Federal regulators have granted conditional approval to a plan by Freddie Mac to purchase second mortgages on single-family homes.
Freddie Mac asked for approval in April, saying it would allow homeowners with a very low mortgage rate to tap some of the equity in the homes without refinancing into today’s high interest rate environment.
The Federal Housing Finance Agency (FHFA) gave its approval of an 18-month trial, permitting Freddie Mac to purchase up to $2.5 billion in second mortgages. FHFA Director Sandra Thompson said an analysis of Freddie Mac’s proposal showed it to be safe, sound and in the public interest.
“The thoughtful engagement from public stakeholders confirmed the value of a transparent process for evaluating potential new Enterprise products and informed the parameters of the conditional approval,” Thompson said. “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.”
Freddie Mac said the pilot program will especially benefit homeowners who purchased at least four years ago, when home prices were significantly lower and mortgage rates hovered around 3%. Instead of refinancing the entire mortgage at a much higher rate, homeowners who want to make improvements can take out some of their equity in the form of a lower-interest second mortgage.
The conditions
The conditional approval of a pilot for Freddie Mac purchases of second mortgages includes several limitations on the product, including:
A maximum volume of $2.5 billion in purchases;
A maximum duration of 18 months;
A maximum loan amount of $78,277, corresponding to certain subordinate-lien loan thresholds in the Consumer Financial Protection Bureau’s definition of Qualified Mortgage;
A minimum seasoning period of 24 months for the first mortgage; and
Eligibility only for principal/primary residences.
Upon the pilot’s conclusion, FHFA said it would analyze the data on Freddie Mac’s purchases of second mortgages to determine whether the objectives of the pilot were met.
FHFA has determined that any increase to the volume or extension of the duration of the pilot, or a conversion of the pilot to a programmatic activity, would be treated as a new product that is subject to public notice and comment and FHFA approval.