Ripple Effects From Fannie And Freddie

Mortgage Giants' Problems Could Mean Higher Loan Rates

The crisis at Fannie Mae and Freddie Mac, once the unwavering giants of the mortgage finance industry, could make getting a home loan even more difficult at a time when lenders are already tightening their grip on credit, industry experts and financial advisers said.

If you're thinking of buying or refinancing a home, expect to see a rise in mortgage rates, the experts said. But if you already have a mortgage, even one backed by Fannie Mae or Freddie Mac, you should have nothing to fear as long as you have no pressing need to refinance, they said.

A spike in rates could also drive homeowners into foreclosure as hundreds of thousands try to refinance out of adjustable-rate mortgages that are scheduled to reset this summer.

What caused this latest panic in the already-crippled mortgage market? Investors have lost confidence in the government-sponsored entities at a time when they need it the most. Badly bruised by the downturn in the housing market, Fannie Mae and Freddie Mac need to raise cash to stay afloat.

"It's unclear what twists and turns this will take, but they have to raise capital," said Keith Gumbinger, a vice president at HSH Associates, which publishes loan information. "In order to attract investors to buy bonds issued by a company that is struggling, they would need to offer higher yields. . . . That higher cost of getting capital would have to be passed along."

This would not bode well for a recovery in the housing market. Rising foreclosures have already shrunk the pool of potential home buyers by spooking lenders into requiring bigger down payments and stronger credit histories from borrowers. Higher interest rates would keep even more people from buying homes that have been lingering on the market for so long.

Don't be surprised if this crisis affects other forms of lending, such as car and student loans.

"As people are already finding, credit tightness translates to the entire system," said Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia. "A bank that loses millions of dollars on mortgage loans is a bank that has less money for loans for other purposes."

These are also dark days for anyone who has a stake in Fannie Mae or Freddie Mac. Shares of the companies plummeted last week on speculation of a government bailout. The turmoil shook the stock market -- and investor confidence. Financial planners said they have been fielding calls from worried investors.

"People are nervous. They really are right now," said Christopher N. Brown, a financial adviser at Ivy League Financial Advisors in Rockville. "Any market like this, when investments are getting whipsawed, most of the time it's emotional and people are reacting."

Advisers recommend that you look at your portfolio to make sure you are not too heavily invested in any one area. Shift money around if need be, but don't make any decisions based on fear. Try to stay the course, they said, and keep plenty of cash in reserves. "If you are keeping a cool head while everyone is losing around you, you'll be okay," Brown said.

But what if you have shares in Freddie Mac and Fannie Mae? "Your options are limited," said David Fleisher, executive vice president of Firstrust Financial Resources in Philadelphia. "For those people with an immediate or urgent need for their cash, they might consider taking what they can get. But at this point the damage has been done."