About Freddie Mac
In 1970, Congress created Freddie Mac with a few important goals in mind:
- Make sure that financial institutions have mortgage money to lend
- Make it easier for consumers to afford a decent house or apartment
- Stabilize residential mortgage markets in times of financial crisis
To fulfill this mission, Freddie Mac conducts business in the U.S. secondary mortgage market – meaning we do not originate loans – and works with a national network of mortgage lending customers. We have three business lines: a Single Family Credit Guarantee business for home loans; a Multifamily business for apartment financing; and an investment portfolio.
In our Single-Family business, we use mortgage securitization to fund millions of home loans every year. Securitization is a process by which we purchase home loans that lenders originate, put these loans into mortgage securities that are sold in global capital markets, and recycle the proceeds back to lenders. This recycling is designed to ensure that lenders have mortgage money to lend.
In the first nine months of 2010, Freddie Mac purchased or guaranteed $261 billion in single-family home loans – funding one out of every four mortgages originated in the market. At the end of the third quarter 2010, our total outstanding obligations of mortgage-backed securities stood at $1.8 trillion.
What makes the securitization process work? Families paying their mortgages every month. Because once a family moves into their home, their monthly payments of mortgage principal and interest are transferred ultimately to securities investors. When a family stops making payments – often due to loss of income – Freddie Mac steps in and makes those payments to securities investors. Managing this risk, known as credit risk, is how we generate revenue. Each time we fund a loan, we collect a credit guarantee fee from the lender selling us the loan. This fee is intended to protect us in case of loan default.
Other features of this business line:
- We guarantee mortgages exclusively in the conventional conforming market, where we purchase loans only up to a a certain dollar amount (for 2011, $417,000 for most of the nation and $729,750 in certain high-cost areas)
- The vast majority of the loans we fund are long term, fixed rate mortgages
- We generally require third-party mortgage insurance on loans with low downpayments
- We have loan servicing operations that work with lenders to avoid foreclosure, where possible, for families in financial difficulty
Since not everyone owns their own home, Freddie Mac supports renters, too. Through our Multifamily business, we work with a network of lenders to finance apartment buildings around the country. Like single-family loans, these lenders originate and close loans that Freddie Mac later purchases; lenders then use the proceeds to originate additional loans.
Unlike single-family loans, which are relatively small in dollar amount and standardized in their composition and underwriting, multifamily loans typically are several million dollars in size, have underwriting characteristics that vary from property to property, and require custom examination such as on-site property inspections and verification of income cash flows (i.e., rents). One other difference: while single-family borrowers are individual consumers, multifamily borrowers are property developers and/or managers.
In this business line, Freddie Mac finances most of its loan acquisitions through mortgage securitization. We also finance a portion through our investment portfolio.
During 2010, Freddie Mac funded $15 billion in multifamily loans – financing more than 1,000 properties amounting to 241,000 apartment units.
The investment portfolio invests in mortgage-related securities that are guaranteed by Freddie Mac and other financial institutions. The portfolio also invests in individual loans that are guaranteed by Freddie Mac but not immediately securitized. As a bidder in the market, the investment portfolio helps to make mortgage-related securities more liquid and mortgage funding more available.
We fund acquisition of mortgage securities by issuing corporate debt securities. From this activity, we produce net income; that is, the difference between the interest payments we collect on the securities we buy and the yields we pay investors for buying our debt. In the first quarter of 2011, the investment portfolio acquired a net of $1.8 billion in mortgage assets, and had an ending balance of $692 billion. Roughly one-third of this balance includes Freddie Mac mortgage-backed securities, known as Participation Certificates, guaranteed by the Single-Family and Multifamily businesses. During 2011, the investment portfolio can be no larger than $729 billion, per our regulator.
Learn more about the benefits of mortgage funding.
One of the most important roles that Freddie Mac plays today is to provide continuous liquidity and keep mortgage funds flowing. With the housing markets and broader economy still recovering, keeping the mortgage markets liquid and stable remains critical.
Together, Freddie Mac and Fannie Mae provide most of the liquidity to the housing market – purchasing or guaranteeing roughly 75 percent of home loans originated in the first quarter 2011.
In the first quarter of 2011, Freddie Mac purchased or guaranteed $105 billion in mortgage loans and mortgage-related securities. Through this funding, Freddie Mac helped:
- 430,000 families buy a home during one of the most challenging credit markets in years.
- 83,000 families rent a home.
Freddie Mac’s role in the housing finance system has additional benefits for homeowners, lenders, and the housing market as a whole:
- Lower mortgage rates: Our liquidity contributes to lower mortgage rates for 30-year fixed-rate conforming mortgages relative to the “jumbo” mortgage loans we aren’t allowed to buy. Over the last year, millions of borrowers have taken advantage of the lowest mortgage rates in five decades to buy and refinance homes.
- The 30-year fixed rate mortgage: We help make possible the freely prepayable 30-year fixed-rate mortgage on a scale that’s unique to this country. The prepayable fixed-rate mortgage is the first choice for many consumers because it protects them from upward swings in interest rates and allows them to refinance whenever they want without penalty. By providing stability, certainty and flexibility in this way, the prepayable fixed-rate mortgage is a real economic asset for our nation.
- A “backstop bid” for mortgage lenders: Our lender customers know there will always be a buyer for their loans – which gives them the confidence to keep lending in any environment and in turn helps stabilize the market.
- We serve the market in good times and bad: We are an important counter-cyclical influence that stays in the market even when purely private capital has pulled out. This has been proven time and again – particularly during the events of recent years.