Hi All,

I am sure you have received about 482 emails talking about the government’s taking over Fannie and Freddie.  However, in an effort to make it easy to understand for you and your clients I will give you my take on it:

What has happened?

The Regulatory agency that oversees FNMA and FhLMC has assumed operational controlof both organizations.  Also, the government has pledged funds to enable both to continue their role as the largest purchasers of Mortgage Backed Securities.  This means that government money  will be available to “keep the wheels turning” within the conventional mortgage market by making money available for both to keep buying funded loans.  This is a very big statement of “we believe in the quality of mortgages as an investment, and so should the rest of the market” by the government.

What does this mean?

In the short term, the move has restored confidence in US financial markets.  Both the stock market and the bond market have experieinced a nice rally today.  As of now, confidence in mortgages as an investment has been bolstered.  If they are percieved as a safer investment, the folks buying mortgages will accept a lower rate of return (the interest rate).

What does the future hold?

We won’t really know until the full cost of this intervention gets figured out.  As we discover what the cost will be, the financial markets will take their long term cues from that.  The more it is estimated to cost, the more rates will be pressured to go up.  If the long term cost stays within initial estimations, this could be just the ticket to help the economy continue to recover without too much upward pressure on rates.

So , right now, it is providing buyers with a nice little dip in their cost of borrowing.  How long that will hold true remains to be seen.

I have never seen as volatile a market as the one we are currently in, so it seems like a great time to take advantage of the dip in rates.  Today’s euphoria is often followed by tomorrows paranoia.