What is the Federal Home Loan Mortgage Corporation (FHLMC)?

Freddie Mac performs a range of functions to increase affordability in the U.S. home loan market

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Commonly known as Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC) supports the U.S. housing finance system by helping manage and facilitate affordable mortgage funds for American homebuyers. However, Freddie Mac is neither a lender nor actually part of the government. Instead, it's known as a government-sponsored enterprise (GSE).

While Freddie Mac doesn't lend money directly to borrowers, it purchases home loans in the secondary market that meet specific government requirements. These loans are ultimately sold to investors around the world as mortgage-backed securities.

If you're in the market for a home loan, you have probably heard of both Freddie Mac and Fannie Mae, another government-sponsored enterprise (GSE) that offers similar services. Learning more about Freddie Mac loans, what makes Freddie Mac different from Fannie Mae and the functions and services both of these agencies provide can help you discern if the service is right for you.

Key insights

The Federal Home Loan Mortgage Corporation (FHLMC) is a government-sponsored enterprise (GSE) commonly referred to as Freddie Mac.

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As a GSE, Freddie Mac is regulated by a government agency called the Federal Housing Finance Agency (FHFA).

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Freddie Mac doesn't loan money directly to homebuyers, but it does purchase eligible mortgages on the secondary market in order to increase available funds in the housing market.

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Fannie Mae is another government-sponsored enterprise (GSE) that performs similar functions, yet there are some notable differences between the two agencies.

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What is a Freddie Mac Loan?

When you need to borrow money to purchase a property, there are numerous types of mortgages to consider. You can opt for a conventional mortgage, an FHA loan with down payment requirements as low as 3.5%, a USDA loan for a rural dwelling or a VA loan for active duty military, veterans and eligible spouses. Some types of home loans can be tailored even further. For example, you may be able to choose your own repayment term or decide whether you want a fixed interest rate or a variable rate.

For the most part, Freddie Mac loans (and Fannie Mae loans, for that matter) are conforming loans that meet specific requirements, including coming in below conforming loan limits that cap the amount homeowners can borrow. Other requirements to be purchased by Freddie Mac or Fannie Mae include meeting certain credit score and down payment thresholds.

Conventional home loans that meet the standards of these agencies go to individuals with a credit score of at least 620, a debt-to-income ratio within acceptable limits (45% to 50% at most)  and a down payment of at least 3%. Buyers who put down at least 20% of the purchase price of a home can avoid paying private mortgage insurance (PMI).

Because government-backed mortgages (FHA loans, VA loans and USDA loans) meet standards set by their respective government agencies, they are typically considered nonconforming. Conventional mortgages are typically considered conforming, whereas jumbo loans in amounts that exceed conforming loan limits are not.

History of Freddie Mac

While Freddie Mac is not a government agency, it was chartered by Congress in 1970 with the goal of supporting the U.S. mortgage market.

When mortgage lenders sell their home loans to Freddie Mac, this frees up additional funds they can lend to homebuyers. This helps ensure availability of mortgage funds within the U.S. system, increasing the prospects for Americans who want to purchase a home.

Or, as the Federal Housing Finance Agency puts it, Freddie Mac's actions help "ensure that individuals and families that buy homes and investors that purchase apartment buildings and other multifamily dwellings have a continuous, stable supply of mortgage money."

Freddie Mac vs. Fannie Mae

According to licensed real estate broker Chris McGuire, who also runs a website called Real Estate Exam Ninja, Freddie Mac operates similarly to Fannie Mae. "Both Freddie Mac and Fannie Mae play a crucial role in the mortgage industry, promoting homeownership by making funds available to lenders," he said.

However, McGuire pointed out a few key differences between the two entities. Firstly, Freddie Mac tends to have a slightly different set of underwriting guidelines compared to Fannie Mae, he said.

Beyond that, Fannie Mae purchases more loans from larger commercial banks and lenders, whereas Freddie Mac purchases loans from smaller financial institutions. Fannie Mae has also been around considerably longer than Freddie Mac. In fact, the original GSE was chartered by the U.S. government in 1938.

How does Freddie Mac affect the mortgage market?

Fannie Mae and Freddie Mac support approximately 70% of home loans that make it to the secondary market, per data from the National Association of Realtors (NAR). This means these entities ultimately purchase or back around seven in 10 mortgages that originated in the United States, thus helping to free up more cash for institutions to lend to potential homeowners.

Fannie Mae and Freddie Mac package the mortgages they purchase into mortgage-backed securities, attracting investors and further expanding the pool of available funds for the housing market. According to the Federal Housing Finance Agency (FHFA), this keeps the secondary mortgage market "more liquid," which in turn increases the competitiveness for loans and helps lower interest rates for mortgages over time.

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    Frequently asked questions (FAQ)

    Who regulates Freddie Mac?

    The Federal Housing Finance Agency (FHFA) is the government agency that regulates Freddie Mac, as well as Fannie Mae and the Federal Home Loan Banks.

    What are some criticisms or controversies associated with Freddie Mac?

    Freddie Mac and Fannie Mae have been embroiled in several controversies over the years. One of the most recent arose when the agencies increased pricing on certain types of loans, but only for some borrowers. This led to the accusation that Fannie Mae and Freddie Mac were penalizing people with good credit to help prop up consumers with bad credit.

    After the national housing crisis of 2008 took hold, some critics also accused Freddie Mac and Fannie Mae of ignoring warning signs of what was to come.

    How does Freddie Mac support homeownership and rental housing?

    Freddie Mac supports homeownership by playing a central role in the purchase and liquidation of mortgages that meet specific requirements. Banks and other lenders that have mortgages purchased by Fannie Mae and Freddie Mac get a return on their investment, which frees up additional capital for loans to borrowers again.

    Increasing liquidity in the mortgage lending space also helps keep mortgage rates lower than they would be otherwise.

    Bottom line

    The terms Federal Home Loan Mortgage Corporation (FHLMC) and Freddie Mac may be interchangeable, but most people refer to this enterprise with the latter term. Even then, it's easy to get Freddie Mac confused with Fannie Mae since they both perform similar functions in their role as government-sponsored enterprises (GSEs).

    Either way, a Freddie Mac mortgage may be right for you, depending on your needs. If you're in search of the perfect home loan, the perfect home or both, your best bet is speaking with one of the best mortgage lenders to find out which type of loan makes sense for you.

    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. Freddie Mac, "About Freddie Mac." Accessed March 22, 2024.
    2. Freddie Mac, "Mortgage Securities." Accessed March 22, 2024.
    3. Fannie Mae, "Who We Are." Accessed March 22, 2024.
    4. PennyMac, "Conforming vs. Non-conforming Loans: Which Is Best for You?" Accessed March 22, 2024.
    5. U.S. Department of Housing and Urban Development, "Let FHA Loans Help You." Accessed March 22, 2024.
    6. Federal Deposit Insurance Corporation, "Freddie Mac." Accessed March 22, 2024.
    7. Experian, "What Is a Conforming Loan?" Accessed March 22, 2024.
    8. Federal Housing Finance Agency, "Fannie Mae and Freddie Mac." Accessed March 22, 2024.
    9. National Association of Realtors, "Fannie Mae & Freddie Mac (GSEs)." Accessed March 22, 2024.
    10. U.S. Bank, "What’s the difference between Fannie Mae and Freddie Mac?" Accessed March 22, 2024.
    11. USAGov, "Federal Housing Finance Agency (FHFA)." Accessed March 22, 2024.
    12. Urban Institute, "No, Fannie Mae and Freddie Mac Aren’t Penalizing People with Good Credit to Help People with Bad Credit." Accessed March 22, 2024.
    13. NPR, "Fannie, Freddie Critics Say Warnings Were Ignored." Accessed March 22, 2024.
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