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 isn’t an actual person but is, along with other semi-governmental entities like Fannie Mae and Ginnie Mae, a government-sponsored enterprise that plays an important role in the mortgage industry and – by extension – the process of buying and selling a home.
What Is Freddie Mac, To Be Exact?
Freddie Mac is an alternative name for 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 initially created as a public enterprise and even had stock listed on the New York Stock Exchange. However, in 2008, during the housing crisis in the U.S., the Federal Housing Finance Agency took over some control of Freddie Mac as well as Fannie Mae. As a result, today, both companies are known as government-sponsored entities (or GSEs) and have privately traded stock.
What Does the FHLMC Do?
Freddie Mac's mission is to provide liquidity, stability, and affordability to the U.S. housing market. It works toward these goals using a variety of tools at its disposal.
Liquidity
Freddie Mac buys home mortgages, primarily from smaller banks, credit unions, and other lenders. In doing so, Freddie Mac keeps its lender network liquid so it can continue making loans. This has proven key to keeping the mortgage industry in continuous operation.
Stability
Freddie Mac pools the mortgages it buys into securities, which it sells to investors on the secondary mortgage market. This provides stability to the overall mortgage market.
Affordability
While Freddie Mac has no role in setting home prices, it does offer preferential mortgage programs, like Home PossibleSM and Home Possible AdvantageSM.
Freddie Mac Mortgages
Many types of mortgages exist, but they fall under two main categories: conforming and non-conforming loans. A conforming loan meets requirements set by the Federal Housing Finance Agency (FHFA). Freddie Mac can’t 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 the risk of each individual home loan.
Does Freddie Mac Issue Loans Directly?
Freddie Mac doesn’t provide loans directly to home buyers but instead buys bundled mortgages from banks and other mortgage originators. By bundling and selling mortgages to Freddie Mac as mortgage-backed securities, banks can free up their capital to lend money to more Americans.
If Freddie Mac backs your loan, when you make your monthly mortgage payment to your mortgage servicer, the servicer sends the money to Freddie Mac. Freddie Mac then bundles your payment with others, takes a small fee, and passes the rest of the money on to the mortgage-backed securities investors.
How Does Freddie Mac Affect The Mortgage Market?
Freddie Mac has a generally positive effect on the real estate mortgage market. This is because, without Freddie Mac, mortgage originators would be required to hold mortgage loans in-house.
As a result, these enterprises would assume all the risk and tie up their capital. This would increase the interest rates that banks would need to make a profit and therefore drive up the total cost of homeownership across the country.
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 couldn’t default, Freddie Mac and Fannie Mae took increasingly riskier investments, such as subprime mortgages. In September 2008, the Federal Housing Finance Agency put Freddie Mac and Fannie Mae into conservatorship rather than let them go bankrupt rather than letting them go bankrupt.
Conclusion
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 willing to lend them the money.