The Federal Home Loan Mortgage Corporation, or FHLMC, is known as Freddie Mac, the entity created by Congress for the purpose of buying mortgages from lenders to increase liquidity in the market. Freddie Mac was created in 1970 and expressly authorized to create mortgage-backed securities (MBS) to help manage interest-rate risk.
Because the FHLMC buys mortgages, lenders don’t have to keep loans they originate on their books. In turn, these lenders are able to originate more mortgages for new customers. The mortgage market is able to keep capital flowing and offer competitive financing terms to borrowers because of this system. In other words, the market runs more smoothly because of Freddie Mac and its sister company, Fannie Mae, the Federal National Mortgage Association (FNMA).
If you want to know more about how this government-sponsored enterprise works and how it affects your money, read on for details on:
• What is the FHLMC and what are FHLMC loans?
• What is the difference between Freddie Mac and Fannie Mae?
• What are Freddie Mac mortgages?
• How does the Federal Home Loan Mortgage Corporation work?
Freddie Mac and Fannie Mae
These organizations, with their friendly-sounding nicknames, serve a very important purpose. Freddie Mac and Fannie Mae were created for the purpose of stabilizing the mortgage market and improving housing affordability. These government-sponsored enterprises (GSEs) do this by increasing the liquidity (the free flow of money) in the market by buying mortgages from lenders. Mortgages are then pooled together into a mortgage-backed security (MBS) and sold to investors. The process created the secondary mortgage market, where lenders, homebuyers, and investors are connected in a single system.
In the past, Freddie Mac and Fannie Mae operated as private companies, though they were created by Congress. Fannie Mae came first in 1938, followed by Freddie Mac in 1970. Freddie Mac’s addition in 1970 resulted in the creation of the first mortgage-backed security.
The federal government took over operations at both companies following the financial crisis in 2008. According to the National Association of Realtors, without government support of Freddie Mac and Fannie Mae, there wouldn’t be very much money available to lend for mortgages.
The Federal Housing Finance Agency (FHFA) has oversight of Freddie Mac and Fannie Mae. On a yearly basis, they assess the financial soundness and risk management of Fannie Mae and Freddie Mac.
What Is the Purpose of the FHLMC?
As mentioned above, the FHLMC, or Freddie Mac, makes the housing market more affordable, stable, and liquid by buying mortgages on the secondary market. When they buy these loans, the retail lenders they buy them from are able to originate more mortgages to new customers and keep the mortgage market flowing smoothly.
There are many types of mortgage loans; the ones that Freddie Mac buys are known as conventional loans. The mortgage loan must meet certain standards (such as loan limits) for Freddie Mac to guarantee they will buy these loans.
In general, the process of successfully obtaining a mortgage usually looks something like this once the buyer has made an offer on a house that’s been accepted:
• The consumer finds a lender, if they haven’t already done so, and will apply for a mortgage.
• The lender collects documentation required by the loan type and submits it to underwriting.
• The underwriter approves the loan.
• The homebuyer closes on the loan, and mortgage servicing begins
• The lender sells the loan on the secondary mortgage market to Freddie Mac (or Fannie Mae or Ginnie Mae, depending on what type of loan it is and from what type of lender it originated).
From a homebuyer standpoint, they will see the outward mortgage servicing, which is the entity to which they will send their monthly payment and who takes care of the escrow account. The mortgage servicer is the one who forwards the different parts of the mortgage payment to the appropriate parties.
Mortgage servicing can also be sold from servicer to servicer, but this is different from the sale of a mortgage to Fannie Mae or Freddie Mac.
Freddie Mac is also tasked with the responsibility of making housing affordable. There are specific mortgage programs guaranteed by Freddie Mac and offered by lenders.
• HomeOne®. HomeOne is a mortgage program that offers low down payment options for first-time homebuyers. There are no income or geographic limits.
• Home Possible®. Home Possible is a program for first-time homebuyers and low- to moderate-income homebuyers. It offers discounted fees and low down payment options.
• Construction Conversion and Renovation Mortgage. This type of loan combines the costs of purchasing, building, and remodeling into one loan.
• Manufactured Home Mortgage. For qualified buyers, Freddie Mac can guarantee mortgages when buying manufactured homes that meet their criteria.
• Relief Refinance/Home Affordable Refinance Program (HARP). For borrowers with a good repayment history but little equity, loans are available to refinance into a more affordable rate.
Recommended: What Is the Average Down Payment on a House?
Understanding Mortgage-Backed Securities
After a mortgage is acquired from a lender, Freddie Mac can do one of two things: either keep the mortgage on its books or pool it with other, similar loans and create a mortgage-backed security (MBS). These MBS are then sold to investors on the secondary mortgage market.
What’s attractive about a mortgage-backed security to an investor is how secure it is. Fannie Mae and Freddie Mac guarantee payment of principal and interest. Both Fannie Mae and Freddie Mac issue mortgage backed securities now.
Does the FHLMC offer Mortgage Loans?
Freddie Mac does not sell mortgages directly to consumers. You won’t see a Freddie Mac mortgage or an FHLMC loan advertised to consumers. Instead, the FHLMC buys mortgages from approved lenders that meet their standards.
Recommended: What Are the Conforming Loan Limits?
The Takeaway
The housing market in the United States arguably benefits from the role of the Federal Home Loan Mortgage Corporation. Lenders can essentially originate mortgages to as many borrowers as can qualify. The free flow of capital created by the FHLMC also means mortgages are less expensive for homebuyers all around. In short, the smooth operation of the housing market owes much of its success to Freddie Mac and Fannie Mae.
If you’re shopping for a home and looking for a lending partner, consider what SoFi has to offer. With dedicated loan officers, competitive interest rates, flexible terms, and low down payment options, SoFi Mortgage Loans can offer something for nearly every borrower.
SoFi Mortgage Loans: Simple, smart, flexible.
FAQs
What does FHLMC stand for?
FHLMC is an abbreviation of Federal Home Loan Mortgage Corporation. It is commonly referred to as Freddie Mac.
What type of loan is FHLMC?
Freddie Mac guarantees conventional loans that adhere to funding criteria, but it does not offer Freddie Mac mortgages directly to consumers.
What is the difference between FNMA and FHLMC?
Fannie Mae and Freddie Mac originated in different decades and initially had different purposes, but for the most part, they serve the same purpose today of helping to improve mortgage liquidity and availability.
Photo credit: iStock/Andrii Yalanskyi
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