Freddie Mac: Empowering Homeownership Through Mortgage Backed Securities
Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation, was established in 1970 with the ground-breaking mission of bolstering homeownership in the United States. Freddie Mac operates by repurchasing mortgages directly from lenders, which are then packaged into mortgage-backed securities and sold on the secondary mortgage market.
How Freddie Mac Operates
This process involves creating a lucrative market for lending institutions, by turning their mortgage assets into cash which can then be used to issue new loans. This cycle of repurchasing and securitizing enhances the liquidity of the housing finance system, benefitting lenders by reducing their risk and consumers by broadening access to home financing options.
Lenders typically initiate the loan process by evaluating and approving prospective homebuyers. Once these mortgages are originated, Freddie Mac steps in to buy these loans from the lenders. Subsequently, Freddie Mac pools these loans together and resells them as securities to investors in the secondary market.
Achieving Affordable Homeownership
Over the recent years, Freddie Mac has taken significant strides to aid families from low and middle-income backgrounds in achieving the dream of homeownership. By setting affordable lending standards and initiatives, Freddie Mac ensures that more families benefit from accessible mortgage opportunities and sustainable home purchases.
Revenue Model
Freddie Mac generates revenue by charging a guaranteed fee on the mortgages it purchases and securitizes. These guaranteed fees compensate for the risk associated with guaranteeing principal and interest payments on the securities’ assets it sells. This guarantees steady operation funds, further fueling Freddie Mac’s efforts to extend homeownership opportunities.
In conclusion, Freddie Mac’s innovative participation in the secondary mortgage market not only transforms the symmetry of purchasing home loans but also contributes to a stable and more inclusive housing market, thereby democratizing homeownership in America.
Related Terms: Fannie Mae, Mortgage, Secondary Market, Home Loans, Securities.
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### What is the primary function of Freddie Mac?
- [ ] To provide direct loans to homebuyers
- [x] To buy mortgages from lenders and resell them as securities
- [ ] To insure loans against default
- [ ] To regulate mortgage lenders
> **Explanation:** Freddie Mac, also known as the Federal Home Loan Mortgage Corporation, buys mortgages from lenders and resells them on the secondary mortgage market as securities. This helps increase the availability of funds for mortgage lending and boosts the overall money available for home purchases.
### When was Freddie Mac created?
- [ ] 1938
- [ ] 1968
- [x] 1970
- [ ] 1980
> **Explanation:** Freddie Mac was created in 1970 by Congress to support the secondary mortgage market, providing more liquidity for the housing finance system and making it easier for more Americans to afford a home.
### What does Freddie Mac's involvement in the secondary mortgage market mainly achieve?
- [x] Increases the pool of money available for mortgage lending
- [ ] Reduces the interest rates for mortgages
- [ ] Ensures mortgages are not granted to high-risk individuals
- [ ] Provides direct assistance to struggling homeowners
> **Explanation:** By buying mortgages from lenders and reselling them as securities on the secondary market, Freddie Mac helps to increase the pool of money available for mortgage lending. This, in turn, increases the total funds available for new home purchases.
### How does Freddie Mac generate revenue?
- [ ] By offering direct loans to borrowers
- [ ] By providing mortgage insurance
- [x] By charging a guaranteed fee on pooled mortgage securities
- [ ] By imposing fees on real estate transactions
> **Explanation:** Freddie Mac generates revenue by charging a guaranteed fee on mortgages or loans that it has bought from lenders and then pooled into security bonds. These bonds are sold on the secondary mortgage market.
### What recent initiative has Freddie Mac undertaken alongside Fannie Mae?
- [ ] Reducing interest rates unilaterally
- [ ] Offering renovation loans
- [ ] Promoting luxury home purchases
- [x] Assisting low and middle-income families in purchasing homes
> **Explanation:** In recent years, Freddie Mac has joined forces with Fannie Mae in efforts to assist low and middle-income families in purchasing homes, thereby making homeownership more accessible to a broader segment of the population.
### Which market does Freddie Mac primarily operate in?
- [ ] Primary mortgage market
- [x] Secondary mortgage market
- [ ] Real estate development market
- [ ] Housing rehabilitation market
> **Explanation:** Freddie Mac mainly operates in the secondary mortgage market where it buys mortgages from lenders and resells them as securities, thus enhancing the liquidity and stability of mortgage funds.
### What is Freddie Mac also known as?
- [ ] Federal Housing Administration
- [ ] Federal National Mortgage Association
- [ ] Farmer Mac
- [x] Federal Home Loan Mortgage Corporation
> **Explanation:** Freddie Mac is also known as the Federal Home Loan Mortgage Corporation. It was chartered by Congress to boost the availability of finances for home mortgages.
### Why was Freddie Mac created by Congress?
- [ ] To regulate mortgage lending practices
- [ ] To provide direct housing finance to low-income families
- [x] To support the secondary mortgage market
- [ ] To build affordable housing
> **Explanation:** Congress created Freddie Mac in 1970 with the primary objective of supporting the secondary mortgage market. This involves buying and reselling mortgage loans to increase financial liquidity and support new home loans.
### Which other similar entity often works with Freddie Mac to assist in homebuying?
- [ ] Veteran Affairs (VA)
- [x] Fannie Mae
- [ ] USDA Rural Development
- [ ] HUD
> **Explanation:** Fannie Mae is the comparable entity that often collaborates with Freddie Mac. Both organizations strive to provide liquidity, stability, and affordability to the housing finance system, and they work toward assisting low and middle-income families in home purchasing.
### What is a core benefit of Freddie Mac's activities in the housing market?
- [ ] Reducing national debt
- [ ] Enhancing property value appreciation
- [x] Increasing the availability of mortgage funds
- [ ] Stabilizing rental prices
> **Explanation:** By buying mortgages from lenders and selling them as securities on the secondary market, Freddie Mac increases the availability of mortgage funds. This makes more finances available for prospective homeowners and aids in the overall stability of the housing finance market.
