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How We Provide Stability to the Mortgage Market
Our Congressional charter contains several restrictions that ensure we maintain a singular focus on the U.S. residential mortgage market. This contrasts with other corporations that may enter or exit any lawful line of business. Freddie Mac may not enter into lines of business outside of its charter. Today, mortgage credit is available whenever borrowers need it because Freddie Mac participates in this market during all economic circumstances – from the smooth and well functioning to the most disruptive. This constant presence brings stability to the mortgage market. Financial markets have their ups and downs – but we've decided as a nation that when it comes to people's homes, keeping markets stable is a good thing. Freddie Mac provides stability to the housing sector by providing funds counter-cyclically to lenders as a buyer of last resort. This means when other investors are not buying mortgages or are seeking to sell their mortgage investments because of adverse economic or market conditions, Freddie Mac helps to stabilize the mortgage market by purchasing mortgages and mortgage-backed securities for its retained portfolio.
This ability to stabilize the market is particularly important during times of economic downturn or market crises. For example, during the September 1998 financial crisis when the Russian government defaulted on its bonds and Long-Term Capital Management, a prominent hedge fund, was on the brink of failure, investors fled most markets for the safety of Treasuries and other government bonds. Freddie Mac (and Fannie Mae) became the predominant purchasers of mortgages and mortgage-backed securities during that time. While credit was curtailed in most other lending sectors, borrowers in the conventional, conforming market served by Freddie Mac continued to enjoy the availability of low-cost mortgage funds throughout the crisis. Mortgage rates even went down.
Freddie Mac's ability to purchase mortgages and mortgage-backed securities for its retained portfolio also can help stabilize the overall economy. Housing is crucially important to the U.S. economy, accounting for about one-quarter of economic growth since 2001. The economic downturn that began in late 2000 was to a substantial degree mitigated by the record levels of mortgage refinancing that took place from 2001-2003. Millions of borrowers took advantage of 40-year lows in mortgage rates to refinance into lower cost fixed-rate mortgages, and Freddie Mac and Fannie Mae provided much of the funds for these borrowers. In refinancing their mortgages, borrowers extracted as much as $300 billion in equity from their homes during this period, which they used for purposes ranging from home improvements to college education expenses to paying off other, higher-cost debts. Government policymakers, including Federal Reserve Chairman Alan Greenspan, noted that homeowners' abilities to reduce their mortgage costs and extract equity from their homes provided crucial stimulus to the economy that helped make the economic downturn brief. "The flexibility and size of the secondary mortgage market has been especially important in the United States. Since early 2000, this market has facilitated the large debt-financed extraction of home equity … That, in turn, has been critical in supporting consumer outlays in this country through the recession."1 1Remarks by Federal Reserve Board Chairman Alan Greenspan at the annual convention of the American Bankers Association, October 7, 2002.
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