Posted on 06/21/2024 10:07:26 AM PDT by SeekAndFind
Recently, Freddie Mac, a government-sponsored enterprise, sought approval from its oversight agency, the Federal Housing Finance Agency (FHFA), to purchase and guarantee second mortgages in the United States.
While the business case for this proposal is deficient (for an excellent perspective on that, see the article by R. Christopher Whalen), I will discuss the economic and political premises behind this move and its possible consequences.
Understanding the single-family mortgage market in the US means realizing that there is no market in the real sense of that term. A whopping 70 percent of home mortgages in the US are owned or guaranteed by Freddie Mac and Fannie Mae, the two government-sponsored enterprises created by Congress to “support the housing market.” When the Federal Housing Administration and ancillary agencies are included, the proportion of mortgages supported by the government rises to approximately 95 percent. Naturally, this ubiquitous subsidy scheme supports a political goal—that of widespread home ownership—while making mortgages more accessible and homes much more expensive.
The government-sponsored enterprises are only nominally private—they were established by Congress specifically to “provide liquidity” to the home mortgage market by buying mortgages originated by banks and other institutions. They have always been subject to regulatory oversight by the government. This is especially true since their failure during the 2008 housing crisis, at which point they were placed into conservatorship under the FHFA.
Aside from mortgage loans, which are primarily used when acquiring a home, homeowners have additional ways to access the equity in their home. Banks and credit unions offer home equity lines of credit, home equity loans, and other second mortgage products to prospective borrowers. They’re “second” because, while secured by the underlying property, they are legally subordinate to the existing (“first”) mortgage. As such, second mortgages are riskier, are generally smaller in size, and incur a higher interest rate. Freddie Mac wants regulatory approval to hold these loans.
Freddie Mac, if approved, will almost certainly be followed by Fannie Mae. Thus, Freddie Mac’s proposal is an attempt to de facto nationalize the second mortgage market, in similar fashion to the existing first mortgage market.
The Freddie Mac proposal should be seen in the context of an ongoing housing bubble combined with all-time highs in consumer debt. The Case-Shiller US National Home Price Index remains at all-time highs despite leveling off around the time benchmark interest rates increased in mid-2022.
Figure 1: Case-Shiller US National Home Price Index compared to the median weekly real earnings of those employed full time, 2019–24
In the meantime, consumer debt continues to climb as price inflation persists and real wages are stuck.
The political imperative is clear—get more people to borrow against the equity that’s been created in the housing bubble of the last ten to fifteen years, especially the last four years. Doing so will likely boost gross domestic product figures as homeowners convert illiquid paper wealth into actual liquidity with which they will buy goods. Never mind that the debt created by this will pile on top of an already-unsustainable burden. This is especially true for the lower- and middle-income segments of the population, as 36 percent of US adults have more credit card debt than emergency savings.
If market participants wanted additional liquidity in second mortgages, they would create and price it accordingly. Shoehorning government participation will only guarantee malinvestment and significant collateral damage, exacerbating existing problems with asset inflation and household indebtedness. The will of individuals acting in their own interests is what creates a healthy market—not government decree from increasingly harebrained regimes desperate for shallow political points.
Preemptive Bailout.
NO!!!!!
Net new government insured credit added to the economy also adds to inflation.
Then they blame everybody else for inflation.
It's like we learned nothing from 2008.
They want people to over leverage their own homes to buy more stuff?
There’s no upside for the average homeowner. This will only prompt lenders to make second mortgages easier to get causing people to be very upside down in the equity position causing more foreclosures.
And as we know Freddie and Fannie do not protect the homeowners. Only the banks.
If you have a lot of equity in your home and a good credit rating banks will happily give you a second mortgage. If you default the bank will not lose money as they will then foreclose on the house and no taxpayer money will be lost.
The only reason the government wants to enter this market is to give loans that are not financially sound. If they default you can bet your ass the taxpayer will pick up the bill.
Mortgages are profitable for investors. Problem is the govt insures them so profits are private and defaults are public. If the public is going to insure them, some profits should be returned. Monthly mortgage bills should have a subtraction off the principal similar to the lottery credit on your tax bill.
Even “good” second mortgages carry a lot of risk.
The reason for this is that most failures to keep up payments on second mortgages happen when the economy is in recession and people are losing their jobs.
That in turn affects the value of the original collateral.
The foreclosure would then be done by the first mortgage holder.
The second mortgage holder will be fortunate to get scraps at that point.
this is needed about as much as teats on a boar
You will own nothing and you will be happy ( or else....!)
I tend to think mortgages should be local.
California real estate prices can and do swell up because of out-of-state funding.
The federal mortgage entities have lots of low interest rate mortgages on their books and probably would like to cover the resulting losses with high interest rate second mortgages.
In the early 1980s, S&Ls tried to cover lower interest rate losses by risky new financing. I read the end result was $500 billion (circa 1990) in federal bailouts.
I’m going to take out a second mortgage just so I can get a Brandon/Ho Administration loan forgiveness letter.
“My job is a corporate recruiter so I pretty much live the employment experience every day. When I read about the ‘job numbers’ I am incensed. Anyone that spends 10 minutes on LinkedIn and reads the feed can see the absolute desperation of white collar workers. Daily and numerous posts of people who are literally at the end…about to go bankrupt, about to lose their home and marriages. People who have been out of a job a year+, unemployment run out and savings gone…people who 2 years ago would have had many job offers, people who are in the professional class and find themselves completely despondent.”
via:
https://theconservativetreehouse.com/
Like S&Ls after Carter, Fannie Mae and Freddie Mac have below their borrowing rate loans on their books.
Properly done (i.e. total mortgages less than 80% of tax assessment value), the second mortgage expansion would be better than eliminating the federal mortgage interest deduction for mortgages under 5% and using the tax revenue gained to shore up Fannie Mae and Freddie Mac.
Nationalization of property
That’s the ultimate goal, total government ownership of all real estate, and dictating where you can live.
What could go wrong? Plenty. Delete the govt and start over.
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