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Puddles and Pools

Long-term mortgages and the rates and terms they carry are determined by a couple of different factors.

While many people mistakenly think the Fed control mortgage rates, they are in fact determined by Mortgage-Backed Securities (M.B.S.).

M.B.S.'s are created by pooling loans and selling bonds with coupons based on the mortgage rates. 60% of the mortgage bonds in the U.S. are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.


Yields, or rates on 10-year Treasury securities, are typically used to track long-term mortgage rates. Investors typically use Treasury yields as a benchmark for value, but it's the M.B.S.'s that create the actual interest rates. Factors such as supply and demand are always important.

When we talk about these large pools of money, we're talking about really large pools (imagine trillions of dollars). Large pools of anything tend to move slow and steady.

Fannie, Freddie and Ginnie are not the only players in the 30-yr. fixed game.
There are significantly smaller "puddles" of money that need to be diversified and invested in real estate (now imagine billions or millions).

These "puddles" may be controlled by large insurance companies, investment funds, pension funds and so on.

Every now and then one of these companies has a "puddle" they desperately need to have invested.

Rule No. 1 of "Pools & Puddles:"
Like water, always keep the money moving - stagnant money earns nothing.
This applies to big business and small.


Real-life example:

Two months ago, a loan officer was approached by a representative who had a "puddle". He needed to move this "puddle". To entice the rapid deployment of this "puddle," they reduced the rate. Once again, supply and demand.

Now since they didn't want to compete head to head with Freddie Mac and Fannie Mae, they went outside of that sandbox. They went "Jumbo".
(a Jumbo loan is anything above the limits of Fannie Mae and Freddie Mac and is currently $417,000)
Hands down there may not be a better loan out there for the long term owner right now.
But is it right for you? Perhaps. Only by running the numbers can anyone really say.

Remember, it's a puddle not a Pool.  There's only so much room in a Puddle.

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  • Last edited July 13 2007
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