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What is Freddie Mac?

What is Freddie Mac?

Freddie Mac is a government-sponsored company which purchases mortgages from banks and securitizes them for sales to investment banks or individuals. Freddie Mac is not a government organization, but was established by a congressional mandate in the 1970’s.

It’s proper name is the Federal Home Loan Mortgage Corporation (FHLMC). The company’s purpose is to make mortgage debts into marketable securities by purchasing the mortgage risk and cash flow from banks and dividing into tranches which are sold to or through investment banking institutions. The securitized mortgages are known as Collateralized Mortgage Obligations, or CMO’s.

By increasing the size of the secondary market for mortgages, it infuses the lending bank system with more liquidity to fund additional home purchases. The risk of the mortgage loan is effectively shifted from the lending bank to the investment bank with Freddie Mac as the conduit.

The incentive of the lending banks to make good loans to qualified individuals is lessened significantly through this arrangement, however, and the additional bad loans that this process brought into the economy, and the significant overweighting that many institutions had in this asset class, were a main cause of what came to be known as the Subprime Meltdown and the Great Recession that occurred between 2007 and 2009.

Freddie Mac and its sister organization, Fannie Mae, along with the eleven Federal Home Loan Banks were taken over in a conservatorship arrangement by the FHFA (Federal Housing Finance Agency) in 2008, effectively infusing bailout money from taxes into the enterprises to assist with the housing correction and restructuring of the businesses.

Keywords: Collateralized Mortgage Obligation (CMO), Fannie Mae, Freddie Mac, Federal Housing Finance Agency (FHFA), subprime meltdown, banking institutions, Great Depression, Federal Home Loan Mortgage Corporation,