September 8, 2008
You may have noticed yesterday that the Federal government has taken over Fannie Mae and Freddie Mac, the two formerly-only-quasi-governmental mortgage giants which package mortgage loans and sell them to institutional investors. This was the sixth Sunday press release in fourteen months aimed at saving the financial system -- timed to arrive on your weekend when your mind will be least on financial matters.
What do Fannie Mae and Freddie Mac do, anyway?When a bank lends money to a person in the form of a mortgage, they exchange cash for a promissory note -- the borrower's promise to pay the cash back. The promissory note is valuable, but it's not cash -- so in most mortgage transactions today, the bank sells the note to Fannie or Freddie for cash. Now the bank has cash to lend again, and the cycle continues. Fannie and Freddie builds portfolios of these promissory notes, turns them into marketable securities (investments) and sells them on Wall Street. Without them, the entire mortgage system would be less efficient, which would mean higher interest rates to everyone.
What does all of this mean to me?If you have a mortgage, sadly, you still have to make your payments. If you have an adjustable rate mortgage that is scheduled to reset in the next couple of years, rates may drop this week about as low as they're going to get -- though they're opening slightly higher this morning.
The biggest losers are going to be the preferred and common shareholders of the companies themselves -- unless you own stock in Fannie Mae or Freddie Mac, that's not you. Beyond that, it's your tax money and mine which is going to be used to stop the bleeding -- and the new FHFA (the Federal Housing Finance Authority, created by the Housing and Economic Stimulus Act of 2008) will be in control of new lending guidelines and underwriting standards.
Points not to be missed:
* We've entered a new phase
of government regulation in our financial markets
* Fannie and Freddie have temporary access to a new government credit
facility, which will bring borrower costs down -- for now
* Yesterday's actions won't directly improve housing prices
My belief is that our country's financial model needs to evolve towards sustainability -- economic, agricultural and financial sustainability. In light of Fannie Mae's announcement last week that it had overstated its financial strength, yesterday's takeover should keep one leg of the financial system from crumbling beneath us.
Quick interest rates
| Program | Rate | APR |
| 30 year fixed | 5.375% | 5.438% |
| Jumbo fixed 30 | 5.625% | 5.779% |
| 5 year ARM | 4.500% | 4.285% |
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