Freddie Mac Explained
Yesterday we talked about what Fannie Mae is. But what about her brother Freddie? Are they twins or do they have separate functions?
What is Freddie Mac?
Officially, Freddie Mac is known as Federal Home Loan Mortgage Corporation or FHLMC. Like Fannie Mae, Freddie Mac is a government sponsored enterprise authorized to make loans and loan guarantees. It is younger than Fannie Mae by 32 years and came into being in as part of the The Emergency Home Finance Act of 1970. Freddie Mac’s main purpose was to provide competition for Fannie Mae and further develop the secondary mortgage market.
Is Freddie Mac a public or privately owned company?
Freddie Mac was never a owned outright by the government and was conceived outright as a private enterprise with shareholders. It trades on the NYSE as FRE. Well, it did at least until September 7th 2008 when the Treasury Department put the company into conservatorship along with its sister company Fannie Mae.
What does Freddie Mac do?
Freddie Mac’s main purpose is the same as Fannie Mae, that is: to buy mortgages from banks and other financial institutions so that they have fresh money to make new loans without having to wait 20-50 years for the money to be repaid.
When the banks have cash that is not tied to an existing obligation, they are said to have liquidity, which means they have a lot of flexibility in terms of what they are able to do with the cash. Usually they extend it as credit in the form of a mortgage. A housing and credit market with lots of liquidity is a healthy one.
A similar situation would be when you have cash left over that is not already spoken for by your mortgage, the phone company, the gas company or your kids. The more of this cash you have saved up, the more flexible you can be. Cash is considered a liquid asset because it can be used anywhere for any purpose. You may have a house worth $5 million but in terms of liquidity, it doesn’t count because you have to first sell it to get the cash if you want to buy food or go to a concert.
Once they have bought the mortgages, Freddie Mac either holds on to them or sells them to Wall Street on the secondary mortgage market.
Why is a problem if Freddie Mac goes bankrupt?
Letting the market correct itself is the American way but sometimes, the implications of a crash would be too far-reaching and the government has to intervene. Between the two of them, Fannie Mae and Freddie Mac own over $5 trillion in mortgage debt. That means that one out of every two homeowners has a mortgage that is owned by this pair of companies!
Even though it is a younger company, Freddie Mac is about twice as big as Fannie Mae and holds 2/3 of that $5 trillion.
According to the Times, because so many mortgage companies have been going bust due to the mortgage market collapse, 80% of mortgages issued in 2008 have been through Freddie Mac and Fannie Mae.
Like I said yesterday, you can imagine the chaos if these companies were no longer in business!
