Mortgage Rates Drop

Interest rates on new home loans headed lower this week after the federal government stepped in to manage Fannie Mae and Freddie Mac, the country's two biggest mortgage companies.

Fannie Mae and Freddie Mac are crucial to the U.S. economy. The two gigantic corporations were chartered by Congress to support affordable homeownership by creating a so-called "secondary market" to purchase home loans from lenders. Today, the two companies buy up nearly 80 percent of the new mortgages that lenders originate. They securitize many of those mortgages and sell them as investments.

Fannie Mae and Freddie Mac have been struggling financially due to the turmoil in the housing and lending markets and the weak U.S. economy. Those struggles combined with investors' concerns about the two companies have kept mortgage interest rates higher than they otherwise would have been this year. But now that the government has taken over the companies, investors have rallied and, mortgage interest rates have fallen on both fixed-rate and adjustable-rate new home loans. 

The government's involvement will give Fannie Mae and Freddie Mac time to "restore the balances between safety and soundness and providing affordable housing and stability and liquidity," said James B. Lockhart, director of the Federal Housing Finance Agency. The FHFA will manage the companies until they can resume their independence.

Federal Reserve Chairman Ben S. Bernanke said the government's actions will "help to strengthen the U.S. housing markets and promote stability" in the financial markets. The Fed may consider these developments when its governors meet next week to talk about interest rates and the economy.

The government's action to manage Fannie Mae and Freddie Mac won't immediately turn around weak housing markets, but the plan has already reduced uncertainty and increased stability in the mortgage arena. That means borrowers who are shopping for a new mortgage today should see lower interest rates on home loans that conform to Fannie Mae's and Freddie Mac's standards.


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