Mortgage Money Financing
Sources...
Mortgage money is
the money a
lender has available
for home loans which must
come from a source.
There
are two basic
sources: (1) savings
generated by
individuals and
businesses as a
result of their
spending less than
they earn (real
savings), and (2)
government-created
money, commonly
referred to as fiat
money or printing press
money. This
second source does
not represent
unconsumed labor and
materials; instead
it competes for
available goods and
services alongside
the savings of
individuals and
businesses.
In the arena of
money and capital,
real estate
borrowers must
compete with the
needs of government,
business, and
consumers.
Governments,
particularly the
federal government,
compete the hardest
when they borrow to
finance a deficit.
Not to borrow would
mean bankruptcy and
the inability to pay
government employees
and provide
government programs
and services. Strong
competition also
comes from business
and consumer credit
sectors. In the face
of strong
competition for home
loan
funds, home buyers
must either pay
higher interest or
be outbid.
One
"solution"
to this problem is
for the federal
government to create
more money, thus
making competition
for funds easier and
interest rates
lower.
Unfortunately, the
net result is often
"too much money
chasing too few
goods" and
prices are pulled
upward by the demand
caused by the newly
created money. This
is followed by
rising interest
rates as savers
demand higher
returns to
compensate for
losses in purchasing
power. Many
economists feel that
the higher price
levels and interest
rates of the 1970s
were due to applying
too much of this
"solution"
to the economy since
1965.
The alternative
solution, from the
standpoint of
residential loans,
is to increase real
savings or decrease
competing demands
for available money.
A number of plans
and ideas have been
put forth by civic,
business, and
political leaders.
They include
proposals to balance
the federal budget,
incentives to
increase productive
output from
available manpower
and machines,
incentives to
increase savings by
exempting savings
deposit interest
from income taxes,
and proposals to
decrease competition
for funds through a
credit allocation
(rationing)
system.
Hence, three major
institutions that
generate mortgage
money:
- Fannie Mae
(FNMA - Federal National Mortgage Association)
- Freddie Mac
(FHLMC – Federal Home Loan Mortgage Corporation)
- Ginnie Mae
(GNMA – Government National Mortgage Association).
Mortgage
Money To Variable
Rate
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