Late on Friday, news began to spread that the federal government would be taking over Fannie Mae and Freddie Mac. Fannie and Freddie are essentially the grease that keeps the American Mortgage market going. Collectively, they hold roughly half of the mortgages in the country via the second mortgage market. The wave of mortgage defaults around the country battered the companies. Their stocks plummeted and there were concerns about the future of the two lending giants. This is what sparked federal intervention over the weekend. The government’s conservatorship will provided needed capital into the companies.
What does that mean for home buyers? The initial indication is that it will lead to a decrease in mortgage rates. The rate of defaults was leading to higher home loan rates as banks tried to build in a buffer on their loans. In the first day after the announcement, 30 year fixed rates dropped .3 of a percentage point. There is potential for additional drops in rates over the next couple of weeks. Qualifying for mortgages is likely to remain challenging with the take over. In fact there are some who are suggesting that lending standards will continue to tighten. I will be keeping in touch with lenders we know to see what they observe. In this environment, buyers with good cash reserves and excellent credit scores will continue to have the best access to mortgage programs.