Are We Entering the Era of the Second Mortgage?

Freddie Mac’s Proposal

We could be poised to enter the era of the second mortgage.

According to its new proposal, Freddie Mac wants to start buying second mortgages on homes, so long as it already has a relationship with the homeowner. If this proposal passes, it could help inject nearly a trillion dollars into the economy. But it’s not without potential drawbacks.

The Requirements

Freddie Mac’s proposal would create a government-backed market for the second mortgage. A second mortgage is distinct from a home equity line of credit, or HELOC, in that it offers a fixed rate, rather than a floating rate. Otherwise, it functions similarly, helping homeowners tap into their home equity and convert it to cash to help fund major expenses.

This proposed change would come with a few caveats:

1.    Freddie Mac must hold the original mortgage.

2.    The total loan-to-value ratio must be 80% or lower.

3.    The borrower must pay off the second mortgage when they refinance, sell the house, or pay off the first mortgage.

The proposal could potentially benefit consumers, as second mortgages are typically offered at lower interest rates than other financing options. In fact, homeowners who have already locked in lower rates would not have to give them up to access a second mortgage.

The Counterpoint

On paper, this proposal may look like a surefire way to stimulate the economy. But critics aren’t so sure.

Some argue that there is no need for enhanced government presence in the real estate market. Others have drawn similarities to the Great Recession, which was caused in part by easier access to mortgages. On top of that, if home prices fall, homeowners who borrowed against their equity could default, and foreclosures — currently hovering near record-low rates — could potentially see a resurgence.

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