Freddie Mac is the nickname for the Federal Home Loan Mortgage Corp. or FHLMC.
What is Freddie Mac?
Freddie Mac is a government-sponsored enterprise or GSE that was chartered by Congress in 1970. Established after Fannie Mae, Freddie Mac was designed to help expand the secondary mortgage market. Its purpose is to keep mortgage capital flowing. Freddie Mac guarantees mortgages for low- and middle-income homeowners.
How does Freddie Mac work?
Freddie Mac buys mortgages from mortgage lenders and securitizes them. It then pools them with other loans and sells the debt to investors on the secondary mortgage market. As a result, these mortgage lenders are no longer tied up by so many mortgage loans. They can use the money received from Freddie Mac to make new loans to homebuyers. This process helps provide liquidity and stability to the U.S. mortgage financing system.
When you make your monthly mortgage payment on a Freddie Mac-owned loan, the issuing bank sends the funds to Freddie Mac. In turn, Freddie Mac pays its investors.
One important feature is that Freddie Mac guarantees payment of the principal and interest on the mortgage-backed securities that are sold to investors. Freddie Mac promises to pay the investor on these mortgages even if the borrower defaults. As a result, this guarantee helps mitigate some risks for the investors.
Freddie Mac Loans
Freddie Mac does not provide mortgages to borrowers. Instead, Freddie Mac supports the home loans made by private lenders, such as banks. For Freddie Mac to purchase the loan, it must meet specific underwriting guidelines. For example, borrowers must have an affirmation of financial hardship and have a housing expense-to-income ratio higher than 31% of their gross monthly income.
Freddie Mac Home Possible is a unique mortgage program for first-time homebuyers. This program is geared at helping low to moderate income home buyers. If you qualify, this home loan allows for a low downpayment as low as 3% of the property purchase price, lower interest rates, and reduced monthly private mortgage insurance costs.
Additionally, with Freddie Mac-owned loans, borrowers who are facing foreclosure can get help. Freddie Mac’s Flex Modification program can reduce an eligible borrower’s mortgage payment by 20%. A few possibilities include lowering your interest rate or extending the term of your loan.
Freddie Mac Versus Fannie Mae
Fannie Mae and Freddie Mac are very similar and serve the same purpose. Fannie Mae, or more officially, the Federal National Mortgage Association, was created in 1938 during the Great Depression. In 1970, Freddie Mac was established to compete with Fannie Mae. It is known as Fannie Mae’s little brother.
Even though they have the same business model, the main difference between them is where they buy their mortgages. Fannie Mae mainly purchases mortgages from major retail or private commercial banks. Then, they sell them as mortgage-backed securities. On the other hand, Freddie Mac buys its mortgages from smaller banks. These banks are known as “thrift banks” that provide banking services to communities.
Loans that meet the funding guidelines of Freddie Mac and Fannie Mae are called conforming mortgages. To find out if Freddie Mac owns your mortgage loan, go to Freddie Mac’s website and use their loan lookup tool.