What is the Federal Home Loan Mortgage Corporation (FHLMC)?
Congress established the Federal Home Loan Mortgage Corp. (FHLMC) in 1970 as a stockholder-owned GSE to assist mortgage lenders and promote homeownership and rental housing for middle-income Americans. The FHLMC, or Freddie Mac, is a critical player in the secondary mortgage market, purchasing, guaranteeing, and securitizing house loans.
History of Federal Home Loan Mortgage Corporation (FHLMC)
Congress launched Freddie Mac in 1970 with the Emergency Home Finance Act. As part of the Federal Home Loan Bank System (FHLBS), it aimed to lower interest rate risk for smaller banks and savings and loan organizations. Freddie Mac was reorganized in 1989 under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It became public and traded on the New York Stock Exchange.2
As a result of the subprime mortgage crisis in 2008, the Federal Housing Finance Agency took over Freddie Mac. Though it’s increasingly becoming independent, it’s under federal control.
Freddie Mac’s job?
Freddie Mac promoted credit flow across the economy. Along with Fannie Mae, it is a significant player in the secondary mortgage market.
Freddie Mac doesn’t originate or service mortgages. It acquires home loans from banks and other commercial mortgage lenders, giving them capital to finance new loans and mortgages. These loans must fulfill Freddie Mac’s requirements.
Freddie Mac buys mortgages and maintains them in its portfolio or sells them as mortgage-backed securities (MBS) to investors wanting a consistent income. No matter what, it “insures” these mortgages by guaranteeing timely principal and interest payments. Freddie Mac securities are liquid and have a credit rating similar to that of U.S. Treasury securities.
The proportion of new U.S. mortgage originations securitized and guaranteed by Freddie Mac and Fannie Mae as of mid-2020
Freddie Mac’s criticism
Its links to the U.S. government allow Freddie Mac to borrow money at cheaper interest rates than other banking companies, drawing criticism. The company uses its financial advantage to issue significant quantities of debt (known as “agency debt” or “agencies”) and acquire an extensive mortgage portfolio (known as its “retained portfolio”).
Some argue that the extensive retained portfolio and sophisticated mortgage risk management represent significant systemic dangers to the U.S. economy. Critics claim that the unregulated growth of Freddie Mac and Fannie Mae caused the 2008 credit crisis, which led to the Great Recession in the U.S. The businesses’ supporters contend that while Freddie and Fannie made terrible business decisions and had inadequate cash during the housing boom, their portfolios comprised just a tiny proportion of subprime loans.
After the 2020 economic crisis, Fannie Mae and Freddie Mac lifted their single-family foreclosure ban on July 31, 2021. They prolong forbearance and actual estate-owned evictions until Sept. 30. Mortgage holders can enroll and halt payments for a year; those registering as of Feb. 28, 2021, can do so for 18 months. Other debtors may qualify for loan modifications.
Fannie Mae vs. Freddie Mac
A 1938 modification to the National Housing Act founded Fannie Mae (the Federal National Mortgage Association, or FNMA). The federal government agency operated a secondary mortgage market that bought, held, and sold FHA-insured loans. The Charter Act of 1954 made Fannie Mae a private-public organization.
Fannie Mae resembles Freddie Mac. Both are public corporations with a mission. Their most considerable distinction lies in the mortgages they purchase. Fannie Mae acquires mortgage loans from large banks, whereas Freddie Mac sources from smaller institutions, such as thrift banks or savings and loan organizations, that specialize in community banking services.
Conclusion
- Freddie Mac is FHLMC’s official moniker.
- Congress formed Freddie Mac in 1970 as a stockholder-owned GSE to help middle-income Americans buy homes.
- Freddie Mac purchases many mortgage loans from lenders, combines them, and sells them as MBS.
- GSEs Fannie Mae and Freddie Mac are public. The fundamental distinction is that Fannie Mae acquires mortgage loans from large retail or commercial banks and Freddie Mac from smaller institutions.
- Unchecked expansion for Fannie Mae and Freddie Mac may have caused the 2008 credit crisis and the Great Recession.
