Freddie Mac

Updated on April 12, 2024
Article byPrakhar Gajendrakar
Edited byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What is Freddie Mac?

Freddie Mac, or Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise formed to increase the money supply to mortgage lenders, which subsequently increases home purchases. It was created by Congress in 1970 and became a publicly owned company in 1989.

It falls into the financial service industry, and mortgage-backed security is the main product. It is designed to stabilize the housing finance system in the United States. Its function is to create and maintain adequate cash flow into the housing market and an environment supporting the affordable solution to rent and buy homes.

Key Takeaways

  • Freddie Mac is the Federal Home Loan Mortgage Corporation (FHLMC), a GSE that buys mortgages from depository institutions and turns them into mortgage-backed securities(MBS).
  • Congress charted it in 1970 to stabilize the housing finance system in the United States, and it became a publicly owned company in 1989.
  • A similar GSE is the Fannie Mae (FNMA). But Fannie Mae purchased mortgages from large depository institutions.
  • The enterprise was blamed for inflating the housing bubble and housing market crisis of 2008.

Freddie Mac Explained

Freddie Mac’s tagline is “We make home possible,” which emphasizes the entity’s goal to make homeownership and rental housing more accessible and affordable in the United States. The enterprise didn’t have a direct relationship with the borrowers but with banks. Its activity includes buying mortgages from small banks, creating tailored bundles to form mortgage-backed securities (MBS), and offering them to investors. Buying mortgages from banks increases the liquidity, and subsequently, banks can offer an increased number of mortgages

Freddie Mac

The guarantee fee, also known as the lender guarantee fee, is what Freddie Mac charges for buying the loans. It pays for anticipated credit losses, administrative expenses, and a return on capital. Payments for lender guarantee fees typically come in the form of regular monthly payments, and they often also include an upfront payment created at the time of enterprise loan acquisition. The cost of an upfront fee is usually obtained from the borrower in the form of a little higher interest rate on the mortgage. Furthermore, the guaranteed flow of interest and principal makes MBS attractive to investors.

The enterprise has been following the mission of providing liquidity, stability, and affordability to the housing market since its start. For example, from 1970 to mid-2020, 81.0M homes were made possible, with total mortgage funding values around $11.6T. From 1990 to mid-2020, financed 21.5M affordable homes, and from 2010 to mid-2020, financed 6M affordable rental units. It discloses that the enterprise functioning benefitted the people, specifically low and moderate-income families in the United States. Furthermore, Freddie Mac’s support helped banks to offer longer tenure loans to the people, which otherwise would have been difficult.

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Types of Mortgage that Freddie Mac Buy?

The entity purchases residential mortgages from mortgage lenders. It does not engage in acquiring mortgages with a size greater than the predetermined size known as the “conforming limit,” which is updated yearly. Hence, they indulge in conforming loans. These loans abide by the guidelines and regulations of FHFA, the Federal Housing Finance Agency. Conforming loans have low-interest rates compared to other types of mortgages. Generally, loans like jumbo loans are not acquired by the enterprise because the Jumbo loan amount at origination exceeds the conforming loan limit and is not government-insured.

How Freddie Mac Affects Mortgage Market?

The enterprise functioning increased the liquidity in the mortgage market and private investors’ role in the mortgage market and expanded the secondary mortgage market. However, it also increased the accessibility of mortgages to non-qualified buyers.

Another significant GSE participating in the secondary mortgage market is Fannie Mae (FNMA). Fannie Mae (FNMA) and Freddie Mac (Stock name: FMCC) shares are now offered only through over-the-counter (OTC) and are not available on stock exchanges. As of September 2022, the value of each share of FNMA and FMCC is less than $2 and generally below $1.

Criticism

  • It was criticized for the housing bubble and credit crisis of 2008 that led to a worldwide economic crisis. In the United States, the crisis began with the collapse of home prices nationally.
  • It takes a high risk by engaging in aggressive buying of loans.
  • It is an organization in conservatorship, and staying in conservatorship for a long time can cause politicization of the organization.

Frequently Asked Questions (FAQs)

What is the difference between Freddie Mac and Fannie Mae?

The basic difference is that Fannie Mae is the older one created to provide affordable housing. In addition, it buys loans from big depository institutions, unlike FHLMC, which is established later to expand the secondary mortgage market further and obtain loans from small banks.

What is Freddie Mac’s mortgage rate for 2022?

The average interest rate on a 30-year fixed-rate loan briefly fell to 5.30 percent in July 2022. The 30-year rate dropped by 0.50 percentage points between June last week and the first week of July, partly due to growing fears that the economy may enter a recession. Before those two weeks, the rate was averaging 5.81%.

What is Freddie Mac’s stock price?

In July 2022, the Federal Home Loan Mortgage Corporation (FMCC) stock price is around $0.4, and the market capitalization value is 285.376M. The stock was trading in the price band of $15 to $60 between 1996 to 2007.

This is a Guide to what Freddie Mac is. We explain its definition, products, mortgage rate, stock details. You can learn more about it from the following articles –

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