Fannie Mae & Freddie Mac

The government's takeover of Fannie Mae and Freddie Mac this past weekend has caused a nice drop in interest rates! By taking control of the 2 largest holders of mortgage bonds, the government has significantly reduced the credit risk associated with these bonds. Reducing the risk to investors results in a drop in the return on these investments. Rate of return equals the interest rate, thus mortgage rates are dropping. Historically, the spread between the yield, or interest rate, on treasury bonds and mortgage bonds with a 30 year life has been around 1.25% to 1.75%. As a result of the downturn in real estate and the increase in mortgage defaults, this spread had grown to a high of 2.75%! With the government's action, we should see this spread shrink. Just today, mortgage rates have dropped .25% to .375%!