1. News & Issues
Send to a Friend via Email

Federal Home Loan Mortgage Corp. (FHLMC)

By

Freddie Mac

The subprime mortgage crisis made many homeowners feel chained to their house.

(Photo: Peter Dazeley/Getty Images)

What Is Freddie Mac?:

Freddie Mac is the Federal Home Loan Mortgage Corporation, or FHLMC. It was created by the Emergency Home Finance Act of 1970 to create a secondary market for home mortgages. It then packages these into mortgage-backed securities, and resells them to investors.

Freddie Mac is the "little brother" to Fannie Mae, the Federal National Mortgage Association. It's called the little brother because it was created in 1970 to provide competition to Fannie Mae, which had been turned into a publicly traded corporation two years earlier. That's because Fannie had grown so large that President Johnson wanted to use its budget to finance the Vietnam War. Freddie Mac went public in 1989.(Source: Time Magazine, A Brief History of Fannie and Freddie, July 14,2008)

Fannie and Freddie were government-sponsored enterprises, or GSEs. They were run as private corporations whose goals were to maximize shareholder value. They were both even listed on the NYSE. Therefore, their managers tried to function as profitably as its private banking competitors.

On the other hand, the loans of both were essentially guaranteed by the Federal government. This made them less risk averse. They were pressured to take on risk to improve their return, while knowing that they would never go bankrupt.

Fannie and Freddie were supposed to simply buy mortgages, repackage them and sell them on the secondary market. However, they found that holding many of these products was actually more profitable. This defect in their set up was brought to light when the subprime mortgage crisis exploded. As housing prices fell in 2006, the value of the GSEs' loans plummeted. Rather than allow them to go bankrupt, Treasury Secretary Hank Paulson nationalized the two. Stockholders lost all value, although they would have if the companies had gone bankrupt. If they hadn't been nationalized, there would essentially have been no housing market whatsoever. That's because banks had simply stopped lending without government guarantees. After nationalization, Fannie and Freddie owned 90% of the U.S. housing market.

What Freddie Mac Does:

Freddie Mac affects the U.S. economy by lowering interest rates, which makes more loans available to more new homeowners. For example, lowering the rate from 8.5% to 8% allows 791,000 low- and moderate-income families to buy homes. Freddie Mac also makes interest rates more consistent. Across the nation's cities, mortgage rates varied by as much as 1.7% in 1970. Today, that difference is only 0.1%.

Since being nationalized, Freddie has initiated programs to help homeowners avoid foreclosures. For more, see Foreclosure Prevention.

Freddie Mac stimulates the housing market. In healthier times, residential construction comprised 5% of the economy. By doing so, it creates wealth for homeowners who receive greater equity from higher-priced homes.

How Freddie Mac Affects You:

Freddie Mac lowers the interest rates on the mortgages you get from the bank. In fact, it estimates it lowers the rate .5%, which translates to a $12,000 over the life of a $100,000 loan.

Freddie Mac also provides monthly housing market analyses. If you are thinking of buying or selling a home, take a look at their reports to get a better idea of what is happening in the real estate market, and to look at current interest rates. Article updated October 30, 2012

©2014 About.com. All rights reserved.