Ed Dodson responding... Bryan Caplan wrote: > Do people willing to take adjustable rate mortgages get a better deal > (as you might expect if most people don't quite get the real/nominal > rate distinction)? Or has arbitrage already taken care of this? Anyone > have any actual evidence? Conjecture and hearsay? Those are *kinds* of > evidence... :-) > Ed Dodson here: Sounds like the kind of question some researcher at one of the Federal Reserve Banks would have undertaken at some point. The interest rate on first mortgage loans is determined, generally, by the bond market. Fixed rate mortgage rates are determined by life expectancy of the loan against the source of funds borrowed by the bank (to match durations). ARMs are priced according to the index (1- or 3-year Treasuries, LIBOR, some bank's prime rate plus, etc.). The better deal" arises when a bank offers a "teaser" rate to undercut the market in order to increase volume. This lower initial rate offering may be targeted to households with lower incomes or to borrowers acquiring homes in distressed census tracts in order to get high Community Reinvestment Act credits -- helpful when community groups are testifying for or against the acquisition of another bank's branch offices or a merger. Thus, there are often franchise-related business reasons for narrowing the spread (or accepting no spread) between cost of funds and the note rate charged to a consumer. > >
begin:vcard n:Dodson;Edward tel;fax:215-575-1718 tel;home:856-428-3472 tel;work:215-575-1819 x-mozilla-html:TRUE org:Fannie Mae;Housing and Community Development, Northeast Regional Office (NERO) version:2.1 email;internet:[EMAIL PROTECTED] title:Senior Affordable Housing Business Manager note:If you need to reach me during non-business hours, send an email to: [EMAIL PROTECTED] adr;quoted-printable:;;1900 Market Street=0D=0ASuite 800;Philadelphia;PA;19103;U.S.A. fn:Edward J. Dodson end:vcard
