SANTA CRUZ (September 14, 2008) - On Monday the government announced the bailout of Freddie Mac and Fannie Mae, the nation’s largest investors in home loans. It had always been implied that these government-sponsored entities (GSE) had the full support and backing of the U.S. government and this implied support gave investors the confidence they needed to invest in Fannie and Freddie. However, with last year’s mortgage meltdown, the world’s financial markets lost the confidence in the ability of Fannie Mae and Freddie Mac to stay afloat. Now that the government has officially taken them over, that support has become explicit. As a result, investors around the world have revived their support and have again been investing in Freddie Mac and Fannie Mae by buying their bonds. That support has led to increased bond prices and interest rates falling nearly three quarters of one percent on Monday, making this perhaps the biggest news in the mortgage industry in nearly 20 years!

With the U.S. government at the helm, Fannie Mae and Freddie Mac can focus their energies on providing mortgages for homeowners and homebuyers without the constraint of having to satisfy shareholders or propping up share prices. This new attitude will hopefully lead to continued lower mortgage rates and, perhaps, more lenient underwriting guidelines. Additionally, Fannie and Freddie’s portfolio has been given a green light to grow at least temporarily. This infusion of capital will enable them to buy more mortgages, which in turn will help the housing market recovery and will stimulate our sagging economy.

For example, when the President signed the Economic Stimulus package in February the conforming limit was raised from $417,000 to $729,750 to help out those homeowners and homebuyers requiring loans in that range. Those of us in the mortgage industry were elated, thinking that we could get the favorable rates and favorable underwriting for the larger loans that previously was only available to loans at or under $417,000. In fact, to our dismay, Fannie and Freddie called this new category of loans ‘jumbo conforming’ and added an interest rate premium and laid out much stricter underwriting guidelines for those larger loans. This was surely not the intention of Congress when the law was passed.

Under government “conservatorship” Fannie and Freddie will hopefully become more consumer oriented. It is now set in stone (the bill the President signed July 30) that the new conforming limit for 2009 will be $625,500, which replaces today’s $417,000 limit. We are expecting Fannie and Freddie to offer rates and underwriting for those loans between $417,000 and $625,500 to be the same as the rates and underwriting of loans under $417,000.

While this is not the end of the credit crunch, some believe it signals the ‘beginning of the end”, which is good news for all of us!

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.