The Federal Home Loan Mortgage Corporation (FHLMC) is a stockholder-owned, government-sponsored company (GSE) established by Congress in 1970 to keep money flowing to mortgage lenders, thereby promoting homeownership and rental housing for middle-income Americans. The FHLMC, also known as Freddie Mac, is a major player in the secondary mortgage market, purchasing, guaranteeing, and securitizing house loans.
The Federal National Mortgage Association (FNMA), also known as Fannie Mae, is a government-sponsored business (GSE) established by Congress during the Great Depression in 1938. It was formed as part of the New Deal to stimulate the housing market by making additional mortgages available to moderate- to low-income borrowers.
Fannie Mae does not make loans to borrowers. However, it does buy and guarantee them in the secondary mortgage market. Banks are more ready to lend money since the risks are reduced.
What Does Fannie Mae Do?
Fannie Mae does not originate mortgage loans as a participant in the secondary mortgage market. Instead, by purchasing or guaranteeing mortgages issued by credit unions, banks, thrifts, and other financial organizations, it keeps cash flowing to lenders. Fannie Mae offers liquidity for lenders by investing in the mortgage market, allowing them to underwrite or fund additional mortgages. Fannie Mae contributed $684 billion in liquidity to the mortgage market in 2022.
It is one of the two largest secondary market purchasers of mortgages. The other is Freddie Mac, or the Federal Home Loan Mortgage Corporation, a GSE chartered by Congress as well.
Fannie Mae pools mortgages purchased on the secondary market to generate a mortgage-backed securities (MBS). An MBS is a mortgage-backed security that is secured by a mortgage or a pool of mortgages.
The Securities and Exchange Commission of the United States. “Mortgage-Backed Securities and Collateralized Mortgage Obligations.”
History of Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation (Freddie Mac) has a long and illustrious history dating back to its inception in 1970. The federal government founded Freddie Mac to give stability and support to the American housing market. Here’s a quick rundown of Freddie Mac’s history:
Early Years and Formation (1970s):
On August 22, 1970, Freddie Mac was founded in response to the need for additional liquidity in the mortgage market. The Emergency Home Finance Act of 1970 established it as a government-sponsored business (GSE).
Freddie Mac’s principal purpose was to promote homeownership by assuring a consistent flow of funding to mortgage lenders. This was accomplished by buying mortgages from lenders and repackaging them as mortgage-backed securities.
Federal Home Loan Mortgage Requirements
The Federal Home Loan Mortgage Corporation (Freddie Mac) has established specific rules and guidelines for lenders and borrowers who participate in its mortgage programs. These standards are intended to ensure the mortgage market’s stability and safety. Here are some important Freddie Mac regulations and guidelines:
- Eligibility for a Loan:
Unlike FHA or VA loans, Freddie Mac generally deals with conventional loans, which are not insured or guaranteed by the government.
To be eligible for a Freddie Mac loan, borrowers must meet certain credit and income standards.
- Different types of loans:
Freddie Mac provides a variety of mortgage products, such as fixed-rate and adjustable-rate mortgages (ARMs).
Fixed-rate mortgages are commonly available in terms of 15, 20, or 30 years.
Borrowers can select from a variety of loan packages based on their demands and financial position.
- Requirements for a Down Payment:
The down payment requirements for Freddie Mac are varied. While a 20% down payment is frequently recommended to avoid private mortgage insurance (PMI), borrowers with lower down payments may be able to qualify.
Down payment needs might vary depending on a variety of circumstances, including
- Credit Rating:
Borrowers must meet credit score requirements set by Freddie Mac. In general, a higher credit score means better loan terms and interest rates.
Borrowers with weaker credit scores may still be qualified, but their interest rates and other conditions may be higher.
Debt-to-Income Ratio (DTI):
Lenders working with Freddie Mac are required to evaluate a borrower’s debt-to-income ratio to guarantee that the borrower can comfortably handle their mortgage payments.
Depending on the loan program, the maximum permitted DTI ratio may differ.
- Property Prerequisites:
To ensure that the properties being funded satisfy particular quality criteria, Freddie Mac has property appraisal and inspection procedures.
These conditions safeguard both the borrower and the lender.
- 7. Mortgage Protection:
Borrowers with less than a 20% down payment are frequently required to carry private mortgage insurance (PMI) or another type of mortgage insurance.
In the event that the borrower defaults on the loan, PMI protects the lender.
8. Verification and documentation:
Borrowers are often expected to present several papers to support their loan application, such as income verification, bank statements, and tax returns.
While these are basic recommendations, specific requirements and eligibility criteria may differ depending on the lender, the type of loan program, and other variables. Borrowers interested in a Freddie Mac mortgage should consult with a certified lender to guarantee a smooth application process and to understand the unique requirements for their scenario. Furthermore, regulations and standards may change over time, so it’s best to consult with a lender for the most up-to-date information.