The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, was chartered by the US Congress in 1970 with a mission to expand opportunities for homeownership and affordable rental housing across the nation, and to stabilize residential mortgage markets.
Today, Freddie Mac claims it makes homeownership possible for 1-in-4 buyers and is one of the major sources of financing for multifamily housing.
“Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market.”
By selling John’s loan to Freddie Mac, the bank now has more funds it can lend to customers.
The corporation, which conducts business under the direction of the Federal Housing Finance Agency, along with Fannie Mae participates in the secondary mortgage market by buying mortgage loans and mortgage-related securities for investment and issuing guaranteed mortgage-related securities, mainly those it calls PCs.
The secondary mortgage market allows financial institutions to sell mortgages to investors such as insurance companies, pension funds and the federal government. Loans are traded in the form of whole loans, i.e. mortgages that have not been securitized, and mortgage-related securities.
Freddie Mac does not lend money directly to people buying their homes.
Freddie Mac guarantees mortgage payments
Freddie Mac’s main method of making money is by charging a guarantee fee on mortgages that it has bought and securitized into MBS (mortgage-backed security) bonds.
Investors are willing to let it keep this fee in exchange for assuming the credit risk, i.e. Freddie Mac’s guarantee that the principal and interest on the underlying loan will be paid back, even if the mortgagor (borrower) defaults.
Thanks to Freddie Mac’s financial guarantee, these MBS are especially attractive to investors.
People can find out whether Freddie Mac owns their loan by using its self-service loan look-up tool.
Cambridge Dictionaries Online says that the Federal Home Loan Mortgage Corporation is:
“A US government organization that buys and sells loans (= money that has been borrowed) on the financial markets in order to raise more money to lend to home buyers.”
Video – Freddie Mac and your mortgage