The Fannie and Freddie Takeover – Short Term Implications for Home Loan Refinancing
In an unprecedented move the US Government recently took over the two mortgage giants Fannie Mae and Freddie Mac. Between them the two companies own or guarantee over half of the home loans in the United States. Both of them have suffered heavy losses due to the ‘credit crunch’ and the government’s move signaled the fact that allowing them to ‘go under’ would have been catastrophic for the US mortgage market.
The move by the government was widely welcomed and resulted in an immediate reduction of interest rates (on average by 0.3% on September 8, the day after the takeover was announced). It is projected that interest rates will continue to edge lower over the next few weeks as the impact of the takeover filters through to different sectors of the economy.
The big question is whether the takeover of Fannie and Freddie, and the resulting easing in interest rates represent an ideal window of opportunity for refinancing? The answer to this question will, obviously, be down to individual circumstances. In general however, the people who will benefit the most from refinancing in the current climates will be those who took out variable rates mortgages during the height of the housing boom. Most of them have seen a steady rise in their monthly mortgage payments and could perhaps now benefit greatly from switching to a fixed rate loan at current rates.
Those who took out their loans more recently will have to be lot more careful in calculating exactly whether the modest reduction in rates would make it worth their while to switch their loans. In such cases early payment penalties and fees could perhaps wipe out any potential savings.
On a larger scale the takeover of Fannie and Freddie does bring a bit of much needed stability into the home finance market. This should, eventually, be of benefit to the consumer as banks (hopefully!) become a bit more comfortable with extending credit for house purchases.
There is perhaps a debate to be had about the merits of Fannie and Freddie and whether their virtual monopoly of the market is a good thing. For the moment, however, their takeover signals a desire from the government to return to ‘business as usual’ as soon as possible. This will hopefully also extend to the refinancing market!