Big news over the weekend and today is that the Federal government is ‘bailing out’ Fannie Mae and Freddie Mac, who lacked enough access to capital to keep the secondary mortgage market going. While buyers and sellers might initially think that this is bad news, it’s actually good, as evidenced by the 300 point market rally at the opening bell today. The markets are glad that what was an ‘implied’ guarantee is now an explicit one and the markets like transparency.
This is critical to the mortgage industry: Freddie and Fannie buy mortgages that are originated by banks, then package those loans up, slaps a guarantee on them, and sell them to investors. This helps transform what would normally be a very illiquid and long-term investment (30 year mortgages) into a very liquid asset: mortgage-backed securities. This keeps access to capital for borrows high, and interest rates low. Both Fannie and Freddie were chartered by Congress for specifically this purpose.
Before you start slamming this as another taxpayer funded bailout, remember that Congress has control of both their charters and heavily regulates what they can buy and sell. Both companies, though publicly traded, have many restrictions on how they operate their businesses. (The government, for example, sets the conforming loan limit of $417,000, now $729,750 in our area, but due to drop back down to $625,000 at year end). If the governments wants the right to legislate how a publicly traded company–presumably accountable to shareholders–is going to operate, then it’s only fair that when things get mucked up the government needs to help out.
In terms of rates, we should expect to see conforming/jumbo-conforming rates drop in the coming weeks by as much as a percentage point.
If you’re on the fence about buying, this means the (possibly temporary) return of rates in the 5.5% range! For those of you who recently purchased, keep a close eye on rates — if rates drop to a full percentage point below what you have, it may actually be worth it for you to refinance. Discuss this with your lender.