This week we are going to talk about Freddie Mac. You’re probably wondering what Freddie Mac is, and while yes this technically could be a person, in this instance it’s not. Freddie Mac is actually short for Federal Home Loan Mortgage Corp. (FHLMC). This program is stockholder-owned and sponsored by the government, which makes it a GSE (government sponsored enterprise).
Freddie Mac came to be after Fannie May in 1970. It was started by congress to help support middle-class American’s to be able to afford a home. Though it is a different program than Fannie Mae, they share a lot of similarities. When the housing crisis in 2008, the Federal Housing Finance Agency took over. It is still to this day under federal conservatorship, but it is trying to transition toward independence. But there is a difference between the two, and it comes down to the different types of mortgages that they buy. Fannie Mae buys from major retail and commercial banks, while Freddie Mac gets their loans from smaller banks, often called “thrift banks” or “savings and loan associations,” that are focused on providing banking services to communities.
So, what does Freddie Mac do? Well, it was created to increase the money flow to different parts of the economy. It has become a key cog in the secondary mortgage market. They don’t handle home mortgages themselves, instead, it buys the loans from banks and other commercial mortgage lenders, which allows the other banks and lenders to finance more loans and mortgages.
After buying these loans, they will either hold them for their own portfolio or sell them to investors who are looking for steady income as mortgage-backed securities (MBS’). With either situation, because these mortgages are insured, it guarantees on-time payments principal and interest on all the loans. This makes all of the loans/securities that Freddie Mac issues very liquid and carry a credit rating that is close to that of the U.S. Treasury.
