Fannie Mae-No Politics (FNMA)

[jeddiemack]

Most people in the banking business know this... some don;t ... not meant to offend anyone. ...

The reason commercial banks, the largest ones ... do not originate and hold 30 year mortgages (on a large scale) is because....

The interest rate risk associated with fixed rate mortgages is too great.

What they'd rather do is offer "adjustable" rate loans.

Because... banks generally make money off of what is called interest rate "spreads". The spread is the difference between interest or income earning assets and interest bearing liabilities.

Since depositors... except for dda accounts (think checking accounts) require some "interest" to induce the deposit; there is a cost to the bank of the "money" This is the money they lend out. Most Commercial loans are adjustable ... they are tied to "libor" London inter bank offertory rate ... or "Prime". These rates adjust... as do Certificate of Deposit rates... which make up the lion share of a banks "deposits".

So in a period of "raising" interest rates the spreads would narrow, if the bank held too much fixed rate interest earning assets - versus.. adjusted interest "paying" liabilities.... Banks, study this intently;

Thus, from an interest rate scenario.. banks will not originate and hold fixed rate mortgage loans (on a large scale - they do some jumbo loans and such but the loans for the masses... they will not).... instead. they sell them into the market and create... mini-bonds out of them... MBS - which they go back and invest in... so they sell them into the secondary market. This allows them to trade with a YTM effect discount rate and price them appropriately.

Thus... no money center bank is going to do this type of lending... and holding the notes. This is why F and F make SO much sense.