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What Is (FHLMC) Federal Home Loan Mortgage Corporation?

 

What is FHLMC or Federal Home Loan Mortgage Corporation?

In 1970 the Congress chartered the Federal Home Loan Mortgage Corp (FHLMC).

FHLMC is a stockholder-owned, government-sponsored enterprise (GSE) that is formed to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle-income Americans.

The FHLMC, more famously known as Freddie Mac, purchases, guarantees, and securities mortgages to form mortgage-backed securities.

Understanding Freddie Mac

When Congress passed the Emergency Home Finance Act in 1970 that is when Freddie Mac was created.

This was done with an intention to expand the secondary mortgage market while reducing interest rate risk for banks.

In 1989 Freddie Mac underwent a reformation and was turned into a shareholder-owned company, now under the Financial Institution Reform, Recovery and Enforcement Act (FIRREA).

Freddie Mac was created to improve and intensify the flow of credit to different parts of the economy. In 2017 Freddie Mac and a similar GSE, Fannie Mae securitized and guaranteed about 46% of U.S. mortgage originations.

They do not originate or service mortgages, but they buy loans from mortgage lenders.

After purchasing these large number of mortgages, the GSEs combine and sell them as mortgage-backed securities, which tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.

This process also frees up the capital of mortgage lenders, who can then lend that same money again.

Because of its ties with the U.S. government, Freddie Mac is allowed to borrow money at interest rates lower than those available to other financial institutions resulting in it coming under criticism.

With this funding advantage, large amounts of debts known as “agency debt” or “agencies” are issued and Freddie Mac successively purchases and holds a huge portfolio of mortgages called a “retained portfolio.”

There is the belief that the size of the retained portfolio combined with the complexities of managing mortgage risk will result in huge systematic risks to the U.S. economy.

Critics have argued that the unchecked growth of Fannie Mae and Freddie Mac is the cause of the credit crisis in 2008 which turned into the Great Recession, and some disagree with this argument.

Difference between Fannie Mae and Freddie Mac

As part of an amendment to the National Housing Act Fannie Mae (Federal National Mortgage Association or FNMA) was created in 1938.

Fannie Mae’s was considered a federal government agency, and its role was to act as a secondary mortgage market that could purchase, hold, or sell loans that were insured by the Federal Housing Administration.

Under the Charter Act of 1954, Fannie Mae stopped being a federal government agency and became a private-public corporation.

There is a lot of similarity between Fannie Mae and Freddie Mac. Both are public limited companies that were reserved to serve a public mission.

The source of the mortgages they buy is the main difference between the two.

Fannie Mae purchases mortgage loans from major retail or commercial banks, whereas Freddie Mac gets its loans from smaller banks, which are called “thrift banks” or “savings and loan associations,” which focus on providing banking services to communities.

Conclusion

Freddie Mac is a stockholder-owned, government-sponsored enterprise (GSE) to support homeownership for middle-income Americans it was chartered by Congress in 1970.

Freddie Mac buys a large number of loans from mortgage lenders, to combine them and sell them as mortgage-backed securities.

Federal Home Loan Mortgage Corp. (FHLMC) has an officially recognized nickname as Freddie Mac. Both Fannie Mae and Freddie Mac are publicly traded GSEs.

While Fannie Mae buys mortgage loans from major retail or commercial banks, Freddie Mac obtains its loans from smaller banks that is the only difference between the two.

The unchecked growth for Fannie Mae and Freddie Mac was the main reason that led to the credit crisis of 2008 leading to the Great Recession.

https://www.compareclosing.com/blog/fhlmc-federal-home-loan-mortgage-corp/

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