Effect of Government Takeover of Freddie Mac and Fannie Mae on Mortgage Rates

Recently the U.S. government took command of the sinking ships that were Freddie Mac and Fannie Mae. Officially Freddie Mac and Fannie Mae were placed in a government conservatorship. The move was in response to the slumping housing market, rising unemployment and slowing consumer confidence. Ideally this move will provide stability to the mortgage industry by removing a huge financial risk. Interest rates dropped by 0.3% overnight, which could prevent foreclosures by providing a lower interest rate for refinancing. Also, the increased security and decreased interest rate could increase the number of home purchases, which will drive up activity in the housing market. This action couldn’t have come at a better time with my closing date on October 3rd. I have yet to lock in my interest rate, which means the further it drops the less interest I’ll be paying on my condo, but first a little background on the two mortgage giants.

The Fall of Goliath(s)

In late 2008 Fannie Mae was hovering around a plateau of $68 to $69 per share. Just 11 short months later and one huge subprime mortgage crisis later and the mortgage giant is valued at $0.99 per share. Freddie Mac experienced a similar drop from the low 60’s to $0.88 per share.

Purpose of Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae were privately owned and operated government sponsored enterprises. They essentially ran the secondary mortgage market. Freddie Mac and Fannie Mae would buy mortgages from banks and repackage them as mortgage-backed securities. They also just outright bought mortgages and held them. Freddie Mac and Fannie Mae provided flexibility and liquidity to the mortgage industry. If banks did not use the secondary mortgage market all of it’s money would be tied up in a small number of mortages and could not lend out anymore money. Also, banks are forced to pay variable rates of interest, while borrowers frequently request a fixed rate of interest, which could put the bank in a position of paying more interest than they are taking in.

Big Problems for Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae were responsible for roughly half of the mortgage industry. When the subprime mortgage crisis hit, most other lenders shut down lending practices. This forced the two giants to take responsibility for more than half of the current mortgage activity, much closer to around 80%. The slowing economy and housing industry coupled with the tightening of lending practices led to a decrease in housing prices and an increase in foreclosures. This in effect cripled Freddie Mac and Fannie Mae allowing the government to come to the rescue.

Effect on my Mortgage Interest Rate

I  have previously written about the basics of a mortgage, which included a section about the effect of the interest rate on the monthly mortgage payment. As the interest rate decreases, the monthly mortgage rate decreases. When I first learned of my closing date two weeks ago, my lender put a cap on the interest rate of 6.5%, which was what the local interest rate was at the time. I have one opportunity to lock in a lower rate before I close. As of right now the local interest rate is 6.0%, which is a decrease of 0.5%. My local interest rate decreased 0.375% overnight after the government took control of the mortgage industry. The national average has dropped to 5.88% as of today. Some experts believe the interest rate national average will drop as low as 5.50%.

What does this mean? It means it’s a great opportunity to refinance your mortgage, especially if it’s an Adjustable Rate Mortgage nearing the end of it’s fixed rate period. Also, if you were on the fence as to whether or not you should buy a vacation home, rental property or your are a first-time homebuyer this decreased interest rate offers a great opportunity to save on the amount of interest you will pay over the course of your loan. With the drop in interest rates over the past two weeks of about 0.5% I will be paying roughly $80 less per month on my monthly mortgage payment. This translates into about $1,000 over the course of the year. If the rate drops to 5.5% as some experts suggest, I will save about $2,000 a year. This turn of events is perfect for my fast approaching condo purchase, and I hope you all find a way to take advantage of the drop in interest rates.

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11 Responses to Effect of Government Takeover of Freddie Mac and Fannie Mae on Mortgage Rates

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    Effect of Government Takeover of Freddie Mac and Fannie Mae on Mortgage Rates | Personal Finance Start-Up Blog

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