How government can help lower mortgage rates

Red jigsaw puzzle piece shaped like a house

A couple of congressional lawmakers last week came up with a bill that could save about one-half percent on your mortgage rates.

The big picture is this: The two lawmakers want to merge home loan giants Fannie Mae and Freddie Mac into a single company run by the government.

How does that result in your winning lower interest rates?

That one-half percent is about how much more you’d pay if there were no government-backed agencies like Fannie Mae or Freddie Mac buying up loans from local bankers and using them to build securities sold globally to investors. (Some estimates suggest you'd pay as much as 3% more.)

Congress wants to tinker with (or end altogether) Fannie Mae and Freddie Mac because they lost a lot of money during the housing crisis -- about $138 billion since they were taken over by the federal government back in 2008.

That sounds like a lot of taxpayer dollars until you look at the other side of the equation -- how much Fannie and Freddie save the typical American homeowner over the course of a 30-year loan.

Last week, the average difference between the conventional loans backed by Fannie/Freddie and the larger, nonconforming jumbo loans backed privately was 0.48% on a 30-year, fixed-rate loan, according to's most recent survey.

For a $200,000 home, paying an interest rate 0.48% lower saves you $57.89 a month, $694.68 year or $20,840 over the life of your 30-year loan. Now multiply that by 30 million (that’s how many home loans Fannie and Freddie own or guarantee), and you end up with a shade over $625 billion in savings.

That one-half percent interest rate difference is pretty conservative -- the difference between the interest rates on Fannie/Freddie loans and jumbo loans not backed by Fannie or Freddie sometimes goes wider.

Reps. Gary Miller (R-Calif.) and Carolyn McCarthy (D-N.Y.) named their bill that would merge Fannie and Freddie the Secondary Market Facility for Residential Mortgages Act of 2011.

I wished they’d called it the Loans Guaranteed by the Federal Government Have Much, Much Lower Interest Rates So Let’s Merge Fannie Mae and Freddie Mac and Have It Guarantee Mortgages Because Housing Might Be Finally Getting Better and the Last Thing We Need Is Higher Interest Rates Act.

It would be so much clearer why anyone about to buy or refinance a home would be in favor of it.

The bill would put the new company under the direction of a board appointed by the president and would cap its market share at 50%, except when there’s a housing crisis and investor demand for privately issued securities dries up (which is what’s going on now).

There are others on Capitol Hill who think the government should just get the heck out of the loan guarantee business and let the private sector take over. The too-big-to-fail banks -- Bank of America, Wells Fargo and JPMorgan Chase -- would be happy to serve you, these folks say.

But the big banks already make half the loans made in America, and giving them more market share just gives them more ability to raise interest rates and fees. It’s true that they’re happy to serve you -- for the right price.

If I have to choose between trusting a government-supported company that answers to the president of the United States or a megabank answering to shareholders, I’ll go to the merged Fannie Mac for my mortgage every time.

Assuming it’s still around.

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