On June 21, 2024, the Federal Housing Finance Agency (“FHFA”) announced its conditional approval of a proposal from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to purchase certain types of single-family, closed-end second mortgages.
In April, Freddie Mac submitted a proposal to purchase certain closed-end, second mortgages when it already owned the first mortgage. The proposal included additional parameters for loans to be eligible for purchase. The second mortgages must be fixed rate, fully amortized, with a maximum 20-year term, and 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.
The FHFA, who oversees Fannie Mae and Freddie Mac, received feedback on the proposal during a 30-day comment period that ended on May 22, 2024. After a review of the submitted commentary, the FHFA announced the conditional approval of the proposal with the following limitations for the program:
- Maximum duration of 18 months;
- Maximum volume of $2.5 billion in purchases;
- Maximum loan amount of $78,277 for a second mortgage, corresponding to certain subordinate-lien loan thresholds in the Consumer Financial Protection Bureau’s definition of Qualified Mortgage (as adjusted annually in Regulation Z);
- First mortgages must be seasoned for 24 months before second mortgages would be eligible for purchase by Freddie Mac; and
- Eligibility is only for primary residences.
“The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities,” FHFA Director Sandra L. Thompson said in a statement regarding the proposal decision.
The pilot is expected to help homeowners save money when borrowing against the equity in their homes. A second mortgage allows a borrower to get cash-out while keeping their existing first mortgage with a potentially lower interest rate in place. Rather than resetting the whole mortgage balance with a higher market rate, it would only apply to the second lien balance. Additionally, the volume limitation of $2.5 billion was set in response to commenters concerned about the inflationary impact of the pilot, and the possible “crowding out” of private capital.
At the end of the 18-month pilot, data from Freddie Mac’s purchase of second mortgages will be reviewed. Any extension to the pilot or changes to the criteria set by FHFA will require a new public notice and comment period, and FHFA review for approval.
DocMagic will announce any changes that will be made to support the pilot program once Freddie Mac launches their new product.
