Anyone planning to buy or refinance a home with a conforming loan is soon likely to have more buying power thanks to a $600 billion government program to purchase mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae.
The plan should keep interest rates on loans eligible for purchase by Fannie and Freddie down, even if the demand for mortgage-backed securities weakens with the slowdown in the global economy. That, in turn, should provide support for housing markets, supporters of the plan said.
In another significant development for borrowers, Freddie Mac said it’s eliminating upfront fees charged to lenders for fixed-rate purchase loans and no-cash-out refinancings for "super conforming" mortgages above the $417,000 conforming loan limit. Because Fannie and Freddie are competitors, it’s common for one to follow the other’s lead on fees.
The Federal Reserve today said it would buy $100 billion in debt from Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. The Fed also announced a separate $200 billion program to lend money to holders of asset-backed securities collateralized by debt such as student loans, auto loans and credit cards.
Since the collapse of the "private label" secondary mortgage market in August 2007, Fannie, Freddie and Ginnie Mae — which securitizes mortgages guaranteed by the Federal Housing Administration — have become the conduits for funding the vast majority of U.S. mortgage lending, buying or guaranteeing more than three in four single-family mortgages.
The National Association of Realtors, which has been pushing for the Treasury Department to buy up mortgage-backed securities under the $700 billion Troubled Asset Relief Program (TARP), welcomed the new Fed plan. NAR estimates that every 1 percent reduction in interest rates can generate 500,000 home sales.
"We commend the Fed decision because it will directly bring down long-term interest rates,” said Lawrence Yun, NAR chief economist. "The level of investment should be aggressive enough to bring interest rates down in a meaningful manner. As we’ve seen in past recessions, home sales rise when mortgage interest rates fall."
NAR will continue to push for a temporary, government-financed, interest-rate buy-down program to get rates down to 4.5 percent or less, Yun said, as part of a proposed package of stimulus measures to bolster housing markets (see story).
The Fed’s purchases of mortgage-backed securities could bring down rates on 30-year fixed mortgages by 50 basis points, or half a percentage point, Yun said. A government interest rate buy-down probram would bring rates down another 200 basis points, a much greater impact that would provide "a good chance for a housing market and economic recovery," Yun said.
James Lockhart, director of Fannie and Freddie’s regulator, the Federal Housing Finance Agency, said the $600 billion Fed program should be a "major boost" to mortgage and housing markets.
The additional liquidity will help reduce the large interest rate spreads between mortgages and Treasuries, resulting in lower mortgage rates over time, Lockhart said.
But the National Association of Home Builders said confusion over the extent of federal support for Fannie and Freddie’s long-term debt obligations has also pushed spreads on that debt in relation to Treasury yields to record highs. That, in turn, has an impact on interest rates. The government needs to explicitly guarantee Fannie and Freddie’s debt in the same way the Federal Deposit Insurance Corp. has guaranteed senior, unsecured bank debt, NAHB said.
The Fed’s announcement came on the heels of other good news for borrowers — Freddie Mac said it’s eliminating or reducing delivery fees on "super conforming" mortgages of between $417,000 to $625,500 that it purchases after Jan. 2. Mortgages with note dates after Oct. 1 are eligible for the new pricing and credit requirements.
Fannie and Freddie’s new chief executive officers indicated in October that such changes were in store. After the companies were placed in conservatorship in September they began reevaluating pricing of their loan guarantees with an eye to increasing liquidity to mortgage markets and a reduced emphasis on maximizing returns for investors (see story).
Freddie Mac also said this week that its retained portfolio of mortgages and mortgage-backed securities grew at an annual rate of 43.6 percent in October, to $763.7 billion — reversing two months of negative growth. The retained portfolio peaked at $798.2 billion in July, but shrank as Freddie pared down holdings of mortgage-backed securities. Growth for the year to date was 7.1 percent at the end of October.
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