Subject: The connections between the Fed and mortgage interest rates

The Federal Reserve, more familiarly known as The Fed,
adjusts interest rates in order to react to the economy and prevent
inflation or pull out of a recession.

When Feds lower interest rates it usually encourages potential
borrowers to borrow money because it costs less.

The Federal Reserve can really only affect short time investments
immediately.

Short time investments are those that mature in a year or less.

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Well, first, if the Federal Reserves adjustment of interest
rates affects short-term investments, than how can it
control mortgage.

Mortgage interest rates are typically long term investments,
long term being ten plus years to maturity.

Further more the majority of mortgages are acquired from two
major private companies, Fannie Mae and Freddie Mac, although
these loans come from a variety of banks and mortgage companies.

Fannie Mae and Freddie Mac sell bonds to finance the large amounts
of mortgages they purchase.

It is important to note that Fannie Mae and Freddie Mac are
private corporations and not government agencies.

And like most corporations, their goal is to maximize their profit.

One way in doing this is to keep their mortgage interest rates
inflated in order to help subsidize some of the interest
they are paying to their bond holders.

Charging high interest rates on mortgages is what attracts new
bond buyers.

So, still the question, how does Federal Reserve affect the
mortgage rates?

Well, when Federal Reserves lower interest rates, companies and
investors view that inflation will not rapidly rise.

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Therefore companies do not have major price changes and investors
are willing to purchase investments at lower interest
rates therefore buying Fannie and Freddie bonds at cheaper interest.

Therefore, Fannie and Freddie lower mortgage rates because they
no longer have to create large profits to issue bonds with large
interest rates to attract bond buyers. And this in turn,
attracts homebuyers.

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Thank you,

Max Taylor
http://taylor-marketing.blogspot.com