The Federal Housing Finance Agency (FHFA) on Friday announced that it has given conditional approval for Freddie Mac to begin purchasing closed-end second mortgages through a pilot program.
The pilot program includes several limitations to the types of loans the government-sponsored enterprise will be allowed to purchase.
The program is only for primary residences and the first mortgage must have a minimum seasoning period of 24 months. The maximum loan amount is $78,277. Freddie Mac will be allowed to purchase up to $2.5 billion in second mortgages over a period of 18 months.
“The thoughtful engagement from public stakeholders confirmed the value of a transparent process for evaluating potential new Enterprise products and informed the parameters of the conditional approval,” FHFA Director Sandra L. Thompson said in a statement. “The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities.”
Scott Olson, executive director of the Community Home Lenders of America (CHLA), released a statement in support of the decision.
“This in an important product given that skyrocketing interest rates have made getting a refinance unaffordable,” Olson said.
Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), indicated the trade group’s receptiveness based on a “rollout that is limited in size and duration.”
“[The program] mitigates the impact on the private-label securitization market for second liens, focuses on borrowers with lower loan balances, and will encourage participation by smaller lenders that do not have easy access to liquidity for closed-end seconds,” Broeksmit said in prepared remarks.
“MBA and its members will remain engaged with FHFA and Freddie Mac to monitor the results of the pilot and ensure that it remains available to lenders of all sizes and business models and avoids disrupting the developing private-label securitization market for second liens.”
In its announcement, the FHFA said it will “analyze the data on Freddie Mac’s purchases of second mortgages to determine whether the objectives of the pilot were met.“ It noted that any increase in the volume of loans being purchased, or the duration of the pilot program, will be treated as a new product. This would subject it to a separate public comment period and further FHFA approval.
In an interview with HousingWire last month, Freddie Mac’s head of single-family acquisitions, Sonu Mittal, defended the agency’s proposal to acquire closed-end second mortgages. The product is designed as an alternative to a cash-out refinance for homeowners who don’t wish to trade in a lower mortgage rate for one in the 7% range, he said.
“Six out of 10 borrowers are below a 4% mortgage rate. But they have also accumulated a good amount of equity over the last few years. How do we allow them to extract equity out of their house in a responsible way?“ Mittal said.
Some trade groups opposed the plan that was initially announced in April. The Housing Policy Council previously said that Freddie’s entry into this market could “add liquidity but at the expense of private capital and private market.“
Seth Appleton, president of the U.S. Mortgage Insurers (USMI), issued a statement following the approval of the pilot program.
“After carefully reviewing the proposal, USMI urged FHFA to disapprove of the proposed product,“ Appleton said. “While today’s announcement includes important limitations to the pilot, further clarifications should be provided including on how loan-to-value (LTV) ratios will be calculated, information about applicable debt-to-income (DTI) limitations, a specific exclusion for ‘piggyback loans,’ and additional details on capital and pricing treatment.“
Bank of America analysts previously estimated that the product could open up to $850 billion in new originations, a hefty volume at a time when mortgage companies have been struggling for business in the wake of higher interest rates and lower levels of for-sale inventory.
Thompson noted that the $2.5 billion volume cap is “responsive to concerns from several commenters regarding the potential macroeconomic and mortgage market impacts of a broader offering.“ The cap of the approved pilot program represents less than 0.5% of many market estimates.
“This is intended to mitigate any concerns about potential inflationary impacts, extending the mortgage ‘lock-in’ effect, or the ‘crowding out’ of private capital,“ Thompson said.
Editor’s note: This story has been updated with comments from the Community Home Lenders of America, the Mortgage Bankers Association and U.S. Mortgage Insurers.
