This weekend, the treasury department stepped in and put Fannie and Freddie into receivership, effectively nationalizing both distressed mortgage companies. In Friday’s update, Uncertainty and the Birth of Black Swans, we mentioned that with oil prices finally declining, mortgage rates might finally be able to follow the Fed’s rate cuts, stimulating the economy as they have done in the past. Until recently, the higher oil prices, coupled with the frozen credit markets, were, perhaps neutralizing the Fed’s stimulative actions.
Today’s news is a key development in allowing mortgage rates to decline, given the importance that both Fannie and Freddie have had in the mortgage market in the past. The markets should have a nice rally today, led by the financials. Of course, anytime actions like these are taken by the government, it is a blow to capitalism and yet at the same time, had it not been done, the blow to capitalism may have been far worse. In the last week, the market was showing clear signs that the problems in the credit market were spreading to other areas of the economy.
Eventually, any improvement in credit markets should lead to a wave of mortgage refinancings, freeing up a little cash in most consumers pocketbooks.
See, white swans do live!