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What Makes Mortgage Rates Change?

By Homesmsp @HomesMSP

Mortgage interest rates are not set by the banks, lenders or brokers.  The rates are based on mortgage-backed securities that trade like regular stocks and bonds.  Basically, if the securities selling volume is lower, rates will increase and if the selling volume is higher, the rates will decrease.  When you hear loan officers talk about the market is improving, typically we mean that interest rates are getting lower.

Mortgage rates will change daily and sometimes more often!  The rates are driven by multiple forces.  The Federal Reserve typically has considerable control over interest rates.  They will tighten money supply during times of economic expansion, which will result in higher rates.  The Fed will also loosen the money supply during times of economic contraction, which results in lower rates.  Currently the Fed has said that they are planning to keep interest rates lower for an extended period of time to help the economy improve.

The Federal Reserve can take a more direct role in controlling rates if they feel they need to.  In 2009 and 2010, the Fed bought about $2.1 trillion of mortgage-backed securities to push interest rates lower.  This policy was very successful in lowering interest rates to their current levels.

Events overseas also will affect mortgage rates.  The economic problems that Europe is currently facing has affected mortgage rates as there have been large purchases of U.S. Treasuries and that has helped lower mortgage interest rates.  Because of the concerns of Greece's possible default, many have been putting their money in the more secure U.S. Treasury bonds and mortgage-backed securities.  As we see Europe's economy stabilize, some of that money will be taken out of the bonds and securities, which will push interest rates higher.

In an effort to keep borrowing costs down and help spur the economy, the Fed has started a new program called "Operation Twist".  The plan will involve the sale of about $400 billion in short term Treasury's in exchange for the same amount of longer-term Treasury's.  The Fed is also investing incoming principal from previously purchased mortgage-backed securities (MBS) to buy additional MBS.

The theory behind Operation Twist is that it will put downward pressure on mortgage rates as the longer term Treasury's lower their yield.

As long as there is little worry about inflation and the economic reports continue to show very slow growth, we should see mortgage interest rates stay low.  They have increased slightly as we had some better employment news in October, however the rates are still very low.  If we continue to see better economic reports, we will see interest rates continue to increase. 

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