Republicans tell FHFA they oppose Freddie Mac’s closed-end second mortgage proposal

A group of Republicans in the U.S. Congress sent a letter to the Federal Housing Finance Agency (FHFA) that opposes a plan for the government-sponsored enterprise (GSE) Freddie Mac to purchase and guarantee single-family, closed-end second mortgages. 

The document sent on Friday states that, if implemented, the “misguided” and “hastily executed” proposal has the potential to “exacerbate inflation, disrupt the home equity lending and consumer credit markets, and increase risks to taxpayers.”

On Wednesday, the FHFA closed the comment period for the proposal, which was opened in April. In their letter, Republicans called the 30-day period “insufficient.” 

If the product is approved as proposed, it will have terms of up to 20 years, be manually underwritten and remain in Freddie Mac’s portfolio for six to nine months until second mortgage non-TBA-guaranteed securities are created. 

Republicans on the Senate Banking Committee, along with 23 members of the House Financial Services Committee, signed the letter sent to FHFA Director Sandra Thompson that indicated “political purposes” for creating the new product. 

“We are deeply concerned that the proposal is a thinly veiled attempt by the Biden administration to offset the effects of excessive fiscal spending and tight monetary policy as the November election approaches,” the letter states. 

“The sole purpose of the FHFA’s conservatorship of the GSEs is to restore their soundness and solvency so they can fulfill their statutory missions — under no circumstances should the FHFA’s ultimate authority as a conservator be exploited for political purposes. The GSEs are already the largest mortgage guarantors in the country; expanding their roles as consumer loan guarantors is a significant step in the wrong direction.”

An FHFA spokesperson told HousingWire that the letter had been received and the agency “will respond appropriately.”

According to the letter, second mortgages are consumer loans that finance spending and consumption, counteracting the effects of tighter monetary policy and worsening inflation for Americans. 

Strategists at Bank of America estimate the product could unlock $850 billion in origination volume. 

Freddie Mac’s head of single-family acquisitions, Sonu Mittal, told HousingWire this week that the product “will provide borrowers an alternative to the cash-out refi.”

“The thing I keep trying to tell folks is that this is not HELOC; this is not piggyback where you can do first and second, and this is not open to all first-lien mortgages in the country. It’s only if you have a Freddie Mac first mortgage. So, when you start slicing it with all those different cuts, it’s a different sizing or opportunity that exists.”  

Members of Congress are also concerned that the proposed Freddie Mac product will crowd out private capital while expanding the GSE into other credit markets. Groups such as the Mortgage Bankers Association (MBA), the U.S. Mortgage Insurers (USMI) and the Housing Policy Council (HPC) highlighted the same concerns in comments to the FHFA.

“The proposed product will primarily help homeowners who possess meaningful equity in their homes and have already gained from the 68.9% increase in home prices since the pandemic,” the letter states. 

“It offers no benefit to renters or homeowners who lack meaningful equity, such as first-time homebuyers. In fact, the proposal is likely to adversely affect these Americans through its broader inflationary impact on the economy, as well as by exacerbating the rate lock-in effect, the adverse effects of which were reported on by the FHFA earlier this year.”

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