You can't automatically blame your mortgage
lender if the rate you're offered stinks.
You see, your 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.
The same thing happens in reverse when it looks like the economy
is degenerating. Investors start clamoring for bonds because they
figure the Fed will have to cut rates in the future (to get the
economy going again) and if they wait, they'll end up with lower-yielding
bonds. Since investor demand is so strong, the lenders who control
loan supply can offer lower yields. This results in lower rates
for consumers.
Because of this process, borrowers who truly
want to get the best rates have to pay more attention to financial
news than ever before.
