The Fannie Mae and Freddie Mac Bailouts: What’s It To You?
By Geoff on Sep 8, 2008 in Credit & Debt, Saving & Investing
The bailout of America’s mortgage giants could have a profound impact on your personal finances.
Let’s face it. The economy is awful right now. It’s a mess that has taken a long time to reach critical mass, and it will take a while to get it all straightened out.
The mortgage giant bailout affects every homeowner seeking a mortgage. On the positive side, most analysts believe that Sunday’s takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage.
The government bailout’s goal is to make mortgages easier to obtain and afford. By reinforcing the mortgage financing giants, they can continue buying mortgages from lenders and thus inject much-needed cash into the system.
Unfortunately, the news isn’t all good. With Friday’s report that foreclosures and delinquencies are at all-time highs, Fannie and Freddie are expected to maintain – if not increase – tighter lending standards. Meanwhile, the fees they have introduced for borrowers with weaker credit histories won’t go away anytime soon.
The rates borrowers pay on mortgages are dependent on the yields that investors expect when they purchase mortgage-backed securities from Fannie and Freddie.
The problem is that investor doubts about the viability of Fannie and Freddie have sent interest rates on those securities soaring. Regulators promised in July that they would intervene to save the two giants. Despite this, investors are still demanding rates of 2.25% to 2.45% above Treasuries. The spread has typically been 1.25% in the past.
The good news is that, with the government taking over the companies and reducing the risk associated with their debt, investors might be willing to reduce their need for higher rates.
Higher borrowing costs have led, in part, to a decline in overall mortgage borrowing. Applications are down 27% from a year ago, according to the Mortgage Bankers Association.
If you enjoyed this post, you may wish to:
