Fannie and Freddie make mortgages more expensive

The financial troubles of mortgage lenders Fannie Mae and Freddie Mac aren’t just a problem for the federal government, said Ron Lieber in The New York Times. They’re a problem for any home buyer shopping for a new loan. The two organizations, now flirting with insolvency, have come to play a “crucial” role in the mortgage industry. They don’t just back mortgages. They also buy home loans from banks, bundle them into bonds, and sell bonds to investors. If banks can’t resell their mortgages to Fannie and Freddie, they’re likely to issue fewer and set more exacting financial requirements. “The mortgage financing system hums along until Fannie and Freddie have trouble raising money to buy loans, or it costs them more to raise the money. And that’s what is happening now.”

“The best bet for home buyers now is probably to lock in a mortgage rate while the scenario plays itself out,” said Jeff Cox in CNBC.com. If Freddie and Fannie have to be bailed out by the government or raise cash on their own, rates will likely rise even more quickly. “If, on the other hand, the two companies are as solvent as Washington politicians say they are, rates probably would hold level.” In that case, you’re still no worse off locking in rates now. “Industry analysts say evaluating which way mortgage rates will trend over the long term will be tricky because of all the unknowns.” But there’s little chance that rates will come down any time soon.

In the short term, the biggest victims of this debacle may be investors who hold shares in Fannie Mae and Freddie Mac, said James Stewart in The Wall Street Journal. Many believed these quasi-governmental entities to be rock-solid buys, on par with U.S. Treasury bonds. Now they’ve learned the hard way that “quasi-governmental is only quasi-safe.” As the companies are dangerously close to becoming the latest casualties of the housing crisis, “stunned and disillusioned” stockholders have seen their supposedly safe investments decline by more than 80 percent. While the government’s rescue plan may “reassure lenders that they’ll be repaid,” it won’t help shareholders much.

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