What Moves Mortgage Rates?

Your credit score isn’t the only thing that determines your mortgage rate.

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Experts cite the high level of public debt as another potential mortgage-rate mover. Interest rates on U.S. Treasury bonds—bonds the federal government needs to finance day-to-day operations and service existing debt—serve as the benchmark for many consumer loan products, including mortgages. As interest rates inch up to attract treasury investors, so will rates for consumers looking to take out loans.

The fate of Fannie and Freddie. The financial sector meltdown has had many lasting effects, not least of all a major disruption in the mortgage marketplace. According to Gumbinger, the federal government or quasi-governmental entities now back most mortgages today, which has provided an extra level of security for investors. That sense of security and confidence has helped keep rates low for borrowers.

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"We don't have a real robust secondary market going on where there are a lot of private mortgages. What you have is investors investing in Ginnie Mae backed by the FHA or Fannie or Freddie," Gumbinger says. "These are well-engineered, mortgage-backed securities and they do have some guarantees against loss."

"Fannie and Freddie have the full faith and credit of the US government," Gumbinger adds. "Absent that guarantee, would interest rates be a lot higher? Oh yeah, they would."

Frank Nothaft, vice president and chief economist at Freddie Mac, agrees. "Rates are a lot lower than they would otherwise be because of FHA, Freddie Mac, and Fannie Mae," he says. "These programs help us have lower borrowing costs, which enables us to provide lower rates for mortgages."

However, with uncertainty facing the ultimate role government-sponsored enterprises will have in the mortgage marketplace going forward, there is a chance investors could demand higher interest rates in the future. That means would-be home buyers might be faced with higher mortgage rates in addition to the stricter credit standards and higher down payment requirements some are already facing.

"By having Fannie Freddie buying all originations, that has synthetically driven rates lower," says Findlay. "Removing the government-sponsored enterprises from the market and having private labels step in, the rates offered to consumers can be expected to rise anywhere from 50 to 80 basis points."

Luckily, experts say that for the time being, mortgage rates should remain relatively low and stable. "It usually takes a major economic event [to see a large move in mortgage rates]," Malouff says. "The market has settled in and there hasn't been any major shift in the economy such as inflation or deflation. There seems to be somewhat of a balance right now that is keeping the rates in that range."

Twitter: @mmhandley