Nick Smith Boise Real Estate New
Friday, October 21, 2011
What Drives Mortgage Interest Rates
Mortgage interest rates are not set by banks, lenders or brokers. Mortgage interest rates are based on mortgage-backed securities (MBS), which trade just like regular stocks and bonds. In essence, if MBS selling volume is lower, bond yields and mortgage interest rates increase. Conversely, if MBS selling volume is higher, bond yields and mortgage interest rates decrease. Mortgage interest rates change daily and are driven by multiple forces. One indirect external force is interest rates in general. The Federal Reserve typically has considerable control over interest rates. It does so by tightening the money supply during times of economic expansion, which results in higher interest rates. Conversely, the Fed can loosen the money supply during times of economic contraction, which results in lower interest rates.
The Fed can also take a more direct role in controlling mortgage rates. The Fed moved aggressively to push down mortgage rates by buying about $2.1 trillion of MBS. This policy, conducted in 2009 and 2010, was largely successful.
Events overseas can also affect mortgage rates. Recent economic problems in Europe have led to large purchases of U.S. Treasurys, which drove down yields and subsequently drove down mortgage interest rates. Current jitters that Greece might default on its debt have continued downward pressure on mortgage interest rates.
In an effort to keep borrowing costs down and spur economic growth, the Fed has started a new program called Operation Twist. The plan entails selling $400 billion in short-term Treasurys in exchange for the same amount of longer-term Treasurys. The Fed also announced it would be reinvesting incoming principal from previously purchased MBS to buy additional MBS.
Mortgage interest rates most closely track the 10-year Treasury note. The theory behind Operation Twist is that purchasing such longer-term Treasurys will lower their yield, thus putting downward pressure on mortgage interest rates.http://www.real1smith.com/
Subscribe to:
Comments (Atom)