Freddie Mac

Freddie Mac is the informal name for the Federal Home Loan Mortgage Corporation. Founded by an act of US Congress in 1970, Freddie Mac is the sibling company to the Federal National Mortgage Association, or Fannie Mae. The company employs nearly eight thousand people and is headquartered in McLean, Virginia, with regional offices nationwide. Freddie Mac's original purpose was to serve as an expansion of the American secondary mortgage securities market, which was effectively monopolized by Fannie Mae when the federal government transformed Fannie Mae from a public-private partnership into a wholly investor-owned enterprise in 1968.

Background and Founding

Freddie Mac's sibling corporation, Fannie Mae, was created during the Great Depression to help stabilize the troubled US mortgage market, which was beleaguered with soaring foreclosure rates and critical cash shortages. The founding of Fannie Mae established the secondary market for mortgage-backed securities in the United States, which provided financial institutions with an influx of money to finance home loans. From its 1938 establishment until 1968, Fannie Mae was the only American financial institution operating in the secondary mortgage-backed securities market, when a financial crunch brought on by the ongoing Vietnam War campaign left federal politicians looking for ways to eliminate debt from the federal government's balance sheet.

Given that mortgage-backed securities are debt-leveraged assets, Fannie Mae was changed from a joint public-private enterprise into a fully privatized corporation. While this solution provided relief from the immediate debt crunch, it created a new problem: Fannie Mae was a monopoly, and monopolies are restricted by American antitrust law. Thus, Freddie Mac was created by Congress in 1970 as a private enterprise to serve as a sibling company to Fannie Mae and ensure that Fannie Mae was not the only company operating in the secondary mortgage-backed securities market.

Lines of Business

Today, Freddie Mac operates in three primary lines of business: single-family credit guarantees for home loans, financing for multifamily dwellings, and an investment arm. The single-family credit guarantee business uses mortgage securities to help fund home loans by buying mortgages from lenders, packaging them together into securities, and selling the securities on global markets. The capital generated by this process is then redistributed to the original lenders, ensuring they have an adequate cash supply to continue supplying mortgage loans to new customers.

The multifamily dwelling line of Freddie Mac's business provides financing services for apartment building purchases to partner financial institutions throughout the United States. Through this service, Freddie Mac buys apartment building mortgages from originating lenders, again allowing partner lenders to access the cash needed to finance additional loans for multifamily dwellings. Freddie Mac finances the purchase of multifamily dwellings through a combination of mortgage securitization and its investment holdings.

The company's investment arm buys and sells securities related to the mortgage market and non-securitized mortgage loans. Freddie Mac generates income from its investment line by issuing financial instruments known as corporate debt securities, through which Freddie Mac offers investors yields in exchange for purchasing its debt obligations. These yields are less than the amount of interest Freddie Mac collects on the mortgage-related securities it purchases and produce profits that are then funneled back into other company activities.

Freddie Mac during the 2008 Subprime Mortgage Crisis

In 2007 and 2008, the American housing market experienced a sharp downward spiral as a confluence of steeply declining property values and steadily increasing mortgage default rates eventually triggered a widespread financial crisis that affected economies worldwide. Cited by some as the most severe economic event since the Great Depression, the resulting recession wreaked havoc on Freddie Mac and Fannie Mae. At the time, Freddie Mac and Fannie Mae held approximately 50 percent of the combined US mortgage market, putting them at very high risk given the dramatic downturn in market conditions.

Predictably, Freddie Mac's share price plummeted as investor confidence in its mortgage-backed securities evaporated, and its very survival was threatened. However, both Freddie Mac and Fannie Mae were deemed too important to the American economy to fail, and the federal government intervened, offering the two companies a taxpayer-funded bailout package valued at $154 billion. Under the terms of the bailout, both companies would continue to operate under a conservatorship of the US Treasury, administered by the Federal Housing Finance Agency. The move was met with significant public opposition—especially in light of a 2003 accounting scandal that saw Freddie Mac fined $175 million for misstating its earnings in financial reports—but was nevertheless approved and implemented.

Regulation and Oversight

Critics have long contended that both Fannie Mae and Freddie Mac have lacked adequate government regulation and oversight. When the US Treasury took control of Freddie Mac and Fannie Mae under the terms of the bailout agreement reached in September 2008, it gained the sole authority to issue the companies' mortgage-backed securities and debt securities, effectively putting both companies under strict federal regulation; both remain under government control. The Department of Housing and Urban Development (HUD) provides an additional level of oversight by ensuring that Freddie Mac follows established guidelines for fair lending practices.

However, some experts have pointed to HUD policies as part of the initial trigger of the 2008 subprime mortgage crisis; in 1995, Freddie Mac and Fannie Mae began to receive affordable housing credits from the federal government in exchange for buying riskier subprime mortgages, which were typically extended to people in lower income brackets as a means of facilitating home ownership. In 2004, HUD encouraged Freddie Mac and Fannie Mae to make deeper forays into the subprime mortgage market to stimulate further home purchases by low-income earners, which, in turn, enlarged the market for higher-risk subprime mortgage-backed securities and helped worsen the financial collapse that occurred in the years that followed.

In the early 2020s amid the COVID-19 pandemic, the government created the Coronavirus Aid, Relief, and Economic Security (CARES) Act to stimulate the American economy. The CARES Act included protection for Fannie Mae and Freddie Mac mortgage holders against foreclosures.

Bibliography

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"Freddie Mac." Corporate Finance Institute, corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/freddie-mac. Accessed 5 Jan. 2025.

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