Freddie's Fix Means Higher Mortgage Rates?


I wanted to make sense of all this Freddie news today; the will they or won’t they raise between $5 and $10 billion in capital through a stock offering and how that could affect mortgage rates.

Raising capital is obviously the necessary move here, if they can, because if they can’t, then they’ll have to take the government up on its offer of cash, and that would come out of yours and my pockets.

Freddie Macneeds to raise more capital in order to play in the new conforming/jumbo market that the recent stimulus package created. In today’s SEC filing, they said they would likely buy bigger loans. But they also said they expect losses to increase.

As for the capital, Friedman Billings Ramsey & Co analyst Paul Miller thinks they need to raise more: “It should be $15 billion or greater.” But here’s the rub, says Miller: “If they say we’re going to conserve capital and back off the mortgage market, that could have negative implications on mortgage rates.”

That’s because Fannieand Freddie are basically the only ones out there buying non-FHA loans these days. Freddie is already talking about increasing fees, which would factor into higher rates. As an investor, of course given the risk these days, you want them to increase fees, but that’s not too politically popular, since it doesn’t help get more home buyers back into the market.

Questions? Comments?