Usually people perceives that it is the Federal Reserve Board that causes the mortgage rate rise or fall in United States, but in actual when the Fed rise or lower their rates, it has no or a least impact on the mortgage rate.
The Fed rate is just only a statistic that has to do with the banks ability to borrow money overnight, to meet minimum reserve requirement, usually from their local Federal Reserve Bank. This rate is basically to tweak economic growth in USA.
The Fed rate is extensively dependent on overall economic situation of a country. When the fed sense the inflation, it increases this rate to control money supply, on
If the Fed thinks inflation is oncoming they will raise this rate to reduce the money supply. On the contrary, if they believe recession is threatening, they may lower this rate. Somehow inflation and recession do have an impact on mortgage rates as well, but not directly or immediate.
Banks follow a cyclic process for originating of a loan. They make a loan, resell it, usually to a quasi-government agency such as FNMA – “Fannie Mae” or GNMA – “Ginnie Mae”, and then make more loans.
These agencies are the “Secondary lender market”, and they obtain funds by selling mortgage-backed securities. Millions of dollars of individual mortgages are packaged into a single security that is sold as a bond.
Bonds are comparatively more secure than other financial instruments such as stock market securities. Especially when bonds offer high interest rates, people put their money to invest in bonds rather than in stock market. Conversely, people put their money into stocks when the stock market in on boom.
Bonds are usually secure investments and people and institutions will invest in them, but those investments are in constant competition with the stock market for investment dollars.
In turn, then, for those mortgage-backed bonds to attract investment, they will have to give higher investment return rates. In other words, those mortgages they buy from lenders will have to have higher interest rates.
And that is the actual reason behind the fluctuations in mortgage rate, and that is what drives mortgage interest rates.
However, lenders are more vigilant when it comes to set the rate on each mortgage loan. Some lenders carefully analyze the market before setting up an interest rate, for high risky markets, they specify higher interest rate while they set lower interest rate, for less risky markets where the default rates are low and the property values are stable.
Similarly, they set different criteria for different clients. There are many factors they look at, and for every category, there are different terms and conditions.
So all this article meant to confer is that there is not just one factor which actually determine the fix mortgage rate at the particular time period, similarly when we talk about lenders, they do a detailed study while setting of a mortgage rate for different sectors and different categories of people.
