Understanding the Powers of Freddie Mac§
The Federal Home Loan Mortgage Corporation (FHLMC), widely known as Freddie Mac, was established in 1970 with a visionary goal — to expand the secondary market for mortgages. Facilitating a broader secondary market means that more funds are available for new home buyers, effectively sustaining a robust housing market.
How Freddie Mac Operates§
Freddie Mac operates by purchasing mortgages from savings and loan associations as well as mortgage bankers. These purchased mortgages are then mixed or pooled with other secondary mortgages. The pooled mortgages are resold as mortgage-backed securities (securities) to other investors.
The excellence of Freddie Mac lies in offering a guarantee to investors against borrower defaults. This guarantee covers both the principal and the interest, reducing the risk for investors in the event that the borrower defaults. Freddie Mac charges a guarantee fee for this security, which fundamentally serves as their primary revenue stream.
The Government-Sponsored Enterprise (GSE) Status§
Although Freddie Mac holds the prestigious title of a government-sponsored enterprise (GSE), it’s essential to note that their securities are not protected by the United States Government. This distinctive status emphasizes a quasi-governmental backing facilitated by private investments without guaranteeing government intervention.
Freddie Mac’s ingenious framework not only supports homeowners but also appeals to investors seeking reliable returns in the real estate sector, marrying public homeownership ambitions with private sector efficiencies. It’s a fine balance of innovation and security that continues to bolster the mortgage and housing markets.
Related Terms: Fannie Mae, Ginnie Mae, Government-Sponsored Enterprises (GSE), Mortgage-Backed Securities (MBS), Primary Mortgage Market.
