The Source Of Mortgage Money
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
The Source of Mortgage Money
Summary
Many people wonder where mortgage money originates. When you secure a $500,000 mortgage, whose money are you actually borrowing? This mystery can seem daunting due to the large figures and seemingly complex systems involved. Understanding where mortgage money comes from is crucial for grasping how the mortgage industry operates.
Understanding Mortgage Money
Mortgage money comes primarily from two sources: banks and a diverse range of investors via Wall Street.
Banks and Deposits
Banks play a pivotal role by recycling money deposited into personal and corporate accounts. When you deposit money into a savings or checking account, the bank pays you interest. However, they also lend this money to borrowers at higher interest rates, making a profit from the difference, known as the "spread."
Banks can lend more than they have on hand, a practice regulated by federal agencies. The Federal Reserve influences the interest rates banks charge by adjusting the Overnight Rate, which impacts the Prime Rate. For context, the Prime Rate equals the Overnight Rate plus 3%.
Federal Reserve's Role
The Federal Reserve, famous for figures like Alan Greenspan and Ben Bernanke, manipulates interest rates by buying and selling bonds. Buying bonds injects cash into the economy, reducing interest rates, while selling bonds withdraws cash, increasing rates. These actions aim to balance economic growth and inflation.
Various indices, such as LIBOR and MTA, are affected by these policies. These indices govern variable rate loan products, like home equity lines of credit, influencing rates significantly.
Investors and Wall Street
Beyond bank deposits, mortgage money also comes from investors managing large funds, including Insurance Funds, Pension Funds, and Retirement Funds. Companies like New York Life and State Farm manage vast amounts of money sourced from individuals like us.
These funds are invested in equities, bonds, and mortgage-backed securities. Money Managers set guidelines for mortgage brokers to follow, ensuring loans meet specific standards. Many loans are insured by agencies like Fannie Mae or Freddie Mac, setting the benchmark for underwriting guidelines.
Impact of Excess Capital
There's a plethora of investment capital, particularly from Baby Boomers saving for retirement, which has led to innovative loan programs. This competition lowers interest rates and introduces various mortgage products like Adjustable Rate Mortgages (ARMs), Interest-Only loans, and even Negative Amortization loans, where the balance can increase each month.
Big mortgage players like Countrywide Mortgage, Wells Fargo, Chase, and Bank of America package and sell these loans on Wall Street, often retaining servicing responsibilities.
Conclusion
In essence, both sources of mortgage money are indirectly fed by us. Our bank deposits and investment funds are recycled into the economy. The abundance of capital keeps interest rates low, but as the Baby Boomer generation starts withdrawing their investments, rates could rise. Now remains a good time to borrow, but this landscape will evolve as economic conditions change.
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