Imagine a significant economic boost that costs the government nothing and doesn’t increase the national deficit. This summer, a proposed initiative could inject nearly $1 trillion into consumers’ wallets, potentially doubling to $2 trillion by autumn.

Recently, Freddie Mac, a government-backed mortgage finance agency, submitted a proposal to the Federal Housing Finance Agency (FHFA) to enter the secondary mortgage market, specifically targeting home equity loans. This strategic move by Freddie Mac, if approved by the FHFA, could have a significant positive impact. Despite homeowners having over $32 trillion in equity, home equity loans remain underutilized.

Back in 2007, just before the financial crisis, there were over $700 billion in home equity loans outstanding. Today, that number has decreased to about $350 billion, even though home prices have increased by more than 70% since then. Why the decline?

Following the financial crisis, banks reduced their mortgage exposure significantly. For instance, Bank of America cut its home equity loan portfolio from over $150 billion in 2009 to $25 billion. By 2022, more than half of all home loans were issued by non-traditional lenders. These non-bank entities lack the balance sheets to hold these loans long-term, unlike traditional banks. They can only originate loans if they can sell them to Freddie Mac, Fannie Mae, Ginnie Mae, or private investors.

The primary mortgage market benefits from a robust system where Fannie Mae, Freddie Mac, or Ginnie Mae buy mortgages, pool them, and sell them as mortgage-backed securities (MBS) to private investors, greatly increasing market liquidity. However, this level of liquidity does not exist in the second mortgage market.

Freddie Mac’s proposal could change this, arriving at an opportune time. Many Americans, especially seniors on fixed incomes, are struggling with persistent inflation. Homeowners’ insurance costs have risen over 11% in the past three years, along with property taxes, which have increased by 26%.

Seniors have been particularly hard-hit, now holding 23% of all consumer debt, double their share from 1999. This debt imbalance is unusual, as younger and older individuals typically have less debt. Before the financial crisis, consumer debt was more evenly distributed. Now, nearly half of all seniors are at financial risk, with less than six weeks of liquid savings. This lack of a financial cushion makes them especially vulnerable to unexpected expenses, such as medical bills or home repairs, making home equity products very appealing.

The proposed Freddie Mac second mortgage/home equity initiative could offer a crucial financial lifeline, providing guidelines to protect both borrowers and Freddie Mac. Freddie Mac would only purchase second mortgages from borrowers who already have a first mortgage with them, and the combined loan-to-value (LTV) ratio of both loans must not exceed 80% of the property’s value. Currently, Freddie Mac’s mortgage portfolio has an average LTV of 52%, potentially unlocking $980 billion in home equity.

If Fannie Mae and Ginnie Mae follow suit, the secondary home equity loan market could surpass $3 trillion. Opening the securitization market for second mortgages would encourage more institutions to originate these loans and reduce borrowing costs through increased competition. This initiative could stimulate the economy and provide much-needed financial relief to consumers, all without adding to the national debt. This truly represents a win-win scenario for the government, Wall Street, and the American public.