Freddie Mac and Fannie Mae received support from the government. As the government steps in the news is providing confidence for investors. Mortgage bonds are enjoying a nice bounce higher resulting in lower interest rates.

How does this work? Fannie Mae and Freddie Mac issue Mortgage Bonds; which over time mature. In order to raise capital, they need to sell new Mortgage Bonds to pay back the principle on the maturing bonds. This is a monthly process and usually works like a well oiled machine.

Recently, the volatility in the mortgage sector and lack of confidence has suppressed the hunger for mortgage bonds. Therefore, Fannie Mae and Freddie Mac offered higher yields on bonds to attract investors. The downside to this was they couldn’t increase the interest rates on closed loans to raise the capital needed. Fearing Fannie Mae and Freddie Mac would not have the ability to sell new bonds to meet the capital requirements to pay off the maturing bonds, the government stepped in before default could occur.

The Treasury will back the payments on these bonds. There is now a guarantee and a “dangling carrot” for investors to buy Mortgage Bonds at a high rate of return along with the same guarantee as lower yielding Treasury Bonds.

Melinda Movick
1 Stop Mortgage, Inc