ICBA voices opposition to Freddie Mac second mortgage product

The Independent Community Bankers of America (ICBA) issued a statement on Monday that opposes the conditional approval of Freddie Mac’s plan to buy closed-end second mortgages.

The plan was approved on Friday by Freddie Mac’s regulator, the Federal Housing Finance Agency (FHFA), which said that it reached the decision to begin the pilot program following a public comment period and “thoughtful engagement from public stakeholders.“

“The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities,” FHFA Director Sandra L. Thompson said in the announcement.

On Friday, the Community Home Lenders of America (CHLA) voiced its support for the program, citing the inability of many borrowers to refinance and tap into equity due to higher mortgage rates. The Mortgage Bankers Association (MBA) also indicated its support for a plan that is ”limited in size and duration.” While some estimates called for up to $850 billion in origination opportunities through the move, the FHFA limited Freddie Mac to $2.5 billion in purchase volume over an 18-month period.

But ICBA President and CEO Rebeca Romero Rainey expressed her organization’s opposition to the plan, something that had been previously shared in a letter to the FHFA last month.

“ICBA and the nation’s community banks are deeply concerned with the FHFA’s announcement that Freddie Mac — which has been in federal conservatorship for more than 15 years — will enter a market that is already liquid and well served by private-sector community banks,“ Romero Rainey said in a statement.

The ICBA argues that Freddie Mac “has failed to establish or justify a market need for this product“ as second mortgages for single-family homes are already available through many community banks and credit unions. It also says that Freddie Mac has yet to provide enough details about loan pricing, property valuation and risk management, making the pilot program inconsistent with the agency’s “core housing mission.“

The ICBA believes that the program “could exacerbate housing supply challenges for new homebuyers during an already-challenging interest rate environment.“ The group also argues that efforts to remove Freddie Mac and fellow government-sponsored enterprise Fannie Mae from their conservatorship status will be further delayed by the product launch as it will be “diverting resources and requiring additional credit risk mitigation that would keep it from retaining appropriate levels of capital.“

“Amid a 15-year conservatorship that has subjected Fannie Mae and Freddie Mac to political influence and compromised their founding purpose of expanding the secondary mortgage market to provide liquidity for home purchases and refinances, the FHFA should avoid further disrupting the private sector, reject a perpetual conservatorship, and return the enterprises to private ownership and control, as required by the Housing and Economic Recovery Act,” Romero Rainey said.

Freddie Mac first announced in April that it was planning to purchase certain types of closed-end second mortgages in an effort to help homeowners tap into home equity without the need to refinance their first mortgage at a higher rate.

The pilot program approved last week will permit Freddie to purchase $2.5 billion in loans during an 18-month period. Only loans for primary residences are eligible and the first mortgage must have been originated at least 24 months prior. The maximum loan amount is $78,277 and the combined loan-to-value ratio on all properties cannot exceed 80%.

The FHFA noted that any efforts to extend the timeline for the pilot program or increase the purchase limits would have to go through a separate approval process, including another public comment period. Thompson said that the $2.5 billion cap was a result of the agency being “responsive to concerns from several commenters regarding the potential macroeconomic and mortgage market impacts of a broader offering.“

“This is intended to mitigate any concerns about potential inflationary impacts, extending the mortgage ‘lock-in’ effect, or the ‘crowding out’ of private capital,“ Thompson said.