Sunday, September 6, 2009

The Federal Home Loan Mortgage Corporation

Another federal agency created to aid the secondary mortgage market appeared in 1970. The Emergency Home Finance Act passed that year gave birth to the Federal Home Loan Mortgage Corporation (FHLMC), more popularly known as "Freddie Mac." FHLMC is a branch of the Federal Home Loan Bank System which, like Ginnie Mae, may combine the mortgages it buys into pools and issue bonds against them. Securities issued by Freddie Mac are guaranteed by GNMA and are very popular with individual and institutional investors, particularly savings and loan associations and mutual savings banks.
The creation of Freddie Mac reflected a desire by the federal government to develop a stronger secondary market for conventional home mortgages. As we have seen, Fannie Mae and Ginnie Mae have made major contributions to the marketability of government-guaranteed (FHA-VA) mortgages, but four fifth of all home mortgages today are conventional, nonguaranteed loans. Freddie Mac buys conventional mortgages, about 80 percent of which come from savings and loan associations; the remainder are supplied by mortgage banking houses, commercial banks, and mutual savings banks.
To raise funds to support these purchases, Freddie Mac sells mortgage participation certificates (PCs) and guaranteed mortgage certificates (GMCs).PCs represent an ownership interest in a pool of conventional mortgages bought and held by Freddie Mac. PCs are sold through Freddie Mac directly and through major securities dealers, who also make an active resale market in these instruments. Freddie Mac guarantees the investor‘s monthly interest and principal payments passed through from the mortgage pool, but PCs are not guaranteed by the federal government. they are issued in minimum denominations of $100,000. More than $10 billion worth were outstanding at year-end 1979.
Guaranteed mortgage certificates (GMCs), like PCs, are claims against a pool of mortgages. They are similar to corporate bonds in that interest is paid semiannually to investors. Repayments of principal are made once a year. While not guaranteed by the federal government, GMGs are guaranteed as to principal and interest by Freddie Mac and are available in minimum denominations of $100,000. Freddie Mac agrees to repurchase any outstanding principal remaining after a period of 15 years.

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