Freddie Mac

Freddie Mac is one of the two government-supported firms in the mortgage market, the other being Fannie Mae. They are both what are known as “financial intermediaries.” There is a series of rules about what is and is not a “conforming loan”, things like the maximum size, the amount of the deposit, whether there is mortgage insurance, but loans which meet these will be slightly cheaper than ones that don’t. This is because of what these intermediaries do in the market.

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Both Freddie Mac and Fannie Mae buy conforming mortgages from the original lenders. Those original lenders remain responsible for collecting the payments and so on, but the loan itself is added to one of the “pools” that the companies run. These will be tens of thousands of mortgages, all bundled together. There will also be tens of thousands of investors who buy small parts of these pools as investments. But because we now have the risk of your loan spread across thousands of investors, each only owns a very small part of that risk. As ever in a financial market, when risks are exchanged or spread, then prices change.

Another way of looking at what Freddie Mac does is this. The savers of America would love to lend you the money to buy your home. But they don’t know you, and it would be difficult for several hundred of them to all agree to lend you say, $1,000 each. What Freddie Mac and Fannie Mae do is provide the system that allows them to lend you the money.