US could give homeowners $980 billion stimulus at no extra cost, says ‘Oracle of Wall Street’

buy a house

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  • A housing proposal could net homeowners nearly $1 trillion, wrote Meredith Whitney for the FT.

  • The idea is that Freddie Mac will buy secondary mortgages, which will give borrowers a cost-effective way to tap into equity.

  • Homeowners have few options to do this because there aren’t many willing buyers.

An idea is percolating at one of the U.S. government-sponsored mortgage financing giants that could unlock a massive new lifeline for homeowners, wrote Meredith Whitney for The Financial Times

“As early as this summer, a proposed move could put nearly $1 trillion in consumers’ pockets. By the fall, that could be on its way to $2 trillion,” Whitney wrote.

That’s if Freddie Mac receives approval from its regulator to operate in the secondary mortgage market, also known as home loans. If given the green light, the plan would amount to a massive stimulus injection, but without adding a single cent to the national budget deficit, the ‘Oracle of Wall Street’ explains.

Under the plan, Freddie Mac could start buying second mortgages and packaging them into bonds, as is now done with primary home loans. Because Freddie Mac is a huge provider of liquidity in the mortgage market, 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. More widely available home equity loans would be a particular boon for older Americans, who are taking on more debt than other age groups and are increasingly at risk of a financial shock.

Approval would also come at the right time. The proposal noted that options are limited for homeowners looking to tap into their wealth, meaning few are taking advantage of 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 can pose a significant financial burden today because it requires refinancing the entire outstanding loan balance at a new, and likely, loan. much higher interest rates,” the report said.

The aim of Freddie Mac’s participation is to offer a cost-effective alternative. According to Whitney, part of the question of why households have so few affordable options is a result of the Great Financial Crisis, as large numbers of bank borrowers reduced their mortgage exposure after the 2008 crisis.

Freddie Mac’s entry into the market could result in $980 billion in home financing becoming available to Americans, with that number growing to $3 trillion. Fannie Mae and Ginnie Mae will follow suit, Whitney estimates.

“Opening the securitization market for second mortgages would not only encourage more institutions to make loans, but would also significantly reduce costs for borrowers as there were more financial service providers,” Whitney said. “It would also give a big boost to an economy. and consumers who appear to be slowing down without adding a cent to the national debt.”

Read the original article on Business Insider