Why do mortgages interest rates change?

I am confused. I know there are ARM’s, and that lending companies sell their mortgages to others to collect payments and so that their books look good at the end of the year. I just don’t understand a few things:

1 – if the Fed has cut interest rates, wouldn’t that rate cut trickle down to the mortgage industry? If so, why would mortgage interest rates increase?
2 – Were people informed of the “ballooning” that was going to happen?
3 – Why did lending institutions issue mortgages at adujustable rates knowing that they were going to increase out of peoples budgets?

Any explanation of what is happening would be appreciated. Thank you!

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