Freddie Mac

Definition

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) established in 1970 to expand the secondary mortgage market in the United States. It provides liquidity, stability, and affordability to the housing market by purchasing mortgages from lenders and selling mortgage-backed securities to investors. Its role is crucial during economic downturns when private lending institutions might tighten credit availability, making it a significant player in government responses and bailouts in the housing sector.

5 Must Know Facts For Your Next Test

1. Freddie Mac was created to provide a stable source of funding for mortgage lenders and facilitate affordable housing in the U.S.
2. During the 2008 financial crisis, Freddie Mac was placed under conservatorship by the Federal Housing Finance Agency (FHFA) to stabilize its operations and protect taxpayers.
3. Freddie Mac's activities are essential for maintaining liquidity in the housing market, especially when private lenders reduce their lending due to economic uncertainty.
4. The company issues various mortgage-backed securities, which are sold to investors and backed by the cash flow from underlying mortgage loans.
5. Freddie Mac, along with Fannie Mae, plays a significant role in shaping housing finance policy in the United States.

Review Questions

• How does Freddie Mac support liquidity in the housing market during economic downturns?
  • Freddie Mac supports liquidity in the housing market by purchasing mortgages from lenders and transforming them into mortgage-backed securities. This process provides cash flow to lenders, allowing them to continue offering loans even when economic conditions make private lending less available. By ensuring that there is a steady flow of credit into the housing market, Freddie Mac helps stabilize home financing options for consumers during challenging economic times.
• Discuss the implications of Freddie Mac being placed under conservatorship during the 2008 financial crisis.
  • The placement of Freddie Mac under conservatorship during the 2008 financial crisis had significant implications for both the housing market and taxpayers. This move was intended to restore confidence in Freddie Mac's operations and protect taxpayer investments by stabilizing its finances. The government provided substantial financial support, which helped prevent a complete collapse of the mortgage market and maintained access to affordable housing finance, but also raised concerns about long-term government involvement in housing finance.
• Evaluate how Freddie Mac's structure as a government-sponsored enterprise influences its operations and the broader housing finance system.
  • Freddie Mac's structure as a government-sponsored enterprise (GSE) influences its operations by allowing it to access capital at lower costs due to implicit government backing. This relationship enables Freddie Mac to provide more favorable loan terms for borrowers and maintain stability within the housing finance system. Additionally, as a GSE, it has a mandate to support affordable housing initiatives, impacting its policies and practices. However, this arrangement also raises questions about risk management and taxpayer exposure during economic downturns, necessitating a careful balance between supporting homeownership and safeguarding public funds.

Related terms

Fannie Mae:

Fannie Mae, or the Federal National Mortgage Association, is another GSE that plays a similar role to Freddie Mac, providing liquidity by purchasing and securitizing mortgages.

Mortgage-Backed Securities: These are financial instruments backed by a pool of mortgages, which Freddie Mac issues to raise funds for purchasing more loans, helping stabilize the housing market.

Government-Sponsored Enterprises: These are financial services corporations created by Congress to enhance the flow of credit to targeted sectors of the economy, with Freddie Mac being one of the most prominent examples.