Our Government Ties Benefit Families and Housing Finance

Congress created Freddie Mac to fulfill a public mission of providing liquidity, stability and affordability to the nation's residential mortgage markets using private, not public capital. This is a unique and important national assignment – and Congress provided benefits and requirements in our Charter to ensure we achieve it. For example, Freddie Mac may operate only in the U.S. residential mortgage market and may not buy or guarantee single-family loans above the conforming loan limit ($359,650 in 2005). Freddie Mac also is expected to make mortgage money available throughout the country, regardless of economic or market conditions. Finally, Freddie Mac must devote more than one-half of its mortgage purchases to funding housing for low- and moderate-income families.

These requirements and responsibilities set us apart from other mortgage market participants. For example, depository institutions are free to enter or leave the mortgage market at any time; they can buy jumbo as well as conforming loans; they can both originate and invest in mortgages; and they can purchase other assets such as car loans or credit card receivables to augment their asset base; and their affordable housing requirements are much less strenuous.

In recognition of our unique role, Congress also provided certain tools in our Charter. For example, Freddie Mac is exempt from paying state income taxes and from registering its securities with the SEC (although Freddie Mac is subject to the SEC's antifraud rules and, to fulfill our commitment to register our common stock with the SEC under the Securities Exchange Act of 1934, we anticipate filing our registration statement with the SEC in the second quarter of 2006 and becoming an SEC reporting company as soon as possible thereafter). Regulated financial institutions are permitted to invest in Freddie Mac securities without limit. And the U.S. Treasury is authorized to purchase, at its discretion, a limited amount of Freddie Mac obligations. As a result of these benefits, investors are willing to lend to Freddie Mac at slightly lower rates than they charge other financial institutions, even though Freddie Mac obligations explicitly are not guaranteed by the government.

Taken together, these benefits facilitate the efficient operation of a national secondary mortgage market where thousands of mortgages are bought and sold each day by investors all around the world. They also create substantial financial benefits for homeowners and the housing finance system. One of these benefits is that families across the nation can rely on a low-cost supply of mortgage credit. Because of Freddie Mac and Fannie Mae, mortgage rates in the conventional conforming market typically are at least ¼ of a percentage point below jumbo mortgage rates. On a $200,000, 6%, 30-year mortgage, for example, this reduces the borrower's direct interest costs by $12,000 over the 30-year lifetime of the mortgage. Lower rates produced by the activities of Freddie Mac and Fannie Mae have been estimated to save America's homeowners between $8.4 billion and $23.5 billion annually in interest costs.¹

Conforming Mortgage Rates Are Lower Than Jumbo Mortgage Rates, Making Housing More Affordable
Source: Freddie Mac, HSH Associates, Banxquote

But Freddie Mac does much more than lower mortgage costs for the mortgages we purchase – because of competition, we lower mortgage rates for all conforming market borrowers. Moreover, low-down payment 30-year fixed-rate mortgages are more broadly available in the conforming market thanks to the financing activities of the GSEs.

30-Year Fixed-Rate Mortgages are More Broadly Available in the Conforming Market
Source: Federal Housing Finance Board’s Monthly Interest Rate Survey 2004

In summary, the GSE charter contains significant restrictions and requirements, as well as certain unique tools to aid the achievement of our mission. The system works because the tools are commensurate with the nature of the task. By using our Charter benefits to fulfill our mission of providing liquidity, stability and support to the mortgage market, Freddie Mac has helped to make home possible for more than 45 million families in the U.S.

¹ J. Pearce and J. Miller, Freddie Mac and Fannie Mae: Their Funding Advantage and Benefits to Consumers, January 2001.