Understanding the Purpose of Freddie Macįreddie Mac leverages the use of an asset-backed security called mortgage-backed securities to achieve a few primary goals: In simple terms, the government does not truly purchase any mortgages but instead buys mortgages issued through lenders in the secondary mortgage market and bundles them into mortgage-backed securities sold to investors. Step 6: Freddie Mac combines payments from the different mortgages, charges a fee, and forwards the rest to the respective shareholders. Step 5: When the borrower makes monthly mortgage payments, the bank forwards the payments to Freddie Mac. Step 4: Freddie Mac guarantees a consistent pay-out to the shareholders per month. Step 3: Shares of the security are then sold to pension funds, insurance companies, and individual investors, which grants them the right to the value of bundled mortgages. Step 2: Similar mortgages are bundled together to create a type of asset-backed security. Step 1: Freddie Mac purchases mortgages from banks and/or other lenders. Here’s a brief, step-by-step breakdown of how Freddie Mac enables a more liquid, stable, and affordable housing market. Freddie Mac is the unofficial title for the Federal Home Loan Mortgage Corporation, a federally-backed government-sponsored enterprise created in 1970 to broaden the secondary mortgage market and deflate interest rate risk for banks.Īccording to its charter, Freddie Mac “establishes secondary market facilities for residential mortgages provides that the operations thereof shall be financed by private capital to the maximum extent feasible.” In essence, Freddie Mac’s mission is to provide liquidity, stability, and affordability in the housing market.
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