What Is A Freddie Mac Loan?

What it does, who owns it and how are you affected by a Freddie Mac Loan?

If you are in the lending industry or have had experience with borrowing, you probably have heard the name Freddie Mac. But what is Freddie Mac exactly?

Freddie Mac is the informal name of the Federal Home Loan Mortgage Corp. It is a government-sponsored enterprise (GSE) that buys mortgages and combines them with other loan forms.

Freddie Mac works in collaboration with the Federal National Mortgage Association, commonly known as Fannie Mae. Freddie Mac’s operations deal with increasing the money supply that is available for mortgages and guarantees mortgages for homeowners that have low to middle-incomes.

What is a Freddie Mac Loan?

Freddie Mac charges a guarantee fee on all loans purchased that have been bundled, or securitized into mortgage-backed securities (MBS) that help provide investors with interest income.

Freddie Mac gives the funds to banks that use them to make new loans for homebuyers. This leads to a boost in the housing market and allows more people to become homeowners.

The FHLMC is known for giving banks the ability to create 30 year mortgages. Without Freddie Mac, banks would have no choice but to keep the loans on their books for about 30 years. This would lead to too much money being tied up. It can also be too risky as many people would end up defaulting over 30 years.

Freddie mac resells the mortgage backed securities to investors on the secondary market. This allows more investors to gain a profit from the real estate sector. These proceeds are used by Freddie to buy more bank mortgages which starts the whole process all over again.

How Does Freddie Mac Work?

Freddie Mac chooses to buy mortgages from banks and other lenders. The same types of mortgages are combined into bundles which are sold in shares to mutual funds, pension funds and insurance companies.

FHLMC guarantees that an agreed-upon payment would be received by the investors each month.

When you make your monthly mortgage payment, it is sent back to the FHLMC by the bank. Freddie Mac bundles your payment and sends it to the investors. It does not sell all of the mortgages it buys. Instead, Freddie Mac keeps some mortgages as investments.

How Does Freddie Mac Affect the Economy?

Freddie Mac’s impact on the economy is caused by the lowered rates. This leads to more available loans for new homeowners. For example, an additional 791,000 moderate-income families were able to buy homes when the rate was reduced from 8.5% to 8%.

Besides reducing them, Freddie Mac also makes interest rates more consistent. In 1970, there was a variation of the interest rates between the nation’s cities by as much as 1.7%. However, the difference today is only about 0.2%.

Since it was nationalized, Freddie Mac has helped homeowners avoid foreclosure by initiating programs that aided the cause. Freddie Mac also plays a role in stimulating the housing market by helping residential construction comprise 5% of the economy. This creates wealth for homeowners who receive greater equity if their homes are higher-priced.

How can a Freddie Mac Loan Affect you?

Freddie Mac gives you a lower interest on the mortgages you get from the bank. In fact, the interest rate is estimated to be at 0.5% with Freddie Mac which translates to about $12,000 over the life of a $100,000 loan.

Freddie Mac can also provide monthly housing market analysis. It is recommended to take a look at the FHLMC Monthly Volume Summaries if you are thinking of buying or selling a home so that you have a good idea of what is happening in the real estate market.

What is the Difference Between Freddie Mac and Fannie Mae?

Freddie Mac is considered as the “little brother” to Fannie Mae, the Federal National Mortgage Association. FHLMC was created by the Emergency Home Finance Act of 1970 to compete with Fannie Mae.

Before the Act, Fannie Mae only bought Federal Housing Association approved loans since it was more likely to hold them on its books instead of securitizing them. However, the creation of Freddie Mac changed that. Freddie Mac could buy any loan and securitize them.

The main differences between Freddie Mac and Fannie Mae are in the products they have and the markets they target. Fannie Mae had been turned into a publicly traded corporation two years earlier by President Lyndon Johnson who wanted to use its budget to finance the Vietnam War.

Freddie Mac ended up going public in 1989. The Financial Institutions Reform, Recovery, and Enforcement Act made this change in response to the Savings and Loan Crisis.

According to their charters, Fannie Mae and Freddie Mac both work to establish secondary market facilities for residential mortgages. Both entities are responsible for:

  • Maintaining stability in the secondary market for residential mortgages.
  • Responding appropriately to the private capital market.
  • Offering ongoing support to the secondary market for residential mortgages. This is done by increasing the liquidity of mortgage investments and making more money available for residential mortgage financing.
  • Promoting access to mortgage credit by increasing the mortgage investment liquidity and making more money available for residential mortgage financing.

According to the Fannie Mae charter, it has one additional responsibility. It is responsible for managing and liquidating federally owned mortgage portfolios to minimize any adverse effects on the residential mortgage market and minimize losses to the Federal Government.

So, is Freddie Mac a conventional loan?

Yes, Freddie Mac is a high loan-to-value (LTV) conventional loan that is a good alternative to FHA lending requirements and mortgage premiums. A conventional loan is any homebuyer’s loan that a government entity does not offer or secure. These loans are usually available through or guaranteed by a private lender or the two government-sponsored enterprises of Fannie Mae and Freddie Mac.

Conclusion

So, to answer the question, “what is a Freddie Mac loan?”, Freddie Mac and Fannie Mae were both created by the federal government and each company has their own private shareholders now. However, Freddie and Fannie were placed into government conservatorship and are now known as “government-sponsored enterprises.”

Nabeel Ahmad

Nabeel Ahmad

Nabeel Ahmad is the founder and editor-in-chief of Insurance Noon. Apart from Insurance Noon, he is a serial entrepreneur, and has founded multiple successful companies in different industries.

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