News & Resources

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, submitted a comment letter in response to a notice of proposed new product issued by the Federal Housing Finance Agency (FHFA) on the proposed “Freddie Mac Single-Family Closed-End Second Mortgages” product, pursuant to the Prior Approval for Enterprise Products Final Rule. This rule is a key pillar in maintaining the safety and soundness of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs or Enterprises) and ensuring that new GSE products and activities do not disintermediate other market participants.

“USMI commends FHFA for utilizing the Prior Approval for Enterprise Products Final Rule framework and noticing this proposed product for public comment. After careful consideration, this product should be disapproved, as it does not align with Freddie Mac’s statutory mission, creates additional risk, is duplicative of an already active private market, and raises important, unanswered questions,” said USMI President Seth Appleton. “USMI remains committed to housing finance policies that enable low down payment borrowers to affordably and sustainably achieve homeownership, while protecting taxpayers from undue credit risk.”

In its comment letter, USMI raises the following aspects in urging FHFA to disapprove this proposed product and have Freddie Mac focus its efforts and resources on helping borrowers achieve homeownership:

• The proposed product is at odds with Freddie Mac’s statutory purpose. Considering Freddie Mac’s core mission and statutory charter, Congress did not intend these objectives to include ongoing access to second loan products after a borrower has received residential mortgage credit and achieved the American Dream of homeownership. While a second lien product may serve some existing homeowners, it does not further access to affordable and sustainable mortgage credit for prospective homeowners.
• History cautions against promoting second lien products without proper guardrails, particularly during times of high home price appreciation (HPA). There is increased risk when additional debt is secured with the same collateral as the first mortgage. Significant post-Great Financial Crisis research, including from FHFA, the Federal Reserve, and Harvard University’s Joint Center for Housing Studies, has documented the risks of second liens and the prevalence of negative outcomes for borrowers. Further, FHFA recognizes the increased risk associated with subordination in its own Enterprise Regulatory Capital Framework (ERCF). Importantly, second liens can also complicate options for refinance and loss mitigation for distressed borrowers, as they may face procedural obstacles where multiple servicers may be involved.
• Consumers are well served by banks, credit unions, independent mortgage banks, and the private label security market without additional taxpayer risk. According to a report by Kroll Bond Rating Agency, LLC (KBRA), $4.5 billion in cumulative closed-end second mortgages have been collateralized in second lien private label security (PLS) transactions, in addition to billions in portfolio lending by other financial institutions. KBRA predicts that if both GSEs were purchasing second liens, nearly 60% of the private market would have been eligible for the proposed product. Consumers already have many choices to access home equity including closed- and open-ended products from banks, credit unions, and independent mortgage banks.

Should FHFA decide not to disapprove this proposed product, USMI requests clarifications that will help market participants better understand its impacts and consequences:

• Clarification on loan-to-value (LTV) calculations: The language in Freddie Mac’s proposal lacks specificity around whether the 80% LTV value cap is based on original LTV or current LTV. It is also unclear how the LTV will be calculated on an updated property valuation. As a prudential matter, it will be important to ensure that borrowers are not over-leveraged and Freddie Mac should fully understand the risks associated with this product. If not disapproved by FHFA, USMI recommends that the product be restricted to borrowers with original LTVs of no greater than 80% and require a full appraisal of the property.
• Clarification on limitations and exclusions: The proposal lacks important details around the safety and soundness of the product and USMI urges FHFA to consider applying guardrails, including debt-to-income (DTI) limitations, allowable maximums, and an exclusion for “piggyback loans.”
• Clarification on capital treatment and pricing of the second liens: FHFA should indicate the capital and pricing treatment, including Loan-Level Price Adjustments (LLPAs), of the proposed product.
• Clarification on whether future amendments to the product would be subject to additional notice and comment periods. The proposal does not address the process for how potential future amendments to the product would be treated. Given the risk and problematic history associated with the performance of second liens, FHFA should require additional notice and comment for any future expansions of the product should the current proposal not be disapproved, as the expansion of the product may have additional unintended consequences not identified during the initial comment period.

“USMI and its member companies appreciate the opportunity to provide feedback and recommendations on the Freddie Mac Single-Family Closed-End Second Mortgages proposed product. We look forward to supporting programs that enable responsible, sustainable access to homeownership, and promote safety and soundness in the U.S. housing finance system.”

###

U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.