The proposed federal bailout of Fannie Mae and Freddie Mac, in the view of experts, is more likely to underpin the price of a house next month or next year than to cut the cost of a home loan next week.
Had those backstops to the country's mortgage industry been allowed to seize up, however, rising mortgage rates and tumbling house prices would have been sure to follow.
Tim Bendel, president of the Minnesota Mortgage Association, noted that with Fannie or Freddie around, 6.25 percent is a common interest rate on a 30-year fixed mortgage. "Rates without Fannie and Freddie would be 8.25 or in that range," he said.
The difference between those two interest rates on a $200,000 mortgage: $272 a month or $3,264 a year.
"We see that as a positive, confidence-building move for the mortgage market," said Wade Abed, managing partner of Lakeland Mortgage in Bloomington. "We think that will settle the market quite a bit."
White House and Federal Reserve officials have asked Congress to authorize loans to Fannie Mae and Freddie Mac and purchases of their shares to keep the two institutions solvent. The federal government created the two publicly traded companies generations ago to buy outstanding mortgages from banks and other lenders.
Worries that investors would back away from repackaged home loans sold in the secondary market by Fannie Mae and Freddie Mac led to a crisis of confidence last week.
Fannie Mae stock closed at $9.73 a share Monday, down from a weekly high of $17.62. Freddie Mac shares closed at $7.11, dropping from a weekly high of $13.46 last Wednesday. Both stocks were in the mid-$60 range in October.
Every dollar Fannie Mae or Freddie Mac pays for a mortgage acquired from banks or other home lenders represents a dollar freed for a bank or other lender to use in a new mortgage. Their operations infuse as much as $50 billion a month into the U.S. mortgage market, backing up loans not only from American financiers but from foreign investors as well.
Cheap, easily available money is a key element in reversing a slowdown in home sales and a drop in home prices.
In the months ahead, Washington's moves to underwrite Fannie Mae and Freddie Mac debt probably will make home loans cheaper and more readily available than they would have been without a federal bailout, but with strings that may help to manage lender risk, said Dave Vang, chair of the finance department at the University of St. Thomas Opus College of Business.
"The wheels of government move slowly even in an emergency," Vang said "It may take a couple of months for any new regulations or procedures to filter their way down to us."
Was it necessary?
To be sure, measuring what will happen versus what could have happened sparks controversy that may continue for years.
"I think the Fed really threw a lifeline to the mortgage market with their actions," said Scott Anderson, senior economist at the Minneapolis office of Wells Fargo & Co. "Economists will be debating forever whether the move was a necessary thing."
But the move comes at a time when U.S. financial markets appeared to be taking hit after hit tied to home mortgages.
California-based IndyMac Bancorp, for instance, was taken over by the Federal Deposit Insurance Corp. (FDIC) last week after home loan losses mounted. The ability of other banks to raise capital to cover bad loans has been undermined by a sharp decline in the value of financial stocks.
The shares of many banks are down 50 percent or more from their 52-week highs, raising odds against being able to raise new capital by simply selling more stock in the company treasury.
Bendel, the mortgage trade group president, views problems with home mortgage defaults and write-offs as part of a larger pattern of concern over consumer credit.
"America is kind of living check to check," Bendel said. "It doesn't matter where you make $50 grand or $250 grand, you don't have a lot of money left over to weather a storm. When a storm comes, the boat sinks."
A federal bailout of Freddie Mac and Fannie Mae will buy time to calm financial markets that have grown wary of surprises, Bendel said.
"All things are intertwined in some way in how our financial system works or doesn't work," he said. "It's a complicated fix."
Mike Meyers • 612-673-1746