Federal Reserves launches educational site
By COCO SALAZAR
4/21/2005

Mortgage originators can now send their prospective borrowers to a government Web site that will educate them about how mortgage rates operate.

The Federal Reserve System this week announced it redesigned its financial education Web site for consumers with easier access to economic and personal finance educational materials, including data on how rates are determined and how the Fed operates.

"The Federal Reserve has a long history of promoting economic education and financial literacy," Fed Chairman Alan Greenspan said in the announcement. "In that tradition, this new online tool offers students easier access to a wealth of information in the areas of economics, banking and financial services."

The site has publications, videos, interactive learning, multilevel games for audiences of various ages and knowledge levels, and links to the Federal Reserve System and other economic education sites. It also has a resource search engine for teachers to locate financial education materials that they can incorporate in their lesson plans.

The site has a section specifically dedicated to personal finance, which intends to help people make informed decisions about their money and build a stable financial future, the Fed said. Topics included within this section include consumer banking, credit, consumer protection, homes and mortgages, and interest rates.

The interest rate section describes how these are determined and how they affect individuals, businesses and the economy as a whole.

The site says loans are priced based, to a large extent, on the supply of, and demand for, credit, or loanable funds. Whereas savings, deposits and bond buying contribute to the supply of credit, borrowing or keeping a balance on a credit card account contribute to the demand for credit.

In explaining why rates differ amongst different types of loans, site visitors are told lenders face the risk of not being repaid and therefore take into account a consumer's creditworthiness as well as whether the loan is secured. Thus, a mortgage, as opposed to a credit card, has a lower rate because it reduces a lender's risk of losing what they have lent by allowing them to take possession of the home if the borrower fails to pay.

Visitors are also told that loans with longer periods have higher rates because lenders must get compensated for the increased risks longer loan durations represent as to whether the loan will get repaid fully, on time or at all, and whether inflation accelerates at a faster pace than anticipated, decreasing a lender's purchasing power if the dollars they are repaid when prices rise can't buy as much as the dollars they lent.

Another factor that affects the level or mortgage rates, is the taxes lenders pay on the income they receive from the interests they charge on loans, the site said. Individual borrowers are charged a higher rate than the government because interest on loans to state and local governments is exempt from federal income tax, and interest on loans to federal government is exempt from state and local income taxes, giving the lender the ability to keep more interest income.

The Web site is located at www.FederalReserveEducation.org

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