What is FHLMC? A Look at The Federal Home Loan Mortgage Corporation

Freddie Mac: A Pillar of the Secondary Mortgage Market

Freddie Mac, otherwise known as the FHLMC, was established in 1970 under the Emergency Home Finance Act. Its main objective was to enlarge the secondary mortgage market in the US, providing an alternative to the Federal National Mortgage Association, or Fannie Mae.

Before Freddie Mac’s inception, Fannie Mae was the sole entity buying real estate mortgages and home loans, primarily from banks and savings and loan associations. Founded as a public enterprise, Freddie Mac’s stock was even listed on the New York Stock Exchange.

However, during the housing crisis in the U.S. in 2008, the Federal Housing Finance Agency took partial control over Freddie Mac and Fannie Mae. These days, both are GSEs with privately traded stock.

Federal Regulators Revise Commercial Real Estate Loan Accommodations and Workouts Policy in FDIC 2023 Policy Statement

What is FHLMC and Freddie Mac’s Key Role: Stabilizing the Housing Market and Enhancing Liquidity

The mission of the FHLMC is threefold: enhance liquidity, provide stability, and promote affordability in the U.S. housing market. Freddie Mac accomplishes these goals using various mechanisms. Freddie Mac Boosts Liquidity by Buying Home Mortgages

By purchasing mortgage loans from smaller banks, credit unions, and other lenders, Freddie Mac ensures the continuous flow of loans in the mortgage industry, thus enhancing liquidity.

Stability Through Mortgage-Backed Securities

Freddie Mac plays a pivotal role in stabilizing the mortgage market by transforming the mortgages it buys into securities. These are then sold to investors on the secondary mortgage market.

Affordable Home Ownership with Freddie Mac

While Freddie Mac doesn’t directly influence home prices, it does offer preferential mortgage programs such as Home PossibleSM and Home Possible AdvantageSM, thus facilitating affordable homeownership.

Why Capital Economics Thinks Office Values Set to Drop 35% by Late 2025

Understanding Freddie Mac Mortgages: Conforming Loans Versus Non-Conforming Loans

Mortgages come in many forms, but they generally fall into two categories: conforming and non-conforming loans. Conforming loans meet the requirements established by the Federal Housing Finance Agency (FHFA), while Freddie Mac cannot buy non-conforming loans.

The labyrinth of commercial real estate financing is populated with a variety of mortgage types, primarily delineated into two categories: conforming and non-conforming loans. The former category, conforming loans, align with the standards prescribed by the FHFA. These standards typically pertain to the loan’s size, the borrower’s financial stability, and the property’s characteristics.

On the other hand, non-conforming loans deviate from these FHFA-set criteria. They might exceed the conforming loan limits, or they may involve properties or borrowers with unique circumstances that don’t fit within the traditional lending framework. While these loans cater to specific niche markets or high-value transactions, it’s crucial to understand that Freddie Mac’s operations don’t encompass the purchase of non-conforming loans.

This differentiation is essential within the commercial real estate sector, as Freddie Mac’s involvement primarily lies with conforming loans. Therefore, if a commercial real estate transaction is financed through a non-conforming loan, stakeholders should not anticipate the benefits provided by Freddie Mac’s purchase and securitization of the loan, such as liquidity and market stability.

Freddie Mac’s Influence on Homeowners: Buying Mortgages and Minimizing Risk

When you ask the question, “What is FHLMC?” you’re probably going to get an answer involving residential mortgages, which might be impossible in their current form without the intervention of Freddie Mac and other government agencies dedicated to expanding American homeownership. With the average home loan on the mortgage market lasting 30 years, without entities like Freddie Mac, issuing banks would need to keep the mortgage on their books for the entire term, assuming all the risk associated with each individual home loan.

Will “zombie buildings” create a commercial real estate “death spiral?”

How Freddie Mac Shapes the Mortgage Backed Security (MBS) Space

Freddie Mac isn’t a direct lender to prospective homeowners. Rather, it operates by purchasing grouped mortgages from banks and other entities originating mortgages. When homeowners complete their monthly mortgage payments, their mortgage service provider forwards the payment to Freddie Mac. Subsequently, Freddie Mac amalgamates that payment with others, deducts a minimal fee, and redistributes the remaining funds to investors who are in possession of the mortgage-backed securities.

Freddie Mac’s Impact on the Mortgage Market

Freddie Mac’s presence significantly benefits the real estate mortgage market. Without Freddie Mac, mortgage originators would need to maintain mortgage loans in-house, tying up their capital and potentially driving up the total cost of homeownership across the country through increased interest rates.

The 2008 Mortgage Crisis: Fannie Mae, Freddie Mac, and Risky Investments

In the lead-up to the 2007 and 2008 housing crisis, Freddie Mac and Fannie Mae were publicly traded corporations. Given that their held mortgages were backed by the U.S. government and couldn’t default, they took increasingly risky investments, such as subprime mortgages. In September 2008, to prevent bankruptcy, the Federal Housing Finance Agency put Freddie Mac and Fannie Mae into conservatorship.

Why is Downtown Denver Commercial Real Estate at an Inflection Point?

Freddie Mac and Fannie May Sustain the American Real Estate Market

Freddie Mac, along with Fannie Mae and Ginnie Mae, plays a crucial role in sustaining the fluidity of the real estate mortgage market. Without these government-sponsored enterprises, the dynamics of acquiring a home loan would dramatically change. Homebuyers might be confronted with higher interest rates, making the dream of homeownership more costly. Moreover, the availability of loans could decrease significantly, as lenders would be less inclined to provide loans without these agencies buying mortgages and thereby managing risk on their behalf.

These institutions’ role in purchasing mortgages is not just beneficial for lenders, but also for homeowners. By buying home loans, they allow lending institutions to free up their capital, which can then be used to lend to more Americans aspiring to own homes.

Another crucial aspect is the creation and promotion of mortgage-backed securities (MBS). By buying mortgages, bundling them, and then selling these as securities, Freddie Mac ensures that the risk is spread out among multiple investors, thus providing stability to the overall mortgage market.

Moreover, their intervention during times of financial instability, such as the 2008 housing crisis, underscores the pivotal role these entities play in the U.S. housing market. By placing Fannie Mae and Freddie Mac under conservatorship, the Federal Housing Finance Agency prevented these institutions from going bankrupt, saving the mortgage industry from potential collapse.

Lastly, their influence extends to providing affordable home ownership opportunities. Programs such as Home PossibleSM and Home Possible AdvantageSM are a testament to Freddie Mac’s commitment to making homeownership more accessible to the masses.

The Takeaway: Freddie Mac, Fannie Mae, and Ginnie Mae Facilitate Smooth Mortgage Operations

In summary, to answer the question: What is FHLMC?:

Freddie Mac, alongside Fannie Mae and Ginnie Mae, is not just a cog in the mortgage wheel. They are at the heart of the housing market, fostering an environment that allows lenders to lend, buyers to buy, and the dream of homeownership to remain accessible and affordable for all. Their roles are complex and multifaceted, but integral to the overall functioning of the housing market in the United States.

Access the country’s largest pool of commercial real estate financing, purpose-built for brokers and lenders, here.

July 2, 2023