Freddie Mac, short for the Federal Home Loan Mortgage Corporation (FHLMC), is another government-sponsored entity (GSE) in the United States. Like Fannie Mae, Freddie Mac operates in the secondary mortgage market and plays a vital role in supporting the availability and affordability of mortgage credit for American homebuyers.
Here’s an overview of Freddie Mac’s role and function:
- Secondary Mortgage Market: Freddie Mac operates as a purchaser and guarantor of residential mortgages in the secondary market. Similar to Fannie Mae, Freddie Mac does not directly originate loans. Instead, it buys mortgages from lenders, such as banks and credit unions.
- Mortgage-Backed Securities (MBS): After purchasing mortgages, Freddie Mac bundles them into pools and issues mortgage-backed securities (MBS) to investors in the capital markets. These MBS represent an ownership interest in the underlying pool of mortgages.
- Risk Mitigation: Like Fannie Mae, Freddie Mac helps mitigate the credit risk of the mortgages it purchases by transferring it from lenders to investors. By doing so, it provides liquidity to lenders, enabling them to make more loans to potential homebuyers.
- Affordable Housing Initiatives: Freddie Mac, as a GSE, is also required by law to support affordable housing initiatives. It has programs and initiatives aimed at increasing access to mortgage credit for low- and moderate-income borrowers and supporting affordable rental housing.
- Government Support: Although Freddie Mac is a shareholder-owned corporation, it is also chartered by Congress and operates under a federal charter. As a GSE, it enjoys certain government privileges, including access to a line of credit with the U.S. Department of the Treasury.
- Regulation: Like Fannie Mae, Freddie Mac is regulated by the Federal Housing Finance Agency (FHFA), which oversees the housing GSEs to ensure their safety, soundness, and compliance with their mission.
- Financial Crisis: Freddie Mac, along with Fannie Mae, faced significant challenges during the 2008 financial crisis due to exposure to high-risk mortgages. As a result, the U.S. government placed it into conservatorship in September 2008, with the FHFA taking control of its operations to stabilize the housing market.
In summary, Freddie Mac plays a crucial role in the U.S. housing market by providing liquidity and stability to mortgage lenders, which in turn helps ensure a consistent supply of affordable mortgage credit for prospective homebuyers. Together with Fannie Mae, these two GSEs are key pillars of the U.S. mortgage system.