Freddie Mac’s head of single-family acquisitions, Sonu Mittal, this week defended the government-sponsored enterprise’s proposal to acquire single-family, closed-end second mortgages amid opposition by trade groups that are worried about its impacts on the secondary market.
“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 in an interview with HousingWire.
“What we are bringing forward, called closed-end second lien, assuming a FHFA approval, will provide them an alternative to the cash-out refi,“ he said. “If someone has a $300,000 mortgage and wants to get $50,000 out, they don’t have to reprice their whole first home mortgage to the rates currently at 7%.“
Mittal spoke to HousingWire on Tuesday during the Mortgage Bankers Association’s (MBA) Secondary and Capital Markets Conference. On Wednesday, the Federal Housing Finance Agency (FHFA) closed the comment period for the proposal, which was opened in April.
In their comments, trade groups expressed concerns about private players’ participation in the secondary market and the elevated risks the product poses to the enterprise.
The MBA said it recognized that the product provides access to equity at lower rates and is a “cost-effective alternative to cash-out refinances.“ Also, if created, the “quick delivery into an agency TBA market could increase overall participation in home equity lending.“ But these are “theoretical benefits,“ the MBA concluded.
“Some MBA members have raised concerns about the timing of Freddie Mac’s announcement — just as the private label securitization market for second liens is gaining steam — and fear this new product will capture share from other market participants and disrupt or reverse the progress that has been made,“ Pete Mills, MBA senior vice president of residential policy and member engagement, wrote in the letter.
The U.S. Mortgage Insurers (USMI), an association representing leading private mortgage insurers, disapproved of the program. Its president, Seth Appleton, said that the proposal “does not align with Freddie Mac’s statutory mission, creates additional risk, is duplicative of an already active private market, and raises important, unanswered questions.“
Meanwhile, the Housing Policy Council (HPC) said that the GSE’s entry into this market could “add liquidity but at the expense of private capital and private market.“ In addition, it would increase risk. For example, if Freddie Mac guarantees a first-lien mortgage at a loan-to-value ratio of 65% and then acquires a second lien at 15%, its risk has “unequivocally gone up,“ the HPC stated.
“Furthermore, the proposed new product will require Freddie Mac to expend resources to establish new credit, operational, and compliance practices inherent with the entry into any new line of business and will require additional capital. All of this would be a new expense at a time when Freddie Mac remains in conservatorship and is undercapitalized,“ HPC President Edward J. DeMarco said in the letter.
Mittal told HousingWire that the “program is designed to provide liquidity and promote standardization.“ According to him, borrowers took out about $100 billion in closed-end second liens last year, and less than $5 billion was securitized. In addition, the product is only available to borrowers who have a first lien with Freddie Mac.
“It may make sense for some homeowners. And it may not make sense for some. The thing I keep trying to tell folks is that this is not HELOC; this is not piggyback where you can do first and second, and this is not open to all first-lien mortgages in the country. It’s only if you have a Freddie Mac first mortgage. So, when you start slicing it with all those different cuts, it’s a different sizing or opportunity that exists.“
If the home equity product is approved as proposed, it will have terms of up to 20 years (even if the first mortgage has a shorter term). It would be manually underwritten and remain in Freddie Mac’s portfolio for six to nine months until second mortgage non-TBA-guaranteed securities are created.
The closed-end second mortgage cannot exceed the first mortgage in value, and the combined loan-to-value ratio must be lower than 80%. Homeowners can refinance anytime they want, but they must consolidate the first and second liens, or pay off the second lien.
“There’s a huge opportunity for us to help borrowers or existing homeowners with this product. But we still have to wait for the FHFA decision. And then, we have to also think about, if we do get approval, how we move forward. It’s not a pilot. It will be a phased rollout,“ Mittal said.
If and when the product gets the FHFA’s approval, Freddie Mac’s goal is “without compromising safety and soundness, select a group of lenders to be part of phase one“ of adoption, bringing “something to the market later this year, early next year,“ Mittal added.
Strategists at Bank of America estimate the product could unlock $850 billion in origination volume.
