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A housing project could unlock nearly $1 trillion for homeowners, wrote Meredith Whitney for the Financial Times.
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The idea is that Freddie Mac will begin purchasing second mortgages, giving borrowers a low-cost way to tap into equity.
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Homeowners have few options for this because there are not many willing buyers.
An idea is brewing at one of America’s government-backed mortgage finance giants that could provide a huge new lifeline for homeowners, wrote Meredith Whitney for the Financial Times
“A planned move could begin pouring nearly $1 trillion into consumers’ wallets as early as this summer. It could be on track to $2 trillion by fall,” Whitney wrote.
This is when Freddie Mac receives approval from its regulator to enter the market for second mortgages, also known as home equity loans. If given the green light, the plan would amount to a huge economic stimulus without adding a cent to the national deficit, explained the “Oracle of Wall Street”.
Under the plan, Freddie Mac could begin purchasing second mortgages and packaging them into bonds, much as it currently does with primary home loans. Since Freddie Mac is a large provider of mortgage market liquidity, this move could encourage more banks to extend this financing to customers.
Whitney points out that Americans are sitting on a huge and growing pile of home equity, but little of it is being tapped. Wider availability of home equity loans would be a particularly boon for older Americans, who take on more debt than other age groups and face growing risk of a financial shock.
The approval would also come at the right time. The proposal noted that options for homeowners looking to leverage their equity are limited, meaning few will benefit from the appreciation of the real estate market.
“For the many homeowners who purchased or refinanced their homes during a time of lower mortgage rates, a traditional cash-out refinance can present a significant financial burden today because it requires refinancing the entire outstanding loan balance at a new and probable date.” The interest rate is much higher,” it said.
Freddie Mac’s participation is intended to offer a cost-effective alternative. According to Whitney, part of the reason why households have so few affordable options is a result of the Great Financial Crisis, as a large number of bank lenders reduced their mortgage risk following the 2008 crash.
Freddie Mac’s entry could result in $980 billion in home financing available to Americans, and that number rises to $3 trillion. Fannie Mae and Ginnie Mae are following suit, Whitney estimated.
“By opening up the securitization market for second mortgages, not only would more institutions be inclined to lend, but costs for borrowers would also fall significantly with more lenders,” Whitney said. “It would also provide a major stimulus to the economy and consumers.” , which appear to be slowing down without adding a cent to the national debt.”
Read the original article on Business Insider