Freddie Mac

Was established to support the U.S. home finance system and to help ensure a consistent and reasonable supply of mortgage funds across the nation.

Author: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Reviewed By: Himanshu Singh
Himanshu Singh
Himanshu Singh
Investment Banking | Private Equity

Prior to joining UBS as an Investment Banker, Himanshu worked as an Investment Associate for Exin Capital Partners Limited, participating in all aspects of the investment process, including identifying new investment opportunities, detailed due diligence, financial modeling & LBO valuation and presenting investment recommendations internally.

Himanshu holds an MBA in Finance from the Indian Institute of Management and a Bachelor of Engineering from Netaji Subhas Institute of Technology.

Last Updated:December 4, 2023

What is Freddie Mac?

To support the U.S. home finance system and to help ensure a consistent and reasonable supply of mortgage funds across the nation, Freddie Mac was established by Congress in 1970.

It engages in the U.S. secondary mortgage market, purchasing loans that fulfill our requirements from approved lenders rather than making direct loans to customers.

These lenders can continue funding the housing market by offering further loans to suitable customers. Mortgages purchased by Freddie Mac are combined into securities, then sold to investors worldwide.

It ran unique programs with strict underwriting rules, including manufactured homes and properties with a significant lack of maintenance.

It also buys mortgages backed by residential buildings and country property estate and offers training to lenders' clients through its online Learning Center. It also created the first bilingual Credit Smart online curriculum to inform borrowers of their pre-purchase advising options.

Let's now define what a Mortgage Loan is. A mortgage loan is a secured loan that enables you to borrow money by giving the lender collateral in the form of a fixed asset, such as a home or commercial property. Until you pay back the loan, the lender retains the investment.

Types of mortgages

A mortgage gives a lender the legal authority to seize your property if you cannot pay back the borrowed amount plus interest.

  1. Conventional loan: Conventional loans exist in two varieties: conforming and non-conforming and the federal government does not back them.
    • Conforming Loans: Loans conform to the rules established by the Federal Housing Finance Agency (FHFA) regarding credit, debt, and loan size.
    • Non-Conforming Loans: Loans that don't comply - These loans do not comply with FHFA requirements. They could be provided to borrowers with poor credit or those who have suffered severe financial setbacks like bankruptcy, or they might be for bigger properties.
  2. Jumbo loan: Jumbo mortgages live up to their name: These loans exceed FHFA restrictions. Jumbo loans are more prevalent in high-cost locations like Los Angeles, San Francisco, New York City, and the state of Hawaii, where housing values may easily exceed conforming loan limitations.
  3. Government-insured loan: Although it is not a mortgage lender, the United States government does play a part in encouraging more people to buy homes. The Federal Housing Administration, the U.S. Department of Agriculture, and the U.S. Department of Veterans Affairs are three government organizations that back mortgages (VA loans).
  4. Fixed-rate mortgage: Your monthly mortgage payment will never change with a fixed-rate mortgage since the interest rate is maintained throughout the loan's term. Although some lenders permit customers to select any period between eight and thirty years, fixed loans generally have maturities of 15 or 30 years.
  5. Adjustable-rate mortgage (ARM): Adjustable-rate mortgages (ARMs) have variable interest rates that can rise or fall with market circumstances, in contrast to the stability of fixed-rate loans.

How It Works

After purchasing mortgages from banks and other lenders, it bundles comparable mortgages into "mortgage-backed securities." Finally, he sells shares of the bundles to insurance firms, pension funds, and other investors on the secondary market.

Freddie promises to provide the agreed-upon monthly payment to the investors, so how does this operate?

If mortgage lending is to continue, mortgage lenders must refill their reserves because they do not have an endless source of cash. As a result, it purchases those loans, freeing up money for lenders to offer mortgages to other suitable applicants, according to Edelstein.

The bank collects your monthly mortgage payment and sends it to them, which then pays its investors. So another advantage of Freddie Mac's contribution to the American economy is maintaining low mortgage interest rates.

Additionally, homeownership becomes more accessible when rates are low. Not all mortgages purchased are necessarily sold; others are maintained as investments.

How may it benefit individuals?

It offers lenders additional assurance when granting loans by insuring mortgages. As a result, people who would not have been authorized without our support can now become homeowners.

Before the Great Depression, only the private sector provided housing financing, and down payments on mortgage loans were frequently as high as 50% of the home's purchase price.

In addition, there was typically a balloon payment due after the period, and the lenders anticipated the borrower to repay the debt in 10 years or fewer.

These efforts encourage the housing market, which is advantageous for people. More homes are built when the housing market is vital, creating more jobs.

Even while not everyone is employed in the housing sector, those who are probably gain from boom times. They're more inclined to buy products and services from other businesses, possibly even the ones you work for. Restaurants, large box stores, and other businesses are more prevalent in developing communities.

How to get a specific loan?

Your lender will define your maximum borrowing capacity in a pre-approval letter. A pre-approval letter does not promise you a loan; instead, it simply states how much your lender is prepared to give you, subject to future information such as the home's worth and the loan's parameters.

To get pre-approved, you must fill out your lender's loan application and give them pertinent details about your credit, debt, employment history, down payment, and housing history.

Your lender can establish how much you might be able to borrow by using the following information to assess your 4 Cs:

1. Capacity: Your present and projected capacity to pay your bills

2. Capital or cash reserves: Your liquid assets, such as cash, savings, and investments

3. Collateral: The house, or the kind of house, that you want to buy

4. Credit: A record of timely payments of commitments such as bills and other obligations

You will receive a written pre-approval specifying the maximum amount you may borrow if your lender decides you qualify for a loan. Remember that it's a maximum and not necessarily how much you ought to borrow. It would help if you kept within your means and comfort zone.

Freddie Mac vs. Fannie Mae

Government agencies Fannie Mae and Freddie Mac were set up to help the housing market. The Federal National Mortgage Association is Fannie Mae, whereas Federal Home Loan Mortgage Corporation is Freddie Mac.

It was founded in 1970, more than 30 years ago, to help develop the secondary mortgage market, where investors and lenders can buy and sell home loans, and to reduce some interest rate risks for banks.

These organizations differ not just in terms of their origins but also terms of their target market and available goods. For instance, Mac purchases mortgages from smaller thrift institutions, whereas Fannie Mae buys them from big retail banks.

However, both assist banks in increasing loan volume and lowering interest rates.

The two companies either retain the mortgages as part of their respective portfolios or repackage them into mortgage-backed securities.

Both companies buy and sell traditional loans. Furthermore, although the federal government backs Fannie Mae and Freddie Mac, the loans are not: private lenders support conventional loans.

Therefore, you wouldn't submit a mortgage application to Freddie Mac or Fannie Mae directly, but any company may buy the mortgage you obtain.

Similarities

For many years, housing was made accessible to ordinary Americans via Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system. Still, they operated as organizations supported by the government.

The loans can also be conforming or non-conforming, which means they must adhere to or meet Freddie Mac's and Fannie Mae's funding requirements and not exceed a set limit. For 2022, the cap is $647,200 unless you live in a state with a higher cost of living that specifies differently.

This required them to generate a profit for the shareholders while establishing the secondary market necessary for selling mortgages.

The U.S. housing market was preserved by Fannie and Freddie working together. Ninety percent of new mortgage funding was provided by Fannie Mae, Freddie Mac, and FHLB by 2009.

That was more than twice as much of the mortgage market as it had before the 2008 financial crisis. Private mortgage lending had stopped.

Fannie and Freddie Differences

They purchase mortgages from various sources. For example, Fannie purchases them from big commercial banks, whereas Freddie buys them from smaller banks.

They also provide schemes for people who can only afford small down payments, such as The Home Ready loan provided by Fannie Mae.

Candidates must make no more than the average neighborhood income and reside in residence.

Fannie Mae provides the HomeReady® Mortgage, a loan program targeted at low- to middle-income homeowners that allow them to put down as little as 3%.

On the other side, Freddie provides the Home Possible® mortgage, which typically calls for a minimum down payment of 3%. To be eligible for this particular loan scheme, applicants must not earn more than the average income in their neighborhood.

The debt-to-income ratio for applicants must be no higher than 50%, and they must earn no more than 80% of the median income for the area.

Freddie Mac in the Financial Crisis

In the years preceding the financial crisis, Fannie Mae and Freddie Mac continuously injected additional cash into the American housing finance system by purchasing excessive mortgages on the secondary market. This supported the housing bubble that developed from 2005 to 2007.

Unsustainable mortgages spread due to loose regulation, financial engineering, and significant investment banks. As a result, many people received mortgage loans even though they would not have been eligible for house loan financing in more normal circumstances.

Due to Freddie Mac's and Fannie Mae's lending, homebuyers and the financial system were overvalued and out of balance. So to reassure the housing market, something had to be done.

Fannie and Freddie were severely impacted by the real estate bubble in 2007 and the ensuing financial crisis in 2008.

On September 6, 2008, just days before Lehman Brothers declared bankruptcy and spun the financial markets, the FHFA took control of the businesses and placed them under conservatorship to prevent a total collapse.

Will their Shares Trade Again?

Today, Fannie Mae's and Freddie Mac's shares are traded over the counter (OTC), meaning you can't buy them on a major stock exchange. The shares of FNMA and FMCC are both valued at less than $1 a share as of September 2021.

Investors still holding the shares are anxious for the companies to leave conservatorship, which would let them trade on a stock exchange again and rise in value.

FHFA presented a strategic plan for removing Fannie and Freddie from control in 2014. The strategy has three main objectives:

  1. Prevent foreclosures and maintain safe and sound mortgage credit flow to maintain strong, liquid, and adequate housing finance markets.
  2. Encourage more private money into the mortgage sector to lower taxpayer risk. This objective would lessen Freddie and Fannie's influence over mortgages.
  3. Establish a fresh structure for the refinancing of mortgages on single-family homes.

The goal is to develop a system that maintains mortgage availability and affordability while doing away with the implicit guarantee that caused the financial crisis of 2008.

Each year, the FHFA releases a scorecard to track progress toward these objectives. Congress must, however, also determine whether to remove Fannie and Freddie from the administration.

Freddie Mac FAQs

Researched and authored by Charbel Yammine | LinkedIn

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