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Source – Financial Times
Ah yes, the warm embrace of our old friends Freddie Mac and their preferred weapon of mass destruction wealth creation, the home mortgage.
For all of 2024 so far, I have dropped hints to you that something big is happening. Well, seems I’ve underestimated just how big it was going to be.
Last month, the government-sponsored mortgage finance agency Freddie Mac filed a proposal with its regulator, the Federal Housing Finance Agency, to enter into the secondary mortgage market, otherwise known as home equity loans.
This was a smart move by Freddie, and the FHFA will do a lot of good by approving it. Despite the more than $32tn in equity on homeowner balance sheets, very little of it has been tapped through home equity loans.
In terms that Australians would understand, we are of course referring to refinancing loans. It’s the most common way to turn your principal place of residence into your personal ATM.
However, I thought the “everything bubble” was the apt way to descirbe the coming tsunami of credit creation piling into the most speculative of assets right up to the land market peak.
Well, put that term into the bin.
Because it’s not coming close to encapsulating what we are about to face here. Should we call this the ‘hyperbubble’ or something? We are talking about US $32 trillion worth of home equity!
Now, no one is saying the entire amount is about to be refinanced, but Freddie Mac has already filed their proposal to the Federal Finance Housing Authority, who is responsible for regulating Freddie Mac, to officially re-enter the secondary housing market.
And of course, the obligatory mouthpieces in the media are already calling such a move a ‘good idea’.
In America, homeowners can take advantage of long-term (25-30 year long) fixed interest rate mortgages. These loans are written by mostly regional US banks and then re-brought by Freddie Mae and Freddie Mac.
Investopedia describes their crucial role as thus.
“…these enterprises have been the pillars on which the American housing market of the last 80 years has largely been built. Their sway lies in securitizing loans, effectively transforming individual mortgages into tradable bonds. This constant flow of capital allows lenders to extend more credit, ultimately shaping interest rates and making homeownership accessible to millions of Americans.”
Now, many of these same homeowners would have borrowed at an interest rate many hundreds of basis points lower than the official cash rate today. A unique situation that dissuades many from moving home due to the fact the new mortgage would be much more expensive to service.
And so, as they take advantage of such low rates to pay down their loan quicker, plus the equity the ever-rising land price grants them, something flicks on in their heads. Economists have a term for it – the wealth channel effect.
In other words, they feel wealthy again. The bullish sentiments are now returning. It’s no longer enough to be wealthy on paper – they must now ‘look’ and ‘act’ wealthy too.
Let me now explain the next logical step in this process to you.
This is how the “mania” phase of the cycle begins.
It’s this secondary mortgage market that is fundamental to how the remainder of this cycle will now play out in the US, and thus the rest of the world.
You just have to look back to a similar time last completed cycle to see this. In 2007, home equity loans in the US amounted to an estimated US$700 billion. Currently, the number is more like half that.
If history repeats, then we understand that each subsequent cycle sees these numbers get bigger and bigger each time.
However, and this is the key here, today we are not at the peak yet.
There are still a few years to go before then. And that same peak is when we are all in. Joe Sixpack and Co are totally saturated in debt, everything they own not tied down is in the markets, and the news is wall-to-wall positive.
As stated, – we aren’t there yet.
So, how do we get there? How about adding an additional mortgage secured by your home?
Because this policy put forward by Freddie Mac must meet government lending standards, they won’t be able to lend more than 80% LVR. If borrowers want more than this, then they must approach non-traditional banks (like shadow banks) to get it.
Any way you cut it though, it’s a huge amount of new credit creation pledged against land values coming into the economy. All we need is for land prices to, you know, keep on rising.
To qualify, someone’s first home mortgage must be with Freddie Mac. The current loan-to-value of Freddie’s mortgage portfolio is 52 percent. Thus, Freddie could unlock $980bn in equity for homeowners. Now recall Freddie’s overall role here.
These second mortgages will be packaged up and then resold to Wall Street.
However, these loans will be charged at today’s prevailing interest rates! That’s right, the highest in almost 20 years. Do you think fund managers might be keen to bid for those?
Is it possible that Freddie may not be able to meet the demand for this new rehypothecated product and thus must lend even more to meet this demand?
Let’s say they can’t; is that it? Oh no, because there also happen to be other federally governed lenders called Fannie Mae and Ginnie Mae.
Very straightforward for them to take this template and do the same.
I won’t lie. This is the most insanely bullish set-up I’ve ever seen in all my years studying the land markets.
I can scarcely believe the timing too. Exactly what the PSE property clock suggests should happen. To write thousands of words each year preparing you for this moment is one thing. But when we finally get there?
This move is inevitable now, the cycle history tells me as much. Time is now of the essence; you must now prepare yourself and your family. The biggest wealth creation event in history is coming, and we have a window into just how bad the eventual bust could be too.
Only those who possess knowledge of land markets will navigate this safely. And only one place will teach and guide you through it. It’s time you became our newest Boom Bust Bulletin (BBB) member.
Allow me to show you the history of the 18.6-year Real Estate Cycle and how it can unveil to you the economy’s hidden order. The reasons why it repeats and the power its inherent timing can give your financial future.
So, the mania has now begun. Frankly, just one ingredient remains to be added.
And that’s the hubris and arrogance of those promoting such moves.
Does the following, from the above article, qualify for you? Bolded text is my own.
If Fannie Mae and Ginnie Mac follow Freddie Mac’s lead into buying second mortgages, we estimate the secondary home equity loan market could exceed $3tn.
By opening up the securitisation market for second mortgages…it would also provide big stimulus to an economy and consumer that appear to be slowing down…rarely have I seen such a true win-win scenario for the government, Wall Street, and the US consumer.
Tick-tock, tick-tock.
The debt time-bomb wick is now lit.
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