The “American Dream” has always been inclusive of—if not synonymous with—home ownership. Historically, political leaders and policy makers have sought to capitalize on this almost universal desire by making ownership easier to attain. Knowing that mortgage lenders eschew risk, legislators long ago saw the importance of providing banks and other financial institutions with security and liquidity, causing them to lend more boldly than before. To this end, the U.S. Congress established the Federal Home Loan Mortgage Corporation, commonly known as FreddieMac, in 1970. Although chartered by the federal government, FreddieMac is established as a privately-held enterprise.
What Does FreddieMac Do?
The corporation maintains three consistent aims. First, it seeks to provide lenders with the money needed to sustain a robust housing market. Secondly, FreddieMac exists to make housing more affordable to Americans. Finally, it determines to hold mortgage markets steady in the event of financial crises. While the institution does not originate loans, i.e. lend directly to home buyers or owners, it transacts with banks and finance companies all over the United States by serving the secondary market. In short, FreddieMac purchases loans made by mortgagors, replenishing the banks’ money supply for a fee. In this way, lenders can extend credit on a broader scale since FreddieMac assumes the risk.
In What Loans Does FreddieMac Invest?
When the corporation buys loans, it transfers these assets into mortgage-backed securities, which in turn are sold to investors in the global marketplace. As the loans are paid down, the investors then receive financial disbursements at regular intervals. This process—known as securitization—applies to assets in three distinct categories.
Single-Family Residences: Mortgage loans on owner-occupied single-family homes are ordinarily (but not necessarily) conventional products with amounts no higher than $424,100 and loan to value ratios no greater than 80 percent, i.e. the borrowers have at least 20 percent equity in the property. Exceptions to these parameters are made depending on geography and borrower profiles.
Multi-Family Residences: This type of collateral serves renters. Accordingly, lender underwriting focuses on the revenue produced by the property itself and not exclusively on borrower creditworthiness. In many cases, multi-unit homes and apartment buildings are owned and managed by legal entities and not individuals.
Investment Portfolio: FreddieMac itself invests is mortgage-backed securities and other loans guaranteed but not necessarily securitized. The purpose of this portfolio is to make mortgage securities more easily convertible to cash thereby making increasing the availability of mortgage funds.
How Is FreddieMac Performing?
Defaults, of course, affect the value of mortgage-backed securities. When the housing market collapsed in 2008, the Federal Home Loan Mortgage Corporation and its older sister, the Federal National Mortgage Association (FannieMae), were bailed out by the federal government at a total cost of $187.5 billion. Both organizations have regained profitability while under government control and discussions are now underway about whether or not to return them to their autonomous authority. Since generating positive revenue again in 2012, FreddieMac’s profits—$2.3 billion in the 3rd quarter of 2016—are directly funneled into the U.S. Treasury rather than to investors, prompting legal action by the latter. Although lawmakers understand that the corporation is intended to operate privately, they may want to keep things as they are for now lest they rock the financial boat.