Freddie Mac: What Is The Federal Home Loan Mortgage Corporation (FHLMC)?
Dan Miller3-minute read
September 17, 2020
If you’ve ever bought, sold or considered buying or selling a home, you may have heard of the Federal Home Loan Mortgage Corporation, more commonly known as “Freddie Mac.” Freddie Mac is not an actual person, but is, along with other semi-governmental entities like Fannie Mae and Ginnie Mae, a government sponsored entity that plays an important role in the mortgage industry and (by extension) the process of buying and selling a home.
What Is Freddie Mac?
As we mentioned earlier, Freddie Mac is not an actual person but is instead a variant of the initials of the company’s full name, the Federal Home Loan Mortgage Corporation or FHLMC. Freddie Mac was created in 1970 as part of the Emergency Home Finance Act. Freddie Mac was created as a way to expand the secondary mortgage market in the United States. Prior to the creation of Freddie Mac, the Federal National Mortgage Association (also known as Fannie Mae) was the only institution that bought real estate mortgages and home loans from issuers (primarily banks and savings and loan associations).
Freddie Mac was originally created as a public enterprise and even had stock listed on the New York Stock Exchange. In 2008, during the housing crisis in the U.S., the Federal Housing Finance Agency took over both Freddie Mac and Fannie Mae. The U.S. government now has full control over Freddie Mac and Fannie Mae.
How Does Freddie Mac Work?
If you are wondering what Freddie Mac is, you might also be wondering how Freddie Mac works in the housing market. Freddie Mac buys home mortgages, primarily from smaller banks and savings and loans. There are many types of mortgages, but Freddie Mac cannot buy non-conforming loans. Many home loans on the mortgage market are for 30 years, and without Freddie Mac, the issuing banks would have to keep the mortgage on their books for the entire term of the loan and assume all of the risk of each individual home loan.
Freddie Mac does not make loans directly to home buyers. Instead, Freddie Mac buys bundled mortgages from the banks and others who issue real estate mortgages to homeowners. By bundling and selling mortgages to Freddie Mac as mortgage-backed securities, banks can mitigate their risk and free up their capital to relend. When you make your monthly mortgage payment to your servicing bank, the bank sends the money to Freddie Mac, which bundles your payment along with others, takes a small fee and passes the rest of the money on to the investors who hold Freddie Mac's mortgage-backed securities.
How Does Freddie Mac Affect The Mortgage Market?
Freddie Mac has a generally positive effect on the real estate mortgage market. As we discussed earlier, without Freddie Mac, banks, savings and loans associations, credit unions and other mortgage issuers would be required to hold mortgage loans in-house. That would require them to take all of the risk themselves as well as tie up their capital. That would increase the interest rates that banks would need in order to make a profit and therefore drive up the total cost of homeownership inside the housing market.
In the years leading up to the housing crisis of 2007 and 2008, Freddie Mac and Fannie Mae were publicly traded corporations. As such, their CEO and executive team had the mandate to increase profitability. Since the mortgages they held were backed by the U.S. government and could not default, Freddie Mac and Fannie Mae took increasingly riskier investments such as subprime mortgages. In September 2008, rather than let them go bankrupt, the Federal Housing Finance Agency put Freddie Mac and Fannie Mae into conservatorship.
Freddie Mac Vs. Fannie Mae
Freddie Mac is sometimes considered the “little brother” to Fannie Mae. They are both government-owned corporations that help facilitate homeownership by purchasing mortgage loans on the secondary market.
One difference of Freddie Mac vs. Fannie Mae is that Fannie Mae primarily buys mortgages from larger retail and commercial banks while Freddie Mac primarily buys the home loans and mortgages from smaller community banks. The Government National Mortgage Association or Ginnie Mae, is another government-sponsored mortgage company that primarily deals with government-backed loans such as FHA, VA or USDA loans.
Freddie Mac works to help support the real estate mortgage market. Without Freddie Mac and his “sisters” Ginnie Mae and Fannie Mae, all home buyers would pay higher interest rates to get a mortgage.
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