Freddie and Fannie fallout: Mortgage rates hit 5-year high
Posted
Jul 23 2008, 03:09 PM
by
Karen Datko
Rating:
Here's bad news for people shopping for a house or looking to refinance an adjustable-rate or interest-only mortgage: The average mortgage rate just reached a five-year high.
The rate on Tuesday for a 30-year fixed-rate mortgage was 6.71%. It's not crazy high by a long shot, but it's more than people have been accustomed to paying in recent years.
The higher rate is due to the pressing problems at mortgage giants Fannie Mae and Freddie Mac, says a New York Times article, even though Congress is poised to bail them out.
Here's how the NYT explains it.
But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.
This is complicated but important.
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Fannie Mae and Freddie Mac own or guarantee $5 trillion in mortgages, or about half of all U.S. mortgages. If one of them failed, says MSN Money's Jim Jubak, "We wouldn't have to wonder about whether the U.S. economy would slip into a recession because we'd be in one -- and looking a depression straight in the eye."
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An Associated Press story says, "Fannie Mae and Freddie Mac stock prices have plummeted on fears about their financial stability in a chaotic housing market where falling home values and rising defaults have contributed to large losses at the two companies."
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Congress is prepared to infuse cash into the two government-sponsored mortgage companies, as part of a bailout plan for homeowners facing foreclosure. The U.S. House is expected to approve the plan today, causing Fannie and Freddie stocks to rise by midday.
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The Congressional Budget Office estimates that a full-blown rescue of Freddie and Fannie could cost taxpayers $25 billion. Hopefully, it won't come to that.
If you're not yet sufficiently outraged about this mess we're all in, check out another NYT article (you've got to love the headline "Given a shovel, Americans dig deeper into debt") about why so many Americans are drowning in a cesspool of debt. Sure, people make stupid choices, but the system encourages such behavior. The article explains this phenomenon:
But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.
Bonus fact: Because of an upcoming change in Federal Reserve regulations, lenders will actually have to pay attention to whether borrowers can afford "higher-priced" mortgages. But the new rule doesn't take effect until October 2009 to give lenders time to get used to operating that way.
