How will the takeover affect mortgage rates and the availability of home loans?
It is generally believed that this will provide a lot of support to financial markets, directly through the provision of capital to these agencies and indirectly because the government has separately decided that it will buy mortgage-backed securities in the open market. So, through both of those channels, there will be higher prices on mortgage-backed securities. That will mean that those making loans to homeowners like you and me will be able to offer them at lower rates because there will be somebody who will be willing to buy those loans at a reasonable price. The government already intervened earlier this year to prevent the collapse of investment bank Bear Stearns. Now it’s stepping in to take over the country’s largest mortgage finance companies. Does this send a message that if big businesses get in too much trouble, the government will bail them out? It does tend to send that message. Not so much to big business in general, but if there’s a financial institution whose failure
