Housing fix backfires

 Housing fix, in the form of a new law, supposed to help buyers getting affordable loans. But actually happening?  We discussed about the quick fix law passed by congress in February. The economic stimulus plan has not been able to provide much help. The policymakers raised the mortgage guarantee levels of Fannie Mae and Freddie Mac from $417,000 to as high as $729,750. This move was supposed to help borrowers of jumbo mortgages by bringing down the mortgage rates which would have increased home sales.

Has it helped in any way? The answer is no. Just see the mortgage rates for a $500,000 30 year-fixed loan- 6months ago the mortgage rate was 6.73% and now it is 6.69%. Not much difference. As there is not much difference, so the housing market is still stuck here.

But investors have doubt about the present condition of these two mortgage giants. They are incurring losses and investors think they will have to be bailed out very soon. Fannie and Freddie has a critical role in the mortgage market. They buy loans from banks and then securitize them and sell the securities to investors. Such buying loans help banks with more available money which helps in keeping home buying affordable for the homebuyers.

By raising the mortgages that both these giants can guarantee, government tried to reduce the spread between the interest rates on the mortgages of the amount $417,000, and those between $417,000 and $730,000. But the rates have risen over the period instead of going down. Two factors that have actually nullified the expected results- investors do not want securities from shaking mortgage giants and both the mortgage giants have limited capital which they have spread over a large mortgage market.