Mortgage Rates: What Are They Really Telling Us

Let's start with some background...

"Freddie Mac" (as the FHLMC is called) does not provide Mortgage Financing directly to buyers, nor do they set Interest Rates. They buy Individual Mortgages from Lenders, then bundle them into Mortgage Backed Securities for sale to Institutional Investors who receive cash flow from borrowers making their Monthly Mortgage Payments. Selling Loans on the Secondary Market provides liquidity to Lenders by returning money back to them so they can continue making Mortgage Loans to other Homebuyers. Most Residential Mortgages in the U.S. are sold to large Investors in the Secondary Market.

Freddie Mac is just one of the Government-Sponsored Enterprise (GSE) companies and other large Investors participating in the U.S. Secondary Residential Mortgage Market, yet they are the only ones publishing weekly average rates as the widely-watched PMMS.

If a Loan does not meet the Qualifying Requirements for sale to Freddie, it will be sold to another Secondary Market Investor or held in the Lender's own Portfolio of Investments. Different Secondary Investors prefer (and even specialize in) different types of Mortgages for various types of Properties and Purchase Transaction Details.

Primary Mortgage Market - Banks, Credit Unions, Mortgage Companies, and other Lenders who originate Loans directly to Homebuyers. Individual Lenders set their own Mortgage Interest Rates.

Secondary Mortgage Market - Marketplace in which Mortgage Loans and Servicing Rights are sold by Primary Market Lenders to GSEs, Aggregators, and Institutional Investors such as Insurance Companies, Pension Funds, Hedge Funds, and Securities Brokers.

So what does all this have to do with Headline Interest Rates?

Each week, Freddie Mac reviews Lenders' Loan Applications submitted on their Proprietary Loan Origination and Underwriting Standards Platform. This software evaluates Borrower, Property, and Transaction Details to determine whether or not a Loan will be eligible for sale to Freddie Mac in the Secondary Market after it is approved and Funded by the Lender.

Because Freddie Mac interacts with many Primary Market Lenders, they are in a good position to report Market Details and Trends.

The average of Lenders' Interest Rates from a very specific group of Loan Applications submitted on Freddie's Eligibility Platform becomes that week's PMMS number and is often presented to the Public in Media Headlines such as:

"Mortgage Rates Rise (drop) to X.X%, up (down) from last week..."

For some historical perspective, it is interesting to note that ever since the PMMS started monitoring Residential Mortgage Interest Rates in April 1971, for 30-Year Fixed Rate Mortgages:

• The Average is 7.74% (average of weekly headline rates)
• The Median is 7.41% (median of weekly headline rates)
• The High was 18.63% in October 1981
• The Low was 3.31% in November 2012

Despite the many comments we now hear about higher rates (7.44% in the November 16, 2023 Report), current 30-Year Fixed Mortgage Rates are VERY close to the PMMS 50-Year Average.

Freddie Mac buys a wide range of Mortgage Loans with different Qualifying Standards from many Lenders.

For the Primary Mortgage Market Survey®, some of the specific criteria used to select Loan Applications whose Interest Rates will be included in the Averages are:

• Owner-Occupied Primary Residence
• Purchase, not Refinance
• 30-Year or 15-Year Fixed Rate Loans
• Located in lower 48 States and D.C. (not A.K., H.I., or Territories)
• Single-Family Home (not Condominium)
• 75-80% Loan-To-Value Ratio (20-25% Down Payment)
• FICO Credit Score 740 or higher
• Conventional Financing (not FHA, VA, USDA)

Based on these Qualifying Standards, the PMMS includes rates offered to prime Borrowers, those who present the least risk of default to the Lender so they are offered more attractive Interest Rates. Obviously, not all Buyers/Borrowers and their Home Purchases fit into these Lower-Risk Standards, so headline Interest Rates are not available to all Homebuyers.

The Interest Rate a Buyer/Borrower receives from a Lender may start with a Market (headline) Rate, then is adjusted to reflect Individual Borrower Qualifying Specifics (like Credit Score and Debt-To-Income Ratio) and the combination of variables mentioned below. It's all about Lenders' Risk Management. Higher Risk = Higher Rate.

Remember that Lenders set their own Interest Rates. However, until more is known about the Buyer, the Property, and the Transaction - Interest Rates are just random numbers being tossed around.

Here are some of the factors that Lenders consider in addition to a Borrower's Income, Assets, and Credit that have a direct bearing on the Interest Rate they receive:

Loan Program Variables:

• Fixed or Adjustable Interest Rate
• Government-Insured or Conventional
• Purchase or Refinance
• Loan-To-Value Ratio (LTV)
• Loan Amount (Conforming, High-Balance, or Jumbo)
• Term (Payback Period) in years

Property Variables:
• Single Family Detached
• Condominium (Low Rise, High Rise)
• Planned Unit Development with HOA
• Geographic Location

Use and Occupancy Variables:
• Owner Occupied Primary Residence
• Second/Vacation Home
• Investment Property - not Owner Occupied; Short-Term or Annual Rental offered to others

Any one of these variables has the potential to directly affect the Interest Rate a Borrower is offered by a Lender.

Each Real Estate Transaction is unique, so the variables change with each buyer and each property. The closer buyers can get to the PMMS Criteria outlined above, the better their chances for receiving an Interest Rate closer to the headline rate they heard about in a news story.

Bottom line - Individual Borrowers cannot be given an appropriate Mortgage Interest Rate until they submit Personal, Financial, Transaction, and Property-Related Information to a Licensed Mortgage Loan Originator.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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