What Exactly Is Freddie Mac?
Freddie Mac, also known as the Federal Home Loan Mortgage Corporation (FHLMC), is one of two key secondary mortgage market companies. The second entity is Fannie Mae.
Fannie and Freddie purchase mortgages from lenders. These lenders consequently have more funds available to finance property purchases.
Many mortgage applicants in the United States can become homeowners because of these two organizations. About 66% of them.
Freddie Mac and Fannie Mae also contribute to the relatively low mortgage interest rates American homeowners enjoy.
What Does Freddie Mac Do?
Not only does Freddie Mac play a significant role in the mortgage sector, but also in the economy as a whole. According to Fortune, Freddie ranks 40th by revenue among U.S. firms. The larger Fannie Mae is 22nd.
Freddie and Fannie do similar activities. They get loans from lenders. The mortgages are subsequently assembled into mortgage-backed securities (MBS). MBS holdings are offered to global investors.
Mortgages are purchased and sold in the so-called “secondary market.” This is an electronic platform that distributes mortgage funds across the United States.
Consequently, banks and lenders can create additional loans for homebuyers.
Freddie Mac and the Secondary Mortgage Market
It is helpful to visualize Freddie, Fannie, and the secondary mortgage market with greater specificity.
Consider a local bank. It can invest $10 million in local mortgages. If the average mortgage balance is $200,000, the bank can generate 50 loans. ($200,000 x 50 Equals $10 million.)
If you are the 51st possible borrower in this situation, money is not available for you.
At this point, the secondary market becomes significant.
The bank sells its fifty mortgages on the secondary market to the highest bidder. In many instances, Freddie Mac will be the winning bidder. Now that the bank has additional funds, it can continue to provide local mortgages.
There are certain advantages to this system. The banks have a steady cash flow, people can purchase homes, and the real estate market is buoyant.
Additionally, Freddie Mac offers MBS shares to global investors. This brings more capital into the United States. More capital, or more availability, decreases interest rates. This is excellent news for mortgage holders.
How Freddie Mac Affects Your Mortgage
Borrowers perceive the mortgage as a source of debt. On the secondary market, however, a mortgage is an asset that may be purchased and sold.
On the secondary market, purchasers seek to ensure that the mortgages they acquire carry as little risk as possible. In addition, Freddie Mac and Fannie Mae decrease risk by establishing criteria for the sorts of loans they will buy and sell.
These rules, which comprise more than 2,000 pages, provide the criteria for what constitutes a “safe” mortgage investment. Applicants must frequently fulfill these requirements to be deemed eligible.
In other words, Freddie Mac and Fannie Mae significantly influence who receives a mortgage loan.
Freddie Mac Guidelines for Conforming and Conventional Mortgages
“Conventional” or “conforming” loans adhere to the Freddie Mac and Fannie Mae criteria.
Freddie Mac and Fannie Mae’s standards for conforming loans stipulate, to name a few examples:
The magnitude of the mortgage (limits vary by state)
- Minimum credit score needed (usually 620)
- Minimum down payment required (as low as 3 percent)
- Private mortgage insurance (needed for down payments of less than 20%)
- Debt-to-income ratios (usually permitted up to 43%)
Lenders often prefer conforming loans since they may be sold on the secondary market.
That may appear restrictive to buyers who do not match the Fannie/Freddie mold. Nevertheless, compliant standards are sometimes reasonably flexible.
Yes, there are norms and regulations, but there are exceptions, sometimes called “compensating considerations.”
For instance, you may have a high debt-to-income ratio and significant monthly expenses (DTI). Your loan request may be declined. However, you may have compensatory circumstances that balance a high DTI, such as a large down payment or substantial liquid assets.
There are choices for folks who need to satisfy conforming loan standards. Government-backed mortgages, such as FHA, VA, and USDA loans, have varying eligibility requirements.
Some lenders also produce nonconforming customized mortgages. These so-called “portfolio” loans are held by lenders until repayment. Portfolio loan requirements may be much different (and simpler to fulfill) than conforming mortgage requirements.
Home Possible Mortgages Are Flexible Home Loans Backed by Freddie Mac
The Home Possible mortgage program from Freddie Mac is an example of unconventional real estate financing.
- Only 3% down is needed.
- You can qualify for the program even if you have poor credit.
- Up to 30% of the borrower’s income may come from rent, maybe from a roommate or boarder.
- Investors are invited
- A lender may provide the borrower with a gift.
Loan officers can provide further information regarding Freddie Mac. Shop around to find the best terms and pricing. Inquire about specific programs that may be optimal for your circumstance.
Is Freddie Mac a Government-Owned Entity?
The federal government established Freddie Mac and Fannie Mae. Currently, each corporation has private stockholders.
Freddie and Fannie were put under government control in 2008. Today, they are frequently referred to as GSEs or “government-sponsored enterprises.”
According to ProPublica, the federal government loaned $71.6 billion to Freddie Mac and has received $122 billion in repayment thus far.
Should the businesses be placed under conservatorship? Should the federal government have demanded more than $100 billion from the two corporations? Such questions are currently before the court, with replies pending.