How would Fannie Mae and Freddie Mac reduce mortgage rates without legislative changes?
In order for Fannie Mae and Freddie Mac to lend at a 5.25 percent rate, government intervention is required to allow these institutions to borrow at a lower rate and thus pass along lower rates to consumers. Despite the semi-nationalization and explicit guarantee from the federal government, Fannie and Freddie debt still trades at a large spread to Treasury rates. (As of Thursday, 10/8, GSE debt was trading near 5.3 percent, about 170 basis points above the 10-year Treasury.) There are at least a couple ways to fix this: A) Federal Reserve will offer to swap Fannie or Freddie debt for an equivalent Treasury (modeled after the Term Securities Lending Facility at the Federal Reserve Bank of New York). B) Treasury debt is issued and the proceeds would be lent to a special purpose vehicle (SPV). The SPV is merely a pass-thru, and lends to GSEs at Treasury rates. (This plan is modeled after commercial paper SPV.) If new Treasury securities are used, eventually Congress would need to approve
