Why Congress Created Us

Freddie Mac was created by Congress in 1970 with a mission to provide liquidity, stability and affordability to the nation's mortgage markets using private, not public capital. Congress' creation of Freddie Mac was a sophisticated and creative approach to the longstanding national goal of promoting homeownership and a recognition that historically the strictly private markets had failed to provide a stable and affordable supply of credit for residential housing.

In the aftermath of the Great Depression, Congress chose to provide government insurance to both the housing and banking industries – mortgage insurance through the Federal Housing Administration (FHA) and deposit insurance through the Federal Savings and Loan Insurance Corporation (FSLIC) – to entice investors back to the housing markets. While the plan worked, it also put the government directly on the hook for the risks associated with loaning individual homebuyers large sums of money for long periods of time. These risks are mortgage default (or credit risk) and interest-rate risk. Managing credit risk was challenging because of the differences in the ability of borrowers to repay their loans. However, the risk of changing interest rates was more vexing. Even if a borrower did not default over the course of 30 years, a lender's money (with government backing) would be tied up in a fixed-rate asset whose value was subject to the vagaries of interest-rate movements over prolonged periods.¹

To address this issue, Congress found an ingenious way to stimulate long-term investment in housing without exposing the public fisc to the risk of substantial loss: it created government-sponsored enterprises with Congressional charters, and gave them the singular job of making markets stable, liquid and affordable in all economic environments.

The GSE model of housing finance has been a Congressional success story. By maintaining exclusive focus on the residential mortgage markets, as required by law, and by leveraging the efficiencies of a shareholder-owned company, the GSEs have developed extraordinary expertise in understanding and managing mortgage credit risk. This has resulted in a steady lowering of down payment requirements within the conventional market to the point at which the GSEs, with no government or taxpayer dollars, are able to provide nearly the same affordable mortgage products for their lenders to use with borrowers as the government provides through its on-budget FHA and VA mortgage programs.

Management of interest-rate risk also has been a notable success. Through the creation of mortgage-backed securities, the issuance of callable debt and the use of derivatives, the GSEs routinely and efficiently transfer interest-rate risk from individual households to global capital markets. Not only do the GSEs make it possible for originators to lend money to individual homeowners for long periods of time at better rates than many corporations can borrow, but borrowers are able to refinance the mortgages whenever they desire to do so and at no penalty. This extremely valuable option to "put" back the loan makes the 30-year fixed-rate mortgage the product of choice among U.S. homeowners. As a result, over the past few years homeowners have been able to profit from falling interest rates by refinancing into lower-cost loans, adding billions of dollars of spending power to our economy. Prepayable mortgages also help make our economy more dynamic by facilitating the mobility of the nation's labor markets.

Innovations in mortgage financing made possible by the GSEs produce valuable benefits. Low-cost mortgage money is readily available. Borrowers can get their loans approved in minutes. Today more people own homes – and higher quality homes – than at any time in our nation's history and than in virtually any other part of the world.² And wealth created through homeownership will provide families with assets that can help secure retirement and may be passed on to the next generation.

In the U.S., we tend to take these benefits for granted. However, very few countries can boast of such an efficient and effective mortgage delivery system. ³ Despite the integration of world capital markets, the U.S. is still the only place where a long-term fixed-rate freely prepayable mortgage product is broadly available.

¹These risks are real: recall the huge credit losses that resulted from the "oil-bust" in the early 1980s, and the taxpayer bailout of the S&Ls, which were in the untenable position of holding 6 percent mortgages in an 18 percent interest-rate environment.

²"As a result of the very favorable conditions in the housing sector, the U.S. homeownership rate climbed to 68.2 percent in the third quarter of 2003 – equal to its highest level on record," 2004 Economic Report of the President, p. 89.

³Marsha J. Courchane and Judith A. Giles, "A Comparison of U.S. and Canadian Residential Mortgage Markets," March 2002.