$3 trillion could be injected into the U.S. economy without any federal spending by changing this segment of the mortgage market, according to the “Oracle of Wall Street”
The U.S. housing market holds unprecedented economic recovery potential that would require no 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 “crisis of the American male” poses to the economy and the real estate market, the CEO of Meredith Whitney Advisory Group highlighted the opportunity that a reform project could represent of the mortgage market.
In a 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 the equity in their homes .
Such loans can be used for things like vacations, weddings, new cars, investments, medical expenses, paying off debts or starting a business. In other words, more money could fuel the economy.
Freddie Mac is best known for its role in purchasing first mortgages, pooling them, and selling them to investors as mortgage-backed securities. This allows lenders to remove these mortgages from their balance sheet, freeing up cash for more loans.
Letting Freddie Mac do that for home equity loans could start putting $1 trillion in consumers’ wallets as soon as this summer and $2 trillion by the fall, Whitney estimated. If fellow mortgage giants Fannie Mae and Ginnie Mac follow suit, the potential stimulus package could exceed $3 trillion, she added.
Their involvement in home equity loans would come as banks have reduced their involvement in the wake of 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, according to Whitney. And that’s even though house prices have soared by more than 70% during this period.
“Freddie Mac’s proposal could change all that, and it couldn’t come at a better time,” she said. “Most Americans are feeling the effects of persistent inflation, but older Americans living on fixed incomes have been particularly hard hit.”
She cited the rising costs of home insurance and property taxes, forcing older Americans to take on more debt. This leaves them vulnerable to unexpected expenses or other financial shocks.
While the weaker-than-expected April jobs report showed slowing wage growth, other economic data indicates that consumer demand remained robust, maintaining upward pressure on employment. ‘inflation. That suggests that now may not be the best time for trillions of dollars in additional stimulus, especially as inflation has remained stubbornly above the Federal Reserve’s 2% target.
Still, Whitney said expanding the ability to tap into home equity loans would provide “a significant stimulus to an economy and consumer that appears to be slowing without adding a dime to the public debt.” I have rarely seen such a truly win-win scenario for the government.” , Wall Street and the American consumer.”
This story was originally featured on Fortune.com
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