Many Factors Influence Daily Rate Fluctuations
Anyone watching interest rates knows that they have moved higher recently. Rate volatility is part of the economic market and there are many factors that influence daily rate fluctuations. And mortgage rates are determined by supply and demand – most notably by investors who buy mortgages.
Most borrowers are often surprised when they receive a letter stating that their mortgage has been sold to a company that differs from the originating mortgage company. This is because the mortgage company may fund the loan, but an investor or a Government Sponsored Enterprise (GSE – usually Fannie Mae or Freddie Mac) will own the loan. These investors bid on securities backed by mortgages, and these MBS are often pools of mortgages sold by the GSEs.
For example, Fannie Mae will auction MBS pools to investors every day, with an underlying rate of 3.5%. Investors will then bid on the 3.5% pool and they are either sold at a premium or discount. If sold at a discount, then the 3.5% pool will repay at a higher rate resulting in increased rates and if the bidding is sold at a premium the rate of return is lower than 3.5%, therefore rates will be lower.
MBS rates and prices track those of other bond markets – but what moves those? Worldwide events impact rates. Mortgage rates have been low since the recession, but any news indicating growth and inflation, which causes the demand for capital to increase, will cause rates to rise. Investors don’t want to buy investments that are fixing their returns at 3.5% when they anticipate rising rates in the near future and can get 4% on returns. On the other hand, investors don’t want to buy rates at 4% if they are anticipated to drop, as they will be refinanced and paid off early. Therefore, mortgage rates are often determined by investors’ best guesses for where the market is going, the risk they are willing to take, and supply issues. These fluctuations result in a daily rate sheet, which changes throughout the day.