Who Sets Mortgage Rates? Why do rates change?

Real Estate Agent with I am a licensed referral agent in NJ


Who sets mortgage rates? Why do rates change? How often do rates change? What is a Mortgage Backed Security (MBS)? These are some of the questions we are often asked by clients. Following is a brief explanation of the MBS market and how it works.

Mortgage loan interest rates, and the corresponding fees or points charged for various rates, are driven by the prices of Mortgage Backed Securities (MBS). While lenders, in effect, set their own mortgage rates, how those rates are set is driven largely by the current rates of Mortgage Backed Securities and not the Federal Funds Rate set by the US Government. MSB are actually pools, or groups, of mortgages packaged into securities for sale in the secondary market. One security may, for example, be made up of 500 loans totaling $75,000. These MBS are traded in markets in a manner very similar to stocks and other fixed income securities, and what investors will pay for these, drives the interest rates.

Direct lenders originate loans, and the wholesale and correspondent lenders purchase the loans from Mortgage Brokers or smaller lenders, most often with the intent to resell those loans into the secondary market, packaging them into MBS. So the going price in the secondary market for loans at various interest rates influences the rates and the prices a lender will offer to the public or a Mortgage Broker. Although the lender and the wholesaler rate sheets are typically issued no more than a couple of times each day, the value of the mortgages or the price of the MBS, and consequently the price (Points) for a certain interest rate, is actually constantly changing throughout the day.

Unlike purchasing or selling stock, where the price is whatever it is at the moment you make the trade, wholesale and correspondent lenders generally issue a rate sheet setting forth their rates and corresponding points/premiums for those rates, and honor those rates, until the change in MBS prices reaches a certain threshold before passing new prices on to their customers in the form of a new rate sheet. Typically lenders will issue new rate sheets as prices move more than 4/32nds to 8/32nds, or 0.125% to .25% points.

A few other characteristics unique to the MBS market also distinguish it from equity and Treasury markets, but the overall operation is similar. A wide range of economic, social and political factors leads to changes in the value of a mortgage whenever new information is released thus determining whether mortgage rates will go up or down that day.

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Nancy Larson   Direct:  609-575-6162



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Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~ yesmyrealtor@gmail.com

Great information on mortgage rates for the consumer.  Many people don't know these facts.

Jun 20, 2008 01:47 PM #1
Joyce Logan
RE/MAX Achievers - Westerville, OH

Great info! Thanks for sharing.

Best wishes in 2008!

Joyce Logan, Realtor Real Living HER


Jun 20, 2008 01:55 PM #2
Richard Byron Smith, NMLS #184479
Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289 - Chattanooga, TN
Mortgage Loan Officer

Many consumers are starting to get educated on this. As with credit when some borrowers come knowing their middle score and the reason, many borrowers have learned that mortgage rates follow the bond markets.

There are still many who do not. A business man referred his cousin to me last week, and just wanted to confirm that the cousin would get the same rate that he had received.

When I said that would not be possible, he advised me that the prime rate had not changed.



Jun 20, 2008 11:14 PM #3
Home Loans

Thanks for sharing this information with us, this is really what we all need to know, i am really thankful to you for this post, actually i am going to retire from my company and was looking for some information like this, i dont have much information about reserve mortage or FHA loans, some one recommend me this site http://www.home123.com , i found it quite informative, so i am sharing it with you.

Oct 21, 2009 11:32 PM #4

You said - "and not the Federal Funds Rate set by the US Government".   The FED sets the short term rate and is NOT part of the US government.   How could you not know this?

Aug 25, 2010 11:53 AM #5
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