Just lately, Freddie Mac, a government-sponsored enterprise, sought approval from its oversight company, the Federal Housing Finance Company (FHFA), to buy and assure second mortgages in the US.
Whereas the enterprise case for this proposal is poor (for a wonderful perspective on that, see the article by R. Christopher Whalen), I’ll focus on the financial and political premises behind this transfer and its doable penalties.
What Does It Imply to “Nationalize Second Mortgages”?
Understanding the single-family mortgage market within the US means realizing that there is no such thing as a market in the true sense of that time period. A whopping 70 p.c of house mortgages within the US are owned or assured by Freddie Mac and Fannie Mae, the 2 government-sponsored enterprises created by Congress to “support the housing market.” When the Federal Housing Administration and ancillary businesses are included, the proportion of mortgages supported by the federal government rises to roughly 95 p.c. Naturally, this ubiquitous subsidy scheme helps a political aim—that of widespread house possession—whereas making mortgages extra accessible and houses way more costly.
The federal government-sponsored enterprises are solely nominally non-public—they had been established by Congress particularly to “provide liquidity” to the house mortgage market by shopping for mortgages originated by banks and different establishments. They’ve at all times been topic to regulatory oversight by the federal government. That is very true since their failure throughout the 2008 housing disaster, at which level they had been positioned into conservatorship underneath the FHFA.
Other than mortgage loans, that are primarily used when buying a house, owners have further methods to entry the fairness of their house. Banks and credit score unions supply house fairness traces of credit score, house fairness loans, and different second mortgage merchandise to potential debtors. They’re “second” as a result of, whereas secured by the underlying property, they’re legally subordinate to the prevailing (“first”) mortgage. As such, second mortgages are riskier, are usually smaller in measurement, and incur a better rate of interest. Freddie Mac desires regulatory approval to carry these loans.
Freddie Mac, if permitted, will nearly definitely be adopted by Fannie Mae. Thus, Freddie Mac’s proposal is an try to de facto nationalize the second mortgage market, in related style to the prevailing first mortgage market.
There Will Be Blood
The Freddie Mac proposal must be seen within the context of an ongoing housing bubble mixed with all-time highs in shopper debt. The Case-Shiller US Nationwide House Value Index stays at all-time highs regardless of leveling off across the time benchmark rates of interest elevated in mid-2022.
Determine 1: Case-Shiller US Nationwide House Value Index in comparison with the median weekly actual earnings of these employed full time, 2019–24
Within the meantime, shopper debt continues to climb as value inflation persists and actual wages are caught.
The political crucial is obvious—get extra folks to borrow towards the fairness that’s been created within the housing bubble of the final ten to fifteen years, particularly the final 4 years. Doing so will possible enhance gross home product figures as owners convert illiquid paper wealth into precise liquidity with which they are going to purchase items. By no means thoughts that the debt created by this can pile on high of an already-unsustainable burden. That is very true for the lower- and middle-income segments of the inhabitants, as 36 p.c of US adults have extra bank card debt than emergency financial savings.
Subverting the Free Market Once more
If market individuals needed further liquidity in second mortgages, they might create and value it accordingly. Shoehorning authorities participation will solely assure malinvestment and vital collateral harm, exacerbating present issues with asset inflation and family indebtedness. The desire of people appearing in their very own pursuits is what creates a wholesome market—not authorities decree from more and more harebrained regimes determined for shallow political factors.
