Banking and Finance Law Daily Wrap Up, MORTGAGES—FHFA approves conditioned course for Freddie Mac second mortgage purchase pilot, (Jun 24, 2024)

By Jeff Williams

The FHFA director stressed that the conditioned approval of the program will enable Freddie Mac to determine if a second mortgage product would benefit consumers, particularly in rural and underserved areas.

The Federal Housing Finance Agency has conditionally approved Freddie Mac’s proposal to launch a limited pilot to purchase certain closed-end second mortgages on properties for which it already holds the first mortgage. The conditions include that the program will have a maximum volume of $2.5 billion in purchases and last a maximum of 18 months, the agency stated. In addition, the conditions set a maximum loan amount of $78,277, based on subordinate-lien loan thresholds in the Consumer Financial Protection Bureau’s definition of Qualified Mortgage, require a minimum “seasoning period” of 24 months from the first mortgage, and limit eligibility to principal/primary residences.

Notice and comments received. The FHFA had identified Freddie Mac’s proposed program as a “new product,” requiring that the agency undertake a 30-day notice and comment period under a new process mandated by the Prior Approval for Enterprises regulation (see Banking and Finance Law Daily, April 17, 2024).

Among the feedback received, Sens. Tim Scott (R-S.C.) and Bill Haggerty (R-Tenn.) had expressed concerns that the proposal would turn Freddie Mac into a large consumer loan guarantor that could disrupt credit markets and increase systemic risk (See Banking and Finance Law Daily, May 29, 2024). In contrast, the Center for Responsible Lending argued that using a second mortgage rather than a cash-out refinance to access home equity would be more beneficial to borrowers during periods when the prevailing mortgage rate is significantly above the interest rate on outstanding mortgages.

In a press release, FHFA Director Sandra Thompson said that 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. 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.”

In a separate statement, Thompson said that while the statutorily limitations of a 30-day comment period and another 30-day deadline for Freddie Mac to render a decision were “shorter periods than those associated with some other public comment periods,” the process “worked well and provided lessons for future new product proposals by the Enterprises.”

The decision was “informed by the numerous comment letters” received during that period, as well “considerations required by law,” including that the product is authorized under specified sections of Freddie Mac’s Charter Act and that the program is in the public interest, she said.

Among the public interest considerations, Thompson said that the product will provide lower-cost alternatives to existing cash-out refinance products and expand the home equity market to smaller financial institutions.

“Freddie Mac’s purchase of closed-end second mortgages is intended to allow borrowers to maintain their low interest rate first mortgage while accessing a portion of the equity in their homes. Several public interest factors were considered in the review process,” she said.

In addition, 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,” Thompson said. Also as required, she said, the pricing of eligible second mortgages and the eligibility parameters help the product meet requirements to ensure the safety and soundness of Freddie Mac and the mortgage finance system.

The FHFA said that when the program concludes it will analyze Freddie Mac’s purchases of second mortgages to “determine whether the objectives of the pilot were met,” adding that it 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.”

Companies: Fannie Mae; Freddie Mac

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