Washington Report: Buying Bonds and the Mortgage Market

Amid the scary financial headlines last week, there were some less-publicized developments in Washington that bode well for the home real estate market in the months ahead.

Federal regulators last Wednesday gave the go-ahead for Fannie Mae and Freddie Mac to buy an extra $200 billion in mortgage securities -- a move that pushed down interest rates for home buyers and refinancers almost immediately.

At the same time, the 12 Federal Home Loan Banks prepared a plan that could allow them to buy an additional $160 billion in mortgage bonds.

Now you might ask: How does buying bonds help the mortgage market ... or trickle down to help real estate sales?

Here's how: The biggest challenge in the capital markets right now is what economists call "illiquidity," which means that large U.S. investors aren't able to sell their mortgage bond holdings because global investors have lost confidence in their safety.

Now in reality, most of the mortgages in these illiquid loan pools are paying on time and often are not even subprime credit. But global investors still won't touch them because they got so badly burned in the subprime crash.

The new moves by Freddie and Fannie to buy up some of these securities are designed to break the logjam and get the secondary mortgage market flowing again. The same is true for the Federal Home Loan Banks.

So: We're looking at the prospect of up to $360 billion of fresh capital injected into the market. Who benefits?

Number one: Just about anybody looking for a mortgage. After the Fannie-Freddie deal was outlined in Washington last week, 30-year fixed rates dropped by anywhere from an eighth to a quarter point.

Rates fell back below 6 percent -- after hitting the mid sixes last month.

Another set of beneficiaries are likely to be thousands of financially-distressed homeowners with loans they can't afford. Fannie and Freddie promised to help some of these homeowners get into fixed-rate mortgages that they CAN afford.

Home buyers in high cost California and along the Eastern seaboard should also benefit: Part of the $200 billion is expected to finance some of the new "jumbo" mortgages authorized by the economic stimulus legislation through December 31 -- those are the big ones that go as high as $729,750.

At a time when the private capital markets are choked up with fear, moves by federal regulators to prime the pump and get fresh money into the housing market can only be a plus.

Which forces us to say: Now and then, amazingly enough, Washington works!


Written by Kenneth R. Harney
March 24, 2008