4204.1: Mortgages with secondary financing (04/24/17)

© Freddie Mac Single-Family Seller Servicer Guide

(a) General requirements

Secondary financing is all financing that is subordinate in lien priority to the First Lien Mortgage. Freddie Mac will purchase First Lien Mortgages with secondary financing under the terms of the Purchase Documents and this section. Terms of any secondary financing must be disclosed to the appraiser and to the MI. The terms of the secondary financing that must be disclosed include, but are not limited to, the Note Rate and the institution or individual providing the financing. The Seller may not indicate a value needed to support the transaction, or provide any information to the appraiser about an expected loan-to-value (LTV) ratio.Except as specifically stated in Section 4204.2 with respect to Affordable Seconds®, the terms of secondary financing must not permit the provider or another party to share in the appreciation of the Mortgaged Premises (equity sharing).Secondary financing is not eligible for sale to Freddie Mac.For special requirements for Affordable Seconds, see Section 4204.2.

(b) Special requirements for new secondary financingSecondary financing originated concurrently with the First Lien Mortgage (i.e., the First Lien Mortgage and the junior lien are originated on the same day) must meet the following requirements:

• Maturity dateThe maturity date or amortization basis of the junior lien must not be less than five years after the Note Date of the First Lien Mortgage delivered to Freddie Mac, unless the junior lien is fully amortizing or a Home Equity Line of Credit (HELOC). In addition, the junior lien must not contain a call provision within the five-year period, unless the junior lien is a HELOC.If the secondary financing is an Employer Assisted Homeownership (EAH) Benefit, the terms of the secondary financing must permit the Borrower to continue making payments on the loan in the event the Borrower no longer works for the employer and may not require repayment in full unless:
  1. The Borrower terminates his or her employment for any reason, or
  2. The employer terminates the Borrower's employment for any reason other than long-term disability, the elimination of the employee's position or reduction-in-force
• Scheduled paymentsThe terms of the secondary financing must provide for regular monthly payments sufficient to meet the interest due; interest may not accrue.If the secondary financing is an EAH Benefit and the monthly payment of principal and interest or interest only begins on or after the 61st monthly payment under the First Lien Mortgage or if repayment of the principal is due only upon sale or default, the amount of the monthly payment may be excluded from the monthly housing expense-to-income ratio and monthly debt payment-to-income ratio. Otherwise, the required monthly payment must be included in both the ratios.
• Documentation requirementsThe Seller must include a copy of the following documentation in the Mortgage file:
  
  • Note or other evidence of subordinate lien terms
  • Settlement/Closing Disclosure Statement that evidences the fees and costs paid by the Borrower at closing in connection with the secondary financing
  • For HELOCs, the HELOC agreement indicating all fees and costs paid by the Borrower at closing, and the maximum permitted credit advance

(c) Special requirements for existing secondary financingFreddie Mac will purchase First Lien refinance Mortgages with existing junior liens (including HELOCs) that are not paid off from the proceeds of the refinance Mortgage provided that:

• Evidence of subordination of outstanding secondary financing is retained in the Mortgage file
• The junior lien has scheduled payments sufficient to meet the interest due

(d) Credit Fees in Price and other delivery instructions for Mortgages with secondary financing

A special Credit Fee in Price will be assessed and billed to the Seller in conjunction with the sale of certain Mortgages with secondary financing. The Seller must refer to Exhibit 19, Credit Fees in Price, for information on the Secondary Financing Credit Fee in Price and other Credit Fees in Price. Credit Fees in Price are paid in accordance with the Credit Fee in Price provisions outlined in Chapter 6303.

See Section 6302.34 for delivery instructions for Mortgages with secondary financing.The Secondary Financing Credit Fee in Price will not be assessed on a Mortgage with an Affordable Second. Affordable Seconds are described in Section 4204.2.