Freddie Mac Proposed Purchase of Single-Family Closed-End Second Mortgages; Comment Request, 29329-29333 [2024-08479]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 89, Number 78 (Monday, April 22, 2024)]
[Notices]
[Pages 29329-29333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08479]


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FEDERAL HOUSING FINANCE AGENCY

[No. 2024-N-5]


Freddie Mac Proposed Purchase of Single-Family Closed-End Second 
Mortgages; Comment Request

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed Enterprise new product; request for comment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) invites comments on 
a proposal by the Federal Home Loan Mortgage Corporation (Freddie Mac) 
to purchase certain single-family closed-end second mortgages as a new 
product (proposed new product).

DATES: FHFA will accept written comments on the proposed new product on 
or before May 22, 2024.

ADDRESSES: You may submit your comments by electronic mail (Email) only 
on the proposed new product, identified by ``Proposed Enterprise New 
Product; Comment Request `Freddie Mac Single-Family Closed-End Second 
Mortgages,' (No. 2024-N-5),'' by either of the following methods:
     Agency website: www.fhfa.gov/open-for-comment-or-input.
     Email: [email protected].
    FHFA will post all public comments received without change, 
including any personal information you provide, such as your name, 
address, email address, and telephone number, on the FHFA website at 
https://www.fhfa.gov. In addition, all comments received will be 
available for examination by the public through the electronic comment 
docket for this notice also located on the FHFA website.

FOR FURTHER INFORMATION CONTACT: Eric Bryant, Policy Analyst, Division 
of Housing Mission and Goals, (202) 253-4505, [email protected]; 
William Merrill, Associate Director, Division of Housing Mission and 
Goals, (202) 649-3428, [email protected]; Lyn Abrams, Associate 
General Counsel, Office of General Counsel, (202) 649-3059, 
[email protected]; or Dinah Knight, Assistant General Counsel, Office 
of General Counsel, (202) 748-7801, [email protected], Federal 
Housing Finance Agency, 400 Seventh Street, SW, Washington, DC 20219. 
These are not toll-free numbers. For TTY/TRS users with hearing and 
speech disabilities, dial 711 and ask to be connected to any of the 
contact numbers above.

SUPPLEMENTARY INFORMATION:

I. Background

A. FHFA's Statutory and Regulatory Authority

    FHFA oversees the government sponsored enterprises, the Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac and, together with Fannie Mae, the 
Enterprises), to ensure that they operate in a safe and sound manner, 
achieve the purposes of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, as amended \1\ (the Safety and 
Soundness Act), fulfill their statutory charters,\2\ and comply with 
other applicable laws.\3\
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    \1\ 12 U.S.C. 4501 et seq.
    \2\ 12 U.S.C. 1716 et seq. and 12 U.S.C. 1451 et seq.
    \3\ Since 2008, FHFA has also acted as conservator for each 
Enterprise.
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    In recognition of the significant impact that the activities of the 
Enterprises have on the U.S. housing finance system, market 
participants, and the broader economy, section 1321 of the Safety and 
Soundness Act requires the FHFA Director to review new Enterprise 
activities and to approve new Enterprise products before these 
activities and products are offered to the

[[Page 29330]]

market.\4\ Under the Safety and Soundness Act, for any new activity, an 
Enterprise must seek a determination from the Director as to whether 
the new activity is a new product that is subject to FHFA prior 
approval.\5\ Before taking a decision on a new product proposal, the 
Safety and Soundness Act requires the Director to provide the public 
with notice and an opportunity to comment on the proposal and 
prescribes a 30-day public notice period.\6\ The Safety and Soundness 
Act also specifies the standards that must be considered by the 
Director in acting on a new product proposal.\7\ Those standards 
specifically require the Director to make a determination that the 
proposed new product is in the public interest.
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    \4\ See generally, 12 U.S.C. 4541.
    \5\ 12 U.S.C. 4541(e)(2).
    \6\ 12 U.S.C. 4541(c).
    \7\ 12 U.S.C. 4541(b).
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    FHFA implements these statutory requirements through its regulation 
on Prior Approval for Enterprise Products.\8\ The regulation 
establishes a framework for identifying new activities and new products 
and a process for an Enterprise to provide FHFA with advance notice of 
a new activity and to request prior approval of a new product.\9\ The 
regulation also describes the factors that the Director may consider 
when determining whether a proposed new product is in the public 
interest. Those factors fall into three broad categories: (1) the 
impact of the new product on the Enterprise's public mission; (2) the 
impact of the new product on the stability of mortgage finance or 
financial system; and (3) the impact of the new product on the 
competitiveness of the housing finance market.\10\ In addition to the 
enumerated public interest factors, the Director retains the discretion 
to seek public comment on any other appropriate factor.
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    \8\ 12 CFR part 1253.
    \9\ 12 CFR 1253.3 and 1253.4.
    \10\ 12 CFR 1253.4(b) and 1253.6(e).
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    FHFA has determined that Freddie Mac's proposed purchase of closed-
end second mortgage loans is a new product for Freddie Mac that merits 
public notice and comment about whether it is in the public 
interest.\11\ In turn, Freddie Mac has requested FHFA's approval to 
proceed with the proposed new product. Consistent with statutory and 
regulatory requirements, FHFA is seeking public comment on the proposed 
new product, including on the public interest factors set forth in the 
regulation and additional factors which the Director has determined to 
be appropriate. The Director will consider all public comments received 
by the closing date of the comment period to inform the determination 
as to whether the proposed new product is in the public interest.\12\
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    \11\ See, 12 CFR 1253.3(a)(1).
    \12\ 12 CFR 1253.6(b)(3).
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B. Freddie Mac's Charter Act

    One element of assessing the public interest is examining the 
degree to which the new product might advance any of the purposes of 
the Federal Home Loan Mortgage Corporation Act (charter act).\13\ 
Congress created Freddie Mac to serve four public purposes: ``(1) 
provide stability in the secondary market for residential mortgages; 
(2) respond appropriately to the private capital market; (3) provide 
ongoing assistance to the secondary market for residential mortgages 
(including activities relating to mortgages on housing for low- and 
moderate-income families involving a reasonable economic return that 
may be less than the return earned on other activities) by increasing 
the liquidity of mortgage investments and improving the distribution of 
investment capital available for residential mortgage financing; and 
(4) promote access to mortgage credit throughout the Nation (including 
central cities, rural areas, and underserved areas) by increasing the 
liquidity of mortgage investments and improving the distribution of 
investment capital available for residential mortgage financing.'' \14\
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    \13\ 12 U.S.C. 1451 et seq.
    \14\ 12 U.S.C. 1451 note.
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    Freddie Mac must operate within the confines of the powers 
expressly granted to it by Congress under its charter act, and the 
exercise of those powers must fulfill one or more of the statutory 
purposes that Congress articulated in the charter act. Section 
305(a)(4) of the charter act specifically authorizes Freddie Mac to 
purchase, service, sell, lend on the security of and deal with 
subordinate mortgages secured by a single-family or multifamily 
property, provided certain conditions are met.\15\
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    \15\ 12 U.S.C. 1454(a)(4).
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II. The Proposed New Product

A. Objective

    In the current housing market, marked by higher mortgage rates, low 
housing supply, and continued year-over-year house price appreciation, 
existing borrowers face limited options to access the equity in their 
primary residences. For the many homeowners who purchased or refinanced 
their homes during a period of lower mortgage rates, a traditional 
cash-out refinance today may pose a significant financial burden, as it 
requires a refinancing of the entire outstanding loan balance at a new, 
and likely much higher, interest rate. Homeowners may also use second 
mortgages to access the equity in their homes. For a second mortgage, 
only the smaller, second mortgage would be subject to the current 
market rate, as the original terms of the first mortgage would remain 
intact. Moreover, second mortgages are typically offered at a lower 
interest rate than some financing alternatives such as consumer or 
personal loans.
    Freddie Mac proposes to purchase certain closed-end second mortgage 
loans from primary market lenders who are approved to sell mortgage 
loans to Freddie Mac (Sellers). In a closed-end second mortgage loan, 
the borrower's funds are fully disbursed when the loan closes, the 
borrower repays over a set time schedule, and the mortgage is recorded 
in a junior lien position in the land records. Freddie Mac has 
indicated that the primary goal of this proposed new product is to 
provide borrowers a lower cost alternative to a cash-out refinance in 
higher interest rate environments. Purchase parameters would seek to 
minimize credit risk to Freddie Mac while balancing with potential cost 
saving to existing homeowners.

B. Key Offering Parameters

    The following tables contain Freddie Mac's proposed parameters 
which help describe the proposed new product. There are two tables 
indicating the various parameters; one table focuses on general 
eligibility while the other table focuses on servicing and 
underwriting. The requirement field in the tables below represents the 
important criteria and features of the proposed new product. The 
observation field indicates how the specific requirements would assist 
Freddie Mac in managing the proposed new product to have a positive 
effect in the relevant marketplace. These items are potential 
considerations to minimize risk and assist with an efficient 
operational process.

[[Page 29331]]



                                          Table 1--General Eligibility
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            Terms                            Requirement                               Observation
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Seller Participation........  Seller must be an approved and active     Ability to meet the financial and
                               Seller/Servicer to Freddie Mac..          counterparty standards to sell loans to
                                                                         Freddie Mac.
Second Mortgage.............  Freddie Mac will only purchase a second   Assist with servicing and risk
                               mortgage if it currently owns the first   oversight.
                               mortgage..
Restricted Products.........  Certain second mortgages would be         Minimize additional layers of risk due
                               ineligible such as land trusts and co-    to complexity and terms.
                               operative share mortgages..
Evaluation Period...........  Limitations on the number and aggregate   Provide an opportunity to manage risk
                               unpaid principal balance of second        and create the infrastructure to
                               mortgage purchases for an initial         support possible future growth.
                               period..
Loan Terms..................  Fixed-rate fully amortizing loan up to a  Fixed and stable payment for the
                               20-year term on borrower's primary        borrower.
                               residence..
Loan Acquisition:             Second mortgages would initially be       Help manage the market risk in the
 Commitments & Delivery.       delivered through the Cash Window..       pipeline.
Pricing.....................  Freddie Mac would initially provide       Help achieve appropriate risk vs. return
                               ``spot bids'' rather than forward         ratios.
                               prices to its Sellers..
Securitization..............  Loans would remain in portfolio for       Allow for Credit Risk Transfer
                               approximately six to nine months until    opportunities that would be evaluated
                               the creation of second mortgage non-TBA   in subsequent phases.
                               guaranteed securities and for systems
                               implementation..
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                                  Table 2--Servicing & Underwriting Eligibility
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            Terms                            Requirement                               Observation
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Loan Servicing..............  Overall servicing for second mortgages    Consistency with servicing and risk
                               would be similar to servicing             oversight.
                               requirements for current first
                               mortgages..
Loss Mitigation.............  Overall loss mitigation servicing for     Freddie Mac could holistically review
                               second mortgages would be comparable to   the performance of both loans.
                               current servicing requirements for
                               delinquent first mortgages. Specific
                               loss mitigation solutions for all
                               foreclosure activities on the closed-
                               end second mortgage would require
                               Freddie Mac approval..
Manual Underwriting.........  Initially, the Seller would manually      Interim approach until automated
                               underwrite the mortgage..                 underwriting is available.
Maximum Total Loan-to- Value  <= 80%, Manufactured Home <= 65%, Not to  Helps maintain acceptable risk levels.
 (TLTV) ratio.                 exceed the maximum LTV/TLTV for cash-
                               out refinance mortgage..
Payoffs.....................  If the first mortgage is refinanced the   Avoids Freddie Mac master servicing only
                               second mortgage must be paid in full      second mortgages.
                               with the first mortgage unless
                               prohibited by law..
Representation and Warranty   R&W framework for the second mortgage     Encourages independent and holistic
 (R&W) Framework.              and the first mortgage, if applicable,    quality control measures.
                               would be applied independently..
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A. Potential Impact

    Freddie Mac's proposed new product may impact various stakeholders 
such as borrowers, Freddie Mac, and the relevant market participants.
Potential Borrower Benefit
    In the current mortgage interest rate environment, a closed-end 
second mortgage may provide a more affordable option to homeowners than 
obtaining a new cash-out refinance or leveraging other consumer debt 
products. A significant portion of borrowers have low interest rate 
first mortgages, and the proposal would allow those homeowners to 
retain this beneficial interest rate on the first mortgage and avoid 
resetting to a higher rate through a cash-out refinance.\16\
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    \16\ U.S. Economic, Housing and Mortgage Market Outlook, Freddie 
Mac (December 2023), p. 4, available at https://www.freddiemac.com/research/pdf/Freddie_Mac_Outlook_December_2023.pdf.
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    The following table is an illustrative example of a borrower having 
two distinct choices to access the $30,000 equity available in their 
current home. In Option A, the closed-end second mortgage, the borrower 
retains their existing three percent fixed rate mortgage, which has an 
initial unpaid principal balance (UPB) of $150,000 and current UPB of 
$120,000. The borrower obtains a second mortgage for $30,000 at a fixed 
interest rate of 9.5 percent for a 20-year term.
    In Option B, the cash-out refinance, the borrower obtains a cash-
out refinance at a hypothetical mortgage interest rate of 7.5 percent. 
The borrower refinances into a new first mortgage with a new principal 
balance of $150,000 and pays off the original first mortgage with an 
outstanding UPB of $120,000, retaining $30,000 to use for their 
personal benefit.
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    \17\ Refinance Rates Slide Down Again: Mortgage Refinance Rates 
for March 18, 2024--CNET Money, available at https://www.cnet.com/personal-finance/mortgages/mortgage-interest-rates-today/. 
``Refinance rates are currently between 6.5% and 7.5%, but your 
personal interest rate will depend on your credit history, financial 
profile and application.''
    \18\ Current Home Equity Interest Rates  Bankrate, the 
home equity loan average rate range is 8.41%--9.49%, available at 
https://www.bankrate.com/home-equity/current-interest-rates/?zipCode=20024.
    \19\ This amount reflects life of loan interest costs on both 
mortgages.
    \20\ This amount does not include mortgage interest already paid 
on the prior mortgage.

[[Page 29332]]



     Table 3--Illustrative Comparison of Cash-Out Refinance to a Second Mortgage Using Freddie Mac Provided
                                                   Information
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                                              Option A                                  Option B
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Scenario....................   Maintain First Mortgage........   Cash-out refinance for
                               Origination UPB $150,000.......   $150,000.
                               Current First Mortgage UPB        Payoff Existing First Mortgage
                               $120,000.                                 for $120,000.
                               Obtain a Second Mortgage for      Borrower Receives $30,000 cash.
                               $30,000.
First Mortgage Initial terms  3% fixed rate...........................  7.5% fixed rate \17\.
                              360-month term..........................  360-month term.
                              Originated ~ 8.5 years ago..............  Originated in 2024.
Current First Mortgage UPB    $120,000................................  $150,00.0
 and terms.                   258 remaining months....................  360 remaining months.
First Mortgage Monthly        $632.41.................................  $1,048.82.
 Payment.
Second Mortgage UPB and       $30,000.................................  N/A.
 terms.                       9.5% fixed rate \18\....................
                              240 payments............................
Second Mortgage Monthly       $279.64.................................  N/A.
 Payment.
Total First and Second        $912.05.................................  $1,048.82.
 Mortgage Monthly Payment
 (if any) Amounts.
Total First and Second        \19\ $114,779...........................  $227,576 \20\.
 Mortgage Interest Paid (if
 any) by Borrower.
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    Table 3 above illustrates the potential borrower's savings between 
the two options for the total monthly loan payment amounts, Option A 
(closed-end second mortgage) [$632.41 + $279.64 = $912.05]; Option B 
(cash-out refinance) [$1048.82]. In this scenario the borrower will 
save $136.77 per month by choosing Option A, the closed-end second 
mortgage. Table 3 also illustrates the total interest savings from a 
closed-end second mortgage. It specifically highlights the lower costs 
of the closed-end second mortgage (Option A) [$77,666 first mortgage + 
$37,113 second mortgage = $114,779 total interest paid] versus the 
cash-out refinance (Option B) [$227,576 total interest paid]. Thus, the 
closed-end second mortgage saves the borrower $112,797 in total 
interest paid compared to the cash-out refinance. The savings to the 
borrower could vary by the interest rates and the loan terms.
    Borrowers may possibly benefit from lower costs if more lenders 
offer closed-end second mortgages. If there is more competition among 
second mortgage lenders, this may provide borrowers with more lender 
choices and better pricing to further reduce their costs.
Potential Enterprise Impact
    Freddie Mac believes the proposed new product may advance its 
charter act purposes by providing liquidity and stability in the 
secondary mortgage market. Freddie Mac also believes it could provide a 
foundation for more consistent liquidity in the secondary mortgage 
market because of its credit guarantee and experience securitizing 
mortgage loans. Freddie Mac believes that the shorter duration of the 
second mortgage term as described in table 1, relative to a typical 30-
year cash-out refinance, would lower Freddie Mac's credit risk relative 
to a cash-out refinance while providing borrowers with significant cost 
savings due to the interest savings on a shorter repayment schedule. 
Finally, Freddie Mac would specifically review and develop compliance 
and technology risk mitigation strategies for this proposed new 
product.
    Since Freddie Mac would only purchase a closed-end second mortgage 
if it has purchased the first mortgage, Freddie Mac would have insight 
into the performance of both loans, enabling better risk management by 
providing consistent servicing support for both mortgages. Moreover, 
loss mitigation activities for closed-end second mortgages would be 
similar to Freddie Mac's current solutions available for first 
mortgages. Certain loss mitigation solutions or proceeding with 
foreclosure on second mortgages would be decided by Freddie Mac, not 
the servicer. The borrower's lower cost of credit and the servicer's 
holistic approach should provide more sustainability and thus the 
potential for lower credit losses for Freddie Mac.
Potential Market and Seller Impacts
    Financial institutions who choose to originate and/or buy closed-
end second mortgages could securitize the loans or hold them on their 
balance sheet. Freddie Mac's involvement could provide participating 
Sellers with additional liquidity which could be beneficial in creating 
lending opportunities for more borrowers. Sellers would have an 
additional secondary market option to consider for obtaining their most 
favorable execution terms.
    Sellers targeted for this proposed new product would be all lenders 
that are currently offering closed-end second mortgages or plan to 
offer such mortgages in the near term. Freddie Mac expects to be able 
to provide Sellers with pricing that would enable them to offer rates 
competitive with current market rates for closed-end second mortgages.
    Current mortgage-backed securities (MBS) investors may experience 
slower pre-payment speeds if borrowers decided against a cash-out 
refinance. The retention of the existing mortgage avoids a payoff 
transaction to the MBS. This could be beneficial to investors by 
enabling them to realize a more predictable and consistent rate of 
return.
    The proposed new product may provide data and process 
standardization to drive operational efficiency and assist with 
servicing the loans. Increasing secondary market

[[Page 29333]]

transactions across many lenders may improve operational processes and 
data standards. Freddie Mac's ownership of both loans reduces the 
challenges of obtaining concurrence for loss mitigation solutions on 
the closed-end second mortgage and may assist with holistic borrower 
retention activities including loan modifications.

III. Request for Comments

    FHFA requests comments on the questions below. Commenters do not 
need to answer each question. Please identify the question answered by 
the number assigned below.
    1. To what degree might the proposed new product advance any of the 
purposes set forth in Freddie Mac's charter act (see section I.B 
above)?
    2. To what degree might the proposed new product advance Freddie 
Mac's Duty to Serve Underserved Markets activities \21\ and support 
Freddie Mac in meeting its housing goals? \22\
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    \21\ Under the Safety and Soundness Act, the Enterprises have a 
statutory duty to serve three specified underserved markets--
manufactured housing, affordable housing preservation, and rural 
housing--by increasing the liquidity for mortgage investments and 
improving the distribution of investment capital available for 
residential financing for very low-, low-, and moderate-income 
families in those markets. 12 U.S.C. 4565; 12 CFR part 1282.
    \22\ As required by the Safety and Soundness Act, the Director 
establishes annual housing goals with respect to mortgage purchases 
by the Enterprises. 12 U.S.C. 4561, 12 CFR part 1282. Purchases of 
subordinate lien mortgages, including the proposed new product, 
would not be treated as mortgage purchases for purposes of Freddie 
Mac's housing goals. 12 CFR 1282.16(b)(10).
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    3. To what degree might the proposed new product already be 
supplied by other market participants?
    4. To what degree might the proposed new product promote or lessen 
competition in the marketplace?
    5. To what degree might the proposed new product overcome natural 
market barriers or inefficiencies?
    6. To what degree might the proposed new product raise or mitigate 
risks to the mortgage finance or financial system?
    7. To what degree might the proposed new product further fair 
housing and fair lending?
    8. To what degree might borrowers benefit from or be adversely 
affected by the proposed new product?
    9. Are there any other factors that the Director should take into 
consideration concerning the proposed new product?

Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2024-08479 Filed 4-19-24; 8:45 am]
BILLING CODE 8070-01-P