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The Federal Housing Finance Agency (FHFA) announced its conditional approval for Freddie Mac (OTCQB: FMCC) to engage in a limited pilot to purchase certain single-family closed-end second mortgages.

The conditional approval follows FHFA’s first publication of a proposed new product by either Freddie Mac or Fannie Mae for public comment. According to the FHFA, the pilot program will have specific parameters:

• A maximum volume of $2.5 billion in purchases;
• A maximum duration of 18 months;
• A maximum loan amount of $78,277, corresponding to certain subordinate-lien loan thresholds in the Consumer Financial Protection Bureau’s definition of Qualified Mortgage;
• A minimum seasoning period of 24 months for the first mortgage; and
• Eligibility only for principal/primary residences.

The FHFA will analyze the data on Freddie Mac’s purchases of second mortgages at the end of the pilot to determine the viability of the endeavor. The continuation of the program would be subject to public notice and comment before the FHFA would grant its final approval.

“The thoughtful engagement from public stakeholders confirmed the value of a transparent process for evaluating potential new Enterprise products and informed the parameters of the conditional approval,” said Director Sandra L. Thompson. “The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities.”

Mortgage Bankers Association President and CEO Bob Broeksmit noted the FHFA’s response to his organization’s concerns over this endeavor.

“MBA appreciates FHFA’s detailed responsiveness to the key questions we outlined in our comment letter regarding the program’s scope, mission, and secondary market implications,” Broeksmit said. “FHFA’s receptiveness to feedback through the New Products and Activities Final Rule has produced a pilot rollout that is limited in size and duration, mitigates the impact on the private-label securitization market for second liens, focuses on borrowers with lower loan balances, and will encourage participation by smaller lenders that do not have easy access to liquidity for closed-end seconds. MBA and its members will remain engaged with FHFA and Freddie Mac to monitor the results of the pilot and ensure that it remains available to lenders of all sizes and business models and avoids disrupting the developing private-label securitization market for second liens.”