“There is nothing wrong with change, as long as it’s in the right direction.” Winston Churchill
And the housing and mortgage industries experienced a great change in the right direction last week, as the Federal government moved to support Fannie Mae and Freddie Mac, causing Bonds and home loan rates to improve significantly and end the week around .25 percent better than where they began.
So why did the Federal government take action? Fannie Mae and Freddie Mac both have issued many Bonds which over time mature, and Fannie and Freddie need to pay back the principal on the maturing Bonds. The way they raise capital to pay these maturing Bonds is to issue new Bonds, which happens every month. And as long as Fannie and Freddie can sell new Bonds this system works well.
But the problems in the mortgage industry have reduced investor appetite to purchase these Bonds. Without the ability to sell new Bonds, Fannie and Freddie are less able to meet the capital requirements to pay off the maturing Bonds. And if Fannie and Freddie were to default and become insolvent, the mortgage and housing industries…and homeowners across our nation… would face even more struggles than we are seeing now.
So the government’s decision to back Fannie Mae and Freddie Mac is great news for homeowners, because it ensures the continued liquidity of conforming loans nationwide and it ensures that buyers of this type of Bond have a safe investment going forward.
In other Bond-friendly news, we saw good news on the inflation front last week. Overall Import Prices declined for the first time since December, thanks in part to the recent plunge in oil and gas prices. And Wholesale Prices, which help measure inflation, fell in August for the first time this year.
Overall, the good inflation news and the Fed’s decision about Fannie and Freddie should lead to improving Bond prices and home loan rates in the long-term. With home loan rates at such low levels, it’s a great time to review your mortgage situation and make sure you have the rate and program that best suits your current financial needs.
