What the bailout means for you

Unless you live in a cave you are probably very familiar with the fact that the federal government recently announced that they would assume control of mortgage industry behemoths Fannie Mae & Freddie Mac. The move has created overwhelming media coverage and speculation with mixed messages on the potential outcomes.

However, very little of the media’s coverage has focused its message on educating the reader on why these two entities are so crucial to the US economy and what practical implications the move will have on the general public.

For more information on why these two institutions play such an important role in our economy please visit this link which I wrote back on July 15th.

The bottom line is that government intervention of this magnitude into the financial markets is unprecedented and therefore accurately predicting the potential ramifications is next to impossible. However, there are 4 main points which I think the general public should be aware of.

→ Mortgage Rates: By stepping in and assuming the guarantees and obligations of Fannie Mae & Freddie Mac the federal government has provided additional confidence into the mortgage-backed bonds which ultimately determine mortgage rates. Furthermore, as a part of the plan the federal government announced that they would invest $5 billion into the mortgage-backed bond market.

These two measures have caused mortgage rates to drop and some analysts believe that mortgage rates will continue to drop into the near future (For a more detailed explanation of this impact please visit my blog posting on September 8, 2008 @ http://www.swansonhomeloans.com/?p=698).

→ Future Underwriting Standards: What is not commonly understood by the general public is that Fannie Mae & Freddie Mac ultimately set or heavily influence the guidelines to determine what loans will be approved and not approved for virtually all loans in the mortgage industry.

Some have speculated that the federal government may begin to loosen underwriting standards in the near term to help prop up the housing market. However, in the long-term underwriting standards may become influenced by who sits in the oval office & Capitol Hill.

→ Loan modifications: For those who find themselves in trouble with their existing mortgages this move may prove to make a loan modification easier to negotiate. This is because most analysts agree that the government will be more willing to work with troubled homeowners than public corporations who have to answer to stockholders.

→ Future taxes/ inflation: Unfortunately whether you do or don’t stand to benefit from any of the previous three points everyone you will get stuck with the bill in the form of higher taxes and/ or higher inflation.

By assuming control of Fannie Mae & Freddie Mac the government is now guaranteeing the interest payments on the $5 trillion that each of these entities has in their combined loan portfolios. If 5% of these loans go bad then the US taxpayers are on the hook for $250 billion.  Although it should be noted that the alternative of not bailing these institutions would likely cost our economy a lot more in terms of financial disaster.

The bottom line is that the government takeover of Fannie Mae & Freddie Mac will impact different people in different ways. For now the only sure thing is that mortgage rates have dipped lower on the news. If you’d like to discuss how this could impact your individual situation we’re always happy to review it with you. Please call or email us!

If you found this posting informative and useful please feel free to leave a comment below and pass it along to others who can enjoy it!