Understanding Freddie Mac
Let me explain what the Federal Home Loan Mortgage Corp., or Freddie Mac, really is. It's a stockholder-owned, government-sponsored enterprise, or GSE, that Congress chartered back in 1970. The goal here is straightforward: keep money flowing to mortgage lenders so they can support homeownership and rental housing for middle-income Americans like you.
Freddie Mac buys, guarantees, and securitizes home loans, making it a key player in the secondary mortgage market. You need to know this because it directly affects how mortgages work in the U.S.
Key Takeaways
Here's what you should remember about Freddie Mac. It's a stockholder-owned GSE focused on supporting homeownership for middle-income folks. It buys loans from mortgage lenders, bundles them, and sells them as mortgage-backed securities. Both Fannie Mae and Freddie Mac are publicly traded GSEs, but Fannie Mae gets its loans from big retail or commercial banks, while Freddie Mac sources from smaller banks.
History of Freddie Mac
Freddie Mac came into existence when Congress passed the Emergency Home Finance Act in 1970. It started as a wholly owned subsidiary of the Federal Home Loan Bank System to cut down interest rate risk for savings and loans associations and smaller banks.
In 1989, under the Financial Institutions Reform, Recovery, and Enforcement Act, or FIRREA, Freddie Mac got reorganized into a publicly owned company with shares trading on the New York Stock Exchange.
Then, in 2008, amid the financial crisis from the subprime mortgage meltdown, the U.S. government, through the Federal Housing Finance Agency, took it over. Freddie Mac is still under federal conservatorship but is slowly moving toward independence.
How Freddie Mac Works
Freddie Mac exists to boost credit flow to various economic sectors, and together with Fannie Mae, it's essential in the secondary mortgage market.
It doesn't originate or service home mortgages itself. Instead, it purchases them from banks and other commercial lenders, giving those institutions more funds to issue additional loans. These loans have to meet Freddie Mac's standards.
Once it has a bunch of these mortgages, Freddie Mac either keeps them in its portfolio or packages and sells them as mortgage-backed securities to investors looking for steady income. In either case, it guarantees timely principal and interest payments, which makes its securities very liquid and rated almost as high as U.S. Treasuries.
Criticism of Freddie Mac
Freddie Mac faces criticism due to its government ties, which let it borrow at lower interest rates than other institutions. This edge allows it to issue a lot of debt, called agency debt, and maintain a massive retained portfolio of mortgages.
Critics say the unchecked expansion of Freddie Mac and Fannie Mae contributed to the 2008 credit crisis and the Great Recession. On the other side, supporters point out that while they made poor decisions and had inadequate capital during the housing bubble, their subprime loans were only a small part of the total.
Freddie Mac vs. Fannie Mae
Fannie Mae, or the Federal National Mortgage Association, was created in 1938 as part of the National Housing Act amendment. It acted as a federal agency to buy, hold, or sell FHA-insured loans, but became a private-public corporation under the 1954 Charter Act.
Freddie Mac and Fannie Mae are quite similar—both publicly traded with a public mission. The key difference is where they get their mortgages from. Fannie Mae buys from major retail or commercial banks, while Freddie Mac targets smaller banks, like thrift banks or savings and loan associations, that serve communities.
Frequently Asked Questions
You might wonder how hard it is to get a Freddie Mac loan. It depends on the lender's criteria— you'll need the right income and credit score for the loan size. A pre-qualification letter can tell you what you might qualify for, but it's not a guarantee.
Do you need a down payment? Yes, for Freddie Mac loans, but you can go as low as 3% if you qualify.
Freddie Mac offers a 3% down program called HomeOne for first-time buyers or cash-out refinances. It works for single-family homes, townhomes, or condos, but you have to meet the qualifications.
The Bottom Line
In the end, Freddie Mac is crucial in the housing market by backing loans to borrowers. It doesn't lend directly, but it guarantees mortgages so lenders can approve them. Still, you have to meet specific standards to qualify for one of these guaranteed mortgages.
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