Friday, January 25, 2008

Mortgage system problems -- real mortgage rates

I am one of many who believe the mortgage system is flawed. However, I think it is fundamentally flawed for a reason that is not often talked about. I think that root of the flaw is the abstract way mortgages are funded. What do I mean? I mean that most of the mortgages are backed by bonds sold by Fannie Mae or Freddie Mac. These bonds typically determine the interest rates. According to some articles, Freddie Mac and Fannie Mae account for providing the backing bonds for about 40% of the US housing market. Essentially, the lower the interest rate on these bonds sold, the lower the interest rate on the mortgages. If thats the case, why is there such a difference between the rates each lender shows?

1) Some lenders pay points (either through charging their customers or hiding them in fees) to lower the interest rate.
2) Some lenders are deceiving the public through the fine print. Who reads all 100 pages of mortgage documents when signing them anyway?
3) Some lender have higher rates to not deceive people but instead to make a profit themselves. If they have a slightly higher rate, they get more money.

But with all these different rates, how is a borrower supposed to know if he or she is getting a good deal or getting taken to the cleaners? One way they can know is to understand the system and look at the useful data provided by Freddie Mac. Freddie Mac provides a weekly survey of the actual average locked in mortgage rates and the points associated with those rates. If your mortgage rates being quoted don't fall close to this, read all the fine print. The farther they are away, the more chance that there is some funny business.

I guess I feel that the same way I did one year ago when I declared that lender laws need reworked. I feel that the mortgage broker should have the responsibility to do whats best for the client. This means they have to know what the client's financial goals are and what they can afford (maybe see a budget) before they offer up a mortgage for that client. If it didn't fit, they can be sued. Otherwise, how is the uninformed public who refuses to be informed going to not repeat our past mistakes.

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