The Federal Home Loan Mortgage Corp. (Freddie Mac) proposed purchasing certain single-family, closed-end second mortgages from primary market lenders that are already approved to sell to it, potentially adding liquidity to a booming segment of the mortgage-backed securities (MBS) market—including credit risk transfers.
The leading structured finance industry group, however, is already questioning whether this is an appropriate role for the government-sponsored enterprise's (GSE). The Federal Housing Finance Agency (FHFA) put out a request for industry comments on Freddie Mac's proposal, which would add a new product to its lineup and help it tap into a booming market. Industry representatives, however, say the private capital markets are already meeting borrowers' needs.
"In the current market, closed-end second mortgages have been, and continue to be, successfully originated and funded by private capital," Michael Bright, CEO of the Structured Finance Association said in a statement Wednesday.
Indeed, second-lien issuance totaled $4 billion in 2023, up from $1 billion in 2022, according to Max Slyusarchuk, CEO of A&D Mortgage, citing figures from Bank of America. That market is expected to grow to $11 billion in 2024. Imperial Funding and A&D Mortgage have been originating closed-end second lien mortgages since H2 2023, and has come to the securitization market to raise at least $1.2 billion of the loans so far this year.
"It is good that Freddie Mac is stepping up to the place to support independent mortgage banks as they allow homeowners access to the equity currently locked up in their homes," Slyusarchuk said.
Loans that get earmarked for MBS deals would remain in the portfolio for six to nine months, until second mortgage, non-TBA guaranteed securities can be created, the FHFA explained in its call for comments. This would allow the loans to be evaluated for credit risk transfer opportunities in subsequent phases of the loan life, according to the FHFA, explanation.
The SFA, however, is not fully convinced of the benefits of Freddie Mac's proposal.
"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," Bright continued in his statement. The SFA says it will convene a task force soon to discuss the proposal and share its findings with the FHFA.
In its call for comments, the FHFA said Freddie Mac's proposed new business addresses the dilemma that so many homeowners face: wanting to do cash-out financing on their homes but facing fewer options due to ongoing high interest rates.
Closed-end second mortgages are junior to other obligations in the property's debt stack, the FHFA explained. Lenders disburse the funds fully at closing, and the borrower repays the funds over a set amortization schedule.
The FHFA invites professionals to comment either at its
