The following article will cover all aspects of Freddie Mac including: What is Freddie Mac, How does Freddie Mac work, What are the key factors of Freddie Mac and the downsides of Freddie Mac.
What is the definition of Freddie Mac?
The Federal Home Loan Mortgage Corp. (FHLMC) is a stockholder-owned government-sponsored company (GSE) established by Congress in 1970 to keep money flowing to mortgage lenders, allowing middle-income Americans to buy and rent homes. The FHLMC, sometimes known as Freddie Mac, is a major player in the secondary mortgage market, purchasing, guaranteeing, and securitizing mortgages.
How does Freddie Mac work?
Freddie Mac was founded in order to improve the flow of credit to various sectors of the economy. It is a major player in the secondary mortgage market, alongside another GSE, Fannie Mae.
Home mortgages are neither originated nor serviced by Freddie Mac. Rather, it purchases mortgages from banks and other commercial lenders. These loans must adhere to Freddie Mac’s requirements.
After buying a significant number of these mortgages, Freddie Mac either keeps them in its own portfolio or bundles them together and sells them as mortgage-backed securities (MBS) to investors looking for a consistent income stream. In any case, it “insures” these mortgages, ensuring that the principle and interest on the loans are paid on time. As a result, Freddie Mac’s securities are often quite liquid and have a credit rating similar to that of US Treasury bonds.
What are the Key Factors of Freddie Mac?
- The Federal Home Loan Mortgage Corporation is formerly known as Freddie Mac (FHLMC).
- Freddie Mac is a stockholder-owned government-sponsored enterprise (GSE) that was established by Congress in 1970 to encourage middle-income Americans to buy homes.
- Freddie Mac’s job is to purchase a huge number of loans from mortgage lenders, aggregate them, and then sell them as mortgage-backed securities.
- Both Fannie Mae and Freddie Mac are GSEs that are publicly traded.
- Freddie Mac acquires loans from smaller institutions.
What are the downsides of Freddie Mac?
Because of its links to the US government, Freddie Mac has been chastised for being able to borrow money at cheaper interest rates than other banking companies. With this financial edge, it may issue significant sums of debt, which it then uses to buy and keep a vast portfolio of mortgages known as its “retained portfolio.”
Some argue that the size of the retained portfolio, along with the challenges of controlling mortgage risk, constitutes a significant systemic danger to the United States’ economy.
Financial Consultant and Author