Legal Definitions - FHLMC

FHLMC stands for the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac.

The FHLMC is a government-sponsored enterprise (GSE) in the United States that plays a critical role in the country's housing finance system. Its primary function is to provide liquidity, stability, and affordability to the secondary mortgage market. It does this by purchasing mortgages from banks and other lenders, packaging these mortgages into mortgage-backed securities (MBS), and then selling those securities to investors. This process allows lenders to replenish their funds, enabling them to issue new mortgages to homebuyers.

Here are some examples illustrating the role of the FHLMC:

• Example 1: Providing Liquidity to Lenders

  A local credit union, "Neighborhood Savings," approves a 30-year fixed-rate mortgage for a young couple buying their first home. After the loan closes, Neighborhood Savings sells this mortgage to the FHLMC. By doing so, the credit union receives cash for the loan, which it can then use to fund additional mortgages for other families in the community. This process allows Neighborhood Savings to continue lending without having to hold onto every long-term mortgage loan on its books.

  This example demonstrates how the FHLMC provides essential liquidity to primary lenders, ensuring they have the capital available to make new home loans and keep the mortgage market active.

• Example 2: Attracting Investors to the Housing Market

  A large university endowment fund, "Future Scholars Fund," is looking for stable, long-term investment opportunities that generate consistent income. The fund decides to invest in mortgage-backed securities (MBS) issued by the FHLMC. These securities represent ownership in a pool of thousands of individual mortgages that FHLMC has purchased from various lenders across the country. The endowment fund receives regular payments from the interest and principal paid by the homeowners whose mortgages are part of that pool.

  This illustrates how the FHLMC transforms individual mortgages into marketable securities, making it easier for institutional investors to participate in the housing market and thereby channeling significant capital into the housing finance system.

• Example 3: Standardizing Mortgage Lending

  A new online mortgage lender is developing a range of loan products and needs to ensure they can be sold on the secondary market to maintain its lending capacity. To achieve this, the lender must ensure that its mortgage products, including their underwriting criteria, documentation, and loan terms, conform to the specific guidelines and standards set by the FHLMC (and its counterpart, Fannie Mae). If the loans do not meet these "conforming" standards, FHLMC will not purchase them, making it much harder for the lender to free up capital for new loans.

  This example highlights how the FHLMC's standards create uniformity and predictability in the mortgage market. Lenders adhere to these standards to ensure their loans are eligible for purchase by FHLMC, which in turn helps maintain a consistent flow of capital and predictable lending practices nationwide.