Freddie Mac: Holding Accountability For Underwater Mortgages

The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a government-sponsored enterprise that deals with residential mortgages. Freddie Mac, along with Fannie Mae, has played a role in most residential mortgages in the country. They buy mortgages on the secondary market and bundle them into mortgage-backed securities (MBS) to sell to investors. While they do not directly interact with home buyers, their role in the mortgage market has been significant. However, their involvement in the mortgage market has not been without controversy, particularly in the context of underwater mortgages. An underwater mortgage occurs when the mortgage balance exceeds the home's value, creating a challenging situation for homeowners. In the past, Freddie Mac has offered relief programs to assist homeowners with underwater mortgages, but their current role and responsibility in addressing this issue are complex and evolving.

Freddie Mac's role in the 2008 financial crisis

In the years leading up to the 2008 Financial Crisis, Freddie Mac, alongside Fannie Mae, started investing in riskier loans, contributing to a housing bubble. They purchased large volumes of Alt-A mortgages, which had higher LTV and DTI ratios and often lacked full documentation of borrowers' incomes. They also bought private-label mortgage-backed securities (MBS) collateralized by subprime mortgages, i.e. loans issued to borrowers with poor credit ratings.

As government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae played a significant role in the secondary mortgage market, buying and securitizing mortgages. They ensured a steady flow of mortgage credit, influencing interest rates and availability. Their government sponsorship included an implicit guarantee and regulatory oversight by bodies like the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD).

When home values collapsed in 2007, defaults surged, and the MBS market unraveled. Freddie Mac and Fannie Mae lost billions of dollars on their portfolios and MBS guarantees, and investor confidence in them eroded. In September 2008, during the height of the financial crisis, they were placed under the direct supervision of the federal government, with the government declaring conservatorship and providing a bailout.

The impact of their role in the 2008 crisis extended beyond the immediate financial losses. The crisis brought to light the potential consequences of their unique company structure and government ties. Their close relationship with the federal government gave them access to lower borrowing costs and more investor confidence due to the perceived implicit guarantee of government support. This perception was reinforced by historical precedents, such as during the late 1970s and early 1980s when the federal government helped Fannie Mae recover from financial losses.

The role of Freddie Mac and Fannie Mae in the 2008 Financial Crisis has led to ongoing discussions and investigations. There have been calls for reforms and a re-evaluation of their structure and oversight to prevent similar crises in the future. Additionally, the impact of the crisis has had long-lasting effects on homeowners and the housing market, with concerns raised about the potential for a repeat of the 2008 events.

Freddie Mac's relationship with the federal government

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise (GSE). It was established in 1970 through the Emergency Home Finance Act to expand the secondary mortgage market by purchasing mortgages from smaller savings and loan associations.

The government's role in Freddie Mac is not without scrutiny. In 2008, the federal government intervened to prevent a financial crisis, leading to a government bailout and conservatorship. This was described as "one of the most sweeping government interventions in private financial markets in decades". The FHFA established conservatorships, directing the enterprises to reduce losses and develop a new operating structure to regain self-management. As of 2024, Freddie Mac remains under conservatorship.

Additionally, in 2025, there were rumours of removing Freddie Mac from federal conservatorship as it focused on avoiding climate risk. This sparked concerns about the impact of underinsurability and the potential for a mortgage meltdown. The Senate Budget Committee launched investigations into Florida regulators' response to climate change, but these were blocked.

In summary, Freddie Mac's relationship with the federal government is complex. While it benefits from government sponsorship and implicit guarantees, it is also subject to regulatory oversight and intervention during financial crises. The government's role aims to maintain stability in the housing market and protect homeowners.

Freddie Mac's involvement in the secondary mortgage market

Freddie Mac, also known as the Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise (GSE) that plays a pivotal role in the secondary mortgage market. Chartered as a federal agency in 1970 through the Emergency Home Finance Act, Freddie Mac expanded the secondary mortgage market by purchasing mortgages from smaller savings and loan (S&L) associations.

Freddie Mac, along with Fannie Mae, buys residential mortgages on the secondary market and either holds them or, more commonly, bundles and sells them as mortgage-backed securities (MBS) to investors. This process, known as securitization, provides a steady flow of mortgage credit, influencing interest rates and availability in the housing market. By replenishing lenders with cash, Freddie Mac and Fannie Mae inject liquidity, stability, and affordability into the market, making homeownership more accessible.

The close relationship between Freddie Mac and the federal government gives it access to lower borrowing costs and enhances investor confidence. This implicit guarantee led to a government bailout and conservatorship during the 2008 financial crisis. While the enterprises have since recovered, they remain under conservatorship, and discussions around their privatization continue.

The secondary mortgage market, facilitated by Freddie Mac and similar enterprises, channels funds to borrowers by enabling the resale of mortgages and MBSs. This market has faced scrutiny due to concerns about widespread uninsurability, which could trigger a mortgage crisis similar to that of 2007-2008. The federal government's role in this market is a subject of ongoing debate, with various alternatives proposed, including a hybrid public-private model, a fully public model, and a fully private model.

The impact of privatising Freddie Mac

The privatization of Freddie Mac, along with Fannie Mae, could have a significant impact on the US housing market and the wider economy. Both enterprises are government-sponsored entities that play a crucial role in the lending market by buying up mortgages from banks and packaging them into bonds, which are then sold to investors. This system keeps borrowing costs low and injects liquidity, stability, and affordability into the housing market.

One of the potential impacts of privatizing Freddie Mac is the effect on mortgage rates. Currently, the borrowing costs associated with Freddie Mac are kept low due to its government backing and favourable credit ratings. However, if privatized, investors may perceive Freddie Mac as a riskier entity, leading to higher borrowing costs and, subsequently, higher mortgage rates for borrowers. This could make buying a home more expensive, particularly in the context of an affordability crisis.

Another consequence of privatizing Freddie Mac could be the impact on investors. The removal of government backing may result in increased risk and volatility in the market. On the other hand, privatization could be a windfall for investors, as it would allow them to directly profit from the enterprises' activities without the profits being funnelled into the treasury, as has been the case during the government conservatorship.

Additionally, the privatization of Freddie Mac may have broader economic implications. As Freddie Mac and Fannie Mae support around 70% of the US mortgage market and back more than half of the country's mortgages, changes to their operations could have a significant effect on the housing market and the wider economy. A release from government control could be a complex and lengthy process, requiring the involvement of multiple parties, including the Treasury, the Department of Justice, the Federal Housing Finance Agency (FHFA), and shareholders in the private sector.

Furthermore, the privatization of Freddie Mac could impact the enterprise's ability to manage risk. Currently, there is an implicit guarantee that the government will intervene to prevent default, even though there is no explicit agreement. This guarantee has been demonstrated in the past, such as during the inflation and recessions of the late 1970s and early 1980s when the federal government provided support to Fannie Mae. A privatization move would need to carefully consider how to preserve at least some form of government guarantee to maintain stability and confidence in the market.

Freddie Mac's response to climate change

Freddie Mac, a government-sponsored enterprise, plays a significant role in the housing market by purchasing residential mortgages on the secondary market and bundling them into mortgage-backed securities (MBS) to sell to investors.

Amid concerns about the impact of climate change on the housing finance industry, Freddie Mac has undertaken several initiatives to address climate change and promote sustainability. Here is a detailed look at Freddie Mac's response to climate change:

• Duty to Serve Plan: Freddie Mac has released white papers as part of its Duty to Serve plan, which aims to increase liquidity in historically underserved markets. The white papers address multifamily resilience efforts, highlighting the importance of these measures for communities disproportionately affected by climate change and disasters. The papers also analyze the impact of energy and water efficiency improvements made through the company's Green Advantage® program, including the Green Up® and Green Up Plus® offerings.
• Sustainability Strategic Framework: Freddie Mac has developed a sustainability strategic framework to achieve three long-term goals: protecting the future of housing, promoting inclusive communities, and upholding responsible operations. This framework focuses on interconnected areas such as climate impact, sustainable housing, diversity, equity, and inclusion (DEI), and sustainable operations.
• Climate-Related Risk Management: In 2023, Freddie Mac established formal oversight of climate-related risks and opportunities. They launched a Corporate Sustainability Committee and a Climate Risk Steering Committee to strengthen their governance structure. These committees promote effective management, raise awareness, and encourage best practices related to climate change.
• Environmental, Social, and Governance (ESG) Priorities: In 2023, Freddie Mac refreshed its ESG priorities, leading to a refined strategic sustainability framework. By sharpening their focus and improving resource allocation, they aim to better address sustainability-related risks and opportunities.
• Green Financing: Through products like GreenCHOICE Mortgages®, Freddie Mac offers financing to homeowners for energy- and water-efficiency improvements. Since 2019, they have provided over $1 billion in GreenCHOICE financing. Additionally, their Multifamily Green Up and Green Up Plus offerings have provided loans totaling $64 billion, impacting nearly 630,000 units.
• Research on Climate Resiliency: Freddie Mac has conducted research on states' varying approaches to climate resiliency for low-income housing development. They found that many states have implemented measures to protect affordable housing properties from disasters and aid in recovery efforts. This research is part of their Duty to Serve plan and provides insights into improving affordable housing resiliency.
• Composting and Food Donation: In 2023, Freddie Mac eliminated almost 44 metric tons of CO2 through composting efforts, a 13% increase from the previous year. They also donated approximately 24,000 meals of leftover food to local food rescue groups.

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