Fannie and Freddie: What You Should Know

Home buyers stand to benefit from lower rates.


Over the weekend, the government announced that it was taking control of Fannie Mae and Freddie Mac, the mortgage companies that back most new mortgages. While the takeover is expensive for taxpayers—the Treasury Department says it could spend up to $200 billion—Treasury Secretary Henry Paulson says it was necessary to shore up the troubled companies, which have been buffeted by the mortgage crisis.

So, what will this historic move mean for consumers who are in the market for a mortgage? Here's a quick guide:

Will mortgage rates fall?

Yes—most industry experts say interest rates will come down as concern over the future of Freddie and Fannie eases. That's good news for consumers taking out mortgages. Rates had been inching up over the summer; in April the average 30-year fixed-rate mortgage was just under 6 percent and in August it was hovering closer to 6.5 percent. Today, reports an almost 0.2 percent drop from last week to 6.08 percent. Experts estimate interest rates could fall anywhere from between a quarter of a percentage point to a full percentage point. What about housing prices?

While lower interest rates can help lubricate the market, making it easier to buy and sell homes, few people are expecting home prices to make an immediate recovery, partly because there is still a backlog of homes on the market. What if I have a fixed-rate mortgage? Can I benefit?

Fixed-rate mortgages won't be affected because their rates are locked in, but consumers looking to refinance their homes would face the newer, slightly lower rates. Will other forms of credit, like auto loans, be affected?

Not directly, no. But Paulson has argued that giving a boost to the mortgage industry will help ensure the rest of the economy—including credit markets—continues to function smoothly. He told NPR's Morning Edition, "Our objective here is to prevent a serious risk to the financial system which would hurt all taxpayers because our financial system is just critical to our overall economy. Anybody that wants to have a car loan, a mortgage, any kind of credit, needs a strong financial system."