Federal Home Loan Bank System - FHLB

What are Freddie Mac and Fannie Mae? while they're

government-sponsored loan vehicles that's what now first up Freddie Mac

Federal Housing loan mortgage corporations kind of rolls off your

tongue there doesn't it well they provide liquidity affordability and

stability in the housing market both Freddie Mac and Fannie Mae buy

mortgages from lenders they package and pool them like put them all in one easy [Lenders and Investors]

to buy a package and sell them to investors and this magic happens via

these government organizations providing money at reasonable interest rates to

banks savings and loans and other mortgage distributors who in turn lend

that money out to Joe the Plumber buying his relatively inexpensive first

or second home Freddie Mac was created during the Nixon administration to make [Nixon in a parade]

the buying of mortgages more liquid especially for the little guy the small

mortgage first time home buying public well a big driver in all of this was the

notion that owning your own home was a central part of the American Dream and [guy moving into a sold house]

that anyone and everyone who was willing to work hard and and generally do the [guy fixing pipes]

dance with you know the khaki pants should in fact be able to afford to own [people dancing in khaki pants]

their you know semi malfunctioning septic tank all yours baby Freddie Mac [septic tank getting emptied]

and Fannie Mae also packaged a bunch of mortgages and sell them into the

secondary mortgage market lenders can then have further liquidity and make [lenders, Freddie Mac, secondary mortgage market flow chart]

more loans stimulating the economy on many levels additionally these

organizations guarantee the timely payment of interest and principal to the

bank's loaning that money thus de-risking a lot of the loan risk from

an investor perspective and having the resulting outcome usually be cheaper

interest rates for the borrowers well Freddie's partner in this dance is

Fannie Fannie Mae aka the federal National Mortgage Association Freddie [fancy dancing]

leads in buying mortgages on the secondary market he puts them all in an

easily digestible investment vehicle and then resells them well the goal of both

Freddie and Fannie is to stabilize and expand the broader housing

market especially at the lower end there well the key difference economically

between the two is the supplier of debt or rather from whom they buy Freddie

buys from myriad smaller institutions in that secondary market whereas Fannie

buys from large commercial banks why does that work

no like this Freddie knocks on the door of the Bank of America mortgage loan [Freddie knocks on mortgage door]

Department in there a big national clearance center right there up in the

clouds he sifts through thousands of mortgages that fit one set of criteria

or another a certain loan size a certain duration to maturity a certain risk

level even geographic exposure like we're nervous about the southeast

because global warming is Florida gonna be a big swimming pool or not yeah well [map of united states, florida highlighted]

Freddie then creates a financial product in which investors can you know invest [Freddie picking up papers]

which is like seven billion dollars worth of mortgages in one unit well [box of $7 Billion worth of Mortgages]

maybe they have an average size of a hundred grand so in total in that unit [mortgages going into risk bucket]

there are at ten thousand of these small mortgages in one bucket which of all of

them pay fully to maturity as expected well then they will deliver to investors

a return of say six point two three four or five percent something like that and

everyone knows that there will be some defaults in these mortgages some

deadbeats who need lawyers that come after them to pay the bills they [guy driving car]

promised to pay some who have calamitous family situations that won't just don't [guy driving fancier car]

let them have the dough to pay and sadly they will be escorted kindly out of [coffin in church, guy moving out of foreclosed house]

their homes by the sheriff to go live in their station wagon or wherever they're [station wagon parked at lake]

forced to go live it's all part of the mortgage dance and Freddie's job is to

aggregate those loans and then resell them to investors who want to just write

one big fat check nut and thousand of them and Fannie Mae basically sprays [Freddie Mac $1B check]

wd-40 on the train track to let everything slip and slide along all the [WD-40 sprayed on train track]

more lovingly because it's very difficult to do the dance when you're

holding ten thousand cheques so yeah maybe Freddie and Fannie can help you [businessman dancing with bags of money]

hold those Oh