On Friday, the Federal Housing Finance Agency (FHFA) announced that it had given conditional approval for Freddie Mac to begin purchasing closed-end (all-at-once, as opposed to a credit line) second mortgages through an 18-month pilot program.
This comes after Freddie initially expressed their interest in starting such a program. Currently, 6 out of 10 borrowers have an interest rate below 4%, and to refinance to take out more equity means, they will go from below 4% to a 7% rate. With a second mortgage, only the smaller second loan would be subject to the current market rate, as the original terms of the first mortgage would remain intact.
Freddie Mac will only offer these loans to borrowers who currently have their first mortgage with them and not with Fannie Mae’s. It should be noted that second mortgages always existed but were not offered by Fannie or Freddie; instead, they were provided through private lenders, usually at a higher interest rate. However, with the government now backing them, the risk will be less, and so will the rate.
The approval has limitations:
• Only for primary residences
• Borrowers need to have had their first mortgage for 24 months.
• The max loan amount is $78,277
• Freddie Mac can only buy up to 2.5 billion of these 2nd mortgage loans
There is a chance Fannie Mae will follow Freddy’s lead, but we will have to wait and see.
Some concerns are that providing additional funds could worsen the already high inflation levels, leading to sustained higher interest rates. Another worry was the possibility of more foreclosures resulting from homeowners’ less equity. Some argued that it shouldn’t be Freddie Mac’s business to deal with second mortgages; instead, it should be left to private lenders.
A significant advantage would be that many people burdened with substantial credit card debt –Americans currently owe $1.2 trillion in credit card debt with an average interest rate of 24%– could consolidate their debts with these second mortgages. Severe delinquencies (over 90 days late) have risen to 10.7% in the first quarter of 2024.
However, high credit card debt appears to result from consumers using credit cards to “pay” for inflation. Therefore, providing borrowers with more money to cover that debt could be seen as postponing the problem rather than solving it. Some believe that The FHFA is playing politics here to boost consumer spending and the housing market in an election year.
Freddie Mac has not officially started the program but is expected to launch soon.
