What the Fannie Bailout Will and Won't Do

The government takeover of Fannie Mae and Freddie Mac is designed to put downward pressure on mortgage rates and to ensure that home loans remain available.

Those goals are made crystal clear in the statements made by public officials.

Green wedding
Green wedding

The primary mission of the two mortgage giants "now will be to proactively work to increase the availability of mortgage finance," says James Lockhart, who will temporarily govern Fannie and Freddie.

Lockhart, head of the Federal Housing Finance Agency, adds that his agency will examine Fannie's and Freddie's fees "with an eye toward mortgage affordability."

Treasury Secretary Henry Paulson says the government has three objectives: "market stability, mortgage availability and taxpayer protection." That's another signal that the government wants mortgages to remain available, at good rates, to borrowers with a low risk of default.

Jim Sahnger, a mortgage broker with Palm Beach Financial Network in Stuart, Fla., says, "The good news for the consumer is that money will still continue to flow, provided you have the ability to qualify."

Rate Reduction Expected
Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., says, "I think that the immediate impact will be somewhat positive. You'll see some drop in mortgage rates because it'll decrease the uncertainty" that had pushed mortgage rates up this summer.

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Baker says he can imagine a drop in mortgage rates of around a quarter of a percentage point, give or take about 5 basis points. A basis point is one-hundredth of a percentage point. "It's something," he says. "It's not going to make a huge difference."
Impact of Fannie & Freddie takeover

It's hard to guess the timing of such a rate decrease. Baker says it might happen as soon as today, but possibly later, as people in the mortgage industry scratch their heads and assess the federal government's plan. "Probably we're talking inside of two weeks," Baker says.

Sahnger agrees that rates will fall soon. "There will be an immediate impact as far as rates," he says. "I think rates are going to improve modestly at the beginning."

Why Rates Should Fall
Mortgage rates are expected to fall because the Treasury Department will buy mortgage-backed securities. Here's why rates would fall as a result of the Treasury buying mortgage-backed securities:

When investors buy bonds, they have a wealth of choices. They can buy U.S. Treasury bills and notes, or corporate debt, or bonds from state and local governments. Or they can buy mortgage-backed securities, which behave much like bonds. Mortgage-backed securities are known as MBS in industry shorthand.

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