Market updates and sector developments

The FHFA has provided conditional approval for Freddie Mac to engage in a limited pilot to purchase certain single-family closed-end second mortgages (SCI 14 May). The aim of the pilot is to explore whether such a product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities.

The conditional approval of the pilot includes several limitations on the product, including: a maximum volume of US$2.5bn in purchases; a maximum duration of 18 months; a maximum loan amount of US$78,277, corresponding to certain subordinate-lien loan thresholds in the CFPB’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 will analyse the data on Freddie Mac’s purchases of second mortgages to determine whether the objectives of the pilot were met.

In a separate statement issued in connection with the pilot, FHFA director Sandra Thompson argues that such a new product is in the public interest. As of December 2023, over 95% of enterprise-backed single-family mortgages had mortgage rates below current market rates, with the majority at least three percentage points lower. Meanwhile, national home prices have doubled in less than a decade, leading to significant amounts of equity for many homeowners.

Freddie Mac’s purchase of closed-end second mortgages is therefore intended to allow borrowers to maintain their low interest rate first mortgage while accessing a portion of the equity in their homes. Many borrowers – particularly low-income borrowers and those in rural and underserved communities – have struggled to access equity in their homes through the private home equity market. In an environment of elevated mortgage rates, they are either forced to give up their below-market rate and obtain a cash-out refinance with a higher mortgage rate across the entire loan balance or are forced to sell their home when a financial need arises.

Additionally, the FHFA believes there are segments of lenders that have struggled to access a secondary market for home equity products outside of cash-out refinances eligible for sale to the enterprises. As such, the agency is interested in learning whether this offering will be utilised by small community financial institutions that have more limited access to securitisation markets. If so, it could support broader lending in underserved communities, while promoting greater competition among lenders and greater choice for consumers.

Nevertheless, the SFA continues to believe that the more prudent course of action would be to disallow the GSEs from purchasing closed-end second mortgages. “That said, we appreciate the FHFA limiting the scale and scope of the programme, with many of the newly announced limits coming directly from SFA members. SFA looks forward to our continued engagement with the FHFA and other policymakers on this issue," comments Michael Bright, ceo of SFA.

In other news…

Landmark LTAF launched
Arcmont Asset Management has received regulatory approval from the UK FCA to launch a first-of-its-kind Long-Term Asset Fund (LTAF), with Carne Global Fund Managers (UK) as the LTAF’s authorised corporate director. The LTAF is open-ended, providing an element of liquidity to investors and exposure to European direct lending opportunities via a Luxembourg fund.

Through the LTAF, a wide range of investors - including UK Defined Contribution schemes - will be offered an alternative to traditional fixed income investments and an opportunity to enhance portfolio diversification via exposure to private debt, thereby tapping into the illiquidity premium available in private markets. Access to the LTAF is approved for professional investors only.

The LTAF, the first offered by a specialist private debt asset manager, will leverage Arcmont’s dedicated direct lending expertise and 13-year track record of providing direct lending solutions to European upper mid-market businesses. “As Defined Contribution pension fund managers increasingly turn to private markets to drive enhanced risk adjusted returns for members, we are seeing growing interest in the LTAF structure, with investors recognising the compelling benefits the structure can bring in providing investor exposure to the private markets opportunity,” comments Ben van den Tol, director, business development at Carne Group.

Pillar 3 disclosure formats released
The EBA has published a final draft implementing technical standards (ITS) on public disclosures by institutions that implement the changes in the Pillar 3 disclosure framework introduced by the amending Regulation (EU) 2024/1623 (CRR 3). These ITS are designed to ensure that market participants have sufficient comparable information to assess the risk profiles of institutions and understand compliance with CRR 3 requirements, further promoting market discipline.

CRR 3 introduced new and amended disclosure requirements stemming from the latest Basel 3 Pillar 3 reforms, as well as a mandate for the EBA to develop IT solutions - including templates and instructions - for the disclosure requirements laid down in the banking regulation. The new ITS implement the CRR 3 prudential disclosures by including new requirements on output floor, credit risk, market risk, CVA risk, operational risk and a transitional disclosure on exposures to crypto-assets. In addition, they aim to provide institutions with a comprehensive integrated set of uniform disclosure formats.

These ITS constitute the first Pillar 3 deliverable included in the EBA roadmap on strengthening the prudential framework published in December 2023. Later this year, the EBA intends to complement these ITS with the CRR 3 disclosure requirements that are not directly linked to Basel 3 implementation; in particular, the extension of the disclosure requirements on ESG risks to all institutions in accordance with the proportionality principle and new disclosure requirements on shadow banking.

The EBA will also publish a technical package - including data point model (DPM), validation rules and taxonomy - that shall be used by institutions to submit this information to the EBA Pillar 3 data hub.

Corinne Smith