Joe Wilson's Silicon Valley Real Estate Blog

By now you've no doubt heard that the Federal government has taken over operation of the beleaguered Fannie Mae and Freddie Mac. Just who are Fannie and Freddie? They're the quasi-private corporations that Congress established many years ago to encourage home ownership by making mortgage financing easier to obtain. You as a consumer never deal directly with Freddie and Fannie but your favorite lender does. And by making loans that conform to Freddie and Fannie guidelines, your lender is assured that they can turn around and sell your mortgage note on the secondary market and immediately recoup the money they lent you. This allows them to turn around and loan that same money out again rather than waiting many years for the balance to be paid off. Fannie and Freddie buy the mortgages from the primary lenders and then use those loans as cash flow entities that individuals and institutions can invest in. So in a nutshell, investors put up the cash and get a nice return, Fannie and Freddie use that cash to purchase the mortgage notes from your direct lender and then direct lenders loan that cash to millions of Buyers to purchase their dream homes.

Pretty simple and effective, and it's been working well for decades...at least until about a year ago when Fannie and Freddie started purchasing a lot of those risky morgages that some direct lenders had been pushing. So even though Fannie and Freddie didn't make those risky loans they ended up being stuck with a lot of them. Well today the chickens finally came home to roost as it became clear that Fannie and Freddie were risking insolvency and the Treasury Secretary moved in and placed them under Federal receivership.

You can argue whether this was a good thing for the government and for tax payers who are now on the hook for making up any shortfalls, but it's pretty clear that it was a very good thing for mortgage rates. A lot of the fear and uncertainty in the mortgage market has now been swept away and lenders reacted by immediately reducing interest rates. Sunnyvale's Star One Credit Union dropped their rates for 30 year fixed rate conforming and jumbo conforming loans today to 5.875%, down from 6.125% the previous business day. Many analysts expect rates to dip even lower in the days and weeks ahead.

So for current home owners who'd like to refi at a better rate and for home buyers actively looking for a home in the best Buyer's market in almost 20 years, think very hard before passing up this golden opportunity. Thank you Fannie and Freddie!