Comment Detail

Comment

Higher interest rates have slowed the housing market and reduced cash-out refinancing following the pandemic boom. Freddie Mac wants to counter higher interest rates by guaranteeing closed-end second mortgages. Similar to cash-out refinancing, second mortgages allow homeowners to tap equity in their home but don’t have to refinance their entire outstanding loan at a new interest rate. A Bank of America research team estimates that homeowners could extract about $1.8 trillion in equity which is more than three times as much as the $512 billion in outstanding second loans and home equity lines of credit. By increasing market liquidity, the GSEs would encourage more lenders to make second mortgages. One risk is that home prices fall, causing some homeowners with second mortgages to default. An equity buffer helps reduce defaults, which is one reason foreclosure rates remain near record lows. A reduction in equity would make defaults and foreclosures more likely. If Freddie Mac buys and guarantees second mortgages, this will create new risks in the financial system. If homeowners with higher credit scores consolidate their consumer loans into second mortgages, riskier borrowers would make up a larger share of bank portfolios. Banks would then hold fewer high-performing loans to offset losses from those that default, which would increase the risk of failures. Freddie Mac is supposed to advance its mission of making housing more affordable for low- and middle-income households. Freddie’s second-mortgage plan won’t do that. It will help those who own homes and have already benefitted from the runup in housing prices. The plan will boost consumer spending which will serve keep inflation and interest rates high.