Mortgage Rates Tumble On Fannie-Freddie News Financial markets around the world reacted favorably to the U.S. government's plan to take over Fannie Mae and Freddie Mac. In the United States, the move sent interest rates down, raising hopes in the real estate industry that prospective buyers may be ready to enter the housing market.
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Mortgage Rates Tumble On Fannie-Freddie News

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Mortgage Rates Tumble On Fannie-Freddie News

Mortgage Rates Tumble On Fannie-Freddie News

Mortgage Rates Tumble On Fannie-Freddie News

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Financial markets around the world reacted favorably to the U.S. government's plan to take over Fannie Mae and Freddie Mac. In the United States, the move sent interest rates down, raising hopes in the real estate industry that prospective buyers may be ready to enter the housing market.


This is Morning Edition from NPR News. I'm Renee Montagne. The repercussions continue from the government's historic takeover of the nation's two largest mortgage companies. In a moment, we'll ask the chairman of the Senate's Banking Committee what's ahead for Fannie May and Freddie Mac. First, NPR's Chris Arnold reports on how interest rates have gone down suddenly and sharply.

CHRIS ARNOLD: Mortgage brokers around the country yesterday were glued to their computer monitors, watching to see what the government takeover would mean for interest rates.

Mr. PAUL VAN WART (Broker, Allied Home Mortgage): We're starting to see some changes right now. So it seems to be a trend, and everyone seems to be re-pricing right now.

ARNOLD: Paul Van Wart is a broker with Allied Home Mortgage in Westwood, Massachusetts. Just last Friday, he could offer customers with good credit a 30-year, fixed-rate loan for 6.25 percent.

Mr. VAN WART: Today, we've had our second rate change. We're actually down about 5.75 right now at this point.

ARNOLD: That's a huge move in just one day of business. Basically, because of the Fannie-Freddie takeover, investors were suddenly willing to pay more to buy up U.S. home loans. And that drives down interest rates. Van Wart gets a phone call alerting him to how quickly rates are changing.

(Soundbite of phone call)

Unidentified man: This is happening. Folks, mortgage-backed securities are going crazy. They are now up 147 basis points...

ARNOLD: The problem has been that Fannie and Freddie took too many risks and got into trouble with mortgages that went bad. And investors as far away as China have been worried about exactly what would happen if Fannie and Freddie failed. The mortgage giants back three-quarters of new home loans being made in the U.S. But now the government stepped in and put itself in charge of that crucial role that the companies play, that's provided a lot of clarity. And yesterday, the market responded.

Mr. VAN WART: You're seeing rates under six percent right now, or back into the fives. These are 2005 interest rates suddenly rearing their head here. So, this is definitely a great, great sign. And it's a good thing for realtors, for home buyers, sellers, people looking to refinance, people looking to buy a second home.

ARNOLD: Some economists are optimistic too. William Wheaton is with MIT's Center for Real Estate.

Professor WILLIAM WHEATON (Economics, MIT Center for Real Estate): Well, first of all I think this is good, good, good.

ARNOLD: Wheaton says he expects interest rates to fall even further in coming months. He's hopeful that'll get more people buying homes. Also, Wheaton thinks Fannie and Freddie were having trouble backing as many loans as they needed to because they couldn't raise enough money from investors.

Professor WHEATON: There was a lot of rumor that in the last two months they were doing very, very little business, that they had really started to restrict their flows. And I think that's what - the Treasury secretary is following that data very, very carefully, and I think that's probably why they stepped in.

ARNOLD: Basically, the housing market's bad enough already. Nobody wants qualified borrowers with good jobs unable to get loans. So some analysts say the Fannie-Freddie takeover plugged a serious hole in the dam. But...

Mr. MARK ZANDI (Chief Economist, Moody's We still have lots of problems.

ARNOLD: Mark Zandi is an economist who's been following the financial crisis and who's written a book about it.

Mr. ZANDI: The job market's still a mess. We've still got inventory. We've still got prices declining. The financial system probably has more shoes to fall. So this isn't over, but I think this marks the beginning of the end of this very painful financial crisis.

ARNOLD: Meanwhile, there's still a lot of questions and concerns over the regulatory lapses that allowed the situation to get this bad to where the government has had to take charge of the two largest companies at the heart of the U.S. mortgage market. Chris Arnold, NPR News.

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Understanding The Fannie, Freddie Rescue

The U.S. government has stepped in with an ambitious plan to help rescue mortgage finance giants Fannie Mae and Freddie Mac.

The Bush administration placed the two companies into a conservatorship, replaced their CEOs and boards of directors, and announced a plan to infuse billions of dollars to prop them up as a means for reinvigorating the U.S. housing market.

Here, a look at some of the reasons the government decided to act and the implications for taxpayers.

Why did the government act now?

Treasury Secretary Henry Paulson told NPR that the primary reason for the rescue was the discovery of a "capital deficiency that needed to be addressed." In other words, they didn't have an adequate cushion against further losses in the deteriorating housing market.

Paulson said that investors have become "increasingly jittery here and around the world" and unwilling to provide added capital for Fannie and Freddie. He said the action was taken to ensure the continued availability of mortgages and to protect taxpayers. Currently, Fannie and Freddie are providing financing for more than two-thirds of all mortgages originated in the U.S.

What does this bailout plan involve?

The government is putting Fannie and Freddie into conservatorships under the control of their regulator, the Federal Housing Finance Agency. (Earlier this summer, Congress gave the administration the green light to take over the two companies if necessary.)

The four-step rescue plan, which also involves the Federal Reserve and the U.S. Treasury, calls for increasing Fannie and Freddie's portfolio of mortgage-backed securities through the end of 2009, then reducing them by 10 percent each year, starting in 2010. It would also establish a special class of shares owned by Treasury that would give preference to the government's investment over those owned by other shareholders. It would create a credit facility to lend up to $100 billion to each of the companies — as a means for encouraging continued investment in the companies. And it would begin a temporary program whereby the U.S. Treasury will invest in new mortgage-backed securities — $5 billion in the next month alone.

What's the goal of the government's takeover?

Paulson said the federal takeover was initiated to avert a "serious risk" to the financial system and keep money available for mortgages.

In the short term, the rescue is meant to help calm the markets and to offer some measure of stability to help the U.S. economy weather the housing correction. In the longer term, the goal is to keep the two companies afloat so that they can continue to support the U.S. housing market.

Fannie and the smaller Freddie own or guarantee more than $5 trillion in mortgages — almost half of all the mortgages issued in the United States. On Sunday, James Lockhart, the director of the Federal Housing Finance Agency, said the two companies' market share of new mortgages "reached over 80 percent" earlier this year, but is now falling.

Will Fannie and Freddie debt and mortgage-backed securities continue to be backed by a government guarantee?

Paulson said this is a key question that will need to be addressed in the next couple of years. Fannie and Freddie were chartered by Congress, and so historically, investors — especially foreign ones — have bought their debt because they believed it was backed by the full faith and credit of the United States, akin to Treasury bonds.

The takeover makes that guarantee explicit for the time being. Paulson said the issue of whether there should be a government guarantee would have to be resolved: "We're going to have to decide whether we want to have government support for private profit."

In recent weeks, Fannie and Freddie suffered a crisis of confidence as their stock price plummeted.

Are taxpayers at risk?

Paulson said the rescue effort was "structured very carefully to protect the taxpayers." If taxpayer dollars are used for the purchase of preferred stock, then "first losses will be borne by the existing shareholders," he said. But if the housing market continues to deteriorate, taxpayers could be on the hook. The Congressional Budget Office has estimated that a bailout of Fannie and Freddie could cost from $0 to $100 billion, with the most likely amount being $25 billion.

How might this affect homebuyers and mortgages?

The takeover buoyed investors, and mortgage rates began to drop in the financial markets after the takeover was announced. Economist Mark Zandi with Moody's says that 30-year mortgage rates could descend to nearly 5.5 percent; the national average is now 6.35 percent.

How will consumers know whether the takeover action is working?

Paulson said the yardstick for consumers would be if there continues to be "an abundant supply of mortgage financing that is reasonably priced." In other words, if homebuyers are still able to obtain mortgages at good rates.

Will shareholders in Fannie and Freddie be wiped out or bailed out?

Paulson said in a prepared statement that because Fannie and Freddie are now in conservatorship, they will "no longer be managed with a strategy to maximize" shareholder returns — a strategy that he said "historically encouraged risk-taking." But he said if everything goes well, they might get some money back. But shareholders are last in line for any claims. So if things worsen, shareholders would likely get very little.

How could the takeover of Fannie and Freddie help stabilize the world financial system?

Many foreign central banks held Fannie and Freddie bonds in their portfolios. Some have reduced those holdings in recent months as questions about Fannie and Freddie's future have intensified. If Fannie and Freddie were not able to make good on their debt, there would be chaos in world financial markets.

With reporting by John Ydstie, Jim Zarroli, Adam Hochberg and Joshua Brockman and The Associated Press