Government-backed mortgage securitizer Freddie Mac is considering whether to broaden out its portfolio from first-time mortgages to become a purchaser of home equity loans, a move that could offer borrowers more favorable terms than those of private credit markets.
Public comments closed less than a week ago on the proposal, which is getting praise from low-income housing advocates and disapproval from bankers and Republicans.
The new rule, which would provide borrowers a cheaper loan option than straight-up cash-out refinancing, is specifically responsive to the higher interest rate financing environment that is putting the squeeze on the housing sector. Interbank interest rates currently at an effective 5.33 percent are at their highest levels since 2001.
“In the current mortgage interest rate environment, a 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,” the Federal Housing Finance Agency (FHFA) wrote in its proposal.
FHFA is the federal agency in charge of overseeing Freddie Mac — formally known as the Federal Home Loan Mortgage Corporation — and Federal National Mortgage Association, also known as Fannie Mae.
Fannie and Freddie each buy mortgages and package them into mortgage-backed securities (MBS), which are purchased by investors. The sales are intended to broaden the pool of Americans who can afford home loans and keep rates lower.
In a scenario comparing the new home equity loan proposal to a cash-out refinancing option, borrowers could save $136.77 in monthly payments as a result of the new product, FHFA said.
The new type of loan is the first time Freddie Mac or any of the government-sponsored enterprises (GSEs) that underpin the U.S. housing market have offered a fundamentally new type of product since they were nationalized as conservatorships in the wake of the 2008 financial crisis.
“We applaud Freddie Mac for its innovation and identifying a need in the market and seeking to create liquidity for a mortgage product other than a first lien mortgage loan,” Garth Rieman, a director of the National Council of State Housing Agencies, which advocates for low-income housing groups around the country, told the FHFA last week.
Rieman said the bounds of the new rule should be expanded, allowing for secondary loan amortization write-offs to extend throughout the course of the primary loan rather than cutting them off at a 20-year limit, as proposed.
Bankers and Republicans are against the new product proposal and fear it will cut into the business of the enormous private lending market. In 2022, there were $37.8 billion in secondary loan originations and $211.1 billion in maximum credit extended to borrowers, according to a 2023 study of the home equity loan market by the Mortgage Bankers Association, a trade group for home lenders.
“Government subsidization will not only enable the proposed product to offer terms that are economically impossible for private capital to match, but represents a vast (albeit indirect) expansion by the GSEs into these other credit markets,” Republican legislators including Sens. J.D. Vance (Ohio) and Mike Crapo (Idaho) as well as Reps. Warren Davidson (R-Ohio) and Blaine Luetkemeyer (Mo.) wrote to FHFA on Friday.
Several Democratic Congressional offices declined to comment on the proposal, including those of House Financial Services Committee ranking member Rep. Maxine Waters (Calif.), and Senate Banking Committee Chairman Sherrod Brown (Ohio). The White House also declined to comment, referring questions to FHFA.
Asked about precedents for the new product, its effect on private lending markets, and how exactly it will be securitized, the FHFA told The Hill Tuesday that it is “reviewing comments from the public to inform our evaluation of this proposed new Enterprise product.”
“As with all activities FHFA considers, the safety and soundness of the [GSEs] and the mortgage finance system are fundamental requirements of any program,” the agency added.
Bankers blasted the secondary mortgage from Freddie Mac as unnecessary.
“The Freddie Mac proposal published by FHFA offers no data to support an assertion that the private market is not sufficiently meeting the demand for these second liens,” Joseph Pigg, senior vice president of the American Bankers Association, wrote to FHFA last week.
“While our members report growing demand for second liens, they have not raised concerns about insufficient capacity,” he wrote.
While FHFA says that resolution and loss mitigation servicing for second mortgages would basically work as it does for first mortgages, private insurers are also against the proposal, arguing that it’s “duplicative of an already active private market, and raises important, unanswered questions,”said Seth Appleton, president of the U.S. Mortgage Insurers trade group.
Despite the push back from bankers and insurers, one industry representative told The Hill that because it’s the first time the GSEs are offering a new product since the 2008 collapse of the banking sector, the move represents a first test of a new rulemaking process.
Accordingly, mortgage bankers are stressing that there are still a lot of unknowns about what’s going to emerge.
“What does Freddie Mac estimate base loan pricing will look like? Will pricing be equitable for lenders of all sizes?” Pete Mills, head of residential policy at the Mortgage Bankers Association, wrote to FHFA.
Amid higher interest rates and a concentration of consumer-facing inflation in the housing sector, housing agencies have shown some sensitivity to the pressures facing renters, tenants and mortgage holders.
In April, the Department of Housing and Urban Development put in place what amounts to a 10 percent rent increase cap for the low-income housing tax credit, a move that was hailed by tenant rights advocates.
