- Feds take over Fannie Mae and Freddie Mac

  September 9th 2008

As of this writing, most of you have heard that federal regulators have taken over the failing Fannie Mae and Freddie Mac mortgage companies.  This announcement came as the government felt both these institutions will no longer be able to meet their mission statement which is to provide liquidity, stability and affordability in the housing markets.

Fannie Mae and Freddie Mac purchase or guarantee most of the home mortgages in the U.S. A.  Investor confidence in these companies has sent their stocks spiraling downward all summer long.  And that's the big fear.  If Fannie and Freddie were to default and become insolvent, it would throw the mortgage and housing markets even deeper into the abyss.

Fannie and Freddie sell bonds to investors to generate liquidity….so they can continue to purchase mortgage loans.  Mortgage industry woes have made these bonds less attractive to investors.  This reduces profits for the mortgage companies and stifles liquidity which contributes to our current “credit crunch”, making it more difficult for consumers to get home loans.

That's why the Treasury has stepped in and said that they will back the payments on these Bonds.  This action has given investors confidence to step in and now buy Mortgage Bonds.  Think about it.  For a higher rate of return, investors can now buy Mortgage Bonds with the same guarantee as lower yielding Treasury Bonds.  This is causing a nice rally in pricing this morning - which combined with the break above the 200-day Moving Average – has led to more attractive rates today.

It’s hard to say how long rates will stay lower.  This action isn’t a cure-all for the problems in the mortgage industry.  But for now, the 100 bps jump in mortgage bonds has led to 30 yr fixed rates in the high 5s for the first time in a while.  So homes just got more affordable.  And those with mortgage rates above the 6% range have a real incentive now to look at their refinance options.   

A little history though, The Government created and owned FNMA and FHLMC before they were privatized in the 1960's. 

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