Freddie Mac Proposes New Second-mortgage Offering
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has proposed a new mortgage product it hopes will give homeowners a way to tap into home equity without surrendering the low rates they locked in the last several years.
The agency sent a notice of a proposed new product to the Federal Register, which would enable Freddie Mac to purchase single-family closed-end second mortgages.
“The proposed activity is intended to provide homeowners with a cost-effective alternative for accessing the equity in their homes,” said FHFA Director Sandra L. Thompson. “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 proposes to purchase closed-end second mortgages on properties for which it already holds the first mortgage. FHFA has determined this to be a new product that merits public notice and comment about whether it is in the public interest.
In the proposed rule document, FHFA provided a hypothetical example of the potential savings for homeowners. It showed a homeowner with an initial 30-year, $150,000 mortgage loan at 3 percent that now has $30,000 in equity and an unpaid balance of $120,000.
If this homeowner did a traditional cash-out refinance, they would re-borrow $150,000 for 30 years at the current market rate of 7.5 percent. Their monthly payment would be around $1,050 a month and they would pay $227,576 in interest over the life of the mortgage.
With the new Freddie Mac product, the homeowner could retain the 3 percent rate on the current $120,000 mortgage balance. They would take out a second mortgage of $30,000 at 9.5 percent for 20 years.
The combined payments on the first and second mortgages would total $912, about $138 less than the cash-out option. More importantly, the homeowner pay only $114,779 in interest over the two loans, roughly half what they’d pay in the cash-out option.
The proposed rule states that certain second mortgages would be ineligible, such as cooperative share mortgages and land trusts. The product will be a fixed-rate fully amortizing loan up to a 20-year term on the borrower’s primary residence.
The Structured Finance Association (SFA), a trade association representing the structured finance and securitization industry, opposes the new product, calling it “an unnecessary government encroachment into a sector that has been operating successfully without government involvement.”
“In the current market, closed-end second mortgages have been, and continue to be, successfully originated and funded by private capital,” said Michael Bright, CEO of SFA. “It is quite unclear what role the government-sponsored enterprises have in funding these mortgage products, or how that fits into Freddie Mac’s overall government-chartered mission objective.”
FHFA invites interested parties to provide written feedback on the proposed new product. Comments may be submitted via FHFA’s website or by email to RegComments@fhfa.gov.
Once the Federal Register publishes the notice, a statutory 30-day comment period begins. After that 30-day period has ended, FHFA has a statutory 30-day period to make a final decision as to whether to approve the proposed new product.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
