When interest rates fall, real estate prices tend to increase. Why? Find out here.
|Scooped by Luke Maynard|
The preceeding article explains the effect of interest rates on property values. Mortgage rates can be either variable or fixed, fixed rates are set and unable to change despite potential changes in the national interest rates. Variable mortgage rates are usually fixed for a pre-specified duration of time and after which the rate is dependant on the time specific benchmark.
The article outlines the 3 parts of the mortgage production line. Primarily there are the mortgage originators. They are the ones who loan out the money to the public. The mortgage originators are in the form of banks, credit unions and mortgage brokers. They compete with eachother just like companies, all trying to maximise profit by setting interest rates appropriately to increase revenue.
The other 2 parts are the aggregator and the investor. The aggregator purchases newly originated mortgages from other instituitions. They pool similar mortgages together to form Mortgage backed securities. These are then sold on to the investors. The price that the aggregator sells the MBS's determines how much they are willing to buy the newly originated mortgages for.
Investors in MBS include; pension funds, mutual funds, banks and hedgefunds.
To a large extent investors determine interest rates on MBS's that are sold to consumers. As it is a free market, this determines the market clearing prices that investors will pay for MBS's. From the data collected through the mortgage industry concerning the prices that the investors are willing and able to pay, the interest rates are formed.