Federal Home Loan Mortgage Corporation (Freddie Mac) - Explained
What is Freddie Mac?
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Table of ContentsWhat is Freddie Mac?How Does the Federal Home Loan Mortgage Corporation Work?Freddie Mac vs. Fannie Mae
What is Freddie Mac?
Federal Home Loan Mortgage Corp (FHLMC) is an institution regulated by the Congress government in the year 1970. Its main objective is to ensure that there is a constant movement of money provided to mortgage lending institutions. These institutions offer housing and rental housing finances to the Americans falling in the middle income group. FHLMC, also known as Freddie Mac, buys, offers guarantee and securitizes mortgages in order to create mortgage-backed securities.
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How Does the Federal Home Loan Mortgage Corporation Work?
Freddie Mac was established by the Congress party in 1970 when it issued the Emergency Home Finance Act. Its main emphasis was to decrease the risks associated with banks interest rates, and enhance the operations of the secondary mortgage market. In the year 1989, Freddie Mac went through a major reorganization, and was converted into an institution owned by shareholders which now comes under The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Freddie Mac is a government-sponsored enterprise (GSE) that was established by the Congress for ensuring smooth flow of credit in the economy. Both Freddie Mac and Fannie Mae (another GSE) maintain and support almost 80% of housing-based mortgages in the United States. They purchase mortgages from lending institutions, and then sell the accumulated mortgages in the form of mortgage-backed securities. These securities are highly liquid and can be easily converted to cash. Also, their credit rating is almost similar to that of U.S. treasuries. Ultimately, this frees up the mortgage lenders and enables them to offer the same amount of money as mortgage in a repeated manner. Rather than offering residential mortgages, it purchases loans from lending parties, thereby creating more freed up capital for increased lending. Freddie Mac faces criticism as its collaboration with the U.S. government permits it to borrow funds at rates of interest that are less than the ones offered by financial organizations and banks. They use this funding benefit in issuing huge quantum of debt, and buying a big portfolio of mortgages which is also referred to as retained portfolio. There are assumptions that the quantum of the retained portfolio, and issues while organizing risks associated with mortgages have a huge impact on the U.S. economy's systematic risk. Also, some researchers are of the view that if the growth of Freddie Mac and Fannie Mae were checked before, then the great 2008 recession wont have occurred.
Freddie Mac vs. Fannie Mae
Fannie Mae known as Federal National Mortgage Association, a federal government-based institution, was established in 1938 in the form of an amendment made to the National Housing Act. Its operated as a secondary mortgage market that enabled the trading of loans insured by the Federal Housing Administration. Fannie Mae started functioning as a private or public organization in the year 1954 under the Charter Act, 1954. Fannie Mae and Freddie Mac have many similarities in between. Both of them are considered as publicly traded organizations that were formed for serving the general public. However, the sources of purchasing loans are not similar. While Fannie Mae purchases mortgages from prime retail or commercial banks, Freddie Mac buys mortgages from small-scale banks, which are also known as savings and loans associations emphasizing on offering financial services to communities.