Freddie Mac

Freddie Mac. The Federal Home Loan Mortgage Corporation is a publicly traded, government-sponsored enterprise chartered by the United States Congress in 1970 to expand the secondary mortgage market. It purchases mortgages from lenders, packages them into mortgage-backed securities, and guarantees them for sale to investors, thereby providing liquidity, stability, and affordability to the housing market. Along with its counterpart Fannie Mae, it plays a central role in the American financial system.

History

The corporation was created by the Emergency Home Finance Act of 1970 to compete with Fannie Mae and to provide a more robust secondary market for savings and loan associations. Its establishment was a response to the financial difficulties faced by the thrift industry in the late 1960s. In 1989, following the savings and loan crisis, it was reconstituted under the Financial Institutions Reform, Recovery, and Enforcement Act and became a shareholder-owned company. The housing bubble and subsequent subprime mortgage crisis of 2007–2008 led to severe financial distress, culminating in its placement into government conservatorship under the Federal Housing Finance Agency in September 2008, a status it remains in today.

Business model

Its primary business involves purchasing residential mortgages from approved lenders and credit unions. These loans are then either held in its own investment portfolio or, more commonly, pooled and securitized into mortgage-backed securities which it guarantees against credit losses. It earns fees for this guarantee and from the interest income spread on its retained portfolio. This model is designed to transfer interest rate risk and credit risk from original lenders to global capital markets, thereby replenishing lender funds for new originations. The corporation also issues discount notes and longer-term bonds in the capital market to finance its operations.

Role in the mortgage market

The enterprise is a dominant force in the secondary mortgage market, providing essential liquidity that enables lenders to offer more mortgages, particularly the standardized 30-year fixed-rate mortgage. It supports market stability by continuing to purchase loans during economic downturns. Its guidelines and underwriting standards significantly influence lending practices across the United States. By setting requirements for loan-to-value ratios and debt-to-income ratios, it helps establish norms for the broader housing finance system. Its activities are crucial for promoting affordable housing goals set by the Department of Housing and Urban Development.

Financial performance and challenges

Historically profitable, the corporation suffered catastrophic losses during the financial crisis of 2007–2008 due to its exposure to subprime and Alt-A loans, requiring an infusion of over $70 billion from the Treasury Department under the Housing and Economic Recovery Act. Since entering conservatorship, it has returned to profitability, remitting dividends to the Treasury Department. Ongoing challenges include managing its legacy mortgage-backed securities portfolio, litigation risks, and the persistent uncertainty regarding its eventual exit from conservatorship and future corporate structure, a subject of ongoing debate in Congress.

Regulation and government oversight

As a government-sponsored enterprise, it is subject to a unique regulatory framework. Its primary regulator is the Federal Housing Finance Agency, which acts as its conservator and oversees its safety, soundness, and mission fulfillment. The FHFA sets capital requirements, approves new business activities, and enforces housing goals. The Securities and Exchange Commission also oversees its financial disclosures. Its debt securities carry an implicit, though not explicit, guarantee of the federal government, a status that has been formally supported since the conservatorship began. Proposals for comprehensive GSE reform continue to be discussed by legislators and policymakers.

Category:Government-sponsored enterprises of the United States Category:Mortgage finance companies of the United States Category:Companies based in Fairfax County, Virginia Category:Financial services companies established in 1970