When you take out a home loan, the company that you send your monthly payment check to is very rarely your lender. Typically, mortgages get packaged up with other mortgages and sold to investors on Wall Street as mortgage-backed securities. Between you and the financial markets, though, your mortgage might have picked up a guarantee from Freddie Mac or its counterpart, Fannie Mae.
History of Freddie Mac
In 1970, the federal government chartered the Federal Home Loan Mortgage Corporation -- called FHLMC, which came to be known as "Freddie Mac" -- to make it easier to create mortgages for homes. Freddie Mac is a "government-sponsored enterprise," which is a hybrid between a government agency and a private company. Even though it's not supposed to be funded by the taxpayers, an investment in debts that are guaranteed by Freddie Mac carries a government guarantee, just in case.
What Freddie Mac Does
Freddie Mac increases the amount of money available for making mortgages by buying them up and reselling them. When a bank makes a block of mortgages that meet Freddie Mac's standards -- called "conforming loans" -- it can turn around and sell them to Freddie. Doing this gives the bank more money to go out and make more loans. Freddie Mac turns around and sells the loans to investors, while guaranteeing that if the borrowers don't make their payments, it will refund the investor.
How Freddie Helped You
If your loan was bought by Freddie Mac -- and, if you took out a conforming loan, it probably was either bought by Freddie Mac or the similar Fannie Mae -- it saved you money. Investors will buy mortgage-backed securities from Freddie Mac for higher prices because they know that the U.S. government will reimburse them if something goes wrong. In the securities market, a higher price means a lower interest rate. This gets passed on to you. One estimate provide by Mark Zandi of bond-rating agency Moody's in 2013 is that the impact of Freddie Mac is around one-half point. For example, if you took out a loan at 4.25 percent with a guarantee from Freddie Mac, that guarantee saved you from paying 4.75 percent.
Freddie-Owned Loan Benefits
If you have a loan that is owned by Freddie Mac, you may also eligible for some of the benefits available under the Making Home Affordable umbrella. If you want to refinance, the Home Affordable Refinance Program may let you take out a low-rate refinance even if you owe more than you're worth. The program can help you modify your mortgage to make it more affordable if you're having trouble making payments, and the Home Affordable Foreclosure Alternative can help you avoid foreclosure if you need to give up your home.
- Freddie Mac: Our Business
- The Mortgage Professor: What Do Fannie Mae and Freddie Mac Do?
- Daily Finance: Mortgage Rates Could Rise Should Fannie, Freddie Shut Down
- Fannie Mae: Making Home Affordable
- Freddie Mac. “Why America's Homebuyers & Communities Rely on the 30-Year Fixed-Rate Mortgage.” Accessed Sept. 12, 2020.
- Federal Housing Finance Agency. “Fannie Mae and Freddie Mac.” Accessed Sept. 12, 2020.
- Freddie Mac. “Getting Started With Investor Accounting,” Page 1. Accessed Sept. 12, 2020.
- Freddie Mac. “Freddie Mac Mortgage Participation Certificates,” Page 5. Accessed Sept. 12, 2020.
- LendingTree. “LendingTree Compares Mortgage Rates by State.” Accessed Sept. 12, 2020.
- National Association of Home Builders. “Housing’s Contribution to Gross Domestic Product.” Accessed Sept. 12, 2020.
- Federal Housing Finance Agency. “Senior Preferred Stock Purchase Agreements.” Accessed Sept. 12, 2020.
- Freddie Mac. “Investor FAQ: When Did Freddie Mac First Become a Public Company?” Accessed Sept. 12, 2020.
- U.S. Department of the Treasury. “Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement.” Accessed Sept. 12, 2020.
- Federal Housing Finance Agency. “FHFA Directs Delisting of Fannie Mae and Freddie Mac Stock From New York Stock Exchange.” Accessed Sept. 12, 2020.
- Federal Reserve Bank of New York. ”The Rescue of Fannie Mae and Freddie Mac,” Pages 45-46. Accessed Sept. 12, 2020.
- Federal Housing Finance Agency - Office of Inspector General. “Fannie Mae and Freddie Mac: Where the Taxpayers’ Money Went,” Page 13. Accessed Sept. 12, 2020.
- Congressional Budget Office. “Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market,” Pages viii-ix. Accessed Sept. 12, 2020.
- United States House of Representatives. “Public Law 91-351.” Accessed Sept. 12, 2020.
- Federal Housing Finance Agency - Office of Inspector General. “A Brief History of the Housing Government-Sponsored Enterprises,” Pages 2-4. Accessed Sept. 12, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.