Oct
1
When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.This behavior is called Risk Aversion and is a basic tenet of personal investing.
An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.
Government and mortgage debt traditionally differ by 1.5 percent. The difference between return rates is called the “spread.”
The Credit Crunch, with associated mortgage delinquencies, began when the “spread” began to grow began in July, 2007. As the Crunch grew, investing in mortgages was recognized as a higher investment risk.
The “spread” almost doubled in a year. On September7, 2008 the takeover of Freddie Mac and Fannie Mae was announced by the federal government. This action offered the “risk free guarantee” for mortgage debt. After the announcement of the takeover the “spread” decreased.
On September 8, 2008 the mortgage rates began to fall. This occurred because the government is backing the market and the risk that raised rates will not be a factor. For the near future, rates should stay low.
If a person now qualifies for a mortgage loan, he might find an easier loan process. It does not mean that more people qualify for mortgages.
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