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Summer 2019 Guide to Mortgage Rates
Mortgage rates are determined by the supply and demand for mortgage bonds in the bond market.
Why Mortgage Bonds? When you get a mortgage in the US, your mortgage company is getting the money from Fannie Mae, Freddie Mac or other "securitizers". These "securitizers" get their money by issuing bonds to bond market investors. These bonds are called "mortgage bonds" or "mortgage-backed securities". Therefore, the mortgage rate you pay is really determined by the supply and demand for mortgage bonds in the bond market.
The Role of the Federal Reserve As you can see from the chart, the Fed owned zero ($0) mortgage bonds prior to 2008. Once the financial crisis happened, the Fed decided to start buying Treasury bonds and mortgage bonds in order to drive down interest rates and stimulate the economy. Since 2009, the Federal Reserve has purchased a staggering $1.6 trillion of mortgage bonds, and it has been the largest buyer of bonds in the market.
This had the impact of keeping interest rates very low. In October 2017, the Fed began reducing its bond purchases, and by October 2018, the Fed's mortgage bond buying program had undergone a near-complete wind-down.
In March of this year, the Fed indicated ... more
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