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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Re: Prime down, rates up? Date: 4/23/2001 12:12 PM
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Hi Jeff,

I am confused as to how mortgage rates can be edging back up when the prime rate just dropped and is scheduled to drop again! This seems like price gouging to me.

You're not alone in your confusion, and it certainly feels like price gouging, but it's not the cause of the lending companies. It's all due to the band traders operating in the free market and trading bonds at their own whim.

Doesn't the lender "buy" the money at this lower price and then collect the difference between that rate and my mortgage rate???? Can someone enlighten me?

Here's where the confusion stems from. The Fed Prime rate is the rate at which the regional banks borrow money... but the much more prevalent cost of money is the secondary bond market, where mortgages are bought and sold and re-sold, providing the lending institutions with a liquid source of capital.

When Greenspan raises or lowers the Fed rate, he's intending to influence the entire mechanism as a whole... but it doesn't always work directly or immediately. In that respect, it's kind of like good medicine; the stuff that works the best doesn't necessarily snap you immediately out of your misery, but rather gently pulls you back into balance. Then again, sometimes we really want that instant gratification and it doesn't come.

The bond market is still causing higher interest costs because the bond traders and institutions still feel the economy is underwater, and risky. Theoretically, the Fed rate drop will eventually convince enough people that the underlying fundamental costs of money are advantageous enough for the economy to swing back around... but it's entirely a perceptual thing at the levels of the bond trading pits.

Don't look to the Fed for mortgage relief... it all comes down to the traders in Chicago (and the institutions that use them all over the world.)

Cheers,
Dave Donhoff
Lic. Mortgage Broker
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