The Federal Reserve or “FED” does NOT directly set mortgage rates. I know its a shocker, but the media is usually all wrong when talking about what moves rates. You have probably heard it mentioned on the evening news that rates are higher because of the “FED” but this is actually all wrong and many times when the media says rates are moving up or down they are a week behind!
What do lenders look at every morning when they issue their rates? They look at the Mortgage Backed Security or MBS market. This is the market where pools of mortgages that have been securitized into bonds are traded. So really investors that are buying mortgages in bulk or determining what the rates are on a constant daily basis.
If you are in the process of buying a home you should ask your loan officer if he or she has access to a MBS monitoring service. These services are relatively inexpensive, but many loan officers do not have one. I use a service called Rate Alert. I can see live updates on the market and I also get emails throughout the day. Working with a loan officer that has access to this information can save you time and money when locking in a mortagge rate. Sometimes waiting to lock the next morning when the market is up can save .125% in rate!
You can not monitor the MBS market for free. It is not published in the paper or Wall Street Journal, so working with a loan officer that pays for a MBS monitoring service is essential.
The big question is what moves the MBS? If the MBS determines daily mortgage rates then knowing what economic factors impact the MBS can help you understand what is coming. One of the largest factors affecting the MBS market is inflation. Mortgages are fixed investments so high inflation greatly reduces the yield and therefore investors demand higher rates to make up for it. Weekly economic news, the same news that drives the stock market, can push the MBS up or down quickly. In my next post I will talk more about these economic indicators.