Freddie Mac wants a new role financing homeowners sitting on equity. This group isn’t happy.

Freddie Mac wants a new role financing homeowners sitting on equity. This group isn’t happy.

Housing giant Freddie Mac wants the greenlight to expand its already dominant footprint in the estimated $44.8 trillion U.S. housing market. Not everyone is on board.

Regulators wants feedback on Freddie’s new proposal to allow it to start buying up second-liens, a popular product among cash-strapped borrowers looking to tap equity in their U.S. homes, especially after mortgage rates shot up in the wake of the pandemic.

Read: Homeowners scrambling for cash breathe new life into second-lien mortgage market

The aim is for Freddie to start buying fixed-rate second-liens, potentially by this summer, giving borrowers a way to tap an estimated $32 trillion of equity built up in U.S. homes in recent years. If approved, it would open the door for more borrowers to extract cash from their homes, without having to refinance at current 30-year fixed mortgage rates of about 7.2%.

But a major Wall Street lobbying group said on Wednesday that the second-lien market should remain in the hands of private credit, not a partially government-backed entity.

“In the current market, closed-end second mortgages have been, and continue to be, successfully originated and funded by private capital,” said Michael Bright, chief executive officer of the Structured Finance Association. “It is quite unclear what role the government-sponsored enterprises have in funding these mortgage products, or how that fits into Freddie Mac’s overall government-chartered mission objective.”

Freddie Mac Fannie Mae and other government-sponsored housing agencies already have a roughly $9.1 trillion stake in the estimated $13 trillion U.S. residential mortgage market.

While they don’t make loans, they will buy up 30-year fixed mortgages that conform to higher lending standards put in place after the late-2000s subprime mortgage crisis.

These lower-risk loans often end up bundled into bond deals with government guarantees, which primarily are owned by the Federal Reserve, banks and other investors. Because of these guarantees, investors consider the bonds to be a Treasury surrogate.

A hitch to Freddie’s proposal would be that it only buys second-liens on homes where it already financed the first mortgage.

Importantly, the proposal aims to limit how much homeowners can borrow in total against their homes. Freddie said it plans to keep a borrower’s loan-to-value ratio at less than 80%, when looking at both first and second-lien mortgages on a home, keeping an equity cushion in place in times of stress.

Servicing of the loans also would be overseen by Freddie, which means homeowners could have access to payment pauses implemented by the government, such as the ones rolled out during the COVID crisis, or in cases where homes are hit by hurricanes or other natural disasters.

Bright at the SFA, which represents bond investors, issuers and Wall Street banks, called the proposal “an unnecessary government encroachment into a sector that has been operating successfully without government involvement.”

But Freddie’s charter in place for decades already indicates it is authorized to purchase, service, sell and deal in subordinate second-liens.

BofA Global researchers estimated Wednesday that Freddie could end up owning around $850 billion in second liens, given the huge swath of first-lien mortgages it already financed at rates below 4%, and based on a combined loan-to-value ratio of 75%.

Fannie Mae, which hasn’t announced a similar program, could see volume of $1 trillion in second liens, when looking at the same parameters.

For context, the team at BofA Global expects Wall Street to packaged up a total of about $11 billion of home-equity lines of credit and second-liens into bond deals this year, up from only $4.5 billion in 2023.

The U.S. housing market has largely frozen up since the Federal Reserve began raising rates in 2022 to fight high inflation, a battle it continues to wage to this day.