Freddie Mac Pilot Unlocking Broader Home Equity Access

Freddie Mac’s new pilot program seeks to purchase closed-end second mortgages, a move that generated substantial interest and feedback from various stakeholders and congressional leaders.  These loans are designed to help homeowners tap into their home equity while preserving the low interest rates on their first mortgages.  Given the sharp rise in home process over the past decade, many homeowners now find themselves with considerable equity in their properties.  However, accessing this equity has often required refinancing their entire mortgage at higher current rates or resorting to selling their homes.

The new FHAFA review process resulted in a cautious 1^st step approval including:

1. Authorized under Freddie Mac’s Charter

2. Public Interest Considerations: The pilot is intended to provide a more affordable alternative to cash-out refinance, especially for low-income and underserved borrowers.

3. Controlled Implementation to Avoid Market Disruption: To mitigate potential macroeconomic and market impacts, the pilot includes several limitations:
   2. $2.5 billion cap on volume
   3. Maximum loan amount of $78,277
   4. Primary residences only with 24 months of experience on the 1^st mortgage

4. Focus on Underserved Borrowers: The pilot targets rural and underserved borrowers. By capping the loan amount, the program aims to extend access to home equity products to those who might otherwise turn to less favorable financial options.

5. Safety and Soundness Measures: FHFA has imposed stringent pricing and capital treatment expectations, as well as a combined loan-to-value ratio cap of 80% for first and second mortgages.

Conclusion and 2^nd Step

As the pilot progresses, the insights gained will shape the future of this particular product.  The 2^nd step today is unknown but could easily become a full-blown 2^nd lien product for both Freddie Mac and Fannie Mae to implement across the market.