Freddie Mac (Federal Home Loan Mortgage Corporation): A privately owned governmental agency (GSE) that was created in 1970 to buy mortgages in the secondary mortgage market. Freddie Mac is a stockholder owned corporation that makes and guarantees loans that must meet set guidelines that are established and approved by Freddie Mac.
Starting in 1938, Fannie Mae literally monopolized the secondary mortgage market. In 1968, a portion of Fannie Mae was privatized to help balance the federal budget. To provide a source of competition for Fannie Mae, Congress chartered Freddie Mac as a private company with the goal of creating a secondary mortgage market for conventional loans.
Freddie Mac buys conventional residential mortgages from mortgage bankers, mitigating risk and letting them provide home loans to individuals who wouldn't qualify without this type of financing. In the rental market, Freddie Mac also provides assistance for affordable rental housing.
Designed to provide stability, liquidity, and affordability to the housing market, Freddie Mac makes loans and loan guarantees. It's primary method of making money is by charging a guarantee fee on loans that it has purchased and put into mortgage-backed security bonds.
Investors are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk in which it guarantees that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.
Freddie Mac is protected financially by the federal government that grants a line of credit through the U.S. Department of the Treasury and is exempt from state and local income taxes. It is also exempt from oversight by the Securities and Exchange Commission (SEC).
In a move to expand the secondary mortgage market in the United States, the federal government set up the Federal Home Loan Mortgage Corporation to buy mortgages on the secondary market, pool them, and then sell them as mortgage backed securities to investors on the open market. This transaction was designed to increase the supply of money available to potential home buyers.
Although Freddie Mac was created by an act of Congress, there were no real oversight commissions to regulate it's activities and there are no guarantees in place on securities, or interest on securities, and as stated in laws that apply to Freddie Mac, it's securities are not debts or obligations by the United States government or any agency of the United States.
In September of 2008, due to the large number of foreclosures, bank failures, and other real estate and financial market losses, the federal government announced that both Freddie Mac and Fannie Mae were being placed in conservatorship. Under the planned conservatorship, the executives of both companies and their boards would be replaced and shareholders investments would be virtually wiped out.
Both Freddie Mac and Fannie Mae would be able to continue functioning with the government standing behind their debt, but the cost to taxpayers will be enormous, in the billions of dollars, making this the biggest government bailout in the nation's history. Any losses on mortgages either company owns or guarantees will more than likely be paid by taxpayers.
Billions of dollars in losses have already been tallied by shareholders due to the dramatic drop in stock values. It has been estimated that stock prices have plunged more than 70 percent this year already. Under the conservatorship, the day to day operation of Freddie Mac and Fannie Mae would run unimpeded with some government oversight and control over the way business is conducted until everything is sorted out.