The Federal Housing Finance Agency (FHFA) has sent a notice of a proposed new product from Freddie Mac to the Federal Register to begin purchasing certain single-family closed-end second mortgages.
Freddie Mac proposes to purchase closed-end second mortgages on properties for which it already holds the first mortgage. FHFA has determined this to be a new product that merits public notice and comment about whether it is in the public interest.
“The proposed activity is intended to provide homeowners with a cost-effective alternative for accessing the equity in their homes,” said FHFA Director Sandra L. Thompson. “Reviewing and considering comments from the public will be a critical component of our review as the Agency exercises its statutory responsibility to evaluate new Enterprise products.”
Benefits to the proposal
For borrowers in today’s mortgage environment, closed-end second mortgage may provide a more affordable option to homeowners than obtaining a new cash-out refinance or leveraging other consumer debt products, according to the proposal. A significant portion of borrowers have low interest rate first mortgages, and the FHFA’s proposal would allow those homeowners to retain a beneficial interest rate on the first mortgage and avoid resetting to a higher rate through a cash-out refinance.
Freddie Mac believes the proposed new product may advance its charter act purposes by providing liquidity and stability in the secondary mortgage market, and establishing a foundation for more consistent liquidity in the secondary mortgage market because of its credit guarantee and experience securitizing mortgage loans. Freddie Mac believes that the shorter duration of the second mortgage term, the lower Freddie Mac’s credit risk is relative to a cash-out refinance, while providing borrowers with significant cost savings due to the interest savings on a shorter repayment schedule.
Alleviating market struggles
The current housing landscape, riddled with higher mortgage rates nearing the 7% mark, limited supply, and continued year-over-year house price appreciation, existing borrowers face limited options to access the equity in their primary residences. According to the new proposal, for a second mortgage, only the smaller, second mortgage would be subject to the current market rate, as the original terms of the first mortgage would remain intact.
In a closed-end second mortgage loan, the borrower’s funds are fully disbursed when the loan closes, the borrower repays over a set time schedule, and the mortgage is recorded in a junior lien position in the land records.
In its proposal, Freddie Mac indicates that the primary goal of this new product is to provide borrowers a lower cost alternative to a cash-out refinance in higher interest rate environments. Purchase parameters would seek to minimize credit risk to Freddie Mac, while balancing with potential cost saving to existing homeowners.
Implementing new regulations
Section 1321 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by Section 1123 of the Housing and Economic Recovery Act of 2008 (Safety and Soundness Act), requires Fannie Mae and Freddie Mac (the Enterprises) to provide advance notice to the FHFA before undertaking a new activity and to obtain prior approval from FHFA before offering a new product to the market, and requires FHFA to adopt an implementing regulation on certain points.
Once the Federal Register publishes the notice, a statutory 30-day comment period begins. After that 30-day period has ended, FHFA has a statutory 30-day period to make a final decision as to whether to approve or deny the proposed new product.
