What is Freddie Mac and how do they help homeowners?
Freddie Mac | Creating liquidity in the mortgage market
Are you familiar with the Federal Home Loan Mortgage Corporation, or "Freddie Mac" for short? It's not an actual person; rather, it is a government-sponsored enterprise (GSE) that works alongside Fannie Mae and Ginnie Mae to make buying and selling homes easier. Freddie Mac has been influential in helping reduce barriers of entry into homeownership by providing much needed liquidity to support the mortgage industry.
What Is Freddie Mac's purpose?
In 1970 Congress established Freddie Mac through the Emergency Home Finance Act. Freddie Mac, also known as the Federal Home Loan Mortgage Corporation (FHLMC), a private corporation that was designed to bring an increased level of liquidity to America's secondary mortgage market and promote affordable housing.
Freddie Mac was created to provide liquidity to the mortgage lending market place. The additional liquidity creates a surplus of mortgage funds that in returns helps mortgage originators offer affordable housing loan programs with lower down payments and interest rates.
Before Freddie Mac emerged, Fannie Mae (Federal National Mortgage Association) was the only organization buying and selling mortgages from financial institutions such as banks and savings and loan associations for single family homes.
In the past, Freddie Mac was established as a public enterprise and its stock traded on the New York Stock Exchange. However, during 2008's U.S housing crisis, control of both the enterprises Fannie Mae and Freddie Mac shifted to the Federal Housing Finance Agency (FHFA). Presently they are known as government sponsored enterprises (GSE) with their stocks being privately dealt in.
Both Fannie Mae and Freddie Mac play a very important role in the US economy. Without the aid of these quasi-government enterprises, the cost of financing would decrease demand for housing.
The creation of these quasi-government sponsored enterprises helps the underserved communities with the addition of low-income housing loan programs that have lower down payment requirements.
What Does The FHLMC Do?
Freddie Mac strives to promote liquidity, stability and affordability across the U.S. housing market through the utilization of its array of strategic resources and assets.
Provide liquidity to banks
Freddie Mac is an essential part of the mortgage industry, providing liquidity to smaller banks, credit unions and other lenders by purchasing mortgages from them. This keeps mortgage funds at these institutions readily available for homeowners to borrow to purchase a home or refinance an existing mortgage.
Without this assistance from Freddie Mac, the mortgage market would struggle due to a lack of funds available for loans.
Stabilizes the supply of funds
Freddie Mac stabilizes the mortgage market by aggregating the mortgages it purchases and then selling them as securities on the secondary mortgage market. These pooled mortgage loans are grouped into asset backed securities known as mortgage backed securities. Investors are thus able to benefit from this process, allowing for a more secure real estate climate overall.
Creates affordability in housing
Although Freddie Mac does not have any control over home prices, they do offer some of the most attractive mortgage programs available such as Home Possible for lower income borrowers and families that have a minimum credit score of 620.
Freddie Mac Mortgages
There are various types of mortgages, yet all can be divided into two major groups: conforming and non-conforming loans. A conforming loan complies with the guidelines outlined bythe Federal Housing Finance Agency (FHFA).
How does liquidity in the mortgage market help?
Without Freddie Mac, banks would have to keep home loans on their books for the full 30 year term and accept all attendant risk involved. Fortunately, with this financial agency in place, mortgages are much more secure investments.
Does Freddie Mac originate home loans?
Freddie Mac doesn’t originate mortgage loans to home buyers, but rather purchases bundled mortgages from banks and other loan providers. This bundling and selling of mortgages gives banks the ability to increase the supply of funds required to issue more home loans, thus helping Americans achieve the dream of homeownership.
When making your monthly mortgage payment to the servicer, if it is backed by Freddie Mac, you are helping support investors who hold the mortgage-backed securities. Your payment will be bundled with others before being sent to Freddie Mac; they then take a percentage as a small fee and pass on the rest of the money on behalf of those investors.
How did Freddie Mac change the Mortgage Market?
Freddie Mac has had significant positive impact on the mortgage finance market; without them, interest rates would skyrocket as lenders absorbed all of the risk and capital investment associated with selling mortgages, - in turn making homeownership much more expensive throughout America. Fortunately, with their help this problem has been entirely avoided so that lending institutions can operate normally while keeping prices affordable for customers nationwide..
2008 Mortgage Crisis with Freddie Mac and Fannie Mae
Before the disastrous 2007-2008 housing crisis, Fannie Mae and Freddie Mac were publicly traded organizations whose executives aimed to maximize the value of their profits. Consequently, the CEO and other members of their executive team had a duty to ensure profitable growth.
Given the unforeseen housing market crash of 2008, the Federal Housing Finance Agency had to intervene to help restore confidence in the market.
Freddie Mac, backed by the U.S government, motivated by increasing the profits for shareholders was also incapable of defaulting. Therefore, Freddie Mac and Fannie Mae were motivated to take increasingly daring investments known as subprime mortgages.
These easy money subprime loans that had poor underwriting guidelines began to default leading to massive loss in money for both companies, Fannie Mae and Freddie Mac. Consequently, in September 2008, the Federal Housing Finance Agency stepped in before these two companies went bankrupt and placed them into conservatorship instead.
Freddie Mac Summary
Freddie Mac, Fannie Mae, and Ginnie Mae play an important for consumers to purchase or refinance a home. When Fannie Mae and Freddie Mac provide liquidity in the single family real estate market by buying and selling mortgages, they are decreasing the cost of financing thus creating affordable housing.
Fortunately, Freddie Mac and Fannie Mae are here to help ensure that the real estate mortgage market stays afloat by offering competitive financing, low interest rate loan options for all types of borrowers.
