You’ve probably heard of Freddie Mac, but do you fully understand the role it plays in the mortgage market? The Federal Home Loan Mortgage Corporation or “Freddie Mac” is a government-sponsored enterprise that owns or guarantees many of the mortgage loans in the United States. Freddie Mac’s main function is to provide liquidity to the nation’s mortgage financing system.
Keep reading to get details about how Freddie Mac works.
Freddie Mac and its counterpart Fannie Mae are government-sponsored enterprises (GSEs). This means that these companies are privately owned, but they receive support from the federal government. Fannie Mae was chartered (established) in 1938, and Freddie Mac was chartered in 1970.
Freddie Mac and Fannie Mae own or guarantee nearly half of all existing U.S. mortgages and around 90% of new ones.
Freddie Mac provides stable funding for the mortgage market, but it doesn’t make loans directly to home buyers. Instead, it supports the nation’s housing finance system though the secondary mortgage market.
Banks, credit unions, and other retail financial institutions make home loans to borrowers, which the lenders then sell to Freddie Mac. Mortgages that Freddie Mac buys must meet strict criteria. Loans that are eligible for sale to Freddie Mac are called “conforming loans.”
In this process, Freddie Mac provides liquidity for the mortgage market because lenders use the money they get from selling loans to fund more mortgage loans.
Freddie Mac keeps some of the mortgage loans it buys and securitizes others. “Securitization” happens when Freddie Mac takes the loans it purchases and aggregates (or pools) them into debt securities called mortgage-backed securities, which are then sold to investors. To reduce the investors’ risk, Freddie Mac often guarantees payment of principal and interest on their mortgage-backed securities in exchange for a fee. Basically, by guaranteeing the loan, Freddie Mac agrees to pay the investor even if the borrower defaults.
Borrowers who have a Freddie Mac-owned loan and are facing a foreclosure get access to special loan workout options. One potential option for homeowners who are struggling to make their mortgage payments is a Flex Modification. The Flex Modification program, which replaces the now-expired Home Affordable Modification Program (HAMP) program, is supposed to reduce an eligible borrower’s mortgage payment by about 20%.