The Biden administration has approved a move that could essentially put taxpayers on the hook for risky borrowing practices and potential real estate losses – and a former mortgage insider is sounding off on the plan.
“The people who should be really mad, I think, are first-time homebuyers who are trying to get their foot in the housing market. They can’t because housing is unaffordable,” Structured Finance Association CEO Michael Bright, also a former president of Freddie Mac and Fannie Mae sister company Ginnie May, said on “The Bottom Line” Tuesday.
“This is going to exacerbate that problem.”
Mortgage giant Freddie Mac received the green light from the White House to offer second-lien mortgages, aiming to help homeowners who are locked into lower rates access their home equity.
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The proposal allows homeowners to access their home equity while keeping their low interest rate on their current loan. The Urban Institute has reported that it could be a cost-effective alternative to cash-out refinances at today’s higher rates, which sat at 6.87% for 30-year fixed rates and 6% for 15-year fixed rates as of Tuesday.
But Bright warned that there are consequences of the government stepping in and guaranteeing second mortgages.
“Freddie Mac is doing this, but Fannie Mae is going to have to follow. They always do,” the CEO said. “I really think we’ve jumped the shark on this one. Having the government subsidize and incentivize equity extraction through second mortgages, we’re not solving any problems in our economy. Consumer spending is actually too high. The Fed is working on that through inflation.”
“You can get mortgage loans through banks and everything, but if the government comes in and really amps this up, you’re talking about additional inflationary pressures,” he expanded. “You’re talking about additional rate lock effect. People taking equity out of their home means they’re not going to sell their home and move. We already have a supply crisis.”
Credible, which is majority owned by Fox Corporation, broke down one example given by the Urban Institute where a borrower with a 3% rate on a $300,000 mortgage would have a monthly payment of about $1,265, but their home is now worth $500,000 and they want to access $100,000 for home improvements. With refinancing at an assumed rate of 7.25%, new monthly payments would be about $2,729.
With Freddie Mac’s new proposed plan, the borrower can keep their current monthly payment and take out a new 20-year mortgage for the additional $100,000, adding only $965 per month for a new monthly mortgage total of $2,130.
Bright called this a “consumer loan.”
“So while the Fed is fighting inflation and trying to manage consumer spending incomes, Fannie and Freddie uses the taxpayer balance sheet to try and juice consumer spending for reasons we don’t really understand,” he said. “Taxpayers are going to bear the risk, more second liens. I just don’t think this is the trend we want to be going.”
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