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Who Affects Mortgage Interest Rates?

By Ann White

Mortgage interest rates can be different from time to time, on one person to another, and in different areas of the country. So who affects mortgage interest rates and who sets them? Your mortgage bank does come up a mortgage rate for you and they must also approve it, but mortgage interest rates are not singly handled by banks. It is the mortgage backed securities market many banks use to fund their mortgage loans that determines mortgage interests rates and banks get only what is quoted in the market and use it as the basis for setting individual mortgage rates for different borrowers. Of course, areas of different mortgage demands would see different levels of mortgage interest rates. And Secondly, future inflation expectations affect mortgage interest rates as well.

MBS Market and Mortgage Interest Rates

In the MBS market, banks are the sellers of mortgage loan securities, but buyers of these securities, private investors and governmental agencies, are the very deciding factors in setting price levels at which the securities are traded, and thus the interest rates or yields demanded by investors. These interest rates /yields are actual basis for setting mortgage interest rates on borrowers’ loans. If there are less investors in the market, such as what happened in the depth of the recession that saw many private investors pulling out of the market under financial constrains, prices of mortgage backed securities will fall and yields on them go up (price and interest rate move in opposite directions for debt securities). Remember, to keep mortgage interest rates low, the government and the Federal Reserve had to step in purchasing huge chunks of the MBS. But if there are more private investors eager to buy, like what is apparently the case for now with the slowly recovering economy bringing investors back to the market, MBS prices will rise and their rates go down.

Inflation and Mortgage Interest Rates

Any interest rate charges are two-part compensations for credit providers, one in the form of risk premium and one for time value of money. Inflation is the classic element in time value of money and lenders/investors expect their future repayments by borrowers to reflect the level of inflation over time. Among things closely watched for potential future inflation are government deficits and the Federal Reserve’s monetary policy. While government support has helped keep mortgage interest rates low, the oversupply of money into the financial system are likely to present inflationary pressure upon the economy. Absent a strong economy to absorb the over expanded buying power with things like increased home sales, the rate of inflation will eventually show up in mortgage interest rates. Note that increased mortgage demand from increasing home sales may be balanced out by an equally increased mortgage supply, without affecting mortgage interest rates upward, when enough investors are in the market,

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1. Why Is The FED Having Less Influence Over Mortgage Interest Rates?
2. What Drives Mortgage Rates?
3. How will Mortgage Rates be Affected Once the Fed Pulls Back?
4. How Do Bonds Affect Mortgage Interest Rates?
5. Inflation Affects Mortgage Interest Rates In What Ways?