Mortgage Participation Certificate Definition

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Mortgage Participation Certificate Definition

What Is a Mortgage Participation Certificate?

A mortgage participation certificate is a form of instrument that bundles loans owned by the government-backed Federal Home Loan Mortgage Corporation (Freddie Mac). Mortgage participation certificates are taxable by the federal, state, and municipal governments and are insured by Freddie Mac but not by the federal government.

Mortgage participation certificates, or PCs as Freddie Mac refers to them, are also known as “pass-through securities” since investors receive monthly interest and principal payments from debtors after service fee reductions.

Key Takeaways

  • A set of mortgages owned by the government-sponsored organization Freddie Mac are the components of a mortgage participation certificate, a kind of security.
  • The certificates are seen as reasonably secure investments since Freddie Mac, not the federal government, is guaranteeing them.
  • These certificates are referred to as pass-through securities since investors receive interest and principal payments from debtors less any service charge deductions.

Understanding Mortgage Participation Certificates

Since Freddie Mac was established by Congress in 1970, mortgage participation certificates have been a crucial component of its operations in one way or another. Increasing liquidity for thrift banks, which at the time supplied the majority of mortgages for people and families, was Freddie Mac’s first objective. In order to provide banks the funds to lend out new mortgages, Freddie Mac purchased mortgages from thrifts. After packaging and reselling these mortgages on the secondary market.

Prior to 1990, Freddie Mac compensated PC investors using a “modified guarantee” mechanism, delaying payment until 75 days after the original borrower’s mortgage payment was due.

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After the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which rebuilt Freddie Mac as a corporate organization focused on the market and put it under the regulatory jurisdiction of the Department of Housing and Urban Development, payment delays altered (HUD).A short while later, Freddie Mac unveiled its “Gold” scheme, which rewards PC investors after 45 days.

The great majority of mortgage participation certificates are for single-family house pools with traditional 15- and 30-year mortgages. However, Freddie Mac also gives certifications for collections of ARMs (ARMs).The standard minimum pool size is $1 million. In the past, Freddie Mac sold the majority of PCs for cash, but now, the majority of PCs are exchanged for brand-new bank mortgages.

Certificates of Mortgage Participation are subject to municipal, state, and federal taxes.

Special Considerations

Mortgage participation certificates are regarded as reasonably secure investments since Freddie Mac insures them, although they do entail some risk. For instance, the new Federal Housing Finance Agency currently oversees Freddie Mac’s financial operations while HUD continues to regulate the organization with regard to fair lending problems after the 2008 subprime housing crisis (FHFA).

The FHFA might cancel Freddie Mac’s assurances, however it is doubtful. Since Freddie Mac PCs are not traded on any exchanges, liquidity is also a danger. The secondary market for Freddie Mac’s personal computers would suffer if it reduces the size of its mortgage investment portfolio.

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