Fannie Mae/Freddie Mac Government Bailout

As I am sure we all heard over the weekend the United States Government is stepping in and bailing out Fannie Mae and Freddie Mac with an expected 200 billion dollars.

So… what does this mean and why is it important to you? Over the past few months the strength of these mortgage giants has plummeted along with their stock prices and insurance ratings. As the stock prices of Fannie Mae and Freddie Mac decreased, so did the appetite of their investment pool. In order to satisfy the appetite of these investors, lending institutions needed to charge higher interest rates so they could offer their investors a better return on a “riskier” investment. By the government shoring up these mortgage giants, it screams less risk and increased investment in the U.S. housing market. We have already seen the sudden effects of this today as the bond market rallied this morning and mortgage interest rates dropped significantly. I just reviewed rates for a 30 year fixed rate FHA mortgage and currently they are between 5.625% and 5.75%! Keep in mind you can always expect a market correction when any kind of sudden reaction is made in our economy. Rates are currently heading south, but you can expect a slight rise in interest rates in the coming days as the bond market experiences a small correction. As the dust settles from this recent news you can expect rates to be continually favorable in the coming weeks.

Another reason this is important to the real estate industry is the amount of money being injected into Fannie Mae and Freddie Mac will increase the amount of money available in the lending market. In early August Fannie Mae and Freddie Mac both announced they would be pulling back the amount of capital they were willing to spend in the mortgage market. We can expect them to reverse this decision as they will continue to purchase mortgage securities due to this influx of capital.

One important note we all need to keep in mind. Even though the government has stepped in and stabilized Fannie and Freddie, we can still expect lending guidelines to tighten in the coming months. Specifically on the conventional lending platform, tougher guidelines will make qualifying for a conventional mortgage more difficult with increases in interest rates in direct correlation with a borrower’s credit score and employment history. The solution for this dilemma is FHA! Currently FHA mortgages have the strongest interest rates and the most flexible lending guidelines. Always make sure you evaluate all your financing options and I suggest asking for a direct comparison of what a conventional loan scenario looks like when compared to an FHA scenario. Once you have all the necessary information you will be in a position to make the most educated decision.