Mortgage Stocks Tick Up As Freddie Mac Is Allowed To Buy Second Mortgages

Shares of U.S.-listed mortgage lenders have risen on the heels of U.S. regulators allowing the Federal Home Loan Mortgage Corp FMCC, aka Freddie Mac, to buy second mortgages, a move that could lower the cost of borrowing against home equity.

The Federal Housing Finance Authority (FHFA) said Freddie Mac could buy up to $2.5 billion of second mortgages over an 18-month trial period, Bloomberg reported. FHFA will then decide whether the pilot program helps borrowers in rural and underserved communities obtain them, among other criteria.

Freddie Mac proposed backing second mortgages in April 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 bigger than their prior mortgage.

Also Read: US Needs 1.5 Million More Homes To Tame Record Prices

But cash-out refinancings are no longer practical for many borrowers because today’s higher interest rates would result in bigger, higher-rate loans.

Meanwhile, the steep rise in housing prices since 2020 has led to U.S. households having more than $32 trillion in equity. About $18 trillion of that is possibly available for equity extraction through private channels, according to Bloomberg.

Freddie Mac's proposal to back second mortgages has faced opposition from industry groups and politicians who argue the initiative could boost inflation and crowd out private lending, but other public comments on the proposal said it would help boost the scale of the market for home-equity lending.

Sandra Thompson, FHFA director, said capping the program at $2.5 billion would mitigate the risk of it boosting inflation. She also said requiring Freddie Mac to buy loans of $78,277 or less would ensure that it stays focused on borrowers who may be underserved, such as rural and low-income homeowners, rather than higher-income borrowers who may be better served by private lenders.

Price action: UWM Holdings Corp. UWMC gained 1.15% on Monday, while Bank of America BAC improved 1.38% and PennyMac Financial Services, Inc. PFSI picked up 0.76%. Discover Financial Services DFS ticked up 0.55%.

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