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Fannie, Freddie takeovers huge
It's time to take advantage of lower rates

by Dave Walden

As we were publishing last week, the news was coming out about the federal government's takeover of Fannie Mae and Freddie Mac. By now we have had an initial reaction and can speculate about the future.

First a little background. Fannie Mae and Freddie Mac, known as the agencies, were set up by the government as private corporations to purchase conventional loans that are now known as conforming mortgages. They are huge in the mortgage markets, touching over 50 percent of the mortgages originated in our nation. When the secondary market collapsed and defaults skyrocketed, the agencies did not run out of money. However, they lost the ability to raise money in reserve against losses. That is what happens when your stock goes from $70 to $2 per share.

The immediate reaction to government control? Lower rates. Rates are down sharply on mortgages. Now the secondary market has more confidence with the government backing the housing industry in a big way. If the agencies run out of money they can go to the treasury for money.

This has been a crisis of confidence and the increased confidence can actually help us out of the housing crisis more quickly. If rates go lower, then more people buy homes. Then housing prices stop going down and there are fewer defaults and the markets become more confident. This, in turn, causes rates to go down further and so on. In the long run, we will have to watch how a larger federal budget deficit could cause long-term rates to rise. For now, buyers are advised to take advantage of lower rates and lower housing prices for a very unique buying opportunity. Because we can never predict how long these opportunities will last.

David Walden is a certified mortgage planning specialist.