What is Freddie Mac and How Does it Influence Your Home Loan?
Written by:
Lauren Hargrave
Lauren Hargrave
Personal Finance Writer
Lauren Hargrave is a writer from San Diego who focuses on technology, finance, and healthcare. She worked in finance for seven years before pivoting to a career in writing, and now, instead of putting numbers into spreadsheets, she writes about them instead.
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Fact Checked by:
Dan Silva
Dan is the Vice President of Marketplace Lending at Own Up. Throughout his career, he has held executive leadership positions in the mortgage and banking industry.
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If you’ve started researching the home mortgage market, you might have come across the name Freddie Mac (as well as its sister organization Fannie Mae). And if you’ve come across this name, you might have been confused as to what Freddie Mac is: Is it a lender? Is it a government agency? Oh and what’s a secondary market?
The truth is, Freddie Mac is neither a lender or a government agency, but it has a large influence on the availability and price of home loans, which affects how affordable housing is. In this post, we’ll give you all the information you need to understand this government-sponsored enterprise (GSE) and navigate the home mortgage market with better ease.
What is Freddie Mac?
Freddie Mac is the colloquial term for the Federal Home Loan Mortgage Corporation (FMCC), which was chartered by Congress in 1970 to help make sure homebuyers and homeowners could access home loans reliably and affordably. It started as a private company operating with government permission (i.e. a government-sponsored enterprise), and was publicly traded. But as a result of the financial and housing crisis in 2008, the government took control of some of Freddie Mac’s operations. Today, the company remains a private enterprise and its stocks are traded privately.
What Does Freddie Mac Do?
Freddie Mac helps to ensure homebuyers and homeowners have ready access to affordable mortgages by purchasing mortgage loans that banks, credit unions, and other mortgage lenders and financial institutions make to borrowers. This increases the supply of capital to the primary mortgage market (i.e. you and other homebuyers and homeowners).
Freddie Mac then bundles loans into something called a mortgage-backed security and sells shares of it to investors in the capital markets. Freddie Mac guarantees the on-time principal and interest mortgage payments to the investors, and in doing so, attracts more investors to the secondary mortgage market.
Freddie Mac then charges the investor a fee for its guarantee. Freddie Mac’s guarantee means it will cover the cost to investors if the borrower happens to default on their loan. This lowers the level of risk investors take on when purchasing the mortgage-backed securities.
The act of buying loans from these lenders helps to increase access to affordable home mortgages because:
- It lowers the risk for banks and other mortgage lenders to make a loan. The lower the risk, the lower the cost to borrowers (i.e. lower interest rates).
- It frees up capital (i.e. increases liquidity) on these lenders’ balance sheets to turn around and make more money.
Freddie Mac, along with its sister organization, Fannie Mae, can also help bring some stability to the housing market and financial markets during times of economic uncertainty by ensuring there is a steady supply of available mortgage funds.
Are Freddie Mac and Fannie Mae the Same?
No. These two entities have similar functions – to ensure plentiful and affordable capital to the housing market. But Fannie Mae is actually older. Its official name is the Federal National Mortgage Association and it was formed after the Great Depression in 1939 to ensure home buyers had a more reliable source of mortgage loans.
Like with Freddie Mac, the government took control of some of Fannie Mae’s operations in the wake of the 2008 financial crisis, but it remains a shareholder-owned company under government charter.
What is a Freddie Mac Loan?
Freddie Mac doesn’t issue home loans itself, but purchases and guarantees home loans that fall within their published parameters. Loans that are considered “Freddie Mac approved” are also called conforming loans or conventional loans. The parameters for conforming and conventional loans vary based on the average home cost in the county where the home is located.
For most counties, a conditional conforming loan would have a loan amount up to $766,550 (or the county limit). A home loan made in a high-cost county can have a loan amount up to $1,149,825 and still be considered a conforming loan.
Typically, Freddie Mac buys loans from smaller banks, credit unions, and mortgage lenders. Fannie Mae (which has a similar function to Freddie Mac) typically buys loans from commercial banks and other large lenders.
What Happens When Freddie Mac Buys My Loan?
According to the Federal Housing Finance Agency (FHFA), Freddie Mac and Fannie Mae own about 62% of the outstanding home mortgages in the United States. So it would not be uncommon for you as a homeowner, who used a mortgage to purchase your property, to receive a letter stating that Freddie Mac had purchased your loan.
If you receive such a letter, there is only one thing you really need to do, and that’s to check that the balance on the letter is correct. If there’s a discrepancy between the balance stated in the letter and what you believe your loan balance to be, contact your servicer (i.e. the company to which you send your mortgage payments). The letter may have been issued prior to you making a payment.
Other than that, you can keep the letter for your records, but there is nothing else to do as it is merely a formality telling you that Freddie Mac has purchased your debt and nothing more. Your servicer stays the same, as does your payment amount, your interest rate, and all other terms of your loan.
In other words: Continue to make your monthly mortgage payments as you usually do.
To find out if Freddie Mac owns your loan, check out their free loan lookup tool here.
How Does Freddie Mac Influence My Home Loan?
Even though Freddie Mac seemingly operates in the background of the mortgage lending market, it has a large influence on how high of a loan you can get as well as the price of that loan. It does this by setting its loan amount and pricing parameters for the loans it guarantees.
Loans that fall within Freddie Mac’s parameters are seen as less risky, and are therefore cheaper to obtain than larger loans. Freddie Mac also helps to ensure there is an active flow of capital (money available to borrow), which helps to lower the cost obtaining that capital.
How Can Homebuyers Use This Information on Freddie Mac?
This post has contained a lot of information on Freddie Mac and you might be asking yourself: Now what?
Well, now you determine how sensitive you are to a higher interest rate. By definition, conventional and conforming loans (i.e. loans that fall within Freddie Mac’s parameters), are going to be more affordable than larger loans. So if you’re price conscious, it might be a good idea to determine Freddie Mac’s loan limit for the county in which you are planning to buy a home. Then add that loan amount to your down payment and narrow your home search to properties that fall at or below that price range. An affordability calculator can help you crunch the numbers.
The Bottom Line
Navigating the home mortgage labyrinth can feel daunting, but if you’re armed with the right information and the right mortgage advisor, obtaining the right loan is attainable.
