Freddie Mac is a secondary market lender that purchases mortgage loans from primary lenders, providing liquidity for new home loans and freeing up capital for the primary lenders to make more loans. Freddie Mac then either holds these loans in its own portfolio or packages them into mortgage-backed securities (MBS) and sells them to investors on the open market.
How Freddie Mac Works
Freddie Mac plays an important role in the U.S. housing market by making funds available. MBS are securities backed by a pool of underlying mortgages, which may include both government-sponsored enterprise (GSE) loans and private-label mortgage loans. By creating MBS, Freddie Mac provides liquidity to the secondary mortgage market, thus freeing up capital for primary lenders to make more home loans.
The GSEs Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970, respectively, to help stabilize the housing market and make home ownership more affordable for American families. The Enterprises purchase single-family mortgages originated by lenders, securitize them into MBS, and sell the MBS to investors in the secondary market.
The Federal Home Loan Mortgage Corporation (Freddie Mac) is a public government-sponsored enterprise (GSE) founded in 1970 to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS). Freddie Mac purchases first-lien residential mortgages originated by banks, credit unions, thrifts, and certified private mortgage companies from around the nation.
Benefits for Borrowers Who Use This Program
The main benefit of using Freddie Mac is that it offers borrowers increased access to financing. When you take out a loan that will be securitized by Freddie Mac, you’re getting funding from not just one source but from many different investors who buy portions of the security. This can result in better terms for you as a borrower, such as a lower interest rate or origination fee. And because Freddie Mac doesn’t lend money directly to borrowers, you’ll work with your primary lender to apply for this type of financing.
Advantages for Investors Who Purchase Securitized Loans through Freddie Mac
Investors benefit from increased liquidity because MBS are much easier to trade than whole loans. In addition, MBS tends to offer higher yields than other types of investments with similar levels of risk. For these reasons, MBS are often used as a tool for managing portfolio risk. By investing in MBS issued by Freddie Mac, investors gain exposure to a diversified pool of high-quality loans while benefiting from the predictability and stability of cash flows generated by these investments.
In conclusion, the Federal Home Loan Mortgage Corporation (Freddie Mac) provides many benefits for both borrowers and investors. By purchasing mortgage loans from primary lenders and holding them in their own portfolio or packaging them into MBS, they provide liquidity for new home loans and free up capital for primary lenders to make more loans. For borrowers, this increases access to financing with better terms, such as lower interest rates or origination fees. For investors, they offer increased liquidity and exposure to a diversified pool of high-quality loans with predictable and stable cash flows generated by these investments.
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