Thirty-four lawmakers urged the Federal Housing Finance Agency (FHFA) to reject Freddie Mac’s proposed second mortgage product, arguing it would have adverse economic implications. The single-family, closed-end loans would be intended to provide borrowers a lower-cost alternative to cash-out refinance in high-interest rate environments.

Senators and House members called the proposal “misguided” and “hastily executed” in a letter to FHFA Director Sandra Thompson. 

“This proposed product, if implemented, will exacerbate inflation, disrupt the home equity lending and consumer credit markets, and increase risks to taxpayers, while providing no benefit to the many Americans who lack substantial home equity,” the lawmakers wrote.

The representatives further argued the proposal could turn Freddie Mac – and possibly Fannie Mae in the future – into a major consumer loan guarantor. This, they contend, would disrupt credit markets, crowd out private capital and increase systemic risk.

“A GSE-insured (government-sponsored enterprise) product that uses subsidized lending to offer reduced interest rates, extended loan terms, and lower monthly payments will have unfair advantages over private lenders and ultimately reduce diversification in home equity lending, second liens, home improvement, installment, auto loan, and other consumer credit markets,” the lawmakers asserted. “Government subsidization will not only enable the proposed product to offer terms that are economically impossible for private capital to match but represents a vast (albeit indirect) expansion by the GSEs into these other credit markets.”

The proposed new loan offering has also met resistance from financial trade advocates as well. In May, the American Bankers Association (ABA) wrote a letter to the FHFA opposing the new offering, arguing the product would not meet a need not already addressed by the private market, would not benefit low-to-moderate income borrowers, and likely would not increase stability to the primary mortgage market and may threaten stability.

The trade group supported its contention with 2023 Home Mortgage Disclosure Act data showing that borrowers applying for a second lien had higher average annual incomes than borrowers applying for a first lien ($110,000 compared with $96,000).

“This data suggests that the main beneficiaries of the new product would be higher income existing homeowners, especially considering that the average second lien borrower has an income well above $85,767 which is the current cutoff for low to moderate income using the enterprises metric of 115 percent of average median income,” the ABA wrote.

The association also questioned whether it is appropriate for Freddie Mac to consider the product while it is still in conservatorship and lacking sufficient capital – a point also referenced in the lawmakers’ letter, which also alleged political motives held by the Biden administration are behind the proposal.

“The sole purpose of the FHFA’s conservatorship of the GSEs is to restore their soundness and solvency so they can fulfill their statutory missions — under no circumstances should the FHFA’s ultimate authority as a conservator be exploited for political purposes,” the lawmakers wrote. “The GSEs are already the largest mortgage guarantors in the country; expanding their roles as consumer loan guarantors is a significant step in the wrong direction.”