What is the Federal Home Loan Mortgage Corporation FHLMC, also known as Freddie Mac?

The Federal Home Loan Mortgage Corp. (FHLMC) is a stockholder-owned government-sponsored company (GSE) created by Congress in 1970 to keep money flowing to mortgage lenders, allowing middle-income Americans to own and rent homes. The FHLMC, or Freddie Mac, is a major player in the secondary mortgage market that buys, guarantees, and securitizes mortgages.

The Emergency Home Finance Act, established by Congress in 1970, gave birth to Freddie Mac. It was a wholly-owned subsidiary of the Federal Home Loan Bank System (FHLBS) that was created to help savings and loan organizations and smaller banks manage interest rate risk. Freddie Mac went through a reorganization in 1989 as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It became a publicly-traded firm with shares that could be traded on the NYSE.

The US government, specifically the Federal Housing Finance Agency, took over Freddie Mac in 2008, following the financial crisis precipitated by the subprime mortgage debacle. It is still under federal control, although it is rapidly gaining independence.

Freddie Mac was established to help the economy by increasing the supply of credit to various sectors. It is a major player in the secondary mortgage market, alongside Fannie Mae, another GSE.

Home mortgages are not originated nor serviced by Freddie Mac. Instead, it purchases mortgages from banks and other commercial lenders (giving these institutions funds that they can then use to finance more loans and mortgages). Freddie Mac establishes certain requirements for these loans.

After obtaining a large number of these mortgages, Freddie Mac either keeps them in its portfolio or bundles them together and sells them as mortgage-backed securities (MBS) to investors looking for a consistent income stream. In either case, it "insures" these mortgages, ensuring that the principal and interest payments on the loans are made on time. As a result, Freddie Mac's securities are highly liquid and have a credit rating similar to that of US Treasury securities.

Because of its ties to the United States government, Freddie Mac has been chastised for being able to borrow money at cheaper interest rates than other financial companies. With this financial edge, it can issue significant sums of debt (known as "agency debt" or "agencies" in the markets) and then buy and maintain a large portfolio of mortgages, dubbed the "retained portfolio."

Some argue that the size of the retained portfolio, along with the challenges of controlling mortgage risk, poses a significant systemic danger to the United States' economy. Critics claim that Freddie Mac's and Fannie Mae's unrestrained growth contributed to the 2008 credit crisis, which ushered in the Great Recession in the United States.

In response, proponents of the companies claim that, while Freddie and Fannie made poor business decisions and lacked adequate cash during the housing boom, their portfolios accounted for a small percentage of total subprime loans.

Fannie Mae (the Federal National Mortgage Association or FNMA) was established in 1938 as part of a National Housing Act modification. It was a federal government entity whose job was to function as a secondary mortgage market for loans insured by the Federal Housing Administration, which it could buy, hold, or sell. With the passage of the Charter Act of 1954, Fannie Mae transitioned from a federal government agency to a private-public partnership.

Fannie Mae and Freddie Mac are both government-sponsored mortgage companies. Both companies are publicly traded and were founded to fulfil a public purpose. The most significant distinction between the two is the origin of the mortgages they purchase.