Borrowers should celebrate the government takeover of Fannie Mae and Freddie Mac, announced Sept. 7. It’s likely to mean lower interest rates for borrowers—at least for now, experts say.
“This has to be good news … we’ve been waiting for this shoe to drop for weeks if not months,” said Robert Dye, senior economist for Pittsburgh-based PNC Financial Services Group.
Experts had grown increasingly worried about the two government-sponsored enterprises (GSEs) in recent weeks. Billions of dollars in losses had damaged Fannie Mae and Freddie Mac’s balance sheets, and it wasn’t clear they had enough cash on hand to cover more, which could have led to the collapse of the mortgage giants.
Bond investors demanded higher yields on GSE bonds in response, pushing up interest rates on loans bought by Fannie Mae and Freddie Mac. Interest rate spreads on 15-year Freddie Mac loans to affordable housing properties had risen to about 240 to 250 basis points by Aug. 28, up 21 basis points in just two weeks.
The federal government has pledged to keep Fannie Mae and Freddie Mac going, even if the Treasury has to buy the securities issued by Fannie Mae and Freddie Mac itself. That’s great news for borrowers, experts say. The government’s pledge will keep the price of agency bonds from collapsing, which will help keep the interest rates competitive on the mortgages that back these bonds. The GSEs hold or have securitized nearly half—roughly $5 trillion—of all mortgages in the United States. Experts predict interest rate spreads for Fannie Mae and Freddie Mac loans could fall as much as 25 basis points thanks to the takeover.
Fannie Mae and Freddie Mac report that they are operating smoothly after the takeover, although CEOs and top officers at both companies have been shown the door.
“It’s business as usual,” said Eileen Fitzpatrick, senior vice president for Freddie Mac.
The takeover is hardly a bailout for shareholders who still ostensibly own the two companies but who now have no power to direct their future. Wall Street now values their shares at less than $1 apiece.