The Federal government expanded its bailout deeper into the consumer and mortgage credit markets. In the past few weeks efforts have focused on capital infusion and solvency. The government has made direct investments into banks- essentially handing them money – so that they would have some operating capital. Now the financial bailout programs are turning to liquidity in the consumer lending market. The effect was felt immediately as home mortgage rates dropped sharply yesterday when the government announced that it will use another 800 billion dollars to buy up consumer debt and mortgages to remove them from the balance sheets of commercial and mortgage lenders. Together with the direct infusion of capital it should loosen up the flow of credit to consumers and businesses. Hopefully this will free up additional credit for small businesses and ease small business financing. Read more about yesterdays infusion here at CNN MONEY
“The feds agreed to spend a half a trillion dollars to buy up mortgage backed securities and another $100 billion to fund lending for Fannie and Freddie; we’re not talking chump change anymore,” said Keith Gumbinger of HSH Associates, a publisher of mortgage information.
Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from 6.06% Monday, according to Gumbinger. They fell as far as 0.75 percentage points during the day, according to Orawin Velz, Associate Vice President for Economic Forecasting at the Mortgage Bankers Association.
That could save a typical homebuyer more than $90 a month on a $200,000 mortgage.
“The government action was geared to bringing mortgage rates down,” said Velz, “and it did.”
The drop was the largest since early September, when the administration announced that it was taking control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and stemmed from similar market sentiment.
Both actions sought to give confidence to the investment community. Most mortgages are sold to investors in so-called secondary markets but with foreclosure rates so high and expensive write downs of mortgage-backed securities so common over the past several months, investors had fled the mortgage market.
Instead of buying mortgage bonds, they’ve been snapping up Treasurys, a virtually risk-free investment. That showed up in the falling yields of Treasury bonds and the greater difference between Treasury yields and mortgage interest rates.
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