Mike J. Gold
When the dust kicked up by the current mortgage crisis settles, we may well look back on these days as a great time for investment. With home prices off 35-50% in some areas from highs set a few years ago, purchasing properties has scarcely been easier. On the other hand, dropping home values and worries about the solvency of the mortgage investment capital firms Fannie Mae and Freddie Mac could be the other edge of the sword.
Firms like Fannie and Freddie are necessary to ensure liquidity and stability in the mortgage market as they provide the actual funds that mortgage securities investors’ receive as returns on their investments. They represent the only such companies in existence and currently own or back $5 Trillion in mortgages.
The main fear of investors is that any disruption of Fannie and Freddie's operations could directly affect mortgage rates, possible raising them as much as 0.25-0.50%. Currently, while the market waits to see what will become of Fannie and Freddie, mortgage rates continue to drop. The prime rate for a 30-year fixed rate mortgage fell 0.05 points to 6.48% in the last week according to Bankrate.com. The prime 15-year fixed fell 8 basis points to 6.01% while the rate for an 5/1 ARM is down .04 points to 6.05%.
Why we shouldn't worry
Since the rates Fannie and Freddie borrow at are directly tied to the prime, they are still able to borrow at a fairly low rate, so even as their corporate stock prices decline, the securities they sell remain strong. This means the financial institutions Fannie and Freddie borrow from will continue to lend then the billions of dollars a week they need to keep the market liquid.