This week’s federal bailout of top mortgage companies Fannie Mae and Freddie Mac has spurred uncertainty over how the area’s homeowners and investors should react. Local experts say it was a smart move and explain how it will affect the market.
Tim Taylor, vice president of Metrocities Mortgage, says the move was “a great idea, and probably the only choice.”
“This decision helps maximize the benefits to the housing market and helps lower the risk of moral hazard,” he said. “It should also allow some stability to return to the mortgage and housing markets.”
Tim Tremblay, chief executive officer of Tremblay Financial Services, said a lot of homeowners weren’t prepared to see their mortgage payments go up and became trapped in negative amortization loans as the value of their property declined.
“Suddenly the collateral you have for all these loans in many instances is less than what the original house cost,” Tremblay said.
Essentially, the experts agree, the two companies controlled too much of the nation’s secondary mortgage market — about half of a $12 billion national mortgage debt — to let them go under.
“Some folks would say, ‘Well, let’s just go ahead and let them fail, free enterprise system,’ but 75 percent of the mortgages out there would have some kind of effect,” Tremblay said.
The question many homeowners are facing is when to refinance, and Tremblay and Taylor suggest that with lowering rates this may be the time to investigate options.
“We’re anticipating seeing interest rates maybe a little lower, so folks that have been on the side lines, I think it’s a great opportunity,” Tremblay said.
Keep in mind, however, that refinancing isn’t free. Taylor suggests homeowners consider how long it will take them to recoup the financing fees, pay attention to the annual percentage rate and understand the loan program.
For those with adjustable rate mortgage loans, Tremblay says now is a smart time to change to fixed if possible. “Even with rates where they are now, they’re at historical lows,” he said. “This would be a great time to be locking in at these low levels.”
Tremblay says he sees indications of higher rates in the near future, when the end of the housing crisis will lead to inflation and, “How does the fed fight inflation? They raise rates.”
Taylor says jumbo rates have dropped quite a bit; however, loans of more than $729,000 haven’t been affected. He suggests refinancing for mortgages below that amount.
For investors who put all their eggs in the FM/FM basket, it’s a tough lesson learned, says Tremblay, who suggests dividing investments for security, obviously even when dealing with blue chip companies such as these.
“Have your money in a wide range of assets; even mutual funds, they have a whole wide range of stocks they’re involved in for investors,” he said. “The idea of diversification is going to reduce the risk.”
He also suggests fighting the urge to enter the stock market when it’s up and bailing when it’s down. “You want to get in when it’s down, and then once everybody is happy, like the end of the ‘90s, pull some off the table,” he said.
Most investors are remaining cautious, Tremblay said, investing in noncorrelated stock market assets and guaranteed annuities.
“In other words, a commercial real estate program in commercial real estate where you don’t have the subprime or stock market concerns,” Tremblay said.
Although it’s difficult to predict how the market will react to this huge change, it seems Tremblay and Taylor are anticipating an optimistic response in mortgage rates.
Noozhawk intern Mollie Helmuth can be reached at email@example.com.