Why The Takeover Of Fannie and Freddie Is Lowering Rates
When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.This behavior is called Risk Aversion and is a basic tenet of personal investing.
Also a part of the Risk Aversion process is choosing the investment with the greater risk if said investment will provide greater return rates.
Government and mortgage debt traditionally differ by 1.5 percent. The difference between return rates is called the “spread.”
The Credit Crunch, with associated mortgage delinquencies, began when the “spread” began to grow began in July, 2007. As the Crunch grew, investing in mortgages was recognized as a higher investment risk.
Through the following year, the spread almost doubled. The federal government announced the takeover of Fannie Mae and Freddie Mac on September 7, 2008. After this announcement, the spread decreased since now there was “risk-free” guarantee for mortgage debt.
This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term. With the U.S. government backing the mortgage market, there’s no room for the risk premium that helped keep rates high this past year.
This will not mean more people will be able to get mortgages. However, those who qualify may find that financing is cheaper.
