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Freddie Mac's New 'Mortgage Reform' Could Spell Disaster

Freddie Mac's New 'Mortgage Reform' Could Spell Disaster

May 14, 2024

Freddie Mac's New 'Mortgage Reform' Could Spell Disaster

In a striking echo of the prelude to the 2008 global financial crisis, Freddie Mac, the government-sponsored mortgage finance agency, has recently filed a proposal that suggests a precarious path for the American economy. Their plan, which has been framed as 'mortgage reform,' potentially unleashes a wave of new debt upon American consumers, which could amount to a staggering $3 trillion.

Financial Times

The concept, described as a home equity loan program, would allow homeowners to extract equity from their properties, ostensibly to increase their spending power. This comes despite the fact that American homeowners currently sit on more than $32 trillion in equity. Such proposals, while seemingly promising a stimulus without the government incurring additional debt, fail to recognize the lessons of the past financial crisis and the recent inflationary pressures exacerbated by previous stimulus measures.

The proposal, filed with the Federal Housing Finance Agency, suggests entering the secondary mortgage market, an area that has been relatively untapped since the last financial crisis. It's worth noting that the volume of home equity loans has dramatically decreased from over $700 billion before the 2008 crisis to about $350 billion today, despite a more than 70% rise in home prices. This disparity raises significant concerns about the sustainability of such financial engineering.

George Gammon, in an episode of Rebel Capitalist, argues that the proposal ignores the hard-learned lessons of the 2008 crisis and the fact that stimulus measures can lead to rampant inflation when not accompanied by a commensurate increase in goods and services. The approach of increasing consumer debt, particularly through home equity, is a dangerous repeat of past mistakes that could lead to increased financial volatility.

The proposal also comes at a time when banks have scaled back their mortgage exposure, often a sign of a cautious approach to an overheated market. Non-traditional operators, without capacity to hold loans, have been selling them to government entities like Freddie Mac, which then securitize them. This secondary market for mortgage-backed securities is reminiscent of the same system that played a large part in the last financial crisis.

Furthermore, the push for more liquidity in the housing market through this proposal is misguided, particularly when American homeownership represents a significant portion of the average American's net worth. The potential for unleashing such a vast amount of liquidity, especially in the form of debt, is a recipe for disaster.

The proposal is especially concerning given that property tax revenues have climbed by 26% over the past three years, indicating an increased financial burden on homeowners. Additionally, older Americans, already feeling the brunt of inflation and fixed incomes, have seen their debt levels rise more than any other age group over the past five years. Encouraging further debt accumulation through home equity loans could exacerbate their financial vulnerability.

This proposal by Freddie Mac, while seemingly a boon for consumer spending, is fraught with risks. It threatens to repeat the same mistakes that led to the last financial crisis, increasing debt and potentially paving the way for another economic downturn. The push for such financial maneuvers, despite historical evidence and recent economic challenges, suggests a troubling disregard for the potential consequences on both individual homeowners and the broader economy.

Financial Times Article


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