Regulators tossing around plan that would make home-equity loans more affordable
The Federal Housing Finance Agency (FHFA) seeks to grant Freddie Mac regulatory approval to guarantee second mortgages.
If allowed, Freddie Mac could provide homeowners with a cost-effective alternative to access their equity and could potentially revive the lackluster housing market.
“The proposed activity is intended to provide homeowners with a cost-effective alternative for accessing the equity in their homes," stated FHFA Director Sandra Thompson.
The decision to grant approval rests with the Federal Housing Finance Agency (FHFA), which oversees Freddie Mac and its sister organization Fannie Mae.
The FHFA has opened the matter up to public comments until May 16.
Second mortgages could be an attractive cash-out option
Americans have a lot of equity to tap into after a record-breaking Covid housing boom.
According to Fed data, homeowners are sitting on nearly $32 trillion in home equity—$10 trillion of which they have amassed since Covid alone.
Real estate market data firm Attom says the amount of mortgaged homes with significant equity has increased to 46.1% as of year-end 2023 compared to 27% in Q3 2019.
If the proposal passes, Bank of America predicts that lenders could dole out an extra $850 billion via government-backed second mortgages.
According to U.S. Census Bureau data, the number of homes with a second mortgage fell in the decade leading up to 2021, the most recent records show.
For example, in 2010, close to one-quarter of homes with a mortgage also had taken out a second mortgage or home equity loan. By 2021, that percentage dropped to 11.6%.
In 2024 so far, second-lien mortgages are on the rise, a trend that would likely gain momentum if Freddie Mac has its way.
The "worst situation" for real estate
The housing market continues to baffle real estate experts.
Redfin CEO Glenn Kelman believes the housing market is stuck between a rock and a hard place, leaving it in a state that he hasn’t witnessed in some 20 years.
“The cost of buying a home has gone up again, and prices haven’t come down. So the Fed keeps trying to tame inflation with rate increases, but at least one sector is untamable, and that is housing,” he explained to Fortune.
Meanwhile, homeowners have grown weary of waiting while young generations like Millennials can only put off homeownership for so long.
The result is that home prices are barely pulling back despite higher interest rates and slowing sales.
After all, housing is a need that isn’t going away, as a result of which Redfin’s Kelman expects sales will pick up this year despite lingering uncertainty about the future direction of rates.