Freddie Mac second lien program shouldn't go ahead yet, MBA says

The proposal for Freddie Mac to purchase certain closed-end second-lien mortgages likely fits with its mission but the proposal as currently stated has many holes and its benefits must be thoroughly analyzed, a Mortgage Bankers Association letter said.

The Federal Housing Finance Agency comment period for the program ends today. It was developed based on feedback on how to allow homeowners to extract the equity from their properties without having to do a cash-out refinance, Sonu Mittal, senior vice president, single-family acquisitions said in a discussion with a National Mortgage News reporter during the MBA's Secondary and Capital Markets Conference this week in New York.

This product would provide liquidity with standardization, Mittal said.

Those benefits are in line with the government-sponsored enterprises' role and do not represent charter creep, said the MBA letter signed by Pete Mills, senior vice president, residential policy and strategic industry engagement. "MBA acknowledges that Freddie Mac's proposal to purchase closed-end second mortgages likely aligns with one or more of the statutory purposes within its charter."

But MBA had a list of questions for the FHFA to consider before the regulator decides on approving this product.

An issue not addressed in the proposal, the MBA said, is how the second lien product would help underserved borrowers.

The group is also worried about the impact on the lending industry. "It remains unclear if the proposed product will provide a benefit and healthy competition for those who currently offer this product or if it will displace them," the letter said. "Prior to considering approval of the proposed new product, MBA urges FHFA to determine if its pricing and loan features: a) will meaningfully expand liquidity and participation in home equity lending; and b) will not supplant current private market participation in the sector."

A May 8 report from Kroll Bond Rating Agency also expressed concern about overlap between the Freddie program and the private-label securitization business.

But for at least one private-label sector participant, Tom Davis, the chief sales officer at Deephaven Mortgage, more liquidity in this area is better, he said during a securitization trends panel at the conference.

The PLS securitization market has capital coming in, and year-to-date it has seen $5 billion in second-lien loan deals, compared with that amount for the entire year of 2023.

At that rate, the market should end up with $15 billion of securitizations this year. Adding in second-lien loans that are held on a balance sheet, whether lender or an investor, it's another $10 billion, so the potential $25 billion second-lien business in 2024 makes it "to me a very, very healthy market," Davis said.

During the session, Barbara Pak, Freddie Mac's vice president, single-family, said as of May 20, the FHFA had received between 70 and 80 comments on this proposal.

"We are going to wait for the guidance…on whether this is a go or no-go or there might be some adjustments that we need to make," Pak said. "Some of the feedback that we did get from the investment community is that they feel like there wasn't enough information to make [a] holistic sort of impact assessment on this."

The loans will be purchased through the cash window and kept on the balance sheet, it will not be the "huge size that some of the dealer research are printing out," Pak said

Securitization would be in "phase two" of the program, with credit risk transfer participation a possibility as well, she said.

Davis' advice was for lenders to focus on second liens. "That's going to be a big opportunity this year," he added. On the non-agency side, 90% of the business will be bank statement and debt service coverage ratio mortgage originations.

Annaly Capital Management's outlook for non-qualified mortgage production industry-wide is for between $75 billion and $100 billion, said Meghan Bruen, director, residential credit.

"The growth in non-QM has been pretty impressive overall throughout the industry," Bruen said. Annaly's correspondent channel locked $3.7 billion of non-QM loans in the first quarter, up from $2.7 billion.

On the securitization side, Annaly is currently marketing its ninth non-QM deal of the year, and the investor base for the AAA-rated securities continues to grow, Bruen said.