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.

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.

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TABLE OF CONTENTS

CHAPTER I
  Lesson 1
  Quiz

CHAPTER II
  Lesson 2
  Quiz

CHAPTER III
  Lesson 3
  Lesson 4
  Lesson 5
  Quiz

CHAPTER IV
  Lesson 6
  Lesson 7
  Quiz

CHAPTER V
  Lesson 8
  Lesson 9
  Quiz

CHAPTER VI
  Lesson 10
  Lesson 11
  Quiz

CHAPTER VII
  Lesson 12
  Lesson 13
  Lesson 14
  Quiz

CHAPTER VIII
  Lesson 15
  Lesson 16
  Lesson 17
  Lesson 18
  Quiz

CHAPTER IX
  Lesson 19
  Quiz

CHAPTER X
  Lesson 20
  Quiz

CHAPTER XI
  Lesson 21
  Quiz

CHAPTER XII
  Lesson 22
  Lesson 23
  Lesson 24
  Quiz

CHAPTER XIII
  Lesson 25
  Lesson 26
  Lesson 27
  Quiz

CHAPTER XIV
  Lesson 28
  Lesson 29
  Lesson 30
  Quiz

Definitions

Certain economic indicators have more impact on interest rates than others

Watch which way the rate winds blow and you can lock in low

Lock-and-float programs give home buyers peace of mind