Saturday, September 6, 2008

Fannie, Freddie Deal To Lead To Lower Mortgage Rates?

Despite the potentially severe negative impact to taxpayers, the Fannie and Freddie Bailout being crafted by the Bush Admin, Treasury, and Fed may have one very significant positive impact- lower interest rates.
Over the past several months the spread between the 10 year treasury rate and mortgage rates has widened significantly. Similarly, the spread between the fed funds rate and prevailing mortgage rates has widened tremendously. While some of the widened spread can be attributed to banks trying to make a buck to survive (or thrive in a collusion sense if they somehow avoided the mortgage mess), a fair share of the inflated rates can be blamed on the interest cost to Fannie and Freddie to raise capital. Since Fannie and Freddie's fate has been in serious question, the two GSEs have had to pay some serious premiums to borrow money. Since the new plan will essentially burden taxpayers and cement the true full faith and backing of the US Government (rather than an ambiguous one), interest costs to the former GSEs should decline significantly. The 3/10ths of a percent decline in the 30 year conventional mortgage over the past couple weeks (to 6.1%) may have been a harbinger of the move and of things to come.
We can only home that a move back to traditional spreads will aid the housing market and limit taxpayer liability.

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