Wall Street Money Fuels Lower Mortgage Rates

Peter G. Miller
OurBroker®

As this is written the Dow is above 10,000 and that's great news for anyone buying or refinancing a home. As more money flows into Wall Street, more money is generally available for mortgages, a process made possible through something called the "secondary market." It sounds mysterious, but here's how it works.

Organizations such as Fannie Mae, Freddie Mac, and Ginnie Mae raise money by going to Wall Street. They do this by selling mortgage-backed securities (Fannie Mae), pass through certificates that generate monthly payments for investors (Ginnie Mae), and mortgage-backed bonds (Freddie Mac).

Money on Wall Street is in constant motion, some going into stocks, some for bonds, some into options, some held in cash, and some used for exotic investments few people understand. The bonds, securities, and certificates sold by big players in the secondary market compete for investor attention with stocks and bonds. The more investor money that flows into the secondary market, the lower interest rates. But if other investments look better than holdings related to mortgages, dollars flow away from the secondary market and rates can rise.

The upward rise of the Dow and high tech stocks have created enormous investor interest. That interest, coupled with a continuing supply of cash from retirement plans and mutual funds, has been good for the mortgage market because people like to have a variety of investments.

What do Fannie, Freddie, and Ginnie do with all that Wall Street cash?

In essence, when a lender originates a mortgage that meets the standards of the secondary market (a "conforming" loan), the loan can be sold to Fannie, Freddie, or Ginnie. Fannie and Freddie buy FHA, VA and conventional mortgages that meet their standards, while Ginnie buys only FHA and VA loans.

After selling a loan, the local lender gets cash in return. With dollars in the vault, the lender can turn around and loan again.

In this process everyone gets something.

• Borrowers get loan money at the cheapest possible cost anywhere in the country.

• Lenders make money from the fees they charge for originating loans. They may also get addition profits if they originate a loan which can be sold at a premium. Being able to sell loans in the secondary market means that lenders can recycle cash and make additional loans that generate new fees and profits.

• Investors who buy bonds, certificates, and securities get interest and possibly higher market values.

• Fannie Mae, Freddie Mac, and Ginnie Mae get fees for their work, and also interest from the mortgages they hold.

What happens if stock values fall? Assuming that cash keeps streaming into Wall Street, falling values would likely drive investor dollars to more conservative choices -- which often include the very certificates, securities, and bonds that underwrite much of the mortgage marketplace, thus forcing down rates.

And what happens if stock values fall and huge volumes of cash do not flow into Wall Street? Then the likely result would be rising mortgage rates.

But for the moment, at least, it's a very good time to be a borrower,

Question Of The Week

Q We are not home during the day and have an uncomfortable feeling that our building manager has often entered our apartment without permission or notice. Is the manager allowed to do this?

A A rental unit is not "your" property in the sense of ownership, but it is your property in the sense of usage and control.

In the general case, a manager has little or no business or authority entering a unit without prior notice or permission -- except in the case of an emergency.

If a repair is required, for example, that can usually be arranged with the knowledge of the tenant and often (but not always) at a time convenient to the renter.

It may be worthwhile to speak with the manager and ask about his or her policies -- and to explain your policies as well.

Weekly Resource

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Published: April 13, 1999

Use of this article without permission is a violation of federal copyright laws.

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Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .