FREDDIE MAC



Freddie Mac is a private corporation but one chartered by the U.S. government. Originally known as the Federal Home Loan Mortgage Corporation (FHLMC), in 1996 the name was changed to Freddie Mac, the corporation's Wall Street nickname. The primary function of Freddie Mac is to act as a secondary market for conventional home mortgages. The FHLMC was established pursuant to Title III of the Federal Home Loan Mortgage Corporation Act of the Emergency Home Finance Act of 1970. Although Freddie Mac is a private corporation it is sponsored and regulated by the federal government. Prior to 1989 Freddie Mac was managed by the Federal Home Loan Bank Board. Now, however, program review and oversight is handled by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development. Freddie Mac also notifies the Treasury Department of some of its activities.

Freddie Mac buys mortgages at a discount rate from primary lending institutions such as banks, savings and loan associations, and mortgage corporations. These institutions profit from the fees they collect for the mortgage processing and the borrower's first few mortgage payments. Selling the mortgage also allows the original lending institution to maintain its liquidity. Freddie Mac, upon buying a mortgage, pools it with similar mortgages it has purchased and, using this pool or basket as collateral, sells "passthrough" securities to individual investors and to institutional investors such as pension funds and insurance companies. The investors receive their principal and interest from the mortgage payments made by the homeowners. This system benefits the institution that originated the mortgage, while Freddie Mac benefits from the sale of securities and homeowners benefit because of the fluid pool of mortgage funds. Freddie Mac issues participation certificates, which are freely transferable. Holders receive monthly payments on pooled mortgages including prepayments and interest. This system is an example of the federal government using the private sector to implement public policy, in this case increased home ownership especially for lower- and middle-income households.

Freddie Mac, like its sister institution Fannie Mae (formerly the Federal National Mortgage Association), is in a symbiotic relationship with the federal government. Until 1984 Freddie Mac was considered to be a governmental instrumentality and as such was not subject to state, local, or federal taxes. That status was revoked in 1985 and Freddie Mac became subject to federal taxation. But because Freddie Mac was created by federal legislation, it receives a noncash subsidy by virtue of this relationship. Even though Freddie Mac and its securities are not backed by the full faith and credit of the U.S. government, there is an implied backing nonetheless. This makes it possible for Freddie Mac to borrow at preferred discount rates and pay lower interest rates to investors because of its risk-free aura.

This association, however, also carries with it government regulation and scrutiny. In 1992 Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act. This legislation increased regulation of government-sponsored enterprises such as Freddie Mac. The act mandates closer federal examination and evaluation of Freddie Mac activities; required purchasing of a fixed percentage of mortgages from low-income, moderate income, and minority families; and tighter capital provisions.

Freddie Mac is expediting its procedures with an automated underwriting system it calls "Loan Prospector." Introduced in 1994, it is used by approximately 270 mortgage lenders. An enhancement known as "Collateral Express" is used to lower the cost of property evaluations. Karmen Carr, director of automated underwriting with the FHLMC, described this system in a 1996 America's Community Banker interview: "Only Loan Prospector offers lenders an automated property assessment service that relieves lenders from the responsibilities of ordering and underwriting the assessment, managing the appraisal process, and representing and warranting the assessment conclusions." Collateral Express has speeded up the turnaround time on assessments, with 80 percent being made within three days. It also provides lenders with access to 31,000 appraisers and real estate professionals nationwide.

[ Michael Knes ]

FURTHER READING:

Freddie Mac. "Welcome to Freddie Mac." McLean, VA: Freddie Mac, 1998. Available from www.freddiemac.com .

Munn, Glenn G. Encyclopedia of Banking and Finance. Rolling Meadows, IL: Bankers Publishing Company, 1991.

Noe, Jeffrey. "Freddie Mac Enhances Loan Prospector." America's Community Banker, August 1996, 8.



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