An idea is percolating at one of America’s government-sponsored mortgage finance giants that could unlock a huge new lifeline for homeowners, Meredith Whitney wrote for The Financial Times
“As early as this summer, a proposed move could begin to unleash almost $1tn into consumers’ wallets. By the autumn, it could be on its way to $2tn,” Whitney wrote.
That’s if Freddie Mac secures approval from its regulator to operate in the market for secondary mortgages, also commonly known as home equity loans. If greenlighted, the scheme would be equivalent to a huge stimulus injection, but without a cent added to the national deficit, the “Oracle of Wall Street” explained.
Under the plan, Freddie Mac could start purchasing second mortgages and package them into bonds the way it does with primary home loans now. As Freddie Mac is a massive provider of mortgage market liquidity, the move could encourage more banks to extend this financing to customers.
Whitney points out that Americans are sitting on a massive and growing pile of home equity, but little of that is being tapped. More widely available home equity loans would be a boon in particular for older Americans, who are taking on more debt than other age groups and are at growing risk of a financial shock.
Approval would also be well-timed. The proposal noted that options are limited for homeowners who want to tap their equity, meaning that few are benefiting from the housing market’s appreciation.
“For the many homeowners who purchased or refinanced their homes during a period of lower mortgage rates, a traditional cash-out refinance today may pose a significant financial burden, as it requires a refinancing of the entire outstanding loan balance at a new, and likely much higher, interest rate,” it said.
Freddie Mac’s participation seeks to offer a cost-effective alternative. According to Whitney, part of the issue as to why households have so few affordable avenues is a consequence of Great Financial Crisis, as a large number of bank lenders decreased their mortgage exposure following the 2008 crash.
Freddie Mac’s entry into the market could result in $980 billion of home equity financing becoming available to Americans, with that number growing to $3 trillion, Fannie Mae and Ginnie Mae follow suit, Whitney estimated.
“By opening up the securitization market for second mortgages, not only would more institutions be inclined to originate the loans, but the cost to borrowers would meaningfully decline with more finance providers,” Whitney said: “It would also provide big stimulus to an economy and consumer that appear to be slowing down without adding a dime to government debt.”
