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The Federal Home Loan Mortgage Corporation: What Is Freddie Mac?

Freddie Mac is a government-sponsored enterprise (GSE), which the congress created in 1970. The original purpose behind Freddie Mac, which still serves as the guiding light today, is to grow and support homeownership for middle-income Americans. But what exactly is Freddie Mac, and how does the company work? We’ll dive into these common questions below.

How Does Freddie Mac Work?

Despite how often you may hear the name Freddie Mac when you’re involved in a real estate transaction, it’s important to know: you are not personally banking with Freddie Mac, nor is Freddie Mac issuing you a mortgage. Freddie Mac serves the secondary mortgage market.

What Does Freddie Mac Do?

The secondary mortgage market may seem foreign, after all, it’s not a market someone interested in buying a home typically directly interacts with. But the secondary market is important, and what happens on the secondary market makes homeownership possible for millions of Americans. According to Freddie Mac’s website, the easiest way to understand the secondary mortgage market is to “think of America's mortgage lenders as retail stores where people go to get mortgages, the secondary mortgage market is their supplier.”

So what does Freddie Mac do? Freddie Mac is in the business of purchasing loans from various lenders, and reselling those loans to various banks, institutions and investors by way of a mortgage backed security. The end outcome is, the lenders that directly interact with, and issue loans to, millions of Americans resell their loans to Freddie Mac. As a result these lenders continue to have the funds needed to issue more mortgages for millions of new customers.

Is Freddie Mac A Government Backed Loan?

Freddie Mac is a federally backed home mortgage company created by the US congress. Unlike an FHA loan, the loan itself is not insured or issued by the US government. Instead, Freddie Mac functions on the back end. Freddie Mac buys the loan from the boutique lender who originally issued the loan to the consumer. Freddie Mac is a private company that serves a public purpose, and works directly with government agencies.

Who Is Eligible For Freddie Mac?

Freddie Mac buys home mortgages from smaller, boutique lenders. If you’re applying for a mortgage at a national name bank, Freddie Mac would not be the company behind the scenes repurchasing that loan - that’s Fannie Mae’s business.

Additionally, the loans must meet various criteria. Freddie Mac does not buy non-conforming loans. What is a non-conforming loan? Simply put, a non-conforming loan is a loan that doesn’t meet various standards established by Fannie Mae and Freddie Mac. The two main reasons why a loan wouldn’t meet these standards are either; the loan is too large to be a conforming loan (such as a Jumbo Mortgage), or, someone else can buy the loan.

If the new homeowner has a high debt to income ratio, or a low credit score, that can also trigger the loan to be non-conforming as well.

The housing market crash in 2007 and 2008 resulted in the federal government bailing out Freddie Mac and Fannie Mae from bankruptcy. Following the dot com bubble, it was far too easy to obtain a mortgage. Banks were issuing mortgages to customers with high debt to income ratios and overall low income requirements. Additionally, adjustable rate mortgages were causing millions of Americans to no longer be able to afford their mortgage. Freddie Mac and Fannie Mae became a lot more strict with which loans they accepted following the crisis they faced in the not so distant past, as did the various lending institutions.

How Does Freddie Mac Affect The Mortgage Market?

Freddie Mac plays a vital role in affecting the mortgage market. Although Freddie Mac does not issue consumer loans, they provide the lenders with enough liquidity, or cash, so the lender can continue operation and issue more loans.

For example, bank ABCD may issue $100,000,000 of mortgages throughout the year. That’s quite a bit of money, and unless the bank is able to resell those mortgages on a secondary market, the bank may not have enough money to continue lending to more customers interested in purchasing a home. Since 1970, Freddie Mac has contributed over 11 trillion dollars to total mortgage funding!

Without Freddie Mac, homeownership can get more expensive for Americans. If the nonbank mortgage lenders aren’t able to resell their loans to Freddie Mac, they wouldn’t have liquidity as they do not operate with other deposits. As a result, they would have to charge a higher interest rate for lending their money.

Additionally, a mortgage in America may look like what it did in the 1930’s, 40’s and 50’s before the introduction of Freddie Mac and Fannie Mae. If one was interested in buying a home during that era, one would have to put down a substantially larger down payment, leading to more cash flow for the lender.

What Is The Difference Between Freddie Mac And Fannie Mae?

Fannie Mae is another name you may hear mentioned when you’re involved in purchasing a home. But what is the difference between Freddie Mac and Fannie Mae? Fannie Mae and Freddie Mac are both very similar, but at their core, serve two different customers.

Freddie Mac serves more boutique, or smaller thrift mortgage lenders. Fannie Mae buys mortgages from large retail banks.

Fannie Mae does not issue loans to the consumer either, and only operates in the secondary mortgage market. Just like Freddie Mac, Fannie Mae buys mortgages on the secondary mortgage market, packages numerous mortgages into a singular security, and resells that security to various investors on a public or private exchange.

Conclusion

Freddie Mac may not be the one issuing you a loan, but they certainly influence the loan market, and perhaps, one's ability to receive a loan to buy a home. Freddie Mac provides small, thrift lenders with the supply (cash) needed to operate and lend money to the end consumer. This has resulted in today’s homebuyer appreciating a lower interest rate on borrowed money, and a more lenient down payment requirement on the total loan value.

 

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This page last updated: March 21, 2022