The Federal Reserve on Tuesday announced a new approach to stabilizing the housing market: driving down mortgage rates.
The effort is based on a two-pronged program that involves buying up to $100 billion in debt of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, while at the same time purchasing up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae.
The initiative is intended to lower Fannie and Freddie’s financing costs, which will enable the government-controlled, mortgage-finance giants to pass along those savings to consumers in the form of lower interest rates.
Here’s what you need to know:
1. Wide Spreads With home prices continuing to decline and investors unsure as to the extent of the government’s support of Fannie and Freddie’s obligations, the mortgage finance giants have had to pay higher premiums on their debt. This increases their cost of funding and translates into more expensive interest rates for consumers. “Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” the Fed said in a statement announcing the initiative. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”
2. Half Point Cut So what will the actions mean for mortgage rates? Keith Gumbinger, of HSH Associates, says that the moves could bring fixed mortgage rates down by as much as a half point.
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