Freddie Mac & Mortgage Backed Securities

After the closing, the primary lender may either hold the mortgage in its portfolio (along with other loans it has made) or sell it in the secondary mortgage market.

When primary mortgage lenders sell loans in the secondary market, they generally sell them as loans to an institution like Freddie Mac. They then use the proceeds of the sale to make new loans to other home buyers in their community.

Freddie Mac is one of the largest investors in mortgages. As a major player in the secondary mortgage market, they

buy mortgages that meet their underwriting and product standards,
package those loans into securities, and
sell the securities to investors on Wall Street.

The mortgages they purchase are bundled or pooled together as mortgage-backed securities (MBS). Freddie Mac guarantees timely payment of principal and interest to MBS investors and finance these investments by issuing debt and mortgage securities. This makes the MBS more liquid than individual mortgages. Investors value Freddie's guarantee on the MBS, and therefore are willing to accept a slightly lower yield as the funds pass through to them.

In addition, Freddie provides more funds to the primary mortgage market through portfolio investment. By investing in mortgages,they attract funds for primary market mortgage lenders from investors who would not otherwise invest in the U.S. residential mortgage market, or who might be averse to prepayment risk.

Freddie Mac's use of funds

Freddie Mac uses the funds from sales of these securities sales to purchase more loans from primary lenders. In this way, they are constantly replenishing the pool of funds available for new loans, which allows primary lenders to use the cash they get from Freddie to originate new mortgages. This makes the mortgage process fast, convenient, and affordable.

The supply of cash the secondary mortgage market makes available to lenders through this process drives down mortgage rates by as much as one-half percent - saving the homeowner with a $100,000 mortgage around $12,000 in interest over the life of a 30-year loan. That savings helps make home ownership affordable for more families and individuals than would be possible without the secondary mortgage market. As a result, home ownership is a reality for many American families, and not just a dream. Take part in the dream now by applying with Allie Mae

 

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