Monday, September 8, 2008
The rescue of Freddie Mac and Fannie Mae proved to be good news for the market, even as it wiped out most of the remaining equity held by investors in the two companies. Most importantly, the rescue established finally that the debt of these two quasi-government entities was officially backed by the U.S. government. That led to a sharp reduction in agency spreads, which in turn allowed all other spreads to tighten as well (agency spreads are the first rung on the spread ladder, so when you lower those spreads all other spreads can follow). Tighter spreads meant a 40 bps decline in mortgage rates, which leaves mortgage rates to the consumer almost half a point lower than the average of the past five years. That can only help the distressed housing market in its efforts to clear out unwanted inventory with lower prices. It also means that a huge amount of uncertainty was eliminated today, and that always favors risky assets. It also unfortunately means that taxpayers will be on the hook for a good chunk of defaulted mortgages, but if we'd been honest with ourselves we would have realized long ago that taxpayers were potentially on the hook for a sizeable amount of money.
Posted by Scott Grannis at 4:27 PM