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What is Freddie Mac?

2016-12-02T10:02:21+00:00

The term 'Freddie Mac' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Freddie Mac is a semi-private company that Congress chartered in 1970. They created the entity to offer stability, liquidity, and affordable prices for the country and its housing markets. They have grown to be responsible for the home purchases of one out of four buyers.

Besides this the company is also among the biggest financing sources for multifamily housing in the nation. From 2009 to 2016, the company has dispersed mortgage market funding that amounts to over $2.5 trillion. This has enabled in excess of 13 million American families to refinance, purchase, or rent a home in that time frame.

In 1970 Congress was seeking to stabilize the mortgage markets of the country. They wanted to grow and improve opportunities for rental housing that was affordable and for home buying. Because of this, Freddie Mac’s mission has always been to bring stability, liquidity, and affordability to the national housing market in the United States. They do this in a variety of ways. The company helps the secondary mortgage market. They buy both mortgage securities and mortgage loans outright as investments. They then package and sell these as guaranteed mortgage securities known as PCs. In this secondary market, there are entities which buy and sell mortgages as complete loans or as mortgage securities. Freddie Mac never makes loans to home owners directly themselves.

Because of the collapse of the mortgage backed securities markets in 2007 and 2008 and its impact on their finances, the company is now being run under conservatorship. The FHFA Federal Housing Finance Agency oversees their business to make sure loans are carefully scrutinized and securitized. They want to avoid the mistakes of the financial crisis becoming repeated here.

Freddie Mac operates in three main business areas to ensure that a continuous supply of mortgage funding goes through to the housing markets in the country. They make rental housing and home buying more affordable through their single family credit guarantee business, their multifamily business, and their investment business. They utilize all three of these to promote financing for affordable housing.

The single family line is essentially a recycling operation. They work with securitizing mortgages so that the entity is able to provide funding to millions of different home loans annually. This securitization proves to be the means where they buy up different loans lenders have made and then package these up into various mortgage securities. They then sell these on the worldwide capital markets. The money from the sale of these securities they next funnel back to the lenders. In this way home loan operations have sufficient mortgage money for lending.

The company is also interested in supporting renters as well. This is the role of their multifamily business. In this line, the outfit cooperates with a group of lenders to help finance the construction of various apartment buildings throughout the United States. The lenders make the loans and Freddie Mac buys them to package and resell. This way the lenders receive back the proceeds so they can issue more loans. This is a critical line as multifamily loans prove to be a few million dollars each and require unique underwriting from one property to the next.

Their investment business actually purchases some of their own mortgage backed securities which they and other financial entities like Fannie Mae guarantee. This portfolio further invests into individual loans which they guarantee but choose not to securitize. By bidding on some of their own securities, the investment business and portfolio serves the markets. It gives these mortgage backed securities greater liquidity and offers more funding for mortgages. They do this by issuing their own debt which creates net income for the company after they pay their interest to the bond holders.

The term 'Freddie Mac' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.