NEW YORK — The government’s historic bailout of Fannie Mae and Freddie Mac on Sunday will be good news to homebuyers and some homeowners hoping to refinance if it leads to lower mortgage rates, as experts expect.
But for homeowners already behind on their mortgage payments, or who owe more than their homes are now worth, the plan unveiled Sunday by Treasury Secretary Henry Paulson offers little in the way of extra relief.
“The bailout will give the mortgage industry a stability that we haven’t had in a couple of years,” said Rich Cosner, president of Prudential California Realty. “But frankly no, it won’t help (struggling borrowers) to refinance.”
Officials announced Sunday that both mortgage giants were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing.
Mark Zandi, chief economist at Moody’s Economy.com, predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent because investors will be more willing to buy the debt issued by Fannie and Freddie — and at lower rates — since the federal government is now explicitly standing behind that debt.
“Effectively, the federal government has now become the nation’s mortgage lender,” he said. “This takes a major financial threat off the table.”
The Treasury Department said Sunday it was prepared to put up as much as $100 billion over time each in Fannie Mae and Freddie Mac if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies’ capital cushion is below prudent standards.
Fannie Mae and Freddie Mac play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders such as Bank of America, Wells Fargo and Washington Mutual to make more loans.
Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation’s total. But an alarming number of those loans started going into default, draining the companies’ financial reserves and sending a chill through credit markets worldwide. As investors grew more skittish, borrowing costs started rising.
By placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies’ debt is as safe as the Treasury Department’s.
While not a cure-all, the bailout is still a step in the right direction, industry observers say. It will at least “keep the lanes in the mortgage freeway open,” said Greg McBride, a senior financial analyst at Bankrate.com, possibly putting the market on the road to recovery.
If mortgage rates fall, that will attract more potential buyers into the market, which, in turn, will help to prop up home prices, he said.
He expects mortgage rates on a conventional, 30-year fixed-rate home loan to fall over the next few weeks as the dust settles on the bailout. Rates, which now average 6.35 percent, could fall as much as half a percentage point, he said. But continued investor wariness and a depreciating housing market will keep rates from dropping further.
“We’re not looking at sunshine and daffodils in the housing market anytime soon,” he said.
Most mortgage brokers expect Fannie and Freddie’s lending standards to remain unchanged under the conservatorship. Over the past several months, the companies have tightened requirements substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.
However, brokers hope the government will eliminate or reduce fees that the pair have been charging lenders to gird against increased credit risk and losses from mortgages they buy. Those rising fees are squeezing out some borrowers because lenders typically pass them along through higher mortgage rates or higher up-front costs.
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