Fannie, Freddie Bailout No Panacea for Housing

Washington, DC, Sept. 9, 2008--Although mortgage rates fell Monday on news of the bailout of Fannie and Freddie Mac, experts warned not to expect lower borrowing costs to suddenly revive the troubled housing market.

The national average on a 30-year fixed mortgage dropped to about 6.2% from 6.55% last week, according to BankRate.
     
The rescue cleared one uncertainty hanging over the U.S. mortgage market, about half of which is backed by Freddie and Fannie.

The government takeover is aimed at lowering mortgage rates and guaranteeing that home loans will be available for consumers.

Experts say that easing mortgages is not necessarily going to stabilize prices anytime soon, because there are simply too many houses available on the market.

"It's clear rates will go lower, but the magnitude is unclear," said Laurie Goodman, head of global fixed-income research at UBS, adding that the impact could be offset by higher Treasury rates.

Treasury prices dropped Monday, pushing up yields, after the U.S. government seized control of mortgage giants Fannie Mae and Freddie Mac, reducing the flight to safety that has benefited Treasurys.

Although lower mortgage rates certainly help, Goodman said the U.S. housing market is caught "in an increasingly tight vise."

Jerry Howard, chief executive of the National Association of Home Builders, said the government action was "a very important first step" that will help ease mortgage rates and restore confidence in the debt of Fannie and Freddie.

Although the government intervention could help abate the "downward spiral" in housing prices, it is no panacea, Howard said.

Economists will also be keeping a close eye on whether the government unwinds the tighter lending standards put in place at Fannie and Freddie following the housing downturn and subprime-mortgage mess. Any relaxation of lending standards could boost housing in the short-term, but taxpayers would be left holding the bag if the loans go bad.