Mortgage Stability?

I am sure you have heard what happened with Fannie Mae and Freddie Mac over the weekend…

With so much speculation and uncertainty in the markets these days, a little confidence was injected into the mortage backed security market with the government taking over Fannie Mae and Freddie Mac.

The announcement came as the government felt that both of these institutions were potentially unable to meet their obligations. These agencies must pay off maturing Bonds every month, and they do so by selling new Bonds. But during the last twelve months, investor appetite to purchase new mortgage-backed security Bonds has deteriorated. As such, it has become more difficult for Fannie and Freddie to replenish capital to fund more loans. If both Fannie and Freddie became insolvent, the housing market as well as the mortgage market would come under further pressure.

With the Treasury stepping in to provide a "backstop" for the mortgage giants, investors now have confidence to purchase Mortgage Bonds. And the greater interest has helped lower interest rates today.

At the end of today (Monday 9-8-08), our benchmark FNMA 6.0% bond rocketed higher for a gain of 100 basis points and a close at $102.47, which the highest we've seen since January of 2005.

Following Sunday's news the government will take operational control over Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) will be taking over the board of directors and management of the two mortgage giants while the U.S. Treasury is providing up to $100 billion in capital for each company to ensure they will be able to meet their debt obligations. Technically, the government's takeover plan is a form of conservatorship similar to a Chapter 11 bankruptcy that will allow the two companies to reorganize their operations. However, the two companies could be run by the FHFA for an indefinite period of time. This story dominated the financial news and markets today and could continue to do so in the days to come as more intricate details of the plan become known. Some analysts are predicting 30-year conventional mortgage rates could fall by as much as half a point over the next few weeks presenting borrowers a great opportunity to refinance loans at lower rates.

Basically, the government stepped in to create a guaranteed foundation underneath the conforming mortgage industry. By creating a 200 billion dollar open ended line of credit to guarantee all bond holders of Fannie Mae and Freddie Mac loans, this brings an incredible amount of stability to the current markets and for future trading as well. This brought with it substantial improvements to the pricing of conforming home loans.

This could definitely help put a new floor for the housing market for us here on the Central Coast.

Call me with any questions you may have.