Mortgage industry group demands answers before FHFA offers green light
The Mortgage Bankers Association (MBA) has raised several concerns regarding Freddie Mac’s proposal to purchase certain closed-end second mortgages, urging the Federal Housing Finance Agency (FHFA) to address its questions before granting approval.
While the MBA said it recognizes the potential benefits of expanding borrower options and increasing competition in the home equity lending market, it raised concerns about the proposal’s potential to disrupt the existing market and harm smaller lenders.
Pete Mills, senior vice president of residential policy and strategic industry engagement at MBA, expressed these concerns in a letter to FHFA director Sandra Thompson.
“Key variables missing from the proposal make it difficult to determine the full scope of effects, especially given a 30-day comment period,” Mills wrote. “We urge the FHFA to request the information that appears to be missing from the initial submission for this new product and further evaluate the issues raised in our comments prior to considering approval.”
The MBA outlined a list of over 10 unaddressed questions that need answers to evaluate the proposal properly:
- What does Freddie Mac estimate base loan pricing will look like? Will pricing be equitable for lenders of all sizes?
- Will there be a loan level price adjustment (LLPA) grid, and to what extent will the program be geared toward “mission” borrowers?
- Will the program explicitly permit a seller other than the current servicer to originate a closed-end second mortgage?
- What would be the implications of canceling mortgage insurance on the first mortgage?
- Will Freddie Mac allow the use of Automated Valuation Models (AVMs) or property inspection waivers as alternatives to a traditional appraisal?
- Will Freddie Mac allow recording via e-notes?
- Will individual lenders be capped on the number of closed-end second mortgages that can be sold to Freddie Mac?
- To the extent that certain large lenders are subject to volume caps on cash window delivery for first mortgages, will delivery of closed-end second mortgages to cash window-only execution options count against this cap?
- Does Freddie Mac anticipate imposing a global volume cap on the acquisition of closed-end second mortgages?
- Has a loan amount cap that would target “mission” borrowers been considered?
- What considerations have been made regarding the performance of the Uniform Mortgage-Backed Security (UMBS), with only Freddie Mac currently seeking approval for closed-end second mortgages?
Mills stressed that addressing these questions is crucial to ensure the new product expands liquidity and participation in home equity lending without disrupting the current market.
Market disruption and competition
The association questioned whether the new product would truly address liquidity shortfalls in the home equity lending market or simply take market share away from existing players. Mills emphasized the need to determine if the proposal’s pricing and loan features would “meaningfully expand liquidity and participation in home equity lending” without supplanting current private market activity.
A particular concern for the MBA is the potential impact on the growing private label securities (PLS) market for second liens. Freddie Mac’s entry into the market could stifle the progress made by private lenders in recent months, as they have stepped up to meet the increasing demand for second-lien financing due to the “lock-in” effect caused by higher interest rates.
The MBA is also seeking clarity on whether Freddie Mac’s proposal would allow sellers other than the current servicer to originate closed-end second mortgages, the use of automated valuation models (AVMs) or property inspection waivers, and potential caps on the number of loans that individual lenders can sell to Freddie Mac.
Call for transparency
The MBA emphasized that these details are crucial for stakeholders to evaluate the program’s mission and market-related impacts and benefits properly.
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“Failure to address these questions could cause market disruption, create unfair advantages/disadvantages for certain market participants, or reverse meaningful progress in the private market – ultimately jeopardizing increased diversity and stability in the secondary mortgage market,” the trade association said.
“We urge the FHFA to request the information that appears to be missing from the initial submission for this new product and further evaluate the issues raised in our comments before considering approval. MBA appreciates the opportunity to provide feedback on Freddie Mac’s proposed new product, and we look forward to continuing our ongoing partnership with FHFA.”
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