What is Freddie Mac (Federal Home Loan Mortgage Corp or FHLMC)?
Federal Home Loan Mortgage Corp (FHLMC) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle-income Americans. The FHLMC, familiarly known as Freddie Mac, purchases, guarantees and securitizes mortgages to form mortgage-backed securities.
How Freddie Mac Works
Freddie Mac was created when Congress passed the Emergency Home Finance Act in 1970. This was done in an attempt to expand the secondary mortgage market while reducing interest rate risk for banks. In 1989, Freddie Mac underwent a reorganization and was turned into a shareholder-owned company, now under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
As mentioned above, Freddie Mac is a GSE, which is a financial service corporation created by Congress in order to enhance the flow of credit to different parts of the economy. Nearly 80% of residential mortgages in America are backed by Freddie Mac and another, similar GSE known as Fannie Mae (see below). These GSEs do not originate or service mortgages, but instead buy loans from mortgage lenders. After purchasing a large number of these mortgages, they combine and sell them as mortgage-backed securities, which tend to be very liquid and carry a credit rating close to that of U.S. Treasuries. This process frees up the capital of mortgage lenders, which means they can lend that same money again.
[Important: Freddie Mac doesn't originate or service home mortgages, but rather buys loans from mortgage lenders, freeing up their capital for more lending.]
Freddie Mac has come under criticism because its ties to the U.S. government allow it to borrow money at interest rates lower than those available to other financial institutions. With this funding advantage, it issues large amounts of debt (known in the marketplace as agency debt or agencies), and, in turn, purchases and holds a huge portfolio of mortgages known as its retained portfolio. Many people believe that the size of the retained portfolio – as well as the complexities of managing mortgage risk – pose a great deal of systematic risk to the U.S. economy. Some have argued that the unchecked growth of Freddie Mac and Fannie Mae led to the credit crisis of 2008 that turned into the Great Recession.
Freddie Mac vs. Fannie Mae
Fannie Mae (Federal National Mortgage Association or FNMA) was created in 1938 as part of an amendment to the National Housing Act. It was considered a federal government agency and its role was to act as a secondary mortgage market that could purchase, hold or sell loans that were insured by the Federal Housing Administration. Fannie Mae stopped being a federal government agency and became a private/public corporation in 1954 under the Charter Act of 1954.
Fannie Mae and Freddie Mac are very similar. Both are publicly traded companies that were chartered to serve a public mission. The main difference between the two comes down to the source of the mortgages they buy: Fannie Mae buys mortgage loans from major retail or commercial banks, while Freddie Mac obtains its loans from smaller banks, often called thrift banks or savings and loan associations, that are focused on providing banking services to communities.