Acronyms seem to be everywhere in the mortgage industry. Freddie Mac is one such acronym and an important one when trying to understand how the mortgage industry works.
A Quick Guide to Freddie Mac
Freddie Mac actually stands for the Federal Home Loan Mortgage Corporation. Based in McLean, Virginia, Freddie Mac is a social financing experiment that has worked out very well. It was created in 1970 by the federal government, but is a shareholder owned entity that trades on the New York Stock Exchange. It remains heavily regulated by the government, which makes it one of the few quasi-publicly traded government agencies/business entities. How it became known by that name is anyone's guess, but the company performs a very important function in the mortgage industry.
As you know, the real estate market went through an absolutely massive boom recently. A lot of money was moved during that market in the form of mortgage loans. Given the rate of purchase for homes, have you ever wondered where the money was coming from? Well, the lenders were selling off the loans on the secondary market to gain liquidity so they could write even more loans. This is where Freddie Mac comes in.
Freddie Mac is charged by the federal government with providing liquidity in the secondary mortgage market. Simply put, it buys loans from lenders that meet certain classifications. By serving this function, Freddie Mac pumps money into the market, giving the bank the ability to continue to issue loans to you and me. This is reflective of an overall government policy of promoting home ownership, which is the staple of middle class America.
While Freddie Mac stands ready to buy loans from retail lenders, it does not just buy anything. Instead, it issues specifications regarding the types of loans it will buy. As you might guess, first time buyers and low income purchases are favored. The point is to expand homeownership, and Freddie Mac does that through its various policies.
Since Freddie Mac is a publicly traded company, you are probably wondering how it makes money. Well, the company takes the loans it has purchased and sells them to other investors! There is a little twist, however, that makes these loans an excellent investment for private money investors. Freddie Mac guarantees that the investor will be repaid on the loan even if the individual who borrowed the money fails to make all the payments. In exchange for this guarantee, Freddie Mac keeps a small percentage of the interest being paid by the borrower on the loan. When this small amount is multiplied over the total volume of loans Freddie Mac handles, revenues in the billions are generated.
Freddie Mac is indeed a unique beast, chartered by the government but publicly traded. There is little dispute, however, that it is one government creation that has worked well.
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