What is Freddie Mac - Federal Home Loan Mortgage Corp - 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, also known as Freddie Mac, purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.
BREAKING DOWN Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC
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, Fannie Mae. These GSEs buy loans from mortgage lenders; after purchasing a large number of these mortgages, they combine them all together and sell them as Mortgage-Backed Securities. This allows the capital of the mortgage lender to free up, meaning they can loan that same money again.
Freddie Mac has come under criticism because its ties to the U.S. government allows 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 poses a great deal of systematic risk to the entire U.S.
Fannie Mae vs. Freddie Mac
Fannie Mae (FNMA) was created in 1938 are a 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 turned from a federal government agency to a private/public corporation in 1954 under the Charter Act of 1954.
Fannie Mae and Freddie Mac are very similar. The main difference between the two comes down to who they buy their mortgages from. Fannie Mae buys mortgage loans from commercial banks, while Freddie Mac obtains their loans from smaller banks.