The Federal Home Loan Mortgage Corporation is a companion agency/company that was designed to compete with the Federal National Mortgage Association (Fannie Mae) because of both of the entities ever-changing status as either private companies or some type of government entity or quasi-government entity. They were created to have a specific macroeconomic effect on the housing market and their status as a governmentally subsidized agency or a privately traded company has been debated since their collective inception.
Freddie Mac and Fannie Mae are both MBS Buyers and Sellers
Freddie Mac’s primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security (MBS) bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk. That is, Freddie Mac’s guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays. Because of Freddie Mac’s financial guarantee, these MBS are particularly attractive to investors and, like other Agency MBS, are eligible to be traded in the “to-be-announced,” or “TBA” market.
Government Supported Free Market Entity?
Ironically, the idea that Freddie Mac is somehow a more secure source of secondary loan market products is based in a myth of government support: they receive no direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes, “There have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises. Government-sponsored enterprises are costly to the government and taxpayers. The benefit is currently worth $6.5 billion annually.”