Federal Home Loan Mtg Corp: The 76-Year-Old Bohemoth in the Mortgage Market

Introduction

Federal Home Loan Mortgage Corporation (Freddie Mac), a government-sponsored enterprise (GSE), has been a cornerstone of the U.S. housing finance system for over seven decades. With a portfolio of $2.5 trillion in mortgages, Freddie Mac plays a critical role in promoting homeownership and ensuring the stability of the housing market.

History and Mission

Founded in 1948, Freddie Mac's mission is to provide liquidity to the mortgage market by buying mortgages from lenders and packaging them into mortgage-backed securities (MBS). By doing so, Freddie Mac frees up capital for lenders to make more loans, increasing access to affordable housing.

Role in the Mortgage Market

Freddie Mac purchases about 20% of all mortgages originated in the U.S. annually. The mortgages it buys must meet specific underwriting guidelines to ensure their credit quality. Freddie Mac then packages these mortgages into MBS and sells them to investors, including banks, insurance companies, and pension funds.

Benefits of Freddie Mac

• Promotes Homeownership: By purchasing mortgages from lenders, Freddie Mac increases the supply of affordable loans, making it easier for people to buy homes.
• Provides Liquidity: Freddie Mac's purchase of mortgages creates a secondary market, which provides liquidity for lenders and allows them to originate more loans.
• Supports Economic Growth: The housing market is a major driver of economic growth. Freddie Mac's role in promoting homeownership and providing liquidity contributes to the overall health of the economy.

Challenges and Criticisms

Despite its significant contributions, Freddie Mac has faced some challenges and criticism over the years.

• Government Backing: Freddie Mac and its sister GSE, Fannie Mae, have been criticized for taking on excessive risk prior to the 2008 financial crisis. Their government backing has raised concerns about the potential for taxpayer bailouts.
• Mission Creep: Critics argue that Freddie Mac has expanded its mission beyond its original purpose of supporting affordable housing. They point to its purchase of subprime mortgages and its participation in the private-label MBS market.

Reforms and Outlook

In the wake of the 2008 financial crisis, Freddie Mac and Fannie Mae were placed into government conservatorship and significant reforms were implemented. These reforms included:

• Increased Capital Requirements: Freddie Mac was required to raise its capital reserves to mitigate risk.
• Stricter Underwriting Standards: The government established stricter underwriting guidelines for the mortgages that Freddie Mac could purchase.
• New Oversight: A new oversight board was created to monitor Freddie Mac's activities.

New Applications

While Freddie Mac's primary focus remains on supporting the mortgage market, it has also explored new applications for its technology and expertise. One promising area is the use of artificial intelligence (AI) to improve mortgage underwriting and reduce costs.

Tables

| Table 1: Freddie Mac's Mortgage Portfolio |
|---|---|
| Total Value | $2.5 trillion |
| Number of Mortgages | 56 million |
| Average Loan Value | $445,000 |

| Table 2: Freddie Mac's MBS Issuance |
|---|---|
| Average Yearly Issuance | $1.2 trillion |
| Total Outstanding MBS | $2.8 trillion |
| Major Investors | Banks, insurance companies, pension funds |

| Table 3: Freddie Mac's Financial Performance |
|---|---|
| Revenue | $62 billion |
| Net Income | $20 billion |
| Return on Equity | 10% |

| Table 4: Freddie Mac's Impact on Homeownership |
|---|---|
| Mortgages Originated | 45 million |
| Homeowners Assisted | 90 million |
| Homeownership Rate | 65% |

FAQs

1. What is the difference between Freddie Mac and Fannie Mae?
   - Freddie Mac and Fannie Mae are both GSEs that purchase mortgages and issue MBS. However, Freddie Mac focuses on the secondary mortgage market, while Fannie Mae focuses on the primary market.

2. Is Freddie Mac a government agency?
   - Freddie Mac is a publicly traded company, but it is regulated by the Federal Housing Finance Agency (FHFA).

3. How does Freddie Mac make money?
   - Freddie Mac earns revenue through fees for purchasing mortgages, servicing MBS, and other activities.

4. What is the future of Freddie Mac?
   - Freddie Mac's future is uncertain. It has been in government conservatorship since 2008, and efforts to reform or privatize it have been unsuccessful.

5. Can Freddie Mac go bankrupt?
   - Freddie Mac cannot go bankrupt in the traditional sense because it is backed by the full faith and credit of the U.S. government.

6. Why is Freddie Mac important?
   - Freddie Mac is important because it plays a critical role in the U.S. housing finance system by promoting homeownership, providing liquidity, and supporting economic growth.