Opinion: Freddie Mac second mortgage loans further its mission

By BrokerOwner.net July 1, 2024 Housing News

Federal
Housing
Finance
Agency
(FHFA)
Director
Sandra
Thompson
recently
announced
its

conditional
approval
of
Freddie
Mac
pilot
to
purchase
second
mortgages.
I’ve
personally
been
an
outspoken
supporter
of
this
endeavor
and
I
applaud
this
decision.

The

Community
Home
Lenders
of
America
(CHLA)
immediately
issued
a
statement
of
support
for
this
pilot.
It
is
unquestioningly
positive
for
homeowners
and
many
of
our
CHLA
members
are
eager
to
help
their
borrowers
by
participating.
The
New
Product
approval
process
was
used
adroitly
by
FHFA
to
hear
public
comments
and
make
modifications.

So
CHLA
was
somewhat
taken
aback
that
it
has
been
almost
alone
among
major
trade
groups
in
supporting
this
pilot. Let’s
be
clear.
Second
mortgage
loans
are
specifically
authorized
in

Freddie
Mac’s
charter
[Section
305(a)(4)
–
12
USC
1454(a)(4)].

And,
although
technically
a
new

product,
this
is
not
in
any
way
a
new

function. Freddie
Mac
has
long
purchased
cash
out

refinances,
which
give
homeowners
whose
homes
have
appreciated
in
value
the
ability
to
access
some
of
the
equity
in
their
home.

What
has
changed
is
the
skyrocketing
of
long-term

mortgage
rates,
from
lows
of
3%
a
few
years
ago
to
around
7%
today. As
a
result,
cash-out
refinances
don’t
make
sense
for
homeowners
with
lower
coupon
loans
due
to
what
many
have
deemed
the
“lock-in
effect.”
It
would
mean
paying
4%
a
year
more
for
the
existing
$300,000
loan
just
to
access
another
$50,000. The
add-on
rate
on
that
$50,000
could
easily
be
over
30%.

That
is
where
the
Freddie
Mac
second
mortgage
comes
in. The
borrower
accomplishes
the
same
result
as
a
cash-out
refinance
from
a
few
years
ago,
borrowing
at
current,
higher
rates
for
ONLY
the
new,
second
mortgage
amount.
The
significant
value
of
the
homeowner’s
current
below-market
3%
or
4%
first
mortgage
is
retained.

CHLA
welcomes
debate
on
this
issue.
Let’s
examine
what
the
detractors
criticizing
these
Freddie
Mac
second
mortgage
loans
are
saying.

The
first
objection
is
the
claim
that
this
injects
more
risk
for

Freddie
Mac.
It
seems
hard
to
make
this
case,
as
there
is
a
plethora
of
limitations
under
the
approved
pilot. The
program
is
limited
to
primary
residences,
the
loan
must
have
been
originated
at
least
24
months
prior,
the
combined
first
and
second
loan
LTV
can’t
exceed
80%,
and
the
maximum
loan
amount
is
$78,277.
Moreover,
the
pilot
is
initially
limited
to
$2.5
billion
in
loans.

So,
the
risk
argument
simply
doesn’t
stand
up.

The
second
objection
is
that
there
are
already
sufficient
private
sector
loan
options
for
this
loan
product
—
primarily
the
banks
and
a
small
cohort
of
PLS
originators. But
banks
are
already
strapped
to
a
significant
degree,
dealing
with
large
overhangs
of
underwater
commercial
real
estate
loans,
thus
we
don’t
see
banks
being
overly
aggressive
in
this
product
sector. We
also
know
the
other
options
out
there
often
have
rates
in
the
double
digits
and
routinely
struggle
to
satisfy
the
High
Cost
and
High-Priced
mortgage
requirements.
Worse
yet,
“predatory”
or
“subprime”
loans
at
high
rates,
which
if
structured
as
a
second
mortgage,
could
put
the
home
at
risk.

The
reality
is
that
the
rates
and
terms
for
the
Freddie
Mac
second
mortgage
loans
will
be
significantly
better
than
most
second
mortgage
liens
publicly
available
today
—
for
the
same
reasons
GSE
first
mortgage
rates
are
generally
significantly
better.

Silicon
Valley
Bank
(SVB)
and
other
federally
regulated
banks
have

gone
bust
in
the
last
year
in
large
part
because
they
borrowed
short
and
lent
long.
Banks
have
largely
retreated
from
mortgage
lending
since
the
2008
Housing
Crisis
—
an
issue
which
the
SVB
borrower
short/lend
long
risks
are
further
exacerbating.

CHLA
might
also
point
out
that
banks
do
not
exactly
have
the
best
track
record
in
terms
of
second
mortgage
lending. Bank
excesses
leading
up
to
the
housing
crisis
in
second
mortgage
lending
were
a
major
contributor
to
underwater
mortgage
loans
and
exacerbated
problems
with
the
underlying
first
mortgage
loans. Ultimately,
the

Treasury
Department
had
to
adopt
policies
which
hurt
homeowners
in
order
to
protect
banks
from
massive
losses
on
their
second
mortgage
loans
—
along
with
a
$700
billion
TARP
bailout
that
largely
went
to
the
big
banks.

But
ultimately,
this
is
the
classic
type
of
debate
we
have
engaged
in
and
will
engage
in
going
forward
regarding
Fannie
Mae’s
and
Freddie
Mac’s
mission,
role
and
range
of
products.
A
framework
for
these
decisions
is
needed. And
we
have
one
—
the
regulatory
requirements
for
FHFA
approval
of
a
New
Product,
which
is
based
on
specific
factors.

These
factors
are
(1)
impact
on
the
GSE’s
mission,
(2)
impact
on
stability
of
mortgage
finance,
and
(3)
the
impact
on
competitiveness
of
the
housing
finance
market.
FHFA’s
conclusion
was
that
this
new
product
“is
in
the
public
interest.” The
analysis
was
laid
out
in
FHFA’s
initial
Federal
Register
notice
and
was
upheld
after
extensive
public
comment.

First,
there
is
demonstrable
“borrower
benefit”
—
as
the
FHFA
outlines
in
a
detailed
analysis.
FHFA
also
notes
that
this
will
encourage
more
competition
among
second
mortgage
lenders,
a
secondary
benefit
of
the
product.

Second,
is
that
this
would
further
one
of
the
major

GSE
mission
responsibilities,
which
is
to
provide
leadership
to
the
market. The
FHFA
Federal
Register
analysis
points
out
that
the
Freddie
product,
“may
provide
data
and
process
standardization
to
drive
operational
efficiency.
.
.”
And
Freddie’s
uniform
ownership
of
both
mortgages
may
make
loss
mitigation
easier
for
distressed
borrowers
compared
to
loss
mitigation
difficulties
with
split
mortgage
ownership
(a
lesson
we
learned
in
the
2008
Housing
Crisis).

Ultimately,
CHLA
is
somewhat
disappointed
that
FHFA
scaled
back
the
initial
proposal
so
much
in
its
final
approval
—
but
we
understand
it
faced
strong
industry
opposition
and
criticism.

There
are
also
guardrails
about
a
potential
expansion
of
this
pilot. FHFA
has
clearly
stated
that,
“Upon
the
pilot’s
conclusion,
FHFA
will
analyze
the
data
on
Freddie
Mac’s
purchases
of
second
mortgages
to
determine
whether
the
objectives
of
the
pilot
were
met.
FHFA
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.”

I
am
confident
that
after
analysis
of
the
pilot
loans,
and
a
comparison
to
alternatives
in
the
market,
that
FHFA
will
conclude
that
the
pilot
should
be
expanded.