Freddie Mac is a mortgage company that was created by Congress to guarantee mortgages issued in the United States. Alongside Fannie Mae, Freddie Mac helps make mortgages affordable and available. While the name is unusual, it’s a nickname derived from its full name — the Federal Home Loan Mortgage Corp. — and its acronym, FHLMC.
Here’s a closer look at what Freddie Mac is, and how it operates.
The Purpose of Freddie Mac
Freddie Mac buys conforming conventional mortgages from lenders, which reduces lenders’ risk and allows them to offer more loans with favorable terms and eligibility requirements to more homebuyers.
Loans that aren’t eligible to be bought by Freddie Mac or Fannie Mae are typically more expensive. Freddie Mac purchases mortgages from lenders and packages them for sale on the secondary mortgage market, which gives lenders the cash flow to issue more mortgages. Meanwhile, lenders don’t have to keep those loans on their books for up to 30 years. As a result, Freddie Mac helps keep the U.S. market liquid, affordable, and stable.
Who funds Freddie Mac?
Freddie Mac is a shareholder-owned company that operates under a congressional charter.
Who regulates Freddie Mac?
Both Freddie Mac and Fannie Mae sit under a conservatorship under the direction of the Federal Housing Finance Agency.
How Do Freddie Mac Loans Work?
Freddie Mac doesn’t issue loans directly to borrowers. Instead, homebuyers take out a loan from a mortgage lender, and Freddie Mac buys loans that meet certain standards from lenders. Because lenders know that Freddie Mac will buy these mortgages, they’re able to offer them with a longer term and at a fixed rate that’s more affordable for homebuyers. The ability to sell mortgages to Freddie and Fannie frees up money for lenders to issue more mortgages.
Freddie Mac conforming loan limits
To be purchased by Freddie Mac, a mortgage must meet the conforming loan limits set by the FHFA. For 2023, the baseline limit is $726,200 for a single-family home, and $1,089,300 in designated high-cost areas.
Freddie Mac lending requirements
To be eligible for a conforming loan, a borrower must meet Freddie Mac’s lending requirements:
- Minimum credit score: 620 for most loans; 640 for manually underwritten adjustable-rate mortgages.
- Minimum down payment: 3%.
- Maximum debt-to-income ratio: No higher than 50%.
Freddie Mac Loan Programs
Freddie Mac offers a variety of loan programs, each geared toward a different type of homebuyer. Here’s a look at some of its options:
- Conforming. These are loans that meet requirements set by the FHFA on loan amounts, credit scores, DTI ratios, and loan-to-value ratios.
- Home Possible. Loans for low-income buyers for a low down payment, as long as they don’t earn more than 80% of the local median income.
- GreenCHOICE. Loans for homebuyers seeking to renovate or make improvements to their home that make it more energy-efficient.
- Affordable Seconds. Loans for low- and moderate-income borrowers who need a second mortgage, or need help with their down payment or closing costs.
- Super Conforming Mortgages. Loans for borrowers in high-cost areas who need larger loans.
- Construction Conversion. Loans for borrowers who are planning to build a new home.
- Manufactured homes. Loans for borrowers who are purchasing manufactured homes.
- Refi Possible. Loans for low- and moderate-income borrowers looking to refinance.
- HomeOne. Loans with low minimum down payments for first-time homebuyers.
- HeritageOne. Loans for Native Americans buying a home on tribal lands.
The History of Freddie Mac
Congress created Fannie Mae in 1938 in response to the Great Depression. In 1970, Congress created Freddie Mac as part of the Emergency Home Finance Act, both to compete with Fannie Mae and to support the secondary mortgage market. Freddie Mac initially was a public enterprise and had stock that was publicly traded on the New York Stock Exchange.
Freddie Mac and the 2008 financial crisis
In 2008, the U.S. housing market crashed and drove the economy into the Great Recession. Housing prices plummeted by an average of 20%, and foreclosures rose. Fannie Mae and Freddie Mac lost billions of dollars on their investment portfolios and mortgage-backed securities. The FHFA took over both Freddie Mac and Fannie Mae under a conservatorship meant to keep both companies solvent.
Both Freddie Mac and Fannie Mae remain under the direction of the FHFA in 2023.
Freddie Mac and the COVID-19 pandemic
Freddie Mac offers mortgage forbearance plans for borrowers who are unable to make their mortgage payment. Mortgage forbearance plans allow the borrower to avoid having to pay their mortgage for a temporary amount of time.
In the past, mortgage forbearance was available only to borrowers who had undergone a specific hardship, such as a job loss or an income reduction. However, at the onset of the COVID-19 pandemic in March 2020, Freddie Mac expanded mortgage forbearance to any borrower who couldn’t pay their mortgage because of COVID-19 — even if they hadn’t contracted the virus.
FAQ
Here are answers to some frequently asked questions about Freddie Mac.
