Posted over 7 years ago

What You Need To Know About Freddie Mac

Fannie Mae and Freddie Mac have operated under government control for the past six years. Together, these two mortgage giants guarantee approximately $4.5 trillion in mortgages with the majority of that dollar figure being issued as securities. The Federal Home Loan Mortgage Corporation (FHLMC), otherwise referred to as Freddie Mac, operates in the United States residential mortgage market through single-family guarantee, multifamily and investments. Because of the tie to the United States government, Freddie Mac has been criticized because it can borrow money at a lower interest rate than other financial institutions.

Both Fannie Mae and Freddie Mac do not directly lend to a home-purchaser, rather they are in the business of loan securitization. This means that each entity purchases loans from banks then bundles them in order to resell to investors. What is unique is that both Fannie Mae and Freddie Mac guarantee the securities that they sell. This means that if the securities go bad Fannie, or Freddie will step in to help the investors.

Before the housing crisis, both entities were privately financed. Because Fannie Mae and Freddie Mac are now considered as government-sponsored enterprises (GSEs), this allows them to borrow at lower interest rates than that of commercial and investment banks.

History of Freddie Mac

The Federal National Mortgage Association (Fannie Mae) was created in 1938 to buy mortgages from depository institutions thus encouraging additional mortgage lending and insuring the value of mortgages by the United States Government. 1968 marked Fannie Mae converting to a private corporation and a publicly financed institution.

Freddie Mac was initially created in 1968 as a private corporation through the Emergency Home Finance Act. Many people believe Freddie Mac was primarily created in order to ensure that Fannie Mae did not function as a monopoly in the mortgage market since it had recently switched to a private corporation.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 revised and standardized the regulation of Fannie and Freddie eliminating the ties of Freddie with the Federal Home Loan Bank System. Freddie Mac also started obtaining affordable housing credit for purchasing subprime securities.

The FHFA (Federal Housing Housing Agency) placed Freddie Mac and Fannie Mae into conservatorship in 2008 as a response to the housing market crash. The United States Department of Treasury committed to providing financial support to both mortgage giants in order for them to continue within the mortgage market. The initial $1.0 billion was placed in Fannie and Freddie at the time of the conservatorships with an additional $187.5 billion cumulative from the Treasury Department. As part of the conservatorship, the FHFA took over the management of the boards while both Fannie and Freddie were allowed to operate legally as business corporations.

In 2011, the Obama Administration outlined its plan to reform the U.S. housing finance market. In the report, the Administration recommended that Freddie Mac and Fannie Mae may be winded down in order to reduce the government’s presence in the housing finance market with the ultimate goal of bringing back private capital back into the mortgage market. Under this plan, the following was outlined:

  • A reduction of conforming loan limits
  • Phasing in a 10 percent down payment requirement on any mortgage insured by Freddie Mac or Fannie Mae
  • Reducing investment portfolios held by Freddie Mac and Fannie Mae (this was part of the purchase agreements with the U.S. Treasury)
  • In 2012, the Strategic Plan for Enterprise Conservatorships put actions into place to update old infrastructures and further attract private capital in order to share credit risk. Today, the FHFA still carries out responsibilities as the Conservator for Freddie and Fannie and has recently developed and released the 2014 Strategic Plan for the Conservatorships.

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