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On June 21, FHFA announced conditional approval of Freddie Mac’s second mortgage pilot proposal. The statement from Sandra Thompson, Director of the FHFA, provided more details on the conditional approval for the pilot.
This followed the April 22nd, 2024 request for comment on the initial Freddie Mac proposal and the resulting 443 comments and letters received, from the major stakeholders in housing finance.
This article takes a first look at how many Freddie Mac first mortgage customers, given the scope of the pilot announced, this could benefit. We also cover the top mortgage servicers who hold Mortgage Servicing Rights (MSRs) assets for these first mortgages, and who hold the customer relationships.
Freddie Mac second mortgage pilot
The general eligibility of the pilot is summarized in the table below. Based on the non-bank average loan size ($77,185) for closed-end second liens originated in 2023, the pilot could originate approximately 35,000 loans over 18 months.
If the pilot is successful and enters the selling guide, we look at how many Freddie Mac single family mortgages may be eligible.
Freddie Mac first mortgage portfolio
As-of May 2024, Freddie Mac has $2.1TN across 9,868,661 loans in their portfolio that would qualify for this program based on the criteria outlined above. A small percentage – $20.98BN (1%) original balance and 383,382 (3.9%) loans – where originated with a second ‘piggyback’ loan. In total Freddie Mac has $2.94TN and 13,091,401 loans in their single family mortgage portfolio.
These are all the Freddie Mac single family mortgages secured on primary residences, seasoned for at least 24 months and with current CLTV less than 80%. Breaking this down further, the majority of loans – 8,456,715 and 85.7% – are under 60% CLTV.
Home equity loan originations in 2023
In 2023 total market home equity loan balances and volume grew 30.7% and 31.9% respectively. The Home Equity Originations in 2023, With 430 New Lenders Active article shows how banks lost ground to non-bank lenders for home equity loans.
For banks, origination loan balances increased 20.2% to $12.3BN and origination volume increased 22.3% to 150,029. In the same period non-banks home equity loan market share surged, with original loan balances growing 116% to $7.18BN and origination volume increasing 75% to 151,865.
Banks and non-banks are largest MSR holders
If the pilot receives full approval, where will second mortgage originations come from?
The table below shows that banks and non-banks have by far the largest servicing portfolios – close to 5 million loans each – that meet the general eligibility requirements. This does not incorporate any assessment of current borrower credit status.
Large non-bank lenders have significant experience using call retail center operations for retention and recapture in their servicing portfolio (‘consumer direct’). They also leverage third-party sub servicers who have this expertise. Plus, non-banks are typically the first lenders to engage in new GSE product pilots. The top 10 non-banks holding eligible Freddie Mac single family first mortgages, sorted by loan count, include:
Banks, especially those with larger commercial real-estate portfolios, are actively strengthening their balance sheets and may be less willing to originate second mortgages through a limited pilot. The top 10 banks holding eligible Freddie Mac single family mortgages, sorted by loan count, include:
Definitions & data sources
Home equity loans (HELOANs) comprises closed-end junior liens, secured by 1-4 single family residential properties.