Monday, September 08, 2008

Government Bailout of Fannie Mae and Freddie Mac

The government takeover of Fannie Mae and Freddie Mac is good news for the real estate industry. This will have the effect of stabilizing the mortgage industry. It's also anticipated that in the next week or so mortgage interest rates will drop some, possibly as much as 1/2 percent, thus adding a little stimulus to our real estate market. Our current average mortgage rate is 6.35% for a standard 30 year fixed rate loan.

This takeover and the ensuing trimming of operations and expenses won’t help struggling borrowers to refinance, but it will guarantee mortgage money availability for qualified borrowers. And it's also possible that some of the borrowers' costs associated with financing will go down.

Fannie Mae and Freddie Mac play a critical role in the mortgage market. They buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders like Bank of America, Wells Fargo and Washington Mutual to make more loans.

Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation’s total. But an alarming number of those loans started going into default, draining the companies’ financial reserves and sending a chill through credit markets worldwide. As investors grew more skittish, borrowing costs started rising.

By placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies’ debt is as safe as the Treasury Department’s.

1 Comments:

At 7:40 PM, Blogger Patrick Roberts said...

from a historical point of view it's hard to object to the government's mass bailouts since similar debt-producing methods were put into action to bring the U.S. out of the Depression... it's like we've been heading for socialism this entire time

 

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