Who sets the mortgage rates?
Taking out a mortgage is a long and arduous process that
involves a lot of different steps, with a lot of different
people involved.
There is you (the buyer), the seller,
real
estate agents, brokers, lenders and banks, just to
name a few.
With all of these factors involved, taking out a mortgage
on a new home can be a very confusing procedure. As you
are going through the
steps
to take out a mortgage, you may be wondering how the
different rates for a mortgage are set and who exactly
is in charge of them.
An article on Bankrate.com from May 1, 2006 entitled,
“How lenders set rates,” tells potential home
buyers about the influential figures in the mortgage rate
world.
“How do lenders set your mortgage rate? Well, actually
they don't. While mortgage lenders control who gets
approved
for a loan and on what terms, actual mortgage interest
rates themselves are largely determined on the secondary
market, where mortgages are bought and sold.”
Mortgages are bought and sold through a market. Lenders
can be seen as the person who gets the
mortgages
for you.
There are two main companies in charge of the
mortgage
world. They are Fannie Mae and Freddie Mac. They are
mortgage investors who are essentially the “Queen
and King” of the mortgage world.
“Fannie Mae and Freddie Mac, two large and influential
mortgage investors, were founded by the government decades
ago to help bring efficiency to the lending process. They
and other mortgage investors buy loans that lenders make
and either hold them in portfolio or bundle them with
other loans into mortgage-backed securities. These are
sold to Wall Street, mutual funds and other financial
investors, who trade them much the same as Treasury securities
and bonds.”
In addition to these two investors, the Federal Reserve
is responsible to regulating the actual interest rates.
They have been on quite a spree lately, and have raised
mortgage rates a consecutive 17 times in a row.
Some analysts say they expect the next spike to occur
on Aug. 8, although others are being more optimistic and
hoping they will remain at the current rate.
So, the financial investors such as Fannie and Freddie
are the ones who are in charge of setting the rates of
the mortgages and then selling them on the secondary market.
“As with the stock market, interest rates in the
secondary market tend to move up and down. When the economy
is on an upswing, investors demand higher yields, forcing
lenders to raise mortgage rates. In a market downturn,
rates tend to drop for consumers due to increased investor
demand.”
So, as with anything in the economy, interest rates and
mortgages depend and change according to the laws of supply
and demand.
“Conventional wisdom is that interest rates move
in cycles; after a prolonged increase, a slow drop usually
occurs. Some use 10-year Treasury bonds as a barometer;
when bonds go up, interest rates go down, and visa versa.
To obtain the best possible mortgage rate, track as many
financial trends as possible for as long as possible and
time the purchase of your home accordingly.”