Freddie Mac: What Is The Federal Home Loan Mortgage Corporation (FHLMC)?
Andrew Dehan3-minute read
May 06, 2022
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If you’ve ever bought, sold or considered buying or selling a home, you may have heard of the Federal Home Loan Mortgage Corporation, more commonly known as “Freddie Mac.” Freddie Mac is not an actual person, but is, along with other semi-governmental entities like Fannie Mae and Ginnie Mae, a government sponsored entity that plays an important role in the mortgage industry and (by extension) the process of buying and selling a home.
What Is Freddie Mac?
As we mentioned earlier, Freddie Mac is not an actual person but is instead a variant of the initials of the company’s full name, the Federal Home Loan Mortgage Corporation or FHLMC. Freddie Mac was created in 1970 as part of the Emergency Home Finance Act to expand the secondary mortgage market in the United States.
Prior to the creation of Freddie Mac, the Federal National Mortgage Association (also known as Fannie Mae) was the only institution that bought real estate mortgages and home loans from issuers (primarily banks and savings and loan associations).
Freddie Mac was originally created as a public enterprise, and even had stock listed on the New York Stock Exchange. In 2008, during the housing crisis in the U.S., the Federal Housing Finance Agency took over both Freddie Mac and Fannie Mae. The U.S. government now has full control over Freddie Mac and Fannie Mae.
What Does Freddie Mac Do?
Freddie Mac’s mission is to provide liquidity, stability and affordability to the US housing market. It works toward these goals using a variety of tools at its disposal.
Freddie Mac buys home mortgages, primarily from smaller banks and savings and loans. In doing so, Freddie Mac keeps its lender network liquid, so it can keep making loans. This has proven key to keeping the mortgage industry in continuous operation.
Freddie Mac then pools the mortgages it buys into securities, which it sells to investors on the secondary mortgage market. This creates a secondary demand for mortgages, to satisfy investor demands, which in turn provides stability to the overall mortgage market.
While Freddie Mac has no role in setting home prices, it does offer preferential mortgage programs, like Home PossibleSM and Home Possible AdvantageSM.
What Types Of Mortgages Does Freddie Mac Buy?
There are many types of mortgages, but there are two main categories: conforming and non-conforming loans. A conforming loan conforms to the consumer protection rules developed by the Consumer Financial Protection Bureau (CFPB).
Those rules were created in response to the 2008 financial crisis, which started with defaults on subprime mortgages that had been packaged as securities and sold to investors on the secondary mortgage market.
Freddie Mac cannot buy non-conforming loans.
How Does Buying Mortgages Benefit Homeowners?
Many home loans on the mortgage market are for 30 years, and without Freddie Mac, the issuing banks would have to keep the mortgage on their books for the entire term of the loan and assume all of the risk of each individual home loan.
Does Freddie Mac Issue Loans Directly?
Freddie Mac does not make loans directly to home buyers. Instead, it buys bundled mortgages from the banks and other mortgage originators. By bundling and selling mortgages to Freddie Mac as mortgage-backed securities, banks can mitigate their risk and free up their capital to relend.
When you make your monthly mortgage payment to your servicing bank, the bank sends the money to Freddie Mac, which bundles your payment along with others, takes a small fee and passes the rest of the money on to the investors who hold Freddie Mac's mortgage-backed securities.
How Does Freddie Mac Affect The Mortgage Market?
Freddie Mac has a generally positive effect on the real estate mortgage market. As we discussed earlier, without Freddie Mac, banks, savings and loans associations, credit unions and other mortgage issuers would be required to hold mortgage loans in-house.
That would require them to take all the risk themselves as well as tie up their capital. That would increase the interest rates that banks would need to make a profit and therefore drive up the total cost of homeownership inside the housing market.
Fannie, Freddie And The 2008 Mortgage Crisis
In the years leading up to the housing crisis of 2007 and 2008, Freddie Mac and Fannie Mae were publicly traded corporations. As such, their CEO and executive team had the mandate to increase profitability.
Since the mortgages they held were backed by the U.S. government and could not default, Freddie Mac and Fannie Mae took increasingly riskier investments such as subprime mortgages. In September 2008, rather than let them go bankrupt, the Federal Housing Finance Agency put Freddie Mac and Fannie Mae into conservatorship.
The Bottom Line: Freddie, Fannie And Ginnie Keep Mortgages Flowing
Freddie Mac works to help support the real estate mortgage market. Without Freddie Mac, Fannie Mae and Ginnie Mae, all home buyers would pay higher interest rates to get a mortgage, if they could find a lender able to originate one.
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What Is Fannie Mae And How Do FNMA Loans Work?
Mortgage Basics - 5-minute read
Kevin Graham - June 23, 2022
The Federal National Mortgage Association (FNMA), or Fannie Mae, purchases and backs mortgage loans for borrowers. Learn more about how Fannie Mae works here.