The Feds May be Saving the Day

The Feds May be Saving the Day

The government announced on Friday that it will be essentially taking over the troubled Fannie Mae and Freddie Mac.  Fannie Mae and Freddie Mac currently account for about 50% of the nation’s $12 trillion of mortgages.  What does this mean for homeowners?  Will this be enough to save the troubled mortgage and housing market?  Is it time to consider refinancing?  Let’s take a look at what this could mean for you.

There still remains an excess of supply in the housing market.  This will not change over night.  The take over will likely mean a reduction in interest rates for those seeking a purchase loan or a refinance mortgage.  How you ask?  Investors in mortgage backed securities have been reluctant to invest due to the unknown continuation and solvency of Fannie and Freddie.  The government intervention basically insures that the two companies will continue to operate and remain solvent.  This bolsters investor confidence which will reduce the interest rates that are available to existing and future homeowners.  The gap between mortgage rates and treasury bills should be reduced as investor’s concerns are reduced.

As rates drop, it may allow more potential homeowners to qualify for home purchase loans.  This could help to slowly reduce the number of homes on the market and eventually stabilize the housing market.  Rates will also allow speculators to start buying homes in highly devalued areas of the market.  This speculation could help to shore up home values in rapidly declining markets.

The available capital for Fannie and Freddie is now virtually unlimited.  They have the backing of government and treasury funds which means that there is almost no chance of the companies going insolvent.  This is great news for the investors of mortgage backed securities.  The government will also be receiving a 10% return on the funds that they grant to Fannie Mae and Freddie Mac.  This could be a good thing for taxpayers, assuming the company can turn around.

There is still a long way to go before the mortgage and housing markets recover.  There will be more steps taken by the government in the Federal Housing Administration and there are sure to be changes in the operating procedures for both Fannie Mae and Freddie Mac.  There is now some good news coming to the market, for the first time in a long time.  This is by no means a fix, but it could prove to be a much needed band-aid.

Mr. Jeremi McMaster

Mr. McMaster has spent more than 10 years in the mortgage banking industry.  Mr. McMaster has worked for some of the top lending institutions in the country while also helping build and grow smaller mortgage banking firms.  Professionals with many years in the industry are continually impressed by his abilities.