How is an interest rate determined?

Final interest rate on a Mortgage Financing is determined during a funding stage and bid down by investors through an auction.

For example, suppose a property owner is seeking to finance $1 million loan on a property. Based on a loan risk profile, IRESE suggests a score of AA – not a high risk loan. At this risk level Mortgage Financing might be listed at 6% for 30 years, $100 domination.

Based on investors individual risk assessment, they can bid an interest rate up or down as follows:

• $100,000 at 5.5%
• $250,000 at 5.75%
• $350,000 at 5.85%
• $450,000 at 5.9%
• $375,000 at 6.5%
• $275,000 at 6.75%
• $150,000 at 7%

In this example, there are more bids then the loan amount; therefore, the property owner benefits from a lower rate. Bids will be filled from the lowest rate until the entire $1 million has been financed. This auction will clear at a rate of 5.9% and all bidders will get the yield. This feature of the auction format leads to more aggressive bidding and property owner gets a better then desired interest rate of 5.9%.