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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 66 July 2024 J O U R N A L FREDDIE MAC APPROVES PILOT TO PURCHASE SECOND MORTGAGES T he Federal Housing Finance Agency (FHFA) has announced its conditional approval for Freddie Mac to engage in a limited pilot to purchase certain single-family closed- end second mortgages. This conditional approval follows FHFA's first publication of a proposed new product by Freddie Mac or Fannie Mae (the GSEs) for public comment under the new process man- dated by the Prior Approval for Enter- prise Products regulation, which became effective in April 2023. "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 condi- tional approval," FHFA Director Sandra L. Thompson said. "The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac's stat- utory purposes and benefits borrowers, particularly in rural and underserved communities." Crafted by Industry Input The conditional approval was informed by the numerous comment letters received, as well as considerations required by law: The product is authorized under specified sections of Freddie Mac's Char- ter Act: The Freddie Mac Charter Act permits the GSE to purchase "residential mortgages that are secured by a subor- dinate lien against a one- to four-family residence," subject to certain conditions (See 12 U.S.C. 1454(a)(4)). The proposed new product meets the requirements for authorization under the Charter Act. The product is in the public interest: As of December 2023, more than 95% of GSE-backed single-family mortgag- es had mortgage rates below current market rates, with the majority at least three percentage points lower. National home prices have doubled in less than a decade, leading to significant amounts of equity for many homeowners. Currently, Zillow reports that the average U.S. home value stands at $360,681, up 4.3% over the past year. Freddie Mac's purchase of closed-end second mortgages is intended to allow borrowers to maintain their low interest rate first mortgage while Government accessing a portion of the equity in their homes. Several public interest factors were considered in the review process: » Provide lower-cost alternatives to existing cash-out refinance products: Many borrowers—particularly low-in- come and those in rural and under- served communities—have struggled to access equity in their homes through the private home equity market. In an environment of elevated mortgage rates, they are either forced to give up their below-market rate and obtain a cash- out refinance with a higher mortgage rate across the entire loan balance or are forced to sell their home when a financial need arises, which can create instability for families and run counter to the Enterprises' missions. » Avoid crowding out private capital or producing unintended macroeco- nomic or mortgage market effects: FHFA anticipates that a pilot with a volume limitation of $2.5 billion, a duration not to exceed 18 months, a maximum loan amount of $78,277 (as adjusted annually in Regulation Z), a 24-month minimum seasoning requirement for the first mortgage, and eligibility only for principal/pri- mary residences will allow analysis of consumer demand, lender offerings, servicer operations, and investor appetite in a controlled manner. The $2.5 billion volume cap, in particular, is responsive to concerns from several commenters regarding the potential macroeconomic and mortgage market impacts of a broader offering. Some commenters cited estimates of $500 billion or more in second mortgage volume if the Freddie Mac proposal were approved, but the volume cap of the approved pilot instead represents less than one-half of one percent of these estimates. This is intended to mitigate any concerns about poten- tial inflationary impacts, extending the mortgage "lock-in" effect, or the "crowding out" of private capital. » Benefit underserved borrowers: FHFA anticipates that a pilot with a per-loan limitation of $78,277 (as