The Federal Housing Finance Agency (FHFA) on April 16 issued a notice and a request for comment related to a proposal whereby Freddie Mac could purchase single-family closed-end second (CES) mortgages. This report explores the proposal’s potential overlap with the existing second lien PLS market and the effects the program may have on the size and risk profile of the PLS market post-adoption.

• Approximately $8.7 billion have been collateralized via second lien 2.0 PLS transactions through Q1 2024, a small but growing portion of the PLS market.
• Assuming both GSEs were active in CES purchases, nearly 60% of the CES originated and securitized in today’s PLS market might have been eligible for the GSEs’ proposed program.
• Other conditions, however, that are not explicitly stated in the proposal, may also have a bearing on KBRA’s estimate of the overlap with PLS market, include appraisal type at origination, the second lien’s documentation type, and the GSE’s pricing of this product.
• The PLS market could end up with a larger share of CES with more negative credit attributes and is likely to become more concentrated with home equity line of credit (HELOC) products.
• In general, PLS markets have capably absorbed the current flow of second lien securitization volumes, with spreads in line with the remainder of RMBS 2.0. Loans have also exhibited stable performance.
• The GSEs’ involvement in this sector could expand the market via the creation of efficiencies and standardization similar to those in other mortgage products currently offered by the Agencies.

Click here to view the report.

Related Publications

• RMBS Trend Watch: Issuance Slowing; Second Liens on the Way?
• RMBS Trend Watch: PLS Marches on, Leaving Some Buyers Behind
• FHFA’s Credit Score Proposal and Its Impacts on RMBS

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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