Freddie Is at It Again

As Yogi Berra would say, “It’s Déjà vu all over again.” Apparently, Government Supported Enterprises (GSEs), Freddie Mac and Fannie Mae, learned nothing from their mortgage backed loan failures and fiascos in 2008-11 which inflicted U.S. taxpayers with total combined losses of $266 and required a $187.5 billion bailout from the U.S. Treasury.

Now according to the Wallstreet Journal Editorial Board, Freddie Mac wants to guarantee second mortgages on homes on which owners have ultra-low first mortgage interest rates, lots of home equity and wish to tap into this equity to pay off current high interest auto and credit card balances. That is, in addition to $7.5 trillion of taxpayer backing at risk, the GSEs wants to get back into taxpayers wallets.

A reduction in equity would once again subject the taxpayer to massive losses from a downturn in home prices and climbing interest rates. The chart below from the Federal Reserve of New York point to the financial risks to the taxpayer.

The GSEs can implement the plan within 60 days unless the FHFA (Federal Housing Finance Authority) vetoes it. There is the temptation to see politics behind this move since it would significantly boost consumer spending as the second mortgage refinancing finds its way onto the street. Not bad for incumbent politicians running for office this November. Ernie Goss