The Big Short 2.0? | Melody Wright
A few days ago, an article appeared in the Financial Times revealing that "Last month, the government-sponsored mortgage finance agency Freddie Mac filed a proposal with its regulator, the Federal Housing Finance Agency, to enter into the secondary mortgage market, otherwise known as home equity loans"
The article's author, Meredith Whitney, claims that if approved, this "could begin to unleash almost $1tn into consumers’ wallets. By the autumn, it could be on its way to $2tn."
That would be a tremendous stimulus to the economy.
But is it a good idea?
Putting aside for a moment concerns of its potential inflationary impact, the Global Financial Crisis was a credit crisis triggered by bad housing loans.
Would allowing the government-sponsored entities like Freddie Mac to unleash a flood of new loans risk repeating the sins of the past?
For answers, we're fortunate to turn to mortgage lending expert & housing analyst Melody Wright. Melody, who was on the frontlines of the meltdown in mortgages during the GFC, is highly concerned this new lending scheme, if enacted, will end up disastrously.
Here are my key takeaways from the discussion:
Melody thinks Freddie Mac's proposal to enter the secondary mortgage market for home equity loans would be a dangerously bad idea.
Over 8 million people have experienced untracked equity withdrawals through COVID-19 forbearance programs, where deferred payments were turned into non-interest-bearing liens added on to the back end of their mortgages, surprising homeowners during sales or loan payoffs that they owed more than they realized. This means many current homeowners have less home equity than they think.
Government-held mortgages have surged post-2008. Today, over 85% of mortgage originations are now government-held, primarily through Fannie Mae, Freddie Mac, and Ginnie Mae, compared to a more significant private market presence before the crisis. Like it or not, we are now a nation of borrowers from the government for our shelter.
Melody expresses concern that Freddie Mac’s venture into home equity loans could exacerbate homeowner over-leverage and potentially lead to a credit crunch similar to 2008, highlighting risks such as
increased delinquencies and foreclosures.
Allowing the issuance of up to $2 trillion in home equity loans THIS YEAR could be highly inflationary, worsening economic inequality by exacerbating the wealth divide and impacting housing affordability.
The private lending market lacks transparency, with significant activities going unnoticed until problems appear in bankruptcy filings. Melody notes that services like Black Knight and the Federal Reserve track delinquencies but miss substantial segments of private transactions.
She observes an increase in "sticky" delinquencies, where borrowers are more frequently letting loans go past 30 days due, indicating deeper market issues. She suggests that current trends point to a growing credit crisis, potentially leading to more underwater borrowers by next year.
Melody emphasizes the importance of staying curious and continually learning new skills to remain adaptable in changing times, advocating for lifelong learning as a key strategy for navigating uncertain situations effectively.
For the full interview, watch the video below:
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