Paulson’s Fannie/Freddie takeover plan: So far, so good.
Early reaction to the Fannie-Freddie takeover by the Fed has been roundly positive. Mortgage rates dropped almost a half point and that will be a boon to homebuyers with decent credit as rates are in the 5% range again as they were in 2005.
As Treasury secretary Paulson had hoped, the spread between the yield on mortgage-backed securities and risk-free Treasury bonds narrowed sharply Monday and mostly held those gains Tuesday. The tightening of those spreads has the effect of bringing down rates on the mortgages the companies are eligible to buy or guarantee – so-called conforming loans, typically those of $417,000 or less though up to $729,000 in some pricier areas. The rate for a conforming 30-year fixed mortgage fell to 5.88% Monday from 6.26% a week ago, according to BankRate.com.
The steep decline in mortgage rates will be good news for the housing market if it holds, by allowing some troubled homeowners to refinance and by generally making financing more available.
“Mortgages tightened a ton,” says Merrill Lynch mortgage-backed securities strategist Akiva Dickstein. “The question now is whether there’s more tightening to come.”
If so, people looking to buy houses could find purchasing a house more affordable. That could bring more buyers into a market struggling to digest near record levels of houses for sale, and slow the decline of prices. Prices in 20 big metro areas have fallen 16% over the past year, according to data from the S&P/Case-Shiller national survey.
In an additional bit of good news, Treasury bond prices rose in the wake of the rally in mortgage-backed bonds, and the dollar continued its two-month-long ascent against other major currencies.
Now is one of those windows of opportunity to refinance, buy a new home, or buy a second home – especailly now that the deal out there can be acquired with cheaper money.