How the Fannie Mae and Freddie Mac takeover are lowering Rates
If one is presented with two investments of equal risk, the informed investor will choose the investment that offers a higher return rate. This is fundamental to personal investing and is called Risk Aversion.
An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.
Government and mortgage debt traditionally differ by 1.5 percent. The difference between return rates is called the “spread.”
In July, 2007 we began to hear about the increasing number of mortgage delinquencies and the now well known Credit Crunch. This occurred when the “spread” grew and mortgage investment was a higher risk.
The “spread” almost doubled in a year. On September7, 2008 the takeover of Freddie Mac and Fannie Mae was announced by the federal government. This action offered the “risk free guarantee” for mortgage debt. After the announcement of the takeover the “spread” decreased.
Mortgage rates fell on September 8, 2008 because of this action. Rates should remain low in the near future. Because the government is backing the market, there will not be risk that kept rates high for the past year.
If a person now qualifies for a mortgage loan, he might find an easier loan process. It does not mean that more people qualify for mortgages.
Filed under: Sales