The NYT reports that the spread between the interest rate on debt guaranteed by Fannie Mae and Freddie Mac and 10-year Treasury bonds is at the highest level in more than 20 years, rising to 2.38 percentage points yesterday. The spread had been close to 1.5 percentage points at the start of the year and had hovered near 1.0 percentage point over much of the period from 2004 to the middle of 2007.
This jump in the spread is not surprising given both the large losses that Fannie and Freddie have incurred on bad loans and the decision by Congress to raise the caps on the loans that qualify for mortgages held by Fannie and Freddie. Congress ostensibly raised the caps on qualifying mortgages to support the housing market in areas with high house prices, but it was predictable that the higher caps would have the effect of raising interest rates on all the mortgages that already fell under the mortgage ceiling.
While some economists did raise this concern at the time, the warnings were rarely reported in the media. As a result, Congress may not have realized that it was likely hurting rather than helping the housing market when it raised the caps.
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