Real Estate Terms

Freddie Mac Definition

The mortgage industry is a major financial sector in the U.S. It establishes various organizations and programs to promote mortgage lending and to offer affordable home financing. These programs include Fannie Mae, Ginnie Mae, and Freddie Mac. The government-sponsored organizations help banks and credit unions to create more cash flow. Due to the measures of these entities, the banks, credit unions, and all types of lenders continue originating, issuing, and processing home loans to the common people. Fannie Mae and Freddie Mac perform two functions; they hold mortgages in their portfolios and pool them into mortgage-backed securities. This post discusses how Freddie Mac operates and its role in the secondary mortgage market.

What Is Freddie Mac?

Freddie Mac purchases mortgages from lenders, pool them into mortgage-backed securities and then sells them to investors. These securities are available with a guarantee for timely interest and principal payments, even if the borrower fails to make payments. Freddie Mac stands for Federal Home Loan Mortgage Corp. (FHLMC). It is a government-sponsored organization established in 1970 to provide affordable financing to homebuyers. The company headquarters is in Washington and is one of the few organizations established to help reduce mortgage costs. Freddie Mac performs an essential role in the home financing system by providing liquidity, affordability, and stability in the mortgage market. By packaging mortgages into mortgage-backed securities, Freddie Mac attracts investors in the secondary mortgage market.

History of Freddie Mac

Freddie Mac was created in 1970 after Congress’s introduction of the Emergency Home Finance Act. It is a stock-holder-owned GSE (Government-sponsored Enterprise) that provides homeownership to moderate-income people. The company underwent a reorganization in 1989 under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). After this reorganization, it became a publicly owned company with shares available for trade at the New York Stock Exchange. Freddie Mac suffered during the financial crisis in 2008. After this crisis, the Federal Housing Finance Agency took control of Freddie Mac. According to some sources, the financial crisis of Fannie Mae and Freddie Mac was because of the unchecked growth of the companies. Freddie Mac is still under federal conservatorship but is also gradually transitioning towards independence.

How Does Freddie Mac Work?

Freddie Mac was established to enhance the credit flow in the market. The main aim of this organization is to improve the country’s economy by investing more in mortgages. This company is an important player in the secondary mortgage market as it buys mortgages. The company doesn’t originate mortgages but buys them from small commercial banks. These loans must meet certain standards that Freddie Mac sets. The following is a step-by-step breakdown of how Freddie Mac operates to make the housing market more affordable and stable:

  1. It purchases mortgages from small banks and lenders.
  2. After purchasing mortgages, it bundles these mortgages together to form mortgage-backed securities.
  3. It shares the shares of securities and sells them to individual investors, pension funds, and insurance companies.
  4. It provides a regular and consistent payment to the shareholders every month.
  5. The bank transfers this payment to Freddie Mac when a borrower purchases the mortgage.
  6. Freddie Mac pools the payment from different mortgages, obtains a fee, and then pays the remaining amount to the shareholders.

Freddie Mac Mortgage Forbearance

The Freddie Mac Mortgage Forbearance program offers help to those affected by the pandemic. With this program, people directly or indirectly affected by the Covid-19 pandemic can get mortgage relief. The mortgage relief allows the borrowers to get some relief if they miss any payments or delay them. The mortgage forbearance program provides up to 12 months and waives penalties and late fees. Besides that, the program also offers loan modification to get lower payments.

Freddie Mac Loan Requirements

Freddie Mac has certain requirements for the mortgages that it purchases. It purchases mortgages that qualify as conforming loans. A conforming loan is a mortgage that adheres to certain guidelines. These guidelines include the following:

  • Credit score: These loans require the borrower to have a credit score of at least 620
  • Loan limit: The loan limit for single-family homes is $647,200, and for high-cost areas, it is $970,800.
  • Down payment: For most of these loans, a down payment of 20% is required. However, Fannie Mae and Freddie Mac also back loans with 3% down payments.
  • Debt ratios: The debt-to-income ratio tells the borrower’s monthly debt ratio to their monthly income. Ideally, a DTI of 28 or 36 is required by most of these loans.
  • Loan-to-value (LTV) ratio: A loan-to-value ratio assesses the risks that may result from offering a loan to the borrower. It determines the ratio of the loan to the value of the asset purchased. Freddie Mac backs mortgages with an LTV of around 95% to 97%.

Freddie Mac vs. Fannie Mae

Just like Fannie Mae, Freddie Mac is a publicly traded GSE too. However, the main difference between those enterprises is that Fannie Mae purchases loans from large commercial banks, whereas Freddie Mac purchases loans from small banks. Besides that, Fannie Mae is older than Freddi Mac. The following are the main differences between Freddie Mac and Fannie Mae:

 Freddie MacFannie Mae
Year of establishment19701938
HeadquartersMcLean, VAWashington, DC
Main operationPurchases mortgages from smaller banksPurchases mortgages from large banks
StatusGovernment-sponsored entityGovernment-sponsored entity

Freddie Mac Example

Example: Suppose a bank offers mortgages to borrowers for purchasing homes. The bank offers lower interest rates because Freddie Mac purchases these mortgages from the bank. After purchasing these mortgages, Freddie Mac bundles similar mortgages into asset-backed securities or mortgage-backed securities. The company sells these mortgage-backed securities in the secondary mortgage market to improve liquidity in the capital market.

Frequently Asked Questions

How to Tell if Freddie Mac Backs a Loan?

To know if Freddie Mac backs the loan, the borrower must contact their lender or issuer. By contacting your servicer, mostly a bank or lender, the borrower can verify if the mortgage is owned or backed by Freddie Mac or Fannie Mae. Besides that, the borrower can also use the Lookup tool and find out. The borrower can also visit the official website directly if they want to contact Freddie Mac.

What are the Business Lines of Freddie Mac?

Freddie Mac oversees three main business lines, which include single-family and multi-family homes and capital markets. It offers mortgage-backed funding for single-family homes and supports apartment owners and renters through these loans. Besides that, Freddie Mac also supports the capital market by purchasing mortgage-backed securities and thus improves the liquidity in the market.

What are the Similarities Between Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac both provide support for affordable home ownership. Both of these organizations are government-sponsored but are under federal conservatorship after the financial crisis of 2008. Both organizations provide liquidity to mortgage lenders but act as competitors. The companies work in the secondary mortgage market and provide affordable housing to the common people.

Who Regulates Freddie Mac?

Freddie Mac operates under the U.S. Federal Government, which provides a financial backstop. The enterprise was placed under the federal government’s supervision after the financial crisis of 2008, and since then, it has been operating this way. The FHFA (Federal Housing Finance Agency) regulates and monitors Freddie Mac’s capital standards and controls its investment portfolios.

What to Know for the Real Estate Exam

Freddie Mac creates more affordable options at lower down payments to make homeownership more affordable. It is a Government-Sponsored Enterprise that frees up bank funds by buying mortgages. It uses mortgage-backed securities to achieve certain goals, such as it expands the secondary mortgage market. When Freddie Mac purchases mortgages, it increases the capacity of banks to provide more loans and mortgages at low-interest rates. Because of its role in the secondary mortgage market, Freddie Mac offers investors, lenders, and insurers an opportunity to participate more in the mortgage market. So, are you ready for your real estate exam? Learn more about real estate definitions if you want to clear your exam.

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