A


Freddie
Mac
home
equity
product
that
was

proposed
this
week
has
the
potential
to
unlock
$850
billion
in
origination
volume.
But
it
could
face
challenges
due
to
the
lack
of
a
robust
securitization
market,
according
to
strategists
at

Bank
of
America
(BofA). 

On
Tuesday,
the


Federal
Housing
Finance
Agency
(FHFA)

announced
a
request
for
comment
on
a
proposal
to
allow
the
government-sponsored
enterprise
(GSE)
to
purchase
single-family,
closed-end
second
mortgages
when
it
owns
the
risk
of
the
corresponding
first-lien
mortgage,
subject
to
a
combined
loan-to-value
ratio
lower
than
80%. 

If
the

home
equity
product
is
approved
as
proposed,
it
will
have
terms
of
up
to
20
years,
be
manually
underwritten
and
remain
in
Freddie’s
portfolio
for
six
to
nine
months
until
the
creation
of
second
mortgage
non-TBA-guaranteed
securities.
Meanwhile,
borrowers
will
be
unable
to
refinance
their
first
mortgage
until
the
product
is
paid
off,
unless
prohibited
by
law.

The
new
product
is
an
alternative
to
a
traditional
cash-out
refinance,
which
requires
refinancing
the
outstanding
loan
balance
at
current
interest
rates.
This
week,
the
30-year
fixed
mortgage
rate

topped
7%
for
the
first
time
this
year,
according
to
Freddie
Mac.
Consider
that
63%
of
outstanding
mortgages
have
a
sub-4%
mortgage
rate,
per
estimates
by
the
BofA
strategists. 

Second
mortgages
are
also
typically
offered
at
a
lower
interest
rate
than
certain
alternative
products
like
personal
loans. 

“The
proposed
activity
is
intended
to
provide
homeowners
with
a
cost-effective
alternative
for
accessing
the
equity
in
their
homes,”
FHFA
Director

Sandra
Thompson
said
in
an
announcement
of
the
proposal.

In
a
report
published
on
Wednesday,
the
BofA
strategists
calculated
that
if


Fannie
Mae
launched
a
similar
product,
it
could
do
$1
trillion
in
closed-end,
second-lien
mortgages.
Thus,
“for
mortgages
owned
by
the
two
GSEs,
equity
extractions
could
be
as
much
as
$1.8
trillion
on
sub-4%
loans,
keeping
the
CLTV
below
75%,”
the
group
added. 

To
compare,
second
mortgages
and

home
equity
lines
of
credit
(HELOCs)
have
a
current
outstanding
balance
of
$512
billion,
with
$150
billion
estimated
to
be
closed-end,
second-lien
loans,
per
the
BofA
report. 

The
secondary
market,
however,
can
be
a
challenge
for
these
products.

In
2023,
the
securitization
volume
for
HELOCs
and
closed-end
second
liens
reached
$4.5
trillion.
This
year,
the
volume
to
date
is
$2.6
trillion,
with
an
expectation
of
another
$8.4
trillion
by
the
end
of
December,
according
to
BofA. 

“Financing
options
are
particularly
important
given
the
increasing
share
of
second
liens
originated
by
non-depositories,”
the
strategists
wrote
in
the
report.
“We
think
that
the
new
product
could,
in
turn,
enhance
originations
by
providing
one
more
financing
outlet,
and
we
expect
that
it
could
quickly
exceed
credit
union
and
RMBS-securitization
bids.” 

The
comment
period
lasts
30
days
from
the
proposal’s
publication
in
the
Federal
Register
and
ends
on
May
16,
2024.

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