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Video:Overview of Freddie Mac

with Zach Toombs

What is the Federal Home Loan Mortgage Corporation, more commonly known as Freddie Mac? Watch this About.com video to learn all about it and what went wrong.See Transcript

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Transcript:Overview of Freddie Mac

Hi, I'm Zach for About.com, and today, we're providing an overview of the Federal Home Loan Mortgage Corporation -- the FHLMC -- more commonly known as Freddie Mac.

How Freddie Mac Works

The FHLMC was formed in 1970 to expand the secondary market for home mortgages in the United States.  As such, Freddie Mac buys mortgages on the secondary market, packages them together, and then re-sells them as mortgage-backed securities.  The sale of those securities creates more money, which in turn allows for more home mortgages.

Freddie Mac is the younger brother to Fannie Mae, the Federal National Mortgage Association.  For 30 years, starting in 1938, Fannie Mae was the only player in the secondary mortgage business. In 1968, Fannie Mae split into two entities -- one public, one private. Freddie Mac became public in 1989.

Mortgages and Freddie Mac

In the early 2000s, Competition between banks rose, and a race to fill more mortgages led to risky loans being issued.   Moreover, the secondary market was flooded with mortgage backed securities that weren't worth the paper they'd been written on. That's because housing prices had started falling in 2006. When it became clear, far too many loans were being defaulted upon, the entire structure of the housing industry collapsed."

The Housing Bubble Bursts

The value of the mortgage-backed securities plummeted when housing prices started to decline in 2006, and that decline lead to a housing meltdown.  

"In 2007, banks began to restrict lending to one another. Because Fannie and Freddie's loans were backed by the Federal government, when the subprime mortgage crisis exploded, the GSEs were nationalized.

Freddie Mac: The Rebound

By 2012, Fannie and Freddie had both rebounded.  The GSE's have turned to issuing investment certificates, called K-certificates.  These are market structured offerings backed exclusively by floating rate loans, and are attractive to investors looking for higher investment yields in an era where the Fed is keeping interest rates at or near zero.

Freddie, and Fannie, once on the brink of collapse, appear to have recovered in the aftermath of the worst housing crisis in American history.

Fannie and Freddie were bailed out by the Treasury Department, which simply took ownership and continues to pay out losses. They are managed by the Federal Housing Finance Agency (FHFA).

Thanks for watching our overview of Freddie Mac.  For more information, go to About.com.

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