|
LESSON 10: HOW LENDERS SET
MORTGAGE RATES
This is one of the most confusing topics of all,
especially for homebuyers that don't have a financial background.
You see, your mortgage lender has little say in what rate you're
charged these days. There's no Mr. Potter behind the counter trying
to figure out how to swindle you out of your hard-earned loot. And
even huge banking conglomerates like Citigroup Inc. and Wells Fargo
& Co. answer to a higher mortgage rate power -- namely, the
secondary
market.
The secondary market is where Fannie
Mae, Freddie
Mac and other mortgage investors ply their trade. These huge
agencies -- which were founded with government help decades ago
to make the mortgage lending process more efficient -- purchase
loans that lenders make, then either hold them in their portfolios
or bundle them with other loans into mortgage-backed
securities. Those securities get sold to mutual funds, Wall
Street firms and other financial investors who trade them the same
way they trade Treasury securities and other bonds.
 Many
people believe that the interest rate charged for mortgages
is set by mortgage lenders and brokers.
In reality, financial investors chart the course for rate
fluctuations.
|
As a result of this business model, investors
-- rather than bankers or mortgage brokers -- are in the driver's
seat when it comes to setting mortgage rates. Whenever economic
news suggests the economy is heating up too much, these investors
demand higher yields from lenders. That's because they don't want
to buy low-yield bonds now if
Federal Reserve Board rate hikes (designed to cool the economy
down) are going to make higher-yield bonds available later. The
only way lenders can get their loans sold in this environment is
to raise the yields they offer investors. This drives the rates
they charge to consumers higher.
(continued on next page)
|
