-
A housing proposal could unlock almost $1 trillion for homeowners, Meredith Whitney wrote for the FT.
-
The idea is that Freddie Mac will begin purchasing secondary mortgages, giving borrowers a cost-effective way to leverage their equity.
-
Homeowners have few options to achieve this because there aren’t many buyers willing to do so.
An idea is brewing at one of America’s government-sponsored mortgage financing giants that could open a huge new lifeline for homeowners, Meredith Whitney wrote for The Financial Times
“As early as this summer, a proposed measure could begin freeing nearly $1 trillion in consumers’ wallets. By the fall, that amount could reach $2 trillion,” Whitney wrote.
It’s so Freddie Mac gets approval of its regulator to operate in the market for secondary mortgages, also known as home equity loans. If approved, the project would amount to a huge injection of stimulus, but without a cent adding to the national deficit, explained the “Oracle of Wall Street”.
Under the plan, Freddie Mac could begin buying second mortgages and packaging them into bonds like it currently does with primary mortgages. Since Freddie Mac is a major liquidity provider in the mortgage market, the move could encourage more banks to extend this financing to their customers.
Whitney points out that Americans have considerable and growing home equity, but little of it is leveraged. More widely available home equity loans would be a boon, especially for older Americans, who are taking on more debt than other age groups and are at increasing risk of financial shock.
Approval would also be timely. The proposal highlights that options are limited for homeowners who want to tap into their equity, meaning few benefit from the appreciation of the real estate market.
“For many homeowners who purchased or refinanced their home during a period of lower mortgage rates, a traditional cash-out refinance today can pose a significant financial burden because it requires refinancing the entire outstanding balance of the loan at a new rate, and probably higher. much higher interest rates,” he said.
Freddie Mac’s participation aims to provide a cost-effective alternative. According to Whitney, the reason households have so little affordability is partly a consequence of the Great Financial Crisis, as many bank lenders reduced their mortgage exposure after the 2008 crash.
Freddie Mac’s entry into the market could provide Americans with $980 billion in home equity financing, with that figure potentially reaching $3 trillion, with Fannie Mae and Ginnie Mae following suit, Whitney estimated.
“By opening the securitization market to second mortgages, not only would more institutions be inclined to make loans, but the cost to borrowers would decrease significantly with more financing providers,” Whitney said: “This would also greatly stimulate the economy and consumers who seem to be slowing down without adding a cent to the government…
