Thursday, May 9, 2024

Here Comes The "Might As Well Spend Some Home Equity" Pitch

Turn that worthless equity into valuable consumer spending!

First up, from MarketWatch via MSN, May 7:

Americans are sitting on a record amount of tappable home equity at $11 trillion — here’s how much cash is trapped in your home

U.S. homeowners are sitting on a record $11 trillion in tappable equity as home prices continue to reach new heights, according to a new report.

But high mortgage rates are putting people off from cashing in.

Homeowners — many of whom bought or refinanced during the pandemic and have mortgage rates below 4%, with little incentive to move — are seeing the value of their home and the equity they have in it increase sharply.

In the first quarter of this year, homeowners had $16.9 trillion in housing equity available to them, out of which $11 trillion was tappable equity, according to monthly data from Intercontinental Exchange.

Home equity loosely corresponds with how much housing wealth one has: It is the difference between how much a homeowner owes on their mortgage and the market value of their house. “Tappable equity” refers to the amount the homeowner can leverage while maintaining a 20% equity buffer. Homeowners can tap into their equity by doing a cash-out refinance or taking out a home equity line of credit. 

Roughly 48 million people have access to tappable equity, which averages out to about $206,000 per homeowner, up from $185,000 at the same time last year. 

Two-thirds of those homeowners also have credit scores of 760 or higher, and mortgage rates below 4%, ICE said.

“For existing homeowners, the picture keeps growing brighter,” Andy Walden, vice president of enterprise research strategy at ICE, said in a statement. 

Elevated mortgage rates are prolonging the lock-in effect. Few homeowners are listing their homes because they don’t want to give up their relatively low mortgage rates, creating a scarcity of homes for sale. While new listings were up 15% at the end of April compared with the year before, the increase was smaller than the historical average, according to Redfin. Low inventory in turn pushes up home prices. 

High rates are also putting off homeowners from cashing in on that equity. “Rising interest rates have cut the number of mortgages in the money for a refinance by half after reaching a 16-month high,” ICE said....


And from another corner of the Murdochian empire, The Wall Street Journal, May 5:

Return of the Housing Godzillas
Freddie Mac and its Biden regulator want to guarantee second mortgages. What could possibly go wrong?

Housing godzillas Fannie Mae and Freddie Mac are threatening the countryside again, and better hide the children. It’s not enough that taxpayers stand behind their $7.5 trillion in mortgages. Now Freddie wants taxpayers to back second mortgages—i.e., de facto consumer loans. What could go wrong?

Higher interest rates have slowed the housing market and reduced cash-out refinancing following the pandemic boom. This has crimped the businesses of mortgage lenders and Fannie and Freddie, the government-sponsored enterprises (GSEs) that buy and guarantee home loans. At the same time, Americans are paying more to borrow for cars and other things.

Enter Freddie, which wants to counter higher interest rates by guaranteeing closed-end second mortgages. Similar to cash-out refinancing, second mortgages allow homeowners to tap equity in their home. The big difference is homeowners don’t have to refinance their entire outstanding loan at a new interest rate.

As the Freddie and Fannie regulator, the Federal Housing Finance Agency (FHFA), explains, “only the smaller, second mortgage would be subject to the current market rate, as the original terms of the first mortgage would remain intact.” Homeowners who bought homes or refinanced during the pandemic wouldn’t have to give up their uber-low rates to tap equity.

The FHFA offers the example of a homeowner with an original $150,000 loan and a current unpaid balance of $120,000. By the agency’s calculations, he would save $136.77 a month and $112,797 in total interest by borrowing $30,000 with a second mortgage versus a cash-out refinancing.

It gets better. Second mortgages typically carry lower interest rates than consumer loans. So borrowers could consolidate their auto and personal loans into a lower-interest second mortgage. If Freddie were to guarantee the second mortgage, its implicit government backstop would further reduce their interest rates.

Freddie and home lenders would profit from a new line of business. Consumers—at least the fortunate ones who bought homes before prices skyrocketed and who have built up equity—would have more spending power. 

A Bank of America research team estimates that homeowners could extract about $1.8 trillion in equity if Fannie copies Freddie’s idea. That’s more than three times as much as the $512 billion in outstanding second loans and home equity lines of credit. By increasing market liquidity, the GSEs would encourage more lenders to make second mortgages....