The US housing market holds the potential for unprecedented economic stimulus that would not require any federal spending, according to Meredith Whitney, the former Wall Street oracle who predicted the Great Financial Crisis.
While she recently warned of the dangers that the “American man crisis” poses to the economy and the housing market, the CEO of Meredith Whitney Advisory Group emphasized the opportunities that proposed reform of the mortgage market could provide.
IN column for Financial Times On Friday, she noted that mortgage finance giant Freddie Mac asked its regulator last month to enter the secondary mortgage market, or home equity loans, which allow homeowners to borrow against their homes.
This type of loan 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 can power the economy.
Freddie Mac is best known for its role in purchasing new mortgages, bundling 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.
Whitney estimates that allowing Freddie Mac to do this for home equity loans could start putting $1 trillion into consumers’ wallets as soon as this summer and $2 trillion by the fall. If fellow mortgage giants Fannie Mae and Ginnie Mac follow suit, the potential stimulus could top $3 trillion, she added.
Their involvement in home equity lending will come as banks have reduced their involvement since the financial crisis. Outstanding home equity loans have fallen to $350 billion today from more than $700 billion in 2007, just before the financial crisis, Whitney said. This is despite house prices rising by more than 70% during this period.
“The Freddie Mac offer could change everything, and it comes at the perfect time,” she said. “Most people in the U.S. are feeling the pain of persistent inflation, but older Americans living on fixed incomes have been hit especially hard.”
She cited rising costs of homeowners insurance and property taxes as forcing older Americans to take on more debt. This left them vulnerable to unexpected expenses or other financial shocks.
While the April jobs report showed lower-than-expected wage growth, other economic data suggests consumer demand remains resilient, keeping upward pressure on inflation. This suggests now may not be the best time for trillions of dollars in additional stimulus, especially as inflation remains stubbornly above the Federal Reserve’s 2% target.
However, Whitney said expanding home equity lending options would provide “a big boost to the economy and consumers, which appear to be slowing, without adding a penny to the national debt.” Rarely have I seen such a truly win-win scenario for the government, Wall Street and US consumers.”