What Makes Mortgage Rates Rise and Fall?

Most people think the Federal Reserve controls mortgage rates... Wrong! 

The Federal Reserve controls the Federal Funds Rate. The Federal Funds Rate directly controls the rate at which banks can lend excess money to each other overnight, which directly impacts HELOC rates (Home Equity Line of Credit), credit card rates, auto loans, and other commercial loans.  

Then what controls mortgage rates?

The 10yr Treasury bond is a good indicator of what mortgage rates are doing, as the 10yr Treasury Bond is the largest bond in the world, so its a good barometer of the overall bond market.  BUT, Mortgage Backed Securities (MBS) are what truly dictate mortgage rates on a daily basis.  

What in the world is Mortgage Backed Securities?!?

Think of pooling 1,000 normal residual mortgages together, and then selling them as a security instrument.  If 1,000 mortgages grouped together pay an interest rate of 4%, that's not a bad investment.  Hedge Funds, Governments, Pensions, investors, and sometimes other Government agencies will buy these mortgage backed securities as an investment.  Its the buying and selling of MBS that dictate what interest rates are doing on the daily.  The more demand for MBS, the lower mortgage rates go.  Less demand, means investors want a higher percentage rate for their investment/returns, so rates go up until supply/demand evens out.

So what does all this mean for you the consumer?!?

At Wain Capital we closely watch MBS at various coupon levels to see if intraday rate changes are happening.  We also closely follow 2, 3, 5, 7, 10, and 30 yr fixed Treasury bonds as those bonds are much larger than MBS and give us an overall indication of what the bond market is doing.  For consumers, the easiest thing to do is watch the 10 yr treasury.  For general understanding - The higher the 10yr goes you can typically expect mortgage mortgage rates going higher as well.  When the 10yr drops, mortgage rates usually drop.