Freddie Mac’s Sonu Mittal on affordability and the cost to originate

Thank you, Sarah, for having me on this podcast again.

You're right, coming up almost 15 months.

Thank you again for having me. As I mentioned last time, I bring a unique perspective, being on the primary side for 20-plus years, so I truly understand the challenges and opportunities in our industry. I also joined at a challenging time with the macroeconomic factors and mortgage rates, and we were pivoting from a heavy refi market to a purchase market. I'm pleased to share that when I reflect on the last 12 months, more than 50% of the loans we purchased at Freddie Mac were first-time homebuyers. We continue to make great progress on our equity plans, serving underserved communities, and reaching qualified borrowers with thin credit files. When I think about affordability, it's a challenge given higher interest rates and limited supply. There are three things we can do: assist with down payment, invest in technology, and educate consumers. On down payment assistance, last fall we rolled out DPA1, a tool that helps lenders match borrowers with local down payment assistance programs. We've helped over 4,000 lenders take advantage of it, and we remain on track to make it available in most of the country by end of this year. We also expanded our incentive on the Borrow Smart product for very low-income purchase borrowers to $2,500 earlier this year. On special purpose credit programs, we launched those in fall 2022 and have nearly bought 10,000 loans under this program, most helping families of color. On technology, we continue to help borrowers with thin credit files. We delivered enhancements to Loan Product Advisor to help lenders qualify more borrowers, and later this year we are looking to bring trended credit data to the market. We continue to leverage bank data to verify income and assets, pay stubs, cash flow, and on-time rent payments. On consumer education, we launched our Credit Smart curriculum in Spanish, which empowers homeowners, and we partner with borrower help centers in low-to-moderate income areas to help borrowers see the path to homeownership. So there's a lot going on, but those are a few things I wanted to share.

I couldn't agree more. Our goal is to continue to provide standards to the industry where it makes sense. This was an effort to make sure existing down payment assistance programs are being leveraged and adopted. Many loan officers aren't aware you can combine more than one program. The team did great work, and we are happy with the progress and feedback, and we continue to enhance the tool based on that feedback.

When you think about creating new homeowners, we need to do that in a safe and sustainable way. As I shared, more than 50% of the loans we purchased are first-time homebuyers. We're working on on-time rent payments, cash flow, bank data, and trended credit data to allow us to create more homeowners responsibly. From a product standpoint, we have Home Possible, our flagship affordable product, which allows someone to become a homeowner with 3% down. Last year, we bought 96,000 Home Possible mortgages, and 75% of those assisted low-income to very low-income borrowers. So we continue to look at credit and products to do our part.

Our goal is to provide training modules and support to lenders. We have a team of affordable lending managers who partner with sellers across the country to train borrowers on what it means to become a homeowner, or provide content for them to educate consumers in the marketplace. So consumer education is done through partnerships with our sellers.

Great question. As you may have noticed, we put a closed-end second lien product out for public comment by the FHFA. The rationale is to address the lock-in effect: six out of 10 borrowers have mortgage rates below 4% and have accumulated equity. If they want to extract equity responsibly without giving up their low rate, a cash-out refi would require them to give up that sub-4% rate on the whole balance. We want to provide an alternative to extract equity without giving up the low rate. This product is specifically for instances where we already own the first lien. It can provide more liquidity and standardization to the market, and it intersects with our mission to reduce costs for borrowers. It's pending FHFA approval after the public comment period.

The feedback is extremely positive. Lenders see that we are bringing more to the table than just liquidity, stability, and affordability. We continue to think about how we can be their partner of choice in more ways than just delivering the loan for liquidity and stability.

Great question. With my experience on both sides, the cost to originate has increased by over $3,000 per loan in the last three years, which is not sustainable. We conducted a study showing that by leveraging our tools within Loan Product Advisor, such as the Asset and Income Model, our appraisal waiver product called ACE, and Condo Project Advisor, lenders can see a 14% reduction in cost, meaning higher margins, and a cycle time that is five-plus days shorter from application to funding. So leveraging our tools helps lenders be more efficient and pass savings to borrowers while maintaining manufacturing quality. Our focus is to increase the adoption of our current tools and continue to enhance them to expand the eligible borrower population.

I clearly remember my first week on the job, with colleagues across the industry sending loan-level examples. I'm excited to share that we've made tremendous progress. Three things: first, the non-acceptable quality rate is 50% lower than the peak in Q3 2022, and that trend continues. I thank the industry because it wouldn't have happened without them making loan quality a priority. Second, repurchase notices issued are down over 60% from the peak in Q3 2022, and that also continues. Third, regarding the repurchase pilot, it came from industry feedback—we took it very seriously and designed the initiative. We have 14 sellers in the pilot, which kicked off earlier this year. We are early but seeing the right signs, and we have FHFA approval to continue the pilot for one year. As we accumulate data, we'll share it with the industry and collaborate with FHFA on next steps.

I'm looking forward to the event. My messaging will be along the lines of what we talked about. Two things I want to convey: one, we want industry feedback—as we demonstrated with the repurchase pilot, we take feedback seriously, listen, adjust our approach, and prioritize our roadmap accordingly. Two, please utilize our tools and unlock the full potential of LPA to gain the efficiencies we've discussed. So really, listening to the industry and leveraging what we deliver to the marketplace.

We have a lot of great folks in the industry, and we appreciate their feedback. Sarah, I also want to thank you for all the great work you do. I appreciate you having me on the podcast.

Same here. Take care, Sarah.