In the wake of the Fannie Mae takeover, mortgage interest rates declined, and the overall cost of taking out a home loan or doing a mortgage refinance fell almost 10 percent. That's unexpected good news for homebuyers, because mortgage rates are now as low as they've been since 2004.

For much of this year, the markets have been unnerved by financial troubles at the nation's two largest mortgage companies, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac). Then, within the last two months, investor confidence plummeted, and sent the share prices of Fannie and Freddie down in a precipitous decline. With the implosion of the two organizations, conventional mortgage rates and mortgage refinance rates both spiked over concerns that the agencies might go bankrupt and leave Americans without a reliable source for affordable home loans.

Mortgage rate rescue

Just when the situation looked bleakest, the United States Treasury stepped in and took over Fannie and Freddie, infusing them with capital, restoring faith in the mortgage markets, and inspiring low interest rates. Mortgage rates on 30-year fixed loans dropped from 6.26 percent to below 5.80 percent, and experts expect that we may see low mortgage rates for the rest of 2008.

Most economists consider another outright interest rate cut unlikely at this point. But it's interesting to note that after the last Fed meeting, futures trading at the Chicago Board of Trade signaled that the Fed was probably going to raise-not lower-rates at its October meeting.

After the Fannie and Freddie takeover, however, market activity points to lower, not higher, interest and mortgage rates. According to the Board of Trade interest rate futures now, investors are already pricing in about an 8 percent likelihood that the Federal Bank will actually cut rates in October.

While those signs are based on conjecture and investor speculation, the Federal Reserve itself indicated in mid-September that it will hold rates steady in an attempt to ride out the economic storm.

Mortgage refinance rates drop

That approach to monetary policy will, in turn, most likely leave bond prices in their current range, but will limit any upside pressure on interest rates, including those for new home loans, as well as mortgage refinance rates.

Prospective buyers, and those homeowners eager to refinance into more secure and affordable loans, should find the news encouraging, because until the takeover happened, the outlook was gloomy. The chaos at Fannie Mae and Freddie Mac increased anxiety to the point where yields on 30-year mortgages had gotten higher, and totally out of synch with 10-year Treasury bonds.  The divergence was symptomatic of a confused and frightened mortgage market.

While today's low mortgage rates may not help homeowners who are extremely upside down on their loans, it may provide relief to those who are only 5 or 10 percent down, because they can now do a refinance to get back into positive equity territory.