Fannie Mae and Freddie Mac in Convervatorship

Well, the news came today - Sunday, September 7th - that the Treasury is putting Fannie and Freddie into conservatorship under authority granted by the housing relief bill passed by Congress in July. Senior management is leaving, all lobbying will be stopped, and dividends on the stock suspended. Here's the link to the announcement from Paulson: www.treasury.gov/press/releases/hp1129.htm

The main news here is that the US Goverment has now guaranteed all Fannie and Freddie debt to the relief of many foreign banks and goverments that own it. Investors in the common stock and preferred stock are subordinated to a new class of preferred that will be owned by the taxpayers. The Treasury will purchase these shares over time to insure that each company maintains positive net worth. In addition, the Treasury will setup a lending facility to insure the two agencies have enough funds to purchase mortgages from lenders.

How will this affect mortgage rates and Treasury rates? The 10 year Treasury closed Friday yielding about 3.66% and mortgages were around 6.00% - 6.25%. My guess is that Treasuries sell off on Monday which will increase their yields. Mortgage rates will probably begin to come down some as the Treasury can now buy Fannie and Freddie mortgage backed bonds and other investors will increase demand because of the federal goverment's guarantee.

The spread between Treasuries and mortgage backed bonds has increased substantially (from a historical average of 1.25% to 2.25% currently) over the past year as fears of mortgage credits spread. Now that Treasury debt and Fannie and Freddie mortgage backed debt both have explicit government backing, the spread should compress. That will happen by Treasury yields rising, mortgage rates falling, or some combination of the two.