U.S. government may buy mortgages
By Marcie Geffner – LendingTree.com

Top officials in the federal government have been working on a new plan to strengthen the country’s financial system.

The bailout plan would allow the U.S. government to buy mortgage-backed securities and other assets from banks and financial institutions. The U.S. Treasury would then be able to sell those assets or keep them as investments. The goal of the plan is to protect the nation’s economy.

Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke and members of Congress have been working on the plan this week. The plan needs approval from Congress and the President’s signature to go forward.

The plan would be cheaper than other alternatives and would “fundamentally and comprehensively” address the root causes of the stress in the financial system, Paulson explained in a statement.

“When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs,” he said.

What the plan means for borrowers
The plan isn’t designed to bolster home prices or help homeowners who can’t afford their mortgage payments. Rather, it’s intended to unfreeze the financial sector, which could indirectly strengthen the housing markets over time. If that happened, homeowners would benefit.

The plan also could affect interest rates that borrowers pay on mortgages and other consumer loans, but right now it’s difficult to predict what the effect on interest rates will be. The government’s purchases of mortgages and other financial assets might make interest rates lower. But the government will need to borrow a lot of money to put the plan into effect, and that could push interest rates higher.

Given that uncertainty, borrowers should focus on their own personal financial situation.

As always, it’s important to:

• Educate yourself about loans and loan products.
• Figure out how much you can afford to borrow.
• Consider your own short- and long-term goals.
• Shop around for a loan that meets your needs.
• Read your loan documents before you sign them.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

Mortgage Rates Drop
By Marcie Geffner – LendingTree.com

Interest rates on new home loans headed lower this week after the federal government stepped in to manage Fannie Mae and Freddie Mac, the country’s two biggest mortgage companies.

Fannie Mae and Freddie Mac are crucial to the U.S. economy. The two gigantic corporations were chartered by Congress to support affordable homeownership by creating a so-called “secondary market” to purchase home loans from lenders. Today, the two companies buy up nearly 80 percent of the new mortgages that lenders originate. They securitize many of those mortgages and sell them as investments.

Fannie Mae and Freddie Mac have been struggling financially due to the turmoil in the housing and lending markets and the weak U.S. economy. Those struggles, combined with investors’ concerns about the two companies, have kept mortgage interest rates higher than they otherwise would have been this year. But now that the government has taken over the companies, investors have rallied and interest rates have fallen on new home loans.

The government’s involvement will give Fannie Mae and Freddie Mac time to “restore the balances between safety and soundness and providing affordable housing and stability and liquidity,” said James B. Lockhart, director of the Federal Housing Finance Agency. The FHFA will manage the companies until they can resume their independence.

Federal Reserve Chairman Ben S. Bernanke said the government’s actions will “help to strengthen the U.S. housing markets and promote stability” in the financial markets. The Fed may consider these developments when its governors meet next week to talk about interest rates and the economy.

The government’s action to manage Fannie Mae and Freddie Mac won’t immediately turn around weak housing markets, but the plan has already reduced uncertainty and increased stability in the mortgage arena. That means borrowers who are shopping for a new mortgage today should see lower interest rates on home loans that conform to Fannie Mae’s and Freddie Mac’s standards. 

 © 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.