What the GSE bailout means to mortgage rates

Mortgage rates could begin to drift lower thanks to the governments decision to bailout mortgage agency lenders Fannie Mae and Freddie Mac. The stock market is going to take time to digest the long term implications of the Federal Government holding the paper on over 4 trillion dollars of mortgage backed loan securities. As the agency lenders financial situation has worsened this year the spread between interest rates on mortgage backed bond securities and treasury securities has increased. The ten year bond has been well below the 4% level for the past sixty days, but interest rates on mortgage loans has moved very little and remain well above the six percent level.

Investors have grown concerned that the health of the countries housing markets could take a number of years to fully recover and they have increasing desired a larger return to buy mortgage backed loan securities. Billions of dollars of Fannie Mae and Freddie Mac mortgage bonds are opened by governments from other companies further complicating the situation and increasing the strain on the political nature of this financial bailout.

Most experts believe that the spread between treasury bonds and mortgage bonds will decrease, therefore mortgage rates are likely to dip down lower. Now that mortgage bonds are in essence insured by the Federal Government a new window may have opened for home owners to consider refinancing their home mortgage or purchasing a new home. It is unclear if the governments role will change guidelines on refinance or purchase mortgages.