FHFA Approves ‘Limited Pilot’ for Freddie Mac Second Mortgage Product
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has given conditional approval for Freddie Mac to purchase certain single-family closed-end second mortgages.
In what the agency is calling a “limited pilot,” some homeowners now have another option for accessing home equity without surrounding the low mortgage rate they may have locked in several years ago. Those limits include:
A maximum volume of $2.5 billion in purchases
A maximum duration of 18 months
A maximum loan amount of $78,277, corresponding to certain subordinate-lien loan thresholds in the Consumer Financial Protection Bureau’s definition of Qualified Mortgage
A minimum seasoning period of 24 months for the first mortgage
Eligibility only for principal/primary residences
The conditional approval followed FHFA’s first publication of a proposed new product by either Freddie Mac or Fannie Mae for public comment under the new process mandated by the Prior Approval for Enterprise Products regulation, which became effective in April 2023.
Many of the comments came from groups opposed to the new product, from Republicans on the U.S. Senate Banking Committee to several banking trade groups. Objections to the proposal included inconsistency with Freddie Mac’s mission, the risk of promoting a second-lien product, and disruption of credit markets.
Thompson responded to many of the concerns about the new product in a lengthy statement that accompanied FHFA’s announcement.
Thompson said the Freddie Mac Charter Act permits the enterprise to purchase “residential mortgages that are secured by a subordinate lien against a one- to four-family residence,” and that the proposed new product meets the requirements for authorization.
The director also claimed the product serves the public interest for several reasons. For starters, 95 percent of enterprise-backed mortgages have rates below current market rates, with the majority at least three percentage points lower. Having Freddie purchase closed-end second mortgages enables borrowers to maintain low rates on first mortgages while accessing part of their equity. The new product is a lower-cost alternative to cash-out refinance loans, which can benefit low-income borrowers and those in underserved and rural communities.
Thompson also argued that the limits placed on the pilot will allow analysis of the overall market potential and mitigate concerns about potential inflationary impacts, extending the mortgage “lock-in” effect, or the “crowding out” of private capital.
The proposal also has the potential to enable smaller financial institutions to expand their participation in the home equity market, Thompson said.
“FHFA believes there are segments of lenders that have struggled to access a secondary market for home equity products – HELOCs and closed-end second mortgages – outside of cash-out refinances eligible for sale to the enterprises,” Thompson said in her statement.
“Current home equity lending is primarily supported by larger depository institutions that tend to hold whole loans on their balance sheets, while securitizations of home equity loans remain limited. FHFA is interested in learning whether this offering will be utilized by small community financial institutions that have more limited access to securitization markets.”
Thompson concluded with assurances that the Freddie Mac product will promote safety and soundness through the program’s pricing, capital requirements and eligibility parameters.
Upon the pilot’s conclusion, Thompson said FHFA will analyze the data on Freddie Mac’s purchases of second mortgages to determine whether the objectives of the pilot were met. FHFA has determined that any increase to the volume or extension of the duration of the pilot, or a conversion of the pilot to a programmatic activity, would be treated as a new product that is subject to public notice and comment and FHFA approval. Any subsequent approval would be informed by the preliminary results of the pilot.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
