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

org:Fannie Mae;Housing and Community Development, Northeast Regional Office (NERO)
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]
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fn:Edward J. Dodson

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