Fannie Mae & Freddie Mac: Promised Interest Savings Disappear
It was just a few weeks ago when Fannie Mae and Freddie Mac were seized by the Federal government. To this day it is not clear why such a seizure was necessary given that the two companies had lost roughly $5 billion in the first half of the year — but had $95 billion in reserves as of mid-July.
One of the reasons given for the take-over was that federalizing the two giant companies would result in lower interest rates.
As the New York Times explained, “the Treasury will force both companies to shrink their portfolios over the long term; they now hold or guarantee about half of the country’s mortgages. In addition, the government plans to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month. This step, never before undertaken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages.”
Lower rates? This is a claim which is easy to check just by looking at a few dates.
___September 4th — The cost of a 30-year, fixed-rate mortgage is 6.35% plus .7 points according to the Freddie Mac weekly price index. The par price — the price 0 points — is 6.51 percent over 10 years. (The 10-year figure is better than 30 years because investors generally compare mortgages with 10-year securities. Why? Because within a decade most loans are paid off when a home is sold or refinanced.)
___September 7th: Fannie Mae and Freddie Mac are nationalized.
___October 16th — The cost of a 30-year, fixed-rate mortgage is 6.46% plus .6 points. The par price is 6.59 percent.
Would interest rates be higher today if Fannie Mae and Freddie Mac had not been taken over? No one knows. That”s just a matter of speculation — as would be any claim that rates might actually be lower.
What we do know is what has actually happened, and what has actually happened is that interest rates have risen — and two of the largest financial giants in the world remain a part of the federal government.
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