In a historic move yesterday, Treasury Secretary Carlson announced the government takeover of Fannie Mae and Freddie Mac. The two financial giants have been struggling over the past year due to an unprecedented increase in foreclosures which relate to falling home values and the subprime loan meltdown. If the two were allowed to fail the results would have been catastrophic.
Fannie and Freddie are the most important conduits involved in mortgage lending. They purchase or guarantee more than one half of all mortgage loans made in the U.S. – almost $5 trillion. Lack of confidence in these entities this year has resulted in a steep decline in demand for the mortgage backed securities (MBS) created when mortgage loans are made. This weak demand has caused mortgage rates to remain higher than they otherwise could be and higher mortgage rates are not helping the ailing housing market.
This year we have also seen a huge increase in fees that Fannie and Freddie have introduced to offset losses. A whole new rate structure was introduced whereby anyone with a credit score under 720 was charged a higher rate and the rate kept going up the closer you got to a 620 score. In the past, any borrower who was approvable within conventional guidelines got the same rate regardless of credit score. There is some hope that the government will reduce or eliminate these fees allowing more borrowers to be approved at lower rates.
Overall, this move should help to reduce interest rates on conventional loans and attract more buyers into the housing market. I can tell you it’s already working in terms of lowering mortgage rates as the 30 Year Fixed rate declined from 6.5% on Friday to 6.0% today. That’s over a $65 decrease in the monthly payment on a $200,000 mortgage!
The purpose behind this takeover is to improve confidence among investors who buy MBS, to ensure the continued viability of the U.S. mortgage market and to help ease the worst decline in home prices since the Great Depression. Let’s hope it succeeds!
Written by Ken Mascia
Prime Capital Mortgage, 248.644.1200
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Russ from Royal Oak 10.18.08 at 11:47 am
Heres how to restore confidence: Jailing the mortgage fraud rings. I hope Obama follows through & walks the walk.
“The first step toward calming these markets is to arrest the two most guilty parties in this whole mess – Angelo Mozilo from Countrywide and Michael Perry at Indymac. They called them liar’s loans, they knew they were enabling mortgage fraud in order to enrich themselves, and they should be in jail. Period. Frog march them for a mile live on every TV in America.”
http://housingpanic.blogspot.com/2008/10/special-housingpanic-message-to-monkeys.html
“It means doing what I proposed more than two years ago and cracking down on predatory lenders by treating mortgage fraud like the crime that it is.”
- Barack Obama, October 9, 2008