[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
http://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.
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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
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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