143k views
0 votes
Fannie Mae / Freddie Mac (Conforming) sets the benchmark for which financial criteria?"

A) Credit score ranges
B) Debt-to-income ratios
C) Loan-to-value ratios
D) Mortgage interest rates

User Roim
by
7.3k points

1 Answer

6 votes

Final answer:

Fannie Mae and Freddie Mac set conforming loan guidelines which affect mortgage interest rates. A 3% drop in inflation would likely lead to lower monthly payments for homeowners with adjustable-rate mortgages. Changes in government bank regulations that make it cheaper and easier to lend can also affect housing market dynamics.

Step-by-step explanation:

Fannie Mae and Freddie Mac, government-sponsored enterprises, play a determining role in the U.S. housing finance system by setting conforming loan limits and guidelines for mortgages that they agree to purchase from lenders. This in turn affects the mortgage interest rates that lenders offer to borrowers, as loans that conform to these limits and guidelines typically come with lower interest rates. When examining the effects of inflation on interest rates, specifically for an adjustable-rate mortgage (ARM), a decrease in inflation by 3% would generally lead to lower market interest rates. Since ARMs are tied to market fluctuations, a homeowner with such a mortgage could expect their interest rates, and hence their monthly payments, to decrease. This decrease can provide financial relief and potentially save them money over the term of their loan.

Moreover, considering the historical relationship between inflation and mortgage interest rates as depicted in hypothetical Table 6.11, a borrower would generally benefit from taking out a mortgage during years where the mortgage interest rate is relatively low compared to inflation. Conversely, banks would benefit more from higher interest rates when inflation is low. Lastly, when government regulations change to make home loans cheaper and easier for banks to make, it can have a stimulating effect on the housing market and potentially lead to lower mortgage interest rates.

User Kayin
by
8.0k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.