I have received numerous phone calls and emails today asking about the Fannie-Freddie takeover and what it means to the everyday borrower. On September 7 Treasury Secretary Henry Paulson announced that the Federal Housing Finance Agency (FHFA) is taking over Fannie Mae and Freddie Mac.
Succinctly, the FHFA is taking over the operations, and the Fed will be financially backing the FHFA. Traditionally, mortgage-backed securities (MBSs) have been a safe investment, and they have traded in close proximity to treasury bonds because investors have perceived the risk associated with MBSs and bonds to be the same. Mortgage-backed securities can be likened to water flowing over a water wheel: The water keeps the wheel (the mortgage business) turning and the water flowing. Before the FHFA takeover we were in jeopardy of losing that water flow. Had that happened, the mortgage business would have come to a stop.
At the beginning of the current mortgage crisis the spread between bonds and MBSs had widened because of the higher perceived risk of mortgage-backed securities. This change in risk perception led to fewer investors buying those securities, thus exaggerating the problem. Since the FHFA has taken over Fannie Mae and Freddie Mac, the perception of risk for MBSs has been reduced; and the spread between those securities and bonds has dramatically shrunk overnight, thereby causing our rates to decline. How long this rate decline will continue and what changes the FHFA will implement for the underwriting side are yet to be determined. Once again, the move to take over Fannie and Freddie has caused a SHARP drop in mortgage rates today; and this in turn may spur action by investors and homebuyers who have been on the fence but now see that this is the right time to buy. In reality we may not see rates this low again in the foreseeable future.
So, what does the Fannie Mae-Freddie Mac takeover mean? Hopefully, it means LOWER RATES . . . HIGHER DEMAND . . . MORE STABILITY . . . LOOSENING OF LENDING GUIDELINES.
We will have to wait to see more clearly . . . .