Last week JMAC’s management took note of changes in the way that Fannie and Freddie price loans. Due to the improvement in the overall housing industry, and with delinquencies and foreclosures going down, those two quasi-government agencies adjusted pricing on certain loan types, certain loan-to-values, and certain risk profiles. And they also are removing their “adverse market fee” which is an automatic quarter point improvement. Lastly, there will be small changes to the guarantee fees (known as gfees) for certain loans.
JMAC know that some of these changes should be beneficial to our broker’s clients. And although they have no impact on jumbo pricing, the changes bring up the question our brokers are often asked by borrowers: “How are mortgage rates set?”
While JMAC controls who gets approved for a loan and on what terms, our brokers know that actual mortgage interest rates are largely determined on the secondary market, where mortgages are bought and sold. Fannie Mae & Freddie Mac play a big role in this by buying the majority of residential home loans. 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, which trade them much the same as Treasury securities and bonds.
And just like stocks, bonds, real estate, rare stamps, and so on, mortgage prices are determined by the supply of, and the demand for, home loans. It is these financial investors in the secondary market, not mortgage lenders, which collectively determine the interest rate of mortgage loans.
The changes that Freddie and Fannie announced last week will benefit many of our broker’s borrowers. Think of the changes as a tax that is being reduced. And so as base rates continue to be good, many borrowers have an opportunity to once again take a look using our brokers to refinance or in purchasing a home that makes financial sense versus the rent they are paying. Ask your JMAC AE about our rates!