Fannie Mae and Interest Rates

or Register to post new content in the forum

10 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Jun 2, 2007 11:28 pm

I'm doing some research on Fannie Mae and their effect on lending rates. I'm having trouble understanding this whole thing. I was always under the impression that as the 10 yr treasury moved, so did lending rates. After being lectured for 5 minutes by a mortgage lender I figured I needed to get a better grasp on the Fannie Mae effect on lending rates.


Can anyone chime in with a basic explanation as to how watching the movement of Fannie Mae rates can help in making preemptive guestimations that benefit clients?

Jun 2, 2007 11:48 pm
707SE:

Can anyone chime in with a basic explanation as to how
watching the movement of Fannie Mae rates can help in making preemptive
guestimations that benefit clients?





What exactly is your question, and what are Fannie Mae rates? Why do you care about them?




Jun 3, 2007 12:10 am
707SE:

I'm doing some research on Fannie Mae and their effect on lending rates. I'm having trouble understanding this whole thing.



I'm having a hard time understanding what you're talking about....

Jun 3, 2007 12:11 am

apology for the lack of clarity.


My question is, how does (if at all) Fannie Mae effect lending rates, specifically mortgage?

Jun 3, 2007 12:13 am
707SE:

apology for the lack of clarity.


My question is, how does (if at all) Fannie Mae effect lending rates, specifically mortgage?



I don't know how they affect lending rates.  Why should I care?

Jun 3, 2007 12:24 am
707SE:

I'm doing some research on Fannie Mae and their effect on lending rates. I'm having trouble understanding this whole thing. I was always under the impression that as the 10 yr treasury moved, so did lending rates. After being lectured for 5 minutes by a mortgage lender I figured I needed to get a better grasp on the Fannie Mae effect on lending rates.


Can anyone chime in with a basic explanation as to how watching the movement of Fannie Mae rates can help in making preemptive guestimations that benefit clients?



If a garbageman lectured you about recycling for 5 minutes would you need a better grasp on how to make plastic? GTFOOH.

Jun 3, 2007 12:27 am

You probably shouldn't, in fact - you shouldn't. The reason I ask is because I'm planning on having a sit down with a mortgage lender next week, for the sake of a potential referral partner. He is hot and heavy on what to him is a new understanding of how Fannie Mae affects mortgage lending rates. He presented this information as if it was common knowledge. I have a basic understanding of Fannie Mae, and what they do but I have no idea how they affect lending rates. Given that this guy was presenting it as what should be common knowledge, I felt I needed to investigate so as to not look like a fool when I meet up with him next week.


That's why I'm inquiring here. Should I not care either?

Jun 3, 2007 12:28 am
707SE:

You probably shouldn't, in fact - you shouldn't. The reason I ask is because I'm planning on having a sit down with a mortgage lender next week, for the sake of a potential referral partner. He is hot and heavy on what to him is a new understanding of how Fannie Mae affects mortgage lending rates. He presented this information as if it was common knowledge. I have a basic understanding of Fannie Mae, and what they do but I have no idea how they affect lending rates. Given that this guy was presenting it as what should be common knowledge, I felt I needed to investigate so as to not look like a fool when I meet up with him next week.


That's why I'm inquiring here. Should I not care either?



I think you shouldn't worry about it.

Let him tell you all about it if he wants...let him feel important...

Jun 3, 2007 12:36 am

Thanks. Just for the hell of it I ended up reading up on the different agencies and feel dialed in with what might be helpful. I think this might be the last "referral powwow" I go on. These are proving to be a waste of time. I decided to do this one because the guy seemed to have a clue, unlike some of the other guys I've had coffee with.

Jun 3, 2007 2:26 pm
707SE:

He is hot and heavy on what to him is a new
understanding of how Fannie Mae affects mortgage lending rates. He
presented this information as if it was common knowledge. I have a
basic understanding of Fannie Mae, and what they do but I have no idea
how they affect lending rates.





Oh that is pretty simple. Fannie Mae/Freddie Mac and securitisations of
residential mortgages into RMBS have lowered the real rate of Resi
mortgages by about 1-2% since the 1970s



The murky origins of this story go back to the great depressiona and
they predate the development of a liquid market for whole loans.



Basicly, a bank has limited lending power b/c of regulatory capital
requirements and limits on the ability to raise funds from deposits.



So if you were Bank of Tonganoxie KS, you might not be able to make all
the mortgage loans your community needed b/c you would run out of
regulatory capital/deposits. Thus you are forced to ration credit, by charging higher interest rates or not making loans.



OTH, if you are a Bank of Boca Raton, you can't make loans in
Tonganoxie since you don't have offices there. FNM makes it easy for
banks to increase/decrease their exposure to Res mortgages buy
purchasing RMBS.



Thirdly, the negative convexity of residential mortgages is a major
pain from an asset/liability management standpoint, so banks do not
want to have too many of them.



So what FNM does, is purchase
"confirming" (Less than $419K, 80% LTV, +660 FICO, Full Doc) mortgages
from banks and bundles them up into RMBS of various types. 
These RMBS are  credit enhanced  by  FNM as to timely
payment of principal and interest, and so have AAA/TSY ratings.



The downside to pass through certificates, is that they retain the
negative convexity of the underlying mortgages. So in turn Wall St,
takes the RMBS and creats CMO's with all sorts of maturity /prepayment
characteristics.



The net result is that banks can make all the confirming loans they
want, since FNM will buy them and sell them to the infinate supply of
capital on Wall St. FNM passes through its implied AAA/TSY cost of
funds which allows FNM to buy loans tight spreads.



E.g if FNM can borrow at 5.35, they will buy loans from banks at 5.50, who in turn will lend out at 5.75.



If FNM wasn't there to take the loan from the bank, the bank would charge a rate much closer to the prime rate (8.25%) on home loans.