Mortgage-rate drop bright spot in Freddie/Fannie takeover
Posted
Sep 09 2008, 08:41 PM
by
Karen Datko
Rating:
If you closed on a house recently, prepare to kick yourself. One of the outcomes of the federal takeover of Fannie Mae and Freddie Mac is the lowest mortgage rate in five months.
According to Bankrate.com, the rate on a 30-year fixed-rate mortgage dropped half a percentage point -- to about 6% -- on Monday after the takeover was announced. Rates dropped even further Tuesday, settling at 5.79%. (To figure out how long that rate will last, you will need a crystal ball.)
It's part of a mixed bag of results American consumers can expect now that the federal government has assumed responsibility for Freddie's and Fannie's debt. And it's just the tip of the proverbial iceberg.
Bankrate explained why the interest rate dropped:
Mortgage rates fell because investors went on a buying spree Monday for mortgage-backed securities, or MBSs. That caused the prices for these bond-like financial instruments to rise -- and when bond prices rise, yields fall. Mortgage rates followed yields downward.
Before we talk about the other effects, we'll offer an admittedly simplistic primer:
Freddie and Fannie bought solid mortgages (not those subprime beasties) from lenders, holding some as investments and packaging others as securities. But with so many borrowers unable to make payments, the government-created but shareholder-owned companies found themselves in a world of hurt. Since they hold or guarantee $5 trillion in mortgage debt, their failure would have ripple effects around the globe. (For a much more complete explanation, read Sam Zuckerman's story in the San Francisco Chronicle.)
What else could the takeover mean to you?
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Nothing, if you're in the market for a so-called jumbo mortgage or home-equity loan. Fannie and Freddie aren't involved in those products.
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Probably nothing, if you're hoping that tighter standards for obtaining a mortgage will be substantially eased. Why would restrictions be removed if loosey-goosey loans caused the housing crisis that eventually ensnared Freddie and Fannie?
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Something, if you're trying to sell your house. The takeover will ensure availability of mortgage money, but it's difficult to tell how many potential buyers are waiting for housing prices to deflate even more than they have.
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A lot, if you're a buyer. If Fannie and Freddie had failed, much of the money in the mortgage trough would have dried up.
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A lot, if you're a taxpayer. As Angry Bear puts it, "Once again, the U.S. taxpayer will be asked to shoulder another mountain of debt. Once again, the taxpayer has become the prop of last resort as poorly managed entities become too big to fail." What this will cost taxpayers is still a guess. But, as Jim Harper at WashingtonWatch.com points out, a $25 billion total cost breaks down to $240 per U.S family. At $100 billion, the per-family cost is $960.
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A lot, if you want stability in the world's financial institutions. Flexo at Consumerism Commentary asks if it is "really worthwhile for the government to seize these semi-private, semi-public corporations? ... Perhaps, if you consider that the alternative -- letting the companies fail -- might have a more devastating effect on the economy."
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Finally, a lot, if those golden parachutes given to failed executives tick you off. According to the Los Angeles Times, Fannie Mae's Daniel Mudd is departing his job with $7.3 million, and Richard Syron is leaving Freddie Mac with $6.3 million.
