What is Freddie Mac?

What is Freddie Mac?

If you've been thinking about buying an Austin home or a house anywhere in the U.S., you may have seen the name "Freddie Mac" used and wondered what this referred to. You probably know that it has something to do with the U.S. housing market, but what exactly is it and how does it apply to you?

Freddie Mac is the more commonly-used name of the Federal Home Loan Mortgage Corporation. Congress created the FHLMC in 1970 as an alternative to Fannie Mae, which offered similar services.

There are a lot of misconceptions about the FHLMC and how it works. For example, some people think it is a government program or that it offers loans to home buyers.

The reality is a bit more complicated. Although the FHLMC is also owned by stockholders, it is sponsored by the government. Its existence does make more loans available to potential homeowners, but it does not offer mortgages itself. It also plays a slightly different role than Fannie Mae, as discussed in more detail below.

What Freddie Mac Does

If you look up the FHLMC, you might find something about its "support for the secondary mortgage market," which really doesn't tell you much if this isn't an industry you're already familiar with.

The FHLMC buys mortgage loans from lenders in large numbers. Then, it insures them in one of two ways so that they are more secure. It might hold onto them or it might sell them on as what is known as mortgage-backed securities or MBS.

In a secondary market, investors sell and purchase securities. It is in this market that the reselling occurs, and this is why you'll see Freddie Mac described in connection with the "secondary mortgage market."

The effect this activity has is essentially creating more profit for lenders and investors, making the overall ecosystem healthier and more stable and increasing liquidity. This means more opportunities for people to borrow money in order to purchase a home--essentially, creating a reliable and affordable supply of mortgage funds. In addition, the actions of the FHLMC contribute to lower interest rates, which is also important to home buyers.

Investors that purchase shares of MBS include pension funds and insurance companies.

What About Freddie Mac and Mortgage Rates?

This can still all seem very abstract if you don't work in the financial or housing industry, so it's normal to want to drill down to more concrete questions, such as asking about the relationship between Freddie Mac and mortgage rates.

The FHLMC does not set these interest rates, but it does track them across the U.S. housing market.

However, the FHLMC does make more loans available to buyers because of their guarantee. This makes lenders more likely to approve a loan and can make it easier for people who otherwise would not have qualified for home ownership to purchase one.

One way this happens is with longer repayment plans. Prior to the creation of Fannie Mae, lenders tended to be wary about loan periods that stretched beyond ten years. This meant that only people who could pay off their homes in that amount of time were about to buy homes. Thanks to Fannie Mae and the FHLMC, 30-year housing loans are common.

When it comes to Austin homes or homes in other cities throughout the country where housing prices are high and the market is hot, the existence of these organizations are especially important in ensuring wider access to home ownership.

Making homes affordable to a wider population was the original mission of Fannie Mae as well, which was the forerunner to the FHLMC and which still exists today. This raises the question of why you have the FHLMC if Fannie Mae exists and what the difference between the two is.

How Freddie Mac and Fannie Mae compare

You've probably also heard of Fannie Mae. You may have even assumed that these were the same organization.

They are similar, so what about Freddie Mac versus Fannie Mae? Why are there two agencies that do the same thing, and how are they different?

Fannie Mae came first. Also known as the Federal National Mortgage Association, Fannie Mae began operation as a federal government agency in 1938 and in 1954, became what is known as a private-public corporation in 1954.

Established in 1970, Freddie Mac was created as a private corporation but was owned by the Federal Home Loan Bank System. The Federal Home Loan Bank Board governed it. The intent was to further grow the secondary market, improving access to homeownership for more people.

The FHLBB no longer exists, and both Fannie Mae and Freddie Mac have gone through several changes in that time, but their role in making housing affordable for individuals has continued.

Aside from their origins, the other main difference in the two is where they go to buy mortgage loans. The banks that Freddie Mac buys from are smaller and are more focused on community banking services. Fannie Mae's loans are purchased at big commercial or retail banks.

How Does the FHLMC Help You?

You may wonder whether the FHLMC offers additional assistance besides moving money around, and the answer is yes.

There are a number of resources available on the FHLMC website, including a Freddie Mac selling guide. In addition, there are videos, calculators, articles, and more to help you better understand what is involved in borrowing money and buying a home, what your rights are and how may be able to access additional help whether you are looking in ATX, PDX, Florida, Ohio, or anywhere else in the country.

In various cities throughout the U.S., the FHLMC has borrower help centers staffed by counselors who can help you with many different issues, including helping you out if you are struggling to make your mortgage payments. They can also assist you in understanding more about buying a home and in assessing which lenders might be best for you.

Whether you are looking to buy or sell a home in Texas or anywhere else within the U.S. housing market, the guides and other information on the FHLMC website will be invaluable to you.

For more than 50 years, the FHLMC has played a substantial role in expanding homeownership throughout the country and is likely to continue doing so in the decades ahead.

Image Credit: Casimiro - stock.adobe.com

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