Sunday's Government Takeover of Freddie Mac and Fannie Mae
The bottom line? It will likely translate into lower mortgage rates and greater availability of credit. Rates could drop by 1 percentage point from the approximate 6.2 - 6.4% for a 30-year fixed rate mortgage. That would ultimately stablize home prices and perhaps help them go back up again over time.
Fannie Mae stock was down almost 6 points to 1.2 from 7.2 - and Freddy is down 4 from 5.15 to 1.15.
For people who bet on their fall with "put" options - they made a lot of money.
Mortgage rates borrowers pay are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie.
Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors were demanding rates of 2.25% to 2.45% above Treasuries. . Historically, the spread has been 1.25%.
With the government now taking over the companies and minimizing the risk associated with their debt, investors may be willing to ease off their need for higher rates.
Lenders are demanding credit scores above 700 these days, up from 620 in the past, and downpayments of 20%, up from zero in some cases, experts said.
Just last month, Fannie Mae announced higher surcharges for loans to weaker borrowers. For instance, applicants with credit scores between 640 and 659 who are putting down 15% to 20% will pay an additional 2.25% charge.
The same borrower would pay 1.7 percentage points more because of higher fees and rates for the same loan today as he or she would have paid 18 months ago.
The government bond market is suffering today - as investors reasoned the bailout would vastly increase the amount of debt needed to fund the government's obligations over the medium term. Yields on two-year Treasury notes jumped nearly a half percentage point on the news.
Under the government takeover plan announced Sunday, the Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each!!!
Government talk on an aid package ended abruptly in the past few days as policy-makers decided to seize the firms.
Fannie Mae stock was down almost 6 points to 1.2 from 7.2 - and Freddy is down 4 from 5.15 to 1.15.
For people who bet on their fall with "put" options - they made a lot of money.
Mortgage rates borrowers pay are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie.
Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors were demanding rates of 2.25% to 2.45% above Treasuries. . Historically, the spread has been 1.25%.
With the government now taking over the companies and minimizing the risk associated with their debt, investors may be willing to ease off their need for higher rates.
Lenders are demanding credit scores above 700 these days, up from 620 in the past, and downpayments of 20%, up from zero in some cases, experts said.
Just last month, Fannie Mae announced higher surcharges for loans to weaker borrowers. For instance, applicants with credit scores between 640 and 659 who are putting down 15% to 20% will pay an additional 2.25% charge.
The same borrower would pay 1.7 percentage points more because of higher fees and rates for the same loan today as he or she would have paid 18 months ago.
The government bond market is suffering today - as investors reasoned the bailout would vastly increase the amount of debt needed to fund the government's obligations over the medium term. Yields on two-year Treasury notes jumped nearly a half percentage point on the news.
Under the government takeover plan announced Sunday, the Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each!!!
Government talk on an aid package ended abruptly in the past few days as policy-makers decided to seize the firms.
posted by Rick Hauser at
1:05 PM
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