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Fannie & Freddie’s New Role

Jul 31

Posted by Rich Epstein in Mortgage News, Mortgage Stats, Real Estate News, Uncategorized | No Comments

The new housing rescue bill signed Wednesday takes aim to bolster Fannie Mae and Freddie Mac.  In a late additon to the bill, the law allows authority for the Treasury to lend a financial hand to Fannie Mae and Freddie Mac if it deems it necessary to help stabilize markets.

For starters, a more strict regulator will be assigned for Fannie Mae & Freddie Mac: The new regulator will have a greater say over how well funded the two government sponsored enterprises are -a major concern in the markets that has sent stocks in both companies plunging in the past two months.  Concerns over whether Fannie Mae and Freddie Mac will have enough money to weather future losses in the housing market has sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade last Friday.

Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.

The law includes provisions that let Treasury offer Fannie and Freddie an unlimited line of credit and buy stock in the companies. The provisions expire in 18 months.

Both critics and supporters of the plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.  The potential cost of a rescue could be $25 billion.
What you must understand here is that the Treasury will NEVER let Fannie and Freddie fail.  If these companies collapse, no one in this country will be able to get a mortgage.  Maybe that’s an overstatement, but not by a lot.  Fannie and Freddie back for the most part solid loans with their stipuations on ability to qualify, etc.  They represent the prime loans rather than the riskier ones which is what caused all of this mortgage brouhaha.

The riskier loans (enter any synonym for sub-prime here) went to Wall Street for investors.  And here’s where it hit the fan.  Take a company like Countrywide who’se modus operandi was sell a loan at any cost with no regard for the client. (watch video here)  Well, investors were well fed right up until many of the loans turned sour and they became less than a great investment – ask Bear Stearns how that worked out, and the money dried up.

So, if the sub-prime as we knew it is gonzo and Fannie and Freddie can’t write the prime loans…that doesn’t leave many mortgage options for most Americans.  And if we think this current little “hiccup” has torched the economy, wait until that happens.

So, no, the Treasury will never let Fannie & Freddie fall, hence the unlimited lines of credit, etc. 

 

Rates, Bonds, and National Debt – Oh My!

Mar 3

Posted by Rich Epstein in Economy, Mortgage Stats | No Comments

The rate on 30-year mortgages rose for a third straight week, hitting the highest level in more than three months. The 30-year, fixed-rate mortgages averaged 6.24 percent this week, up from 6.04 percent last week. Rates on 15-year mortgages rose to 5.72 percent from 5.64 percent. Rates on five-year adjustable-rate mortgages rose to 5.43 percent from 5.37 percent. Rates on one-year ARMs climbed to 5.11 percent from 4.98 percent.

Many people are asking why mortgage rates have gone up recently when the Fed dropped the Prime Rate. It’s a very common misunderstanding about how exactly 30 year mortgage rates come about. Firstly, 30 year mortgage rates do not parallel the Prime Rate (the rate at which banks lend money to their best prime customers). Rather, these mortgages follow Treasury Bonds, specifically the ten year bond rate. We’ll get to that in a minute. The Prime Rate will affect adjustable rate mortgages, credit cards, and lines of credit based specifically on this number. Personally I have a line of credit in which I pay prime plus 1/4 point. So when the Fed dropped the prime rate recently, it was all good news. Your adjustable rate mortgage just got easier to pay as well. Additionally, many credit cards companies follow the Prime Rate patterns when adjusting their rates.

There are a few downsides to dropping the Prime Rate however. If you have CD’s and high yield savings accounts, those interest rates will drop as well.

So, why does the Fed drop the Prime Rate you ask? The idea here is to fend off a recession. Everybody is worried about the state of the U.S. economy. Lower rates mean cheaper loans. People can borrow money. Whether it’s businesses or individuals, everyone is going to find it easier to do business and the economy is more likely to expand.

So how does the 30 year mortgage actually work with Bonds? Well the US Government is really a great person to lend money to. It has never defaulted on a loan and is considered very safe, thus the lower yield for the bond you buy. These bonds are generally given in 30 year maturity dates. Hence the correlation to the 30 year mortgage. The direct impact on you, the home-buyer, is that higher Treasury note and bond yields mean that the Treasury Department will be forced to pay a higher interest rate to attract buyers. Over time, these higher rates can start to increase demand for Treasury notes and bonds, thereby increasing the value of the dollar, staving off inflation. High demand for Treasury notes and bonds means low yields, which means low interest rates. This makes housing more affordable, which stimulates the housing market and the economy. Conversely, higher note and bond yields mean higher mortgage interest rates, which means you have to buy a smaller, less expensive home. This slows down the economy.

So it’s the delicate balance of managing inflation, the nation’s debt and priming the economy that makes these rates go up and down.

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