Market updates and sector developments

The FHFA has issued a notice of a proposed new product from Freddie Mac to begin purchasing single-family closed-end second mortgages on properties for which it already holds the first mortgage. The proposal allows for the assets to be securitised into guaranteed non-deliverable MBS pools and for credit risk transfer opportunities to be evaluated in subsequent phases.

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, in order to access the equity in their homes. 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.

Freddie Mac therefore proposes to purchase certain closed-end second mortgage loans from primary market lenders that are approved to sell mortgage loans to Freddie Mac. Purchase parameters would seek to minimise credit risk to Freddie Mac while balancing with potential cost saving to existing homeowners.

Eligible collateral would be fixed-rate fully amortising loans up to a 20-year term on a borrower’s primary residence. The maximum total LTV ratio would be equal to or less than 80% (60% for manufactured homes). Loans would remain in the portfolio for approximately six to nine months until the creation of second mortgage non-TBA guaranteed securities and for systems implementation.

Freddie Mac believes the proposed new product may advance its charter act purposes by providing liquidity and stability in the secondary mortgage market. The agency also believes it could provide a foundation for more consistent liquidity in the secondary mortgage market because of its credit guarantee and experience securitising mortgage loans.

Financial institutions who choose to originate and/or buy closed-end second mortgages could securitise the loans or hold them on their balance sheet. 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.

The agency notes that while current MBS investors may experience slower prepayment speeds if borrowers decided against a cash-out refinance, the retention of the existing mortgage avoids a payoff transaction to the MBS, which could be beneficial to investors by enabling them to realise a more predictable and consistent rate of return.

Corinne Smith