Freddie Mac proposes buying home equity loans

Government-backed mortgage securitizer Freddie Mac is considering whether to expand its portfolio of first-time mortgages and become a buyer of home-equity loans, a move that could offer borrowers more favorable terms than they can get in the private credit market.

Public comment on the proposal, which closed less than a week ago, has drawn praise from low-income housing advocates and opposition from bankers and Republicans.

The new rules offer borrowers a cheaper loan option than a straight cash-out refinance, and are a particular response to the high interest rate lending environment that has put pressure on the housing sector. Currently, the interbank rate stands at an effective 5.33%, the highest since 2001.

“In the current mortgage interest rate environment, closed-end second mortgages may be a more affordable option for homeowners than alternative cash-out refinancing or using other consumer debt products,” the Federal Housing Finance Administration (FHFA) said in the proposal.

The FHFA is the federal agency responsible for overseeing Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Corporation (Fannie Mae), also known as Fannie Mae.

Fannie Mae and Freddie Mac each buy mortgages and package them into mortgage-backed securities (MBS) that investors can buy, with the goal of making more Americans able to get mortgages and keeping interest rates low.

When comparing the new mortgage proposal with a cash-out refinance option, borrowers could potentially save $136.77 on their monthly payments with the new product, according to the FHFA.

This new type of loan marks the first time that Freddie Mac and the government-sponsored enterprises (GSEs), the backbone of the U.S. housing market, have offered a fundamentally new type of product since they were nationalized as receivers after the 2008 financial crisis.

“We applaud Freddie Mac’s innovation, identification of market needs and exploration of creating liquidity in mortgage products other than first-lien loans,” Garth Lehman, executive director of the National Council of State Housing Agencies, which supports low-income housing organizations across the country, told FHFA last week.

Lehman said the scope of the new rules should be broadened to allow amortization of secondary loans to be extended over the entire term of the primary loan, rather than cutting off at 20 years as proposed.

Bankers and Republicans have opposed the proposed new products, fearing they could hurt business in the vast private lending market.Secondary loan originations totaled $37.8 billion in 2022, and the maximum amount of credit offered to borrowers was $211.1 billion, according to a 2023 mortgage market study by the Mortgage Bankers Association, a trade group for mortgage lenders.

“Government subsidies not only enable the proposed products to offer terms that would be economically impossible with private capital, but also represent a massive, albeit indirect, expansion by the GSEs into other credit markets,” Republican lawmakers including Sens. J.D. Vance (Ohio) and Mike Crapo (Idaho), as well as Reps. Warren Davidson (R-Ohio) and Blaine Luetkemeyer (Missouri) wrote to the FHFA on Friday.

The offices of several Democratic congressional leaders, including Rep. Maxine Waters of California, ranking member of the House Financial Services Committee, and Sen. Sherrod Brown of Ohio, chairman of the Senate Banking Committee, declined to comment on the proposal. The White House also declined to comment, referring questions to the FHFA.

Asked about the precedent for the new product, its impact on the private lending market and how it would specifically be securitized, the FHFA told The Hill on Tuesday that it is “considering public comment as we evaluate this proposed new enterprise product.”

“As with all activities FHFA considers, [GSEs] “And a mortgage finance system is a fundamental requirement of any program,” the agency added.

Bankers blasted Freddie Mac’s second mortgages as unnecessary.

“FHFA’s proposed Freddie Mac does not provide any data to support its assertion that the private market is not adequately meeting the demand for these second mortgages,” Joseph Pigg, senior vice president of the American Bankers Association, wrote to the FHFA last week.

“Members report an increased demand for second mortgages but have not expressed concerns about a lack of capacity,” he wrote.

The FHFA has said second-lien resolution and loss mitigation services would essentially work the same as for first-lien loans, but private insurers also oppose the proposal, arguing it “duplicates an already active private market and raises important unanswered questions,” said Seth Appleton, president of the National Association of Mortgage Insurers trade group.

Despite the backlash from bankers and insurers, one industry representative told The Hill that the move marks the first test of the new rulemaking process because it marks the first time the GSEs are offering new products since the banking sector collapsed in 2008.

Mortgage bankers therefore stress that there are still many unknowns about what will happen next.

“What does Freddie Mac estimate the base pricing of loans will be? Will pricing be fair for lenders of all sizes?” Pete Mills, head of housing policy at the Mortgage Bankers Association, wrote to the FHFA.

Rising interest rates and the concentration of consumer inflation in the housing sector have made housing agencies somewhat sensitive to the pressures faced by renters, borrowers and mortgage holders.

In April, the Department of Housing and Urban Development introduced a measure to raise the cap on rent increases for low-income housing tax credits to 10%, a move welcomed by tenant advocates.