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How the Fannie Mae and Freddie Mac takeover are lowering Rates |
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| Written by Rob Kosberg |
| Sunday, 28 September 2008 12:16 |
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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. The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 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. By the start of this month, the spread had nearly doubled. But that all changed Sunday. When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk. On September 8, 2008 the mortgage rates began to fall. This occurred because the government is backing the market and the risk that raised rates will not be a factor. For the near future, rates should stay low. It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper. About the Author: If you are in the early stages to Buy a Home then check out Rob Kosbergs' Detailed FREE Guide on Buying your Dream Home with a Zero Down Mortgage or for up to date Mortgage info visit my Mortgage Blog
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