"Freddie Mac's New Plan: Are We Heading Towards Another Mortgage Crisis?"

Hey Income Hunters,

Today, we're diving into a topic that's super important and a bit complex, but I’ll break it down in simple terms so we all can understand it better…?

We're talking about a mortgage crisis 2.0, which follows the 2008 version, which drove home prices to levels far beyond their true value and when the bubble burst it nearly caused a collapse of the global financial system …?

Why now??

Because the housing numbers are weakening enough that they feel the need to step and fuel more demand … Check out the latest numbers on new mortgages and new homes sold …?

This new plan involves something called "second mortgages."

Great Financial Crisis Revisited?

Mortgage lenders fueled the “Housing Bubble” and regulators allowed this to go on in order to boost growth, all the while knowing it would end in a crash … Here is what that looked like …?

Moral Hazard of Epic Proportions

• Banks would lend money to home buyers knowing they would likely default on the loans.
• They did not care because they also knew they could package multiple types of loans into a complex derivative called collateralized debt obligations (CDO) and sell them to the investment banking desks
• The investment bankers would use their influence with rating agencies and the packaged loans (CDOs) would be stamped with much higher ratings than their risk warranted.
• Next the investment bankers would sell the packaged debt (CDOs) to their clients including pension funds and insurance companies for massive profit while knowing the loans would soon be worthless.?

During the Great Financial Crisis everyone was nearly wiped out except the banks?

Freddie Mac's New 2024 Plan

Freddie Mac is a government-sponsored company that helps people get mortgages. They have a new idea to help homeowners get more money from their homes without having to refinance their entire mortgage.?

This plan involves something called "second mortgages."

What Are Second Mortgages?

A second mortgage is like taking another loan on top of your existing mortgage ... It's a way to borrow more money based on the value of your home.?

Unlike cash-out refinancing, where you replace your old mortgage with a new one (usually at a higher interest rate) … A second mortgage allows you to keep your current mortgage rate and just add another smaller loan at the current interest rate.

Why Is This a Big Deal?

Freddie Mac wants to guarantee these second mortgages. This means they would promise to pay back the loans if homeowners can't …?

Sounds good, right? Homeowners can get more money, and Freddie Mac ensures lenders don’t lose out. But here’s where things get tricky.

1. Increased Debt: Homeowners might end up with too much debt. If house prices drop or if they lose their job, they could default on these loans.
2. Market Impact: If many people start taking out second mortgages, it could push house prices up again, creating another bubble. When the bubble bursts, it could lead to a financial crisis similar to what happened in 2008.
3. Government Risk: By guaranteeing these loans, Freddie Mac (and ultimately the government) takes on a lot of risk. If many people default on their loans, it could cost the government a lot of money.

So, Why Now?

Interest rates are high right now, which means borrowing money is more expensive …

Freddie Mac's plan is a way to help people borrow money at a lower cost. They think this will help stimulate the economy by giving people more money to spend.?

But there's a catch - it would fuel even higher? inflation, which makes everything more expensive.

What Could Go Wrong?

Think of it like this: imagine you have a credit card with a low interest rate. You then get another card with a higher rate but can use both to spend more money.?

This is great until you can’t pay back what you owe. This is what could happen on a massive scale with second mortgages.

Here is an Example:

• Let's say a homeowner owes $120,000 on their mortgage and wants to borrow another $30,000.?
• Instead of refinancing the whole $120,000 at a higher rate, they just take out a second mortgage for the $30,000.?
• They save money on interest in the short term, but now they have two loans to pay back.

Bigger Picture

A Bank of America study estimates that homeowners could borrow about $1.8 trillion from their home equity if they use second mortgages …

That's a lot of money, and it could boost the economy. But it also means that many people are borrowing a lot of money, which can be risky.

The Government's Role:

Freddie Mac and Fannie Mae (another quasi-government guaranteed mortgage lender)? are controlled by the Federal Housing Finance Agency (FHFA).?

For this plan to work, both companies need to agree and have enough money to back up these loans. This could create a huge pool of money for mortgages, potentially lowering interest rates.

What this Means for You

While this plan could help the economy in the short term, it has risks that could lead to long-term problems.?

By guaranteeing second mortgages, Freddie Mac might be setting us up for another housing bubble.?

This is simply another trick being used by the government to further kick the “day of reckoning” can down the road before a massive correction in stocks takes place.?

?It could be another couple of years before a massive crash occurs buts It’s important to understand these risks and think carefully about the potential consequences …

For access to more "Inside Baseball" on the Fed, the Treasury and Money Flows that impact Markets go to:

https://optionpit.com/power-income/

Live and Invest with Passion My Friends,

Bill Griffo