How the Takeover of Fannie and Freddie Will Impact You

How will the seizure of Fannie and Freddie impact you in your day-to-day lives? Read on.

The Federal takeover of Fannie and Freddie is a watershed moment that signals a change in how financial companies will operate in the future.  It marks one of the last gasps of a out-of-control securitization system that led to loose credit standards and artificially low mortgage rates.  So, how will the takeover of the giant financial entities impact Americans on a day-to-day basis.  Here's what I think:

1. Getting a mortgage will become harder.  Initially, getting a mortgage will become easier as banks and other financial institutions loosen credit now that the government has taken over Fannie and Freddie.  But it's clear that the government intends to significantly shrink both institutions over time, and this will diminsh their impact in the mortgage market.  Without a quasi-governmental institution to buy bank-issued mortgages and repackage them, banks will have to keep loans on their balance sheets, creating sticter lending standards and higher rates.

2. Mortgage rates will rise.  See #1 above.

3. Deposit rates will rise.  Banks will need your dollars to fuel their lending in the future.  They won't be able to sell mortgages so easily and then reinvest the proceeds in even more loans. 

Take 2 and 3 togther and you'll see that interest rates are going to eventually rise, as they have been doing for longer-term instruments.  Massive amounts of capital have been destroyed and increased demand for the capital that remains means a higher cost.  It's fundamental economics.

4. Your taxes will rise.  Don't believe a candidate who tells you your taxes aren't going to rise.  Between the war in Iraq, soaring Medicaid costs, rising Social Security costs, and now this bailout, the government will need more money.  The national debt is over $9 trillion dollars and as we've come to learn, you can't keep borrowing, and borrowing, and borrowing.  

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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  • Sam Cass

    September 09, 2008

    I forgot to add that this may slow the drop in home prices but it isn't going to reverse it. It will simply stretch the pain out further instead of dealing with it at once. The government will basically print money to fund the bailout, which will result in higher inflation and higher interest rates.

  • thedorightman

    September 11, 2008

    So now the game goes to 50 year mortgages as the new standard.

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