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67 July 2024 J O U R N A L adjusted annually in Regulation Z) will appropriately target rural and un- derserved borrowers. The average loan size of closed-end second mortgages is nearly half of the average loan size of home equity lines of credit (HELOCs). Since borrowers in underserved communities (such as lower-income borrowers or those in rural areas) carry smaller balances, on average, HELOC providers may overlook these borrow- ers in favor of higher-income borrow- ers and others currently well-served by the home equity market. Thus, a per-loan cap on closed-end second mortgages could potentially expand access to home equity products for underserved borrowers who otherwise would need to obtain a less economi- cal cash-out refinance or utilize other higher-rate consumer credit options. » Broaden participation in the home equity market to smaller financial institutions that can effectively serve their local communities: FHFA believes there are segments of lenders that have struggled to access a secondary market for home equity products—HELOCs and closed- end second mortgages—outside of cash-out refinances eligible for sale to the GSEs. Current home equity lending is primarily supported by larger depository institutions that tend to hold whole loans on their balance sheets, while securitizations of home equity loans remain limited. FHFA is interested in learning whether this offering will be utilized by small community financial institutions that have more limited access to securitiza- tion markets. If so, this offering could support broader lending in under- served communities, while promoting greater competition among lenders and greater choice for consumers. This will be one of the many factors FHFA will examine upon the conclusion of the Freddie Mac pilot. The product is consistent with the safety and soundness of Freddie Mac or the mortgage finance system: While the volume cap ensures that any second mortgages acquired through the pilot would represent a small fraction of Fred- die Mac's aggregate loan acquisitions, FHFA also approved the limited pilot subject to additional safety and sound- ness considerations, including: » Pricing and capital treatment: FHFA expects that the pricing of eligible second mortgages and the capital requirements associated with them will appropriately reflect the risks they pose. This should also mitigate the risk that Freddie Mac will displace activity already occurring in the home equity market, which is primarily concen- trated in offerings to higher-income borrowers, as the objective is to reach borrowers who otherwise would be subject to more expensive alternatives, such as a cash-out refinance. » Eligibility parameters: Further, as is required of cash-out refinances purchased by the GSEs, the maximum combined loan-to-value (LTV) ratio of the first and second mortgages cannot exceed 80%, ensuring a robust equity position for the borrower to protect against a decline in home prices. Unlike a cash-out refinance, which for most borrowers in the current environ- ment would entail resetting the entire mortgage balance at a higher interest rate, a second mortgage allows borrow- ers to maintain an existing low interest rate first mortgage. In many cases, this would lead to a lower overall month- ly mortgage payment relative to a cash-out refinance, thereby improving mortgage sustainability. Next Steps for the GSE In recognition of the significant impact that the activities of the GSEs have on the U.S. housing finance system, market participants, and the broader economy, FHFA is required by law to review new activity and approve new GSE products before these activities and products are offered to the market. FHFA implements this requirement through its regulation on Prior Approval for Enterprise Products. "MBA appreciates FHFA's detailed re- sponsiveness to the key questions we out- lined in our comment letter regarding the As of December 2023, more than 95% of GSE-backed single-family mortgages 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.