Understanding Securities

Freddie Mac helps make mortgage financing available to homeowners across America by keeping the cost of mortgage financing as low as possible. We do this by providing various investment opportunities to the marketplace through two types of securities:

• Mortgage-backed securities: Securities that represent an interest in a pool of loans, such as residential mortgages.

• Debt securities: Securities issued by Freddie Mac to raise funds. The issuer promises to pay interest and to repay the debt on a specified date. These debt securities are issued in the U.S., Europe, and Asia.

How Mortgage-backed Securities Work

The primary mortgage market connection. Each month, the mortgage payments made by homeowners flow to the holders of the mortgage-backed security. Here's how the process works:

1. A homeowner sends the monthly mortgage payment to a lender or loan servicer.

2. If the mortgage had been purchased by Freddie Mac, the lender sends the homeowner's mortgage payment on to Freddie Mac.

3. Freddie Mac passes the mortgage payment through to the holders of the mortgage-backed security, minus the fee we charge for guaranteeing the timely payment to the investor, as well as some additional fees.
   

The secondary mortgage market process. We purchase mortgages from across the country that share similar characteristics – payment terms, interest rate, loan term – and yet may have other characteristics that vary. For example, some mortgages may carry greater credit risk than others, based on the type of property or the credit history of the borrowers.

Freddie Mac purchases large numbers of mortgages that we "pool", or bundle together, into large groups. We guarantee timely payment of principal and interest to the investors who invest in these pools.

Pooled mortgages are used to back the issuance of a particular type of instrument known as a mortgage-backed security (MBS). Many investors – typically large-scale institutional investors such as pension funds or mutual funds – find mortgage-backed securities very attractive.

Sometimes mortgage-backed securities are called "pass-through" securities, because Freddie Mac "passes through" to securities investors the funds homeowners pay for their mortgages.

How Debt Securities Work

Every year, Freddie Mac purchases millions of home loans from primary mortgage market lenders. Those that we don't pool together and sell as securities, we retain in our portfolio. In these cases, we continue to receive the homeowners' monthly payments sent along by the lenders, but we don't need to pass those payments through to investors.

By investing in mortgages, we attract funds for primary mortgage market lenders from debt investors who would not otherwise invest in the U.S. residential mortgage market or who might be averse to prepayment risk. We finance these mortgages by issuing debt securities.