Fannie Mae and Freddie Mac Bailout
Mortgage Bonds are soaring higher on last Sunday’s announcement that Fannie Mae and Freddie Mac will come under control of the government. This announcement came as the government felt both these institutions will no longer be able to meet their mission statement which is to provide liquidity, stability and affordability in the housing markets.
Fannie Mae and Freddie Mac both have issued many Bonds which over time mature, and Fannie and Freddie need to pay back the principal on the maturing Bonds. The way they raise capital to pay these maturing Bonds is to issue new Bonds. This happens every month. And as long as Fannie and Freddie can sell new Bonds this system works well. But the problems in the mortgage industry have reduced investor appetite to purchase these Bonds...and that's where the trouble begins. Without the ability to sell new Bonds, Fannie and Freddie are less able to meet the capital requirements to pay off the maturing Bonds. And that's the big fear. If Fannie and Freddie were to default and become insolvent, it would throw the beleaguered mortgage and housing markets even deeper into the abyss.
Additionally, the recent lack of appetite for Fannie Mae and Freddie Mac Bonds caused the two mortgage giants to have to do something to make their Bonds more attractive...so they offered their Bonds at higher yields to gain more investor interest. However, since they couldn't go back and raise rates on loans that had already been closed, it sucked even more profits out of Fannie and Freddie, reducing capital even further, and exacerbating the problem.
That's why the Treasury has stepped in and said that they will back the payments on these Bonds. This action has given investors a lot of confidence to step in and now buy Mortgage Bonds. Think about it. For a higher rate of return, investors can now buy Mortgage Bonds with the same guarantee as lower yielding Treasury Bonds. This is causing a nice rally in pricing yesterday – which combined with the break above the 200-day Moving Average – leads to attractive rates and what could be a refinance season ahead.
YUP, this is me.
Wayne Smith, Licensed in NJ & PA
About Me
- Wayne Smith
- East Amwell, NJ, Hunterdon, Somerset, Mercer, Burlington, Warren Counties, United States
- I have been finding DREAM HOMES for my clients in the Hunterdon, Somerset, Warren, Mercer and Burlington County area for years. My skills are used to mentor new agents as well as First, Second and Third Time Homebuyers as to the changing marketplace, policies and procedures. I LOVE to see the expression on my clients faces and hear the excitement in their voices when I take them to their, soon to be, new home for the first time. I understand the dynamics of a move touch more people than the client themselves; the parents, children, in-laws, friends and relatives, and take the extra time needed. Many of my best friends today were my clients of the past.