What Uncle Sam's Fannie and Freddie Plan Means for You

How the government's dramatic show of support will impact investors and mortgage rates.

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"The concern was their ability to raise capital in the future. This suggests they'll have that ability to raise it without much trouble so I don't think it will weigh on debt holders tremendously," says Kim Rupert, managing director of global fixed income analysis at Action Economics.

In the end, a recovery in demand for agency debt might matter most for U.S. taxpayers who could be on the hook for some $5 billion in liabilities if the government actually assumes its now explicit guarantees for Fannie's and Freddie's loans. Guaranteeing those liabilities won't necessarily be costly since most will be backed by healthy mortgages. Still, adding $5.2 trillion worth of mortgages to the current $9 trillion U.S. deficit at a time when housing-related assets are still falling in price should be a big reason for everyone concerned to hope lenders can eventually stand on their own two feet. Keep an eye on Fannie Mae, which has an auction for short-term debt scheduled for Wednesday.

Current mortgage holders

If you already have a mortgage that is being held or guaranteed by Fannie and Freddie, the recent turmoil will not affect you, says Christopher Thornberg of Beacon Economics. "You are locked in ... the money is yours as long as you continue to pay [your mortgage]," Thornberg says. "That's not even an issue."

Mortgage rates

While the government's actions appear to have brought some short-term stability to the mortgage market, the long-term impact remains murky, Larson says. "Nobody really knows how much Fannie and Freddie are going to lose from the housing market," Larson says. "Until the housing market shows signs of a real turnaround, there is still the question of: Are we going to be in this same situation six months or 12 months down the road?" If investors conclude that the government's plan is not enough to resolve Fannie's and Freddie's capital concerns, they could demand higher returns on their mortgage-backed securities. Those higher costs will be passed along to consumers in the form of higher interest rates. "At the end of the day, there are only two people that pay—that's you and me," says Keith Gumbinger, vice president of HSH Associates.

Coupled with the growing inflationary pressures, the turmoil surrounding Fannie and Freddie represents another factor that could push mortgage interest rates modestly higher by the end of the year, Larson says. "I don't think we're going to see a huge increase, we're not going to 8 percent or anything," he says. "But I wouldn't be surprised to see six-and-three-quarters [or] seven percent on the 30-year fixed [rate mortgages]."

Coming Up Next

Vagaries of Paulson's plan leave room for uncertainty for investors of all sorts (not to mention that the plan hasn't yet been approved by Congress, though it appears set to pass). The next big moment in this drama comes tomorrow, when Fed Chairman Ben Bernanke offers his semiannual testimony before Congress. He'll undoubtedly address the bailout and its implications for the current pause in moving interest rates. Plus, it is earnings season, and this week is a big one for the financial sector where the pain being felt by Fannie and Freddie swept through shares like a brushfire earlier this year. Names to watch this week: Wells Fargo, JPMorgan Chase, Merrill Lynch, and Citigroup.