Freddie Mac

Freddie Mac (Federal Home Loan Mortgage Corporation) is a government-sponsored enterprise that purchases mortgages from lenders, guarantees mortgage-backed securities, and provides liquidity to the mortgage market. Freddie Mac is one of two dominant players in the U.S. secondary mortgage market (alongside Fannie Mae).

The role of Freddie Mac

Freddie Mac serves the same essential role as Fannie Mae in the U.S. mortgage system:

1. Buys mortgages: Freddie Mac purchases mortgages from lenders, providing liquidity.

2. Securitizes mortgages: Freddie Mac pools mortgages and issues mortgage-backed securities.

3. Guarantees securities: Freddie Mac guarantees principal and interest, backed implicitly by the government.

4. Provides liquidity: By purchasing mortgages, Freddie Mac allows lenders to free up capital and originate more mortgages.

Freddie Mac and Fannie Mae together dominate the secondary mortgage market, purchasing and guaranteeing roughly 50% of all U.S. mortgages. Without them, the mortgage market would be far smaller, more expensive, and less accessible.

History

Freddie Mac was chartered in 1970 as a government-sponsored enterprise. It was created to compete with Fannie Mae and provide alternative liquidity for mortgage lenders.

Like Fannie Mae, Freddie Mac was privatized while retaining an implicit government guarantee. And like Fannie Mae, Freddie Mac faced massive losses during the 2008 financial crisis, entering government conservatorship.

Conforming loan limits

Freddie Mac and Fannie Mae coordinate on conforming loan limits. Both use the same baseline limit (2024: $766,550 for single-family homes), adjusted annually for inflation. High-cost counties have higher limits.

Mortgages within the limit are “conforming” and can be sold to either Fannie Mae or Freddie Mac. Mortgages exceeding the limit are “jumbo” and must be held by lenders or sold to private investors at higher cost.

MBS market and TBA securities

Like Fannie Mae, Freddie Mac issues agency MBS through a TBA system. The two entities’ MBS are traded in massive volumes in the secondary market, providing liquidity for investors.

Freddie Mac MBS carry the same implicit government guarantee as Fannie Mae MBS, making them equally safe (credit-risk-free from the investor’s perspective).

Implicit government backing

Freddie Mac is a publicly traded company but with an implicit government guarantee. This allows Freddie Mac to borrow very cheaply and pass the subsidy to borrowers.

The guarantee has been tested multiple times: in 2008, the government took conservatorship; today, Freddie Mac remains under government control, with the government holding senior preferred stock.

Guarantee fees and insurance

Freddie Mac charges lenders a guarantee fee (typically 0.25–0.5% of the loan balance) for the credit guarantee it provides. This fee compensates Freddie Mac for backing the MBS.

The guarantee covers credit risk (borrower default). Prepayment risk remains with MBS investors.

Competition with Fannie Mae

Freddie Mac and Fannie Mae are competitors, but competition is limited given their duopoly and identical implicit government backing. Lenders can choose to sell mortgages to either, but the economics are similar (both offer comparable pricing).

Theoretically, competition keeps both entities efficient. In practice, the lack of real competition concerns some policy makers.

2008 crisis and conservatorship

Like Fannie Mae, Freddie Mac faced catastrophic losses in 2008 when subprime mortgages it had guaranteed defaulted en masse. The government took conservatorship, injecting capital and essentially nationalizing the entity.

Freddie Mac (like Fannie Mae) remains in conservatorship, with the government holding substantial equity stakes.

Policy debates and reform

The future of Freddie Mac and Fannie Mae is contested:

• Privatization advocates: Argue the government backing should be removed and the entities fully privatized.
• Status quo supporters: Argue the government backing provides essential stability and keeps mortgage rates low.
• Reform advocates: Propose restructuring or breaking up the duopoly.
• Public purpose advocates: Argue the entities should prioritize affordable housing and community development.

No major reforms have passed since 2008. Both entities remain in conservatorship as of 2024.

Freddie Mac and housing mission

Freddie Mac has a public mission to support affordable housing. The entity has programs and commitments to increase lending to low-income borrowers, underserved communities, and borrowers with weaker credit.

These public mission elements are sometimes in tension with profit maximization, a balancing act for the conservatorship.

See also