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Freddie Mac, federally chartered private corporation created by the U.S. Congress in 1970 to provide continuous and affordable home financing. It is one of several government-sponsored enterprises (GSEs) established since the early 20th century to help reduce the cost of credit to various borrowing sectors of the economy. Its headquarters are in the Washington, D.C., suburb of McLean, Va.
The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, operates mainly by purchasing mortgages from lenders, repackaging them as mortgage-backed securities (securities collateralized by cash flows from pools of mortgage loans), and selling the securities to investors with a guarantee of timely payment of principal and interest, whether or not the original borrowers pay. Mortgage lenders use the proceeds from their loan sales to Freddie Mac to fund new mortgages, thus replenishing the funds available to home buyers at a lower cost.
From 1938 to 1968 the Federal National Mortgage Association (FNMA), better known as Fannie Mae, was by far the largest buyer and seller of government-insured mortgages. Congress took steps to increase competition in the secondary mortgage market (the market for the purchase and sale of mortgage loans) by privatizing Fannie Mae in 1968 and creating Freddie Mac in 1970.
Fannie Mae and Freddie Mac together exercised a virtual monopoly on the secondary mortgage market until the 1990s, when increasing federal regulation of the corporations and new legislation allowing mergers between banks and other financial companies resulted in greater competition from conventional firms. In 1989 Freddie Mac was given an independent board of directors but was subjected to oversight by the U.S. Department of Housing and Urban Development (HUD). HUD and its Office of Federal Housing Enterprise Oversight assumed additional regulatory responsibilities for both Freddie Mac and Fannie Mae in 1992. In 2007 the Federal Housing Reform Act transferred these responsibilities to the new Federal Housing Finance Agency.
Both Freddie Mac and Fannie Mae suffered heavy losses in 2007â08 during the subprime mortgage crisis, a severe contraction of liquidity in credit markets worldwide brought about by drastic declines in the value of securities backed by subprime mortgage loans. To prevent further losses that would worsen the crisis and damage the U.S. economy, both corporations were placed under the conservatorship of the U.S. government in September 2008, though neither was legally entitled to any direct government backing, insurance, or support. As part of this takeover, the government planned to provide billions of dollars to the corporations in the form of investments and loans.
