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What is Freddie Mac? 

Freddie Mac

Freddie Mac, or Federal Home Loan Mortgage Corp (FHLMC) is a government-sponsored company, chartered by the US Congress in 1970 with the purpose of expanding the secondary market for mortgages in the United States. 

Together with Fannie Mae, or the Federal National Mortgage Association, Freddie Mac acquires mortgages on the secondary market, accumulates them and then sells them as mortgage-backed securities on the open market.

Headquartered in Tysons Corner, Virginia, the company is included in Fortune 500 list of the largest US corporations by revenue. 

Freddie Mac meaning 

What does Freddie Mac stand for? The secondary mortgage market increases the money supply available for mortgage lending and grows the amount of money available for new home purchases. 

Primarily, Freddie Mac makes money by charging a guarantee fee on loans it has purchased and turned into MBS (mortgage-backed security) bonds. Those investors who buy Freddie Mac MBS allow Freddie Mac to keep this fee in exchange for covering the credit risk. It means that Freddie Mac assures that the underlying loan’s principal amount and the interest will be paid back in any case, even if the borrower fails to repay. 

The financial guarantee of Freddie Mac makes their MBS bonds extremely attractive for investors. 

What is the difference between Freddie Mac and Fannie Mae?

Both Freddie Mac and Fannie Mae are publicly traded government-sponsored enterprises (GSEs) with one major difference: Fannie Mae purchases mortgage loans from commercial banks and major retailers, and Freddie Mac usually acquires loans from smaller banks. 

Both companies do not provide mortgage services, but instead buy loans from mortgage lenders. Today, around 80 per cent of all the US residential mortgages are covered by these two enterprises, Freddie Mac and Fannie Mae. 

However, Freddie Mac has faced with some criticism, because its close ties to the US government allow it to borrow money at lower interest rates than those available to other financial companies. This advantage helps the company aggregate a huge portfolio of mortgages, known as a retained portfolio.

There is a view that the size of the retained portfolio together with complexity of managing mortgage risk invokes high systematic risk to the economy of the United States. Some believe that unlimited growth of Fannie Mae and Freddie Mack contributed to the credit crisis in 2008, which turned into the Great Recession. 

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