Taking Charge

by Lawrence Yun, Chief Economist, NAR Research


You wake up one Monday morning to find Fannie Mae (FNMA) and Freddie Mac (FHLMC) no longer exist - that was a scenario that NAR staff - and no doubt a number of other economic, financial and housing market watchers - have been contemplating over the past month. Well, the government did, in effect, take over Fannie and Freddie. And guess what - on the Monday morning after the official announcement, the sun still came out. The question is: will this mean darker skies for housing and our economy?

Predictions
The federal government had no choice because the capital situation of two organizations was insufficient to face the upcoming realities of rising mortgage defaults. We will now have to wait and see what impact the government's action will have. I think we can make some predictions.

First of all, it is likely that mortgage rates will trend down over the short run. But how much of a decline will depend on how actively the government - more specifically the Treasury Department and the new Federal Housing Finance Agency (FHFA) - loosens the mortgage liquidity spigot. For over the next 12 months at least, the FHFA has the authority to purchase more than the normal amount of mortgages from lenders to put into its portfolio holdings. That means all conforming loans, including the newly conforming jumbo loans up to $625,000, will qualify for purchase by the FHFA. That will help drive down mortgage rates. In about two years' time, when the housing recovery is assumed to be well underway, the government will trim its mortgage portfolio. Then Fannie and Freddie will be completely restructured. It will be up to the next administration and Congress to determine that structure. And be assured that NAR will make its 1.3 million voices heard during those discussions.

The credit spread between the 10-year Treasury and the 30-year mortgage rates has greatly widened in recent months due to the uncertainties that surrounded the fate of Fannie and Freddie. The typical historic spread has been about 150 to 180 basis points. That means if the 10-year Treasury yield is 4%, then the 30-year mortgage would be about 5.5% to 5.8%. Recently though, we have seen the spread at 250 to 300 basis points. With the government's takeover of Fannie and Freddie, the spread will surely narrow and hence result in lower mortgage rates. That is good for the housing market.