Fannie, Freddie bailouts could drive up home loan interest rates

Jul 15, 2008 (The Bulletin - McClatchy-Tribune Information Services via COMTEX) -- FNM | Quote | Chart | News | PowerRating -- This week's bailout package for the nation's two largest home lenders will have ramifications for the High Desert in the form of higher home loan interest rates and tighter lending requirements, one mortgage banking analyst believes.

The U.S. Treasury plan, which needs the approval of Congress, would extend credit to lend money to or buy stock in both Fannie Mae and Freddie Mac, the two companies that own or guarantee more than $5 trillion worth of U.S. home mortgages, almost half of the nation's total.

The move was necessary to restore confidence in the nation's financial system, but higher rates could be on the way as a result, Mike Smith, a banker with Sunset Mortgage in Bend, said Monday.

"Nothing has happened, but it's coming," Smith said. "This most likely means that rates are going to go up."

Higher rates could knock out more potential buyers from Central Oregon's glutted housing market and put increased downward pressure on home prices because buyers would spend more over time, Smith said.

Fannie Mae and Freddie Mac borrow money from debt markets, usually at a discounted rate, and use that money to buy mortgages from banks. The bailout could result in higher costs for the mortgage giants to borrow money, which would be passed along to consumers, Smith said.

Mortgage rates, though, can still be held in check if Freddie Mac and Fannie Mae are allowed to borrow money at a discounted rate from the Federal Reserve, said Dave Swisher, president of Mortgage Professionals of Central Oregon Inc.

"There's a longer-term risk on the upside for interest rates, but it hasn't happened yet," Swisher said.

Last week, rates on 30-year fixed-rate mortgages averaged 6.37 percent, an attractive rate compared by historical standards. A year ago, the average rate was 6.73 percent, according to data from Freddie Mac.

Smith expects rates to increase 0.25 percent to 0.375 percent across the board. The change could happen immediately, he said.

Both Fannie Mae's and Freddie Mac's share prices have plummeted over the past year, and more declines could lead to higher mortgage interest rates, Smith said.

"The harder-to-get loan rates will go up," he said. "Even with the loans that the Fed gives them, the risk of their health is enough to scare away investors."

Share prices dropped 8.26 percent to $7.11 for Freddie on Monday afternoon. Fannie shares fell 5.07 percent to $9.73.

The effect of the Freddie and Fannie bailout "shakes at the core of the financial system," spreading fear throughout the markets, said Brett Rabatin, an analyst for FTN Midwest Securities Corp., based in Nashville, Tenn.

More banks, especially those that have sizable construction loan portfolios, will fail as they recognize bad loans, Rabatin said. The national economy will be in slower growth mode as banks look to recapitalize rather than make new loans, he said.

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