US government bailout of Fannie Mae and Freddie Mac
News that government has come to the rescue of the ailing US mortgage companies Fannie Mae and Freddie Mac has been well received in the US but prompted concerns that the credit crunch is far from over. It seems that the rate of mortgage defaults and liquidity of the markets was at risk which is why the US authorities decided to act now. So what does it mean in the short, medium and longer term?
In the short term we are sure to see mortgage rates fall by around 1% as the government looks to shore up the ailing market. However, those with a dubious credit history will not see an awful lot of change because they will still have limited access to funds or pay a higher rate. The backing of the US authorities is vital to the success of this move and with over 5 trillion dollars worth of mortgages at stake it literally has to work.
Fannie Mae and Freddie Mac between them support over 50% of all mortgages currently outstanding in the US and with mortgage default rates approaching 10% there are many homes at risk. It is hoped that US authority intervention will prevent widespread home repossessions. But is there any coincidence that a presidential election is just around the corner?
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