Interest rates for the 30 year fixed rate dropped nearly half a percentage point overnight this week in reaction to the announcement that the U.S. federal government is taking control of Fannie Mae and Freddie Mac.
A brief synopsis of why rates have come down so quickly:
Mortgage interest rates are determined by the price and yield of bonds issued by Fannie Mae and Freddie Mac. These agencies issuebonds to raise cash (investors purchase the bonds) which they use to purchase mortgages from U.S. lenders. The yield (rate thatFannie/Freddie have to pay on the bonds) represents the agencies' cost of funds, ie. If they need to pay more to entice investors tobuy bonds, they will need to charge more to the U.S. consumer (conversely if they can pay out less, they will charge less.)
In the past 12 months, speculation about the financial solvency of these agencies has spooked investors who deem Fannie/Freddieand the whole U.S. mortgage mess as a risky investment. So...Fannie/Freddie have needed to pay more to entice investors. Paying more means charging more, and hence the rates have been relatively high. Now that the federal government is officially behind Fannie/Freddie, these agency bonds are deemed to have considerably less risk. So investors are excited again, and with investors rushing to buy bonds, the agencies don't need to pay so much to attract investors,and the agencies can charge less to consumers.
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