What the Takeover Means for Your Mortgage

Monday, September 8, 2008

Fannie Mae and Freddie Mac are the largest buyers of U.S. mortgages. Their takeover is expected to ripple through the economy, affecting U.S. home buyers directly and indirectly. Here are answers to common questions about the mortgage finance giants and explanations on how you might be affected by yesterday's news.

Q What does the takeover of Fannie Mae and Freddie Mac mean for mortgage rates?

A The government takeover is expected to push mortgages rates down.

District-based Fannie Mae and Freddie Mac of McLean do not set mortgage interest rates, but they hold significant sway over the market. The firms buy mortgage loans and sell them to investors. The government's backing is expected to make investors more willing to buy the loans and bring rates down as demand increases, analysts said.

"It will make investors more comfortable with the risk of buying these mortgage-backed securities," said Holden Lewis, a reporter for Bankrate, an online research site.

Fannie and Freddie's fees, which are incorporated into interest rates and have become more expensive recently, will also be reviewed as the firms come under new management, said John A. Courson, chief operating officer of the Mortgage Bankers Association, the industry lobbying group. "It is going to have a positive impact on the costs to borrowers," he said.

I already have a mortgage. How will this affect me?

It won't. It could affect people who are shopping for loans.

How have Fannie and Freddie's troubles over the past year affected mortgage rates?

As the companies' troubles mounted, investors demanded artificially higher interest rates, said Guy Cecala, publisher of Inside Mortgage Finance. "They required a higher yield to buy the securities," he said.

For years, mortgage rates closely followed U.S. Treasury bonds, but they fell out of sync as foreclosure losses mounted, Cecala said. Absent the problems surrounding Fannie and Freddie, rates for the typical 30-year mortgages would be about 5.5 percent or lower; current rates are more than 6 percent.

With the government backing, investors are likely to see investing in mortgages fall back in line with investing in U.S. Treasury securities, analysts said.

When can we expect mortgage rates to drop?

No one knows for sure. It could take a day, a few weeks or a month for the takeover to affect rates, analysts said.

It may depend on whether the housing market improves, said James Sahnger, vice president of Palm Beach Financial Network of Stuart, Fla., which tracks mortgage rates. "I think in the short term it will improve modestly," he said. "I don't know [if] we're going to see significant improvement because of the overall risk [remaining] in the housing market."

What is the best way to negotiate a lower interest rate for my mortgage?

Same as always: Force lenders to compete for your business. Get multiple offers and have your finances in order to make yourself more competitive, analysts said. "Shop around and get them to bid," Cecala said.

In this market, that also means having a high credit score and a significant down payment. Many lenders now want at least a 10 percent down payment, but borrowers can make themselves eligible for a better interest rate with a bigger upfront investment, analysts said.

To ensure a better rate, borrowers should also weigh whether their mortgage would qualify to be bought by Fannie and Freddie. Congress recently increased the limit of loans that the firms can purchase to $729,750 for single-family homes in high-cost markets, including the Washington area. If the home exceeds that limit, the borrower needs a "jumbo" loan, which remains more expensive.

Mortgage companies have tightened lending standards in the past year. Could the takeover affect those conditions?

Debatable. Fannie and Freddie want borrowers with a 750 credit score and a 20 percent down payment, Cecala said. But the government takeover could prompt the firms to bend a bit, he added. If that happens, borrowers could see a shift by the end of the year, Cecala said. "The underwriting standards could be more flexible. They are very rigid now," he said.

But Lewis said any change to lending standards is doubtful. Loosening standards -- even a little -- could spook investors and ultimately cost taxpayers more, he said.

-- Renae Merle

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