Rate Expectations

Mortgage and Lending with Guaranteed Rate NMLS# 2611 NMLS #208860
Bermuda Triangle
Did anyone see where my 5% interest rate went?

The mystery of what controls interest rates rivals the Bermuda Triangle and why women like shoes so much.  It's funny to listen to "industry experts" talk about the 10-year T-Note being a leading indicator of which way rates will head on a daily basis, but I'm here to tell you, they couldn't be wronger.  This blog is my effort to share both industry secrets and daily information on what's truly driving interest rates; mortgage-backed securities.  Hopefully this blog will educate, enlighten, and empower you so that you can stand out in this challenging real estate market, or at the very least, sound really smart at your next holiday party.

For now, a basic overview of how rates work might be in order.  Lenders are in the business of making money.  Unfortunately, that hasn't been the easiest task as of late.  What many lenders do is originate loans and then sell them in bundles of 50, 100, or even 1000 to an end user.  That end user can be Fannie Mae (FNMA), a government lending agency who then takes those mortgages and creates an investment called a mortgage-backed security.  Often, mutual fund managers or institutional investors buy these securities because they guarantee a specific rate of return.  For example, a FNMA 30-yr. fixed bundle with a 6.0% rate, pays the investor 6.0% return on their money.  Not too shabby.  Interestingly enough, this money is coming from people paying their mortgage payments.

How do the lenders make money doing this?  They may sell the bundle of loans to FNMA for a profit.  For example, if a lender has a $100,000 loan at 6.0%, FNMA may buy that loan for $101,000.  That's $1000 payday for the lender.  FNMA may then include that loan in a portfolio of mortgage-backed securities and then turn around and offer investors a share of this security for $100.  The investor gets 6% on their money and it's all good.

But what if market conditions change?  What if buying a mortgage-related product becomes riskier?  Then the end investor wants to be compensated for that risk.  They may only pay $99 for that $100 FNMA 6.0% bond.  So who eats the loss?  The lenders do.  And to make up for those losses, they raise their interest rates.  Aha!

So if the price of the FNMA 6.0% security goes down, rates go up.  If the FNMA 6.0% bond goes up due to more demand for a safer investment, rates go down.  Sure, it's a little more complex, but hopefully this 35,000 foot overview gives peels away a couple layers of the onion.  So check back here every day or so to get my take on what is moving interest rates and you can wow your clients with market knowledge even before it happens.  They'll wonder if you have a crystal ball.

I'm new to Active Rain, so I'd love to hear from you and get some feedback on what you think of my site.  Feel free to contact me or post here with any questions or comments and I look forward to not only surviving this market, but thriving in it with you!

Comments (4)

Keith Perry
Coldwell Banker - Hiram, GA
REALTOR - West Metro Atlanta
Hi Michael and welcome to AR!! There are loads of good people and information here.
Dec 20, 2007 05:35 AM
Boston, MA


Welcome to AR.  Any friend of Dan Forbes is a friend of mine.  Be careful.... this place can be addicting! 

Dec 20, 2007 05:50 AM
Scott Daniels Florida Real Estate 2.0. Agents Earn 100% Commission.
Florida List For Less Realty, Inc. Broker/Owner. - Cooper City, FL

Hello MT,

Welcome to A/R. If I can ever be of any assistance to you please feel free to contact me.

It`s our pleasure.

Happy Holidays. 

Dec 20, 2007 06:17 AM
Bob Stewart
ActiveRain - Seattle, WA
ActiveRain Ambassador

Let me echo Scott's welcome..........if there are any questions you need answered regarding the workings of AR, you are free to contact me. I usually have the answer :)


Dec 20, 2007 11:21 AM