuyers. Such scenarios highlight the interconnectedness between Freddie Mac's performance and the overall real estate investment landscape.

Related terms

Fannie Mae: Fannie Mae, or the Federal National Mortgage Association, is another government-sponsored enterprise that works similarly to Freddie Mac by purchasing mortgages and securitizing them to provide liquidity in the housing market.

Mortgage-Backed Securities (MBS): Mortgage-backed securities are investment products created by pooling together multiple mortgages, which are then sold to investors, allowing them to earn returns based on the mortgage payments made by homeowners.

GSE (Government-Sponsored Enterprise): GSEs are financial services corporations created by the U.S. Congress to enhance the flow of credit to specific sectors of the economy, including housing. Both Freddie Mac and Fannie Mae fall under this category.