Wall Street wants second mortgages expanded for ‘the next big U.S. stimulus.’ Is that wise?
Wall Street wants second mortgages expanded for ‘the next big U.S. stimulus.’ Is that wise?
Freddie Mac wants to enter into the secondary mortgage market. Wall Street loves the idea.
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Back in April, Freddie Mac filed an official proposal with the Federal Housing Finance Agency, asking for permission to enter into the secondary mortgage and home equity loans market.
U.S. homeowners have around $32 trillion in home equity, while outstanding home equity loans only amount to around $400 billion.
Already, Wall Street analysts like Meredith Whitney, founder and CEO of Meredith Whitney Advisory Group, have praised the proposal, writing in the Financial Times that: “As early as this summer, a proposed move [by Freddie Mac] could begin to unleash almost $1 trillion into consumers’ wallets. By the autumn, it could be on its way to $2 trillion.”
Supporters of the proposal also argue that expanding second mortgages would enable more Americans to access their home equity without having to refinance and lose their ultra-low mortgage rates on their primary mortgage. In their view, this would be preferable to taking out higher-interest-rate credit card debt, which is rising and has seen delinquencies rise.
But here are the concerns they’re overlooking.
First, Wall Street types like Whitney have framed the proposal as an economic stimulus. (The headline of her op-ed was: “The mortgage reform that could unleash the next big US stimulus.”) Those stimulus demands could be premature.
After all, the Federal Reserve is still focused on the inflation side of its dual mandate to keep prices stable while maximizing employment, having jacked up interest rates at the fastest clip in over four decades. While inflation has decelerated from the pandemic highs, the year-over-year Consumer Price Index reading (+3.4%) is still slightly above target, while the U.S. unemployment rate (3.9%) remains tame.
Click here to view an interactive version of the map below.
Second, U.S. homeowners have a massive amount of home equity right now.
Over the past four years, U.S. home prices tracked by the Freddie Mac House Price Index have skyrocketed by a staggering 47%. Given the current period of inflationary concerns and the recent historic rise in home prices, does the federal government truly believe that now is the best time to encourage Americans to tap into their home equity?
Finally, is it wise to stretch homeowners given the role the second mortgage played in the financial crisis of 2007-2008?
Between 2001 and 2006, Citi ran an advertising campaign called “Live Richly,” which encouraged homeowners to live in the moment and take out home equity loans. One ad read: “There’s got to be at least $25,000 hidden in your house. We can help you find it.” Those types of ads were common during the 2000s housing boom.
Those ballooning second mortgages—which between the early 1980s and 2008 had soared from $1 billion to $1 trillion—proved toxic once U.S. home prices began to fall around 2007. Many homeowners who had taken on second mortgages were among the first to go underwater.
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