Bailout good news for some

Fannie, Freddie deal may lower mortgage rates but will have little effect on hurting homeowners

NEW YORK -- The government's historic bailout of Fannie Mae and Freddie Mac on Sunday will be good news to homebuyers and some homeowners hoping to refinance if the move leads to lower mortgage rates, as experts expect.

But for homeowners already behind on their mortgage payments, or who owe more than their homes are now worth, the plan unveiled Sunday by Treasury Secretary Henry Paulson offers little in the way of relief.

"The bailout will give the mortgage industry a stability that we haven't had in a couple of years," said Rich Cosner, president of Prudential California Realty. "But frankly, no, it won't help [struggling borrowers] to refinance."

Fannie Mae and Freddie Mac play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders like Bank of America, Wells Fargo and Washington Mutual to make more loans.

Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation's total. But an alarming number of those loans started going into default, draining the companies' financial reserves and sending a chill through credit markets worldwide. As investors grew more skittish, borrowing costs started rising.

By placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies' debt is as safe as the Treasury Department's.

While not a cure-all, the bailout is still a step in the right direction, industry observers say. It will at least "keep the lanes in the mortgage freeway open," said Greg McBride, a senior financial analyst at Bankrate.com, possibly putting the market on the road to recovery.

If mortgage rates fall, that will attract more potential buyers into the market, which, in turn, will help to prop up home prices, he said.

He expects mortgage rates on a conventional, 30-year fixed-rate home loan to fall over the next few weeks as the dust settles on the bailout. Rates, which now average 6.35 percent, could fall as much as half a percentage point, he said. But continued investor wariness and a depreciating housing market will keep rates from dropping further.

"We're not looking at sunshine and daffodils in the housing market anytime soon," he said.

The Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, is planning to work with the companies on existing loan modification efforts and report on their results in the coming months.

Most mortgage brokers expect Fannie and Freddie's lending standards to remain unchanged under the conservatorship. Over the past several months, the companies have tightened requirements substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.

However, brokers hope the government will eliminate or reduce fees that the pair have been charging lenders to gird against increased credit risk and losses from mortgages they buy. Those rising fees are squeezing out some borrowers because lenders typically pass them along through higher mortgage rates or higher upfront costs.

Getting more buyers into the market is key to a turnaround. And a stabilized housing market with some price gains would help homeowners struggling with their mortgage payments. But such a market is at least a year away, Cosner said.

"That will help them," he said, "if they can hold out that long."