HOUSING: Fannie, Freddie takeover could help local market

Interest rates down half a percentage point early Monday.

By ZACH FOX - Staff Writer | Monday, September 8, 2008 6:32 PM PDT ∞

The federal takeover Sunday of two mortgage giants sent interest rates tumbling Monday, reducing the cost of buying a home and perhaps strengthening the North County real estate market, some local analysts said.

Interest rates on mortgages were widely available to buyers with good credit Monday at 6 percent with no broker fees. By paying broker fees, homeowners could secure a mortgage with a rate of 5.5 percent.

"That's going to fire up some buyers," said Dan Seiver, a finance professor at San Diego State University.

For the last two months, interest rates have hovered around 6.5 percent. The one-half percentage point drop in rates translates to a savings of $130 per month on a $400,000 mortgage, or about $47,000 over the life of a 30-year loan.

Cheaper mortgages followed the government's acquisition Sunday of mortgage giants Fannie Mae and Freddie Mac, a move that analysts said increased the confidence of investors who lend to the firms, thus driving down interest rates.

Some mortgage brokers said the reduction in home-buying costs could hasten a recovery in North County's troubled housing market.

"I think we've hit bottom," said Don Marginson, a mortgage broker in Rancho Bernardo. "The majority of business is first-time home buyers getting into the market. There's a lot of renters who have realized it's cheaper to buy than rent."

But Seiver and others cautioned that home buyers still face tougher underwriting guidelines, meaning they need a significant down payment, good credit and substantial income to qualify for a loan.

Also, although lower interest rates mean it costs less to buy a home, North County's housing market still faces a bundle of other obstacles, such as high foreclosure rates and an overhang of inventory.

Several analysts said the downward blip in interest rates would not do enough to solve those problems.

Still, optimism could be found in Southwest Riverside County, where real estate brokers said prices have stopped falling.

What's more, some said a recent increase in sales signaled the start of a market recovery and increasing home prices in the Temecula-Murrieta region.

Sales in July were triple the same month a year ago.

"I've said it before and I'll say it again, 'It's a seller's market on bank-owned properties. Prices have pretty much stabilized,' " said Earl Bonawitz, a real estate broker in Temecula. "We are already starting to recover."

Dropping interest rates could only help any nascent recovery. The decline in costs came about, analysts said, because of Sunday's governmental backing of Fannie Mae and Freddie Mac.

Before, the entities were considered "government-sponsored enterprises," meaning that Congress had chartered the companies, but they were private businesses that operated with no taxpayer help.

Sunday's move by the U.S. Treasury meant that the two enterprises became officially state-owned entities and the government assumes the liabilities and assets.

Many analysts said the move was necessary because the twin companies qualified as "too big to fail."

Combined, Fannie and Freddie own about $5 trillion of the nation's $11 trillion mortgage market. They don't issue mortgages; rather, they buy mortgages from banks as investors.

In recent months, their finances have wobbled as the crush of foreclosures has diminished their assets.

Often, banks do not want to keep home loans as assets. They instead look to investors, so Fannie and Freddie buy the loans from banks and then issue bonds backed by pools of the mortgages. The price of those bonds often dictate interest rates.

Now that the government has ensured Fannie and Freddie will not fail, investors have been reassured and are more willing to buy the mortgage-backed bonds. With less perceived risk come lower interest rates.

When the housing market began its historic downturn in 2006, many investors scattered, enlarging the role of Fannie and Freddie.

Without them, some analysts said, it would be nearly impossible to find a loan. That made Sunday's government takeover necessary, they say.

"If they had closed, the local real estate market would have crumbled," said Dave Hopkins, a mortgage broker with Rancho Financial, a firm in Rancho Bernardo.

The government also has assumed Fannie's and Freddie's delinquency problems, which put the two giants in danger of failure in the first place. That means that if the mortgage crisis deepens, the government ---- and, by extension, taxpayers ---- could be on the hook for billions of dollars in losses.

The national debt Monday stood at about $9.67 trillion, according to the U.S. Treasury.

"It'll just make our national fiscal situation even worse," Seiver said. "It'll be something we deal with tomorrow. But sometimes tomorrow actually shows up. The current level of our national debt is not a problem. The question is what's going to happen over the next 20 years."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business