The government’s historic bailout of Fannie Mae and Freddie Mac will be good news to home buyers and some homeowners hoping to refinance if it leads to lower mortgage rates, as experts predict.
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.
"We believe this will bring market stability to the housing industry," said Frank Norton Jr., a Gainesville real estate executive who monitors economic trends. "While it has more government control, the government has already been in control of Fannie Mae and Freddie Mac. They were designed to be a strong secondary market for the housing industry to stimulate the overall economy."
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 like 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.
U.S. Rep. Nathan Deal, R-Gainesville, through a spokesman expressed some reservation about the action taken by the Bush administration.
"He has two concerns about what the Secretary of the Treasury has done," said Chris Riley, Deal’s chief of staff. "One is the lack of congressional approval and the other being the precedent it sets with the executive branch taking this administrative action without that approval."
Riley said while Deal voted against the housing bailout approved by Congress this summer, he did favor the portions dealing with Fannie Mae and Freddie Mac.
John Yeoman, an associate professor of finance in the Mike Cottrell School of Business at North Georgia College & State University, said the immediate result will be lower mortgage rates.
"Before the takeover, there was a lot of uncertainty," Yeoman said. "People were demanding higher risk premiums to buy the mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Now, with the federal government coming in and explicitly guaranteeing that debt, you’ll see those risk premiums come down.
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.
Government officials declined to speculate on how much mortgage rates would be affected, but said they hoped government control would allow the companies to focus on their mission of supporting the housing market.
The Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, is planning to work with the companies on existing loan modification efforts and report on their results in the coming months.
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.
Other legislation might have to fill in the holes. Lawmakers are expected to watch intently how the takeover works in the coming months, but more housing legislation appears unlikely until next year, when a new administration and Congress take office.
The Associated Press contributed to this report.