(Bloomberg) — US regulators have authorized a pilot program for housing giant Freddie Mac to buy second mortgages, a shift that could ultimately make it cheaper for households to borrow against the equity in their homes.
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The Federal Housing Finance Agency said in a statement Friday that Freddie Mac could buy as much as $2.5 billion of the mortgages over the 18-month trial period. The regulator will then evaluate the program to see if it has benefited borrowers in rural and underserved communities, among other criteria.
Freddie Mac in April proposed backing second mortgages after the steep jump in home-loan rates over the past two years. When rates were lower, a homeowner who wanted to borrow for renovations might have used a cash-out refinancing that allowed them to take out a new loan that was bigger than their prior mortgage.
But now that rates have climbed, cash-out refinancings don’t make sense for many borrowers because they would be shifting into a bigger, higher-rate loan. So getting a smaller second mortgage might make sense in many cases.
At the same time, US households have more than $32 trillion of equity following the steep rise in housing prices, about a 60% increase from 2020. Bank of America strategists had estimated that some $18 trillion of that amount was potentially available for equity extraction, mostly through private channels.
The scale of the initial program means the impact of Freddie Mac’s involvement will be more limited than anticipated.
“We did expect the program to be rolled out with numerous restrictive parameters, as was mentioned frequently in the comments received by the FHFA,” said Bank of America’s Jeana Curro. “But limiting the overall size to just $2.5bn was surprisingly small.”
Freddie Mac’s proposal to back second mortgages faced opposition from some industry groups as well as politicians including Senators JD Vance and Mike Crapo, who argued it could boost inflation and crowd out private lending. But other comments from the public on the proposal said it would help boost the scale of the market for home-equity lending.
Sandra Thompson, the FHFA director, said in a statement that capping the program at $2.5 billion will mitigate the risk of its boosting inflation. And requiring that Freddie Mac buy loans of $78,277 or less would ensure that the government-backed enterprise stays focused on borrowers who may be underserved, such as rural and low-income homeowners, rather than higher-income borrowers that may be better served by private lenders, Thompson said.
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