The US housing market holds the potential for unprecedented economic stimulus that does not require federal spending Meredith Whitney, the one-off “Oracle of Wall Street,” which predicted the Great Financial Crisis.
Although she has recently warned of the dangers posed by the “crisis of the American man' poses to the economy and the housing market, the CEO of Meredith Whitney Advisory Group highlighted the opportunity that a proposed reform of the mortgage market could provide.
In a column for the Financial times On Friday, she noticed that mortgage financing giant Freddie Mac asked the regulator last month to enter the secondary mortgage market, or mortgage loans, which allow homeowners to borrow against the equity in their homes.
Such loans can be used for things like vacations, weddings, new cars, investments, medical bills, paying off debt or starting a business. In other words, it's more money that could drive the economy.
Freddie Mac is best known for its role in buying new mortgages, merging them and selling them to investors as mortgage-backed securities. This allows lenders to remove these mortgages from their balance sheets, freeing up liquidity for more loans.
Letting Freddie Mac do this for home loans could put $1 trillion in consumers' pockets as early as this summer, and $2 trillion by the fall, Whitney estimates. As fellow mortgage giants Fannie Mae and Ginnie Mac follow, the potential stimulus could exceed $3 trillion, she added.
Their involvement in home loans is said to have arisen because banks scaled back their participation after the financial crisis. According to Whitney, outstanding home loans have fallen from more than $700 billion in 2007, just before the financial crisis, to $350 billion today. And that means that house prices have risen by more than 70% during that period.
“The Freddie Mac proposal could change all that, and it couldn't come at a better time,” she said. “Most people in the US are feeling the sting of persistent inflation, but older Americans living on fixed incomes have been hit particularly hard.”
She cited rising costs for homeowners insurance and property taxes, forcing older Americans to take on more debt. This makes them vulnerable to unexpected expenses or other financial shocks.
While the lower-than-expected April jobs report showed that wage growth was cooling, other economic data shows Consumer demand has remained robust, which maintains upward pressure on inflation. That suggests this may not be the best time for trillions of dollars of additional stimulus, especially as inflation has remained stubbornly above the Federal Reserve's 2% target.
Still, Whitney said expanding the ability to tap home equity loans “would provide a big boost to an economy and consumer that appears to be slowing without adding a dime to the national debt.” Rarely have I seen such a true win-win scenario for government. , Wall Street and the American Consumer.”
This story originally ran Fortune.com
