The Federal Housing Finance Agency (“FHFA”) recently published a notice of a proposed new product from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the Federal Register. Freddie Mac is seeking approval to purchase certain types of single-family closed-end second mortgages.
Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by section 1123 of the Housing and Economic Recovery Act of 2008 (“Safety and Soundness Act”), Freddie Mac and the Federal National Mortgage Association (“Fannie Mae”) are required to provide advance notice to the FHFA before offering a new product. The FHFA, who oversees the two government-sponsored enterprises, is required to provide the public with a 30-day notice and comment period. After the comment period, FHFA has 30 days to make a final decision on whether it will approve the proposed new product after considering its impact on the housing finance market.
The FHFA has determined that Freddie Mac’s request to purchase second mortgages qualifies as a new product, and that it merits a 30-day public notice and comment period to determine if the requested change is in the public’s best interest. “The proposed activity is intended to provide homeowners with a cost-effective alternative for assessing the equity in their homes,” FHFA Director Sandra L. Thompson explained in a written statement. “Reviewing and considering comments from the public will be a critical component of our review as the Agency exercises its statutory responsibility to evaluate new Enterprise products.”
Freddie Mac’s proposal includes the purchase of closed-end second mortgages on homes where it already owns the first mortgage. FHFA’s notice states that the new product would provide another option for homeowners, allowing them to avoid the “significant financial burden” of a cash-out refinance on an existing low-rate first mortgage to access equity in their home.
FHFA’s notice provides the proposed requirements of the new product. Freddie Mac would purchase the loans from primary market lenders who are already approved to sell to them. The second mortgages must be fixed-rate, fully amortized, with a term of up to 20-years on a borrower’s primary residence. The first and second mortgage together cannot total more than an 80% loan-to-value ratio, except for manufactured homes, which cannot exceed 65%. Land trust and co-operative share mortgages are prohibited.
Initially, manual underwriting would be required for the second mortgages. The loan servicing requirements for the first and second lien would be similar, but if the first mortgage is refinanced, the second mortgage must be paid in full with the first, unless prohibited by law.
FHFA is accepting comments on the proposal, by email or by submission on the agency’s website, through May 22, 2024. FHFA has included a list of questions in the notice that it would like commenters to answer. All comments FHFA receives will be posted on their website for the public to view. It should be noted that Fannie Mae has not yet announced a similar proposal.
DocMagic will provide support for the new second mortgages by creating a new loan plan that meets selling guidelines if Freddie Mac’s proposal is approved by the FHFA. Further updates will be provided as information becomes available.
