What Really Drives Mortgage Rates?

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I’ve just seen yet another “expurt” (spelling deliberate) on CSNBC explaining how we should track the 10 year Treasury Note in order to see what is happening to mortgage interest rates.


Mortgage interest rates are a direct result of prices on Mortgage Backed Securities. Prices for Fannie Mae Bonds are a good reflection of the market for these.

Just to illustrate this fact, consider that between Wed and Thu mornings of a recent week the 10 yr Note went up by 285 basis points while Mortgage Bonds rose by 12 basis points. Mortgage interest rates were virtually unchanged.

If your Loan Broker is using the price change in the 10 year Note to advise your clients on when to lock their loan, they might as well be reading the tea leaves in their morning cuppa. As a result your client is receiving financial advice from an unqualified person. Over the life of a Mortgage this can be very expensive advice. If you are the person who recommended the Loan Broker you may well lose a client and any referrals in the future.

To understand why this misconception survives you have to consider that most of the pundits who fill our airwave are involved in the Secondary Market where individual mortgages go to be collateralized. During the weeks between your loan closing and the Lender getting it packaged ready for re-sale its value can be reduced by market forces. To protect against that possibility the Lender will hedge by buying options on the 10 year Note. For these pundits the 10 year Note is very important. For us down here in the retail world it is totally irrelevant and should be ignored for our purposes.

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