Structured Finance Association CEO Michael Bright reflects on ‘The Bottom Line’ as the US approves Freddie Mac’s second mortgage pilot program.
The Biden administration has approved a move that could essentially put taxpayers on the hook for risky lending practices and potential real estate losses — and a former mortgage instructor is sounding off on the plan.
“The people who should be really mad, I think, are first-time home buyers who are trying to get into the housing market. They can’t because housing is unaffordable,” Structured Finance Association CEO Michael Bright, also a former president. of sister company Freddie Mac and Fannie Mae, Ginnie May, said Tuesday on “The Bottom Line.”
“This will make this problem worse.”
Mortgage giant Freddie Mac got the green light from the White House to offer second-lien mortgages, aimed at helping homeowners who are locked into lower rates access their home equity.
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The proposal allows homeowners to access their home equity while maintaining their low interest rate on their current loan. The Urban Institute has reported that it can be a cost-effective alternative to cash-out refinances at today’s higher rates, which dropped to 6.87% for 30-year fixed rates and 6% for 15-year fixed rates as of tuesday
The Biden administration approved Freddie Macs plan to offer second lien mortgages. (Getty Images)
But Bright warned that there are consequences to government intervention and underwriting of second mortgages.
“Freddie Mac is doing it, but Fannie Mae will have to follow. They always do,” the CEO said. “I really think we’ve jumped the shark on this one. As the government subsidizes and incentivizes equity withdrawals through second mortgages, we’re not solving any problems in our economy. Consumer spending is actually very high. The Fed it is working for this through inflation”.
“You can get mortgage loans through the banks and everything, but if the government comes in and really increases that, you’re talking about additional inflationary pressures,” he added. “You’re talking about the lock-in effect of surcharges. People taking the equity out of their home means they won’t sell their home and move. We already have a supply crisis.”
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Credible, which is majority-owned by Fox Corporation, broke down an example given by the Urban Institute where a borrower with a 3% rate on a $300,000 mortgage would have a monthly payment of about $1,265, but their home now is worth $500,000 and they want to access $100,000 for home improvements. Refinancing at an assumed rate of 7.25%, the new monthly payments would be about $2,729.
With Freddie Mac’s proposed new plan, a borrower could keep their current monthly payment and get a new 20-year mortgage for an additional $100,000, adding just $965 per month for a new monthly mortgage total of $2,130 dollars.
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Bright called this a “consumer loan.”
“So while the Fed is fighting inflation and trying to manage income from consumer spending, Fannie and Freddie are using the taxpayer balance sheet to try to regulate consumer spending for reasons that we don’t really understand,” he said. “Taxpayers will bear the risk, more second hurdles. I just don’t think that’s the direction we want to go.”
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