Do You Want To Know How Mortgage Rates Are Determined?

No one simply "sets" rates.  Rates are primarily determined by the market through supply and demand.  The market buys and sells bonds or other debt instruments all the time.  The United States (US) to fund the government has the Treasury auction debt (typically the 5, 10, and 30 year US Treasury Bonds).  At Auction, the more the demand, the more someone is willing to pay for a bond, results in a lower yield (there is an inverse relationship between a bond's value and its yield).  On the other side, when there is less demand at auction for the US Treasury Bonds (maybe too much debt is being sold or market conditions, such as inflationary fears, etc are prevalent), the less people will pay which results in higher yields.  While not strictly based on long term treasury rate, mortgage rates correlate very well to their yields.  

Mortgage rates are also affected by a bank's pricing department.  A bank's pricing department will take into account:

• Perceived market conditions.
• What the secondary market is willing to pay for Mortgage Backed Securities (MBS).
• If they want to promote or limit a product in their portfolio.
• If their processing centers become too impacted with volume.

A good example of a Bond Auction being dramatically affected by "demand" occurred on February 6^th, 2008.  Because few buyers turned up at auction, the bonds sold much lower price than expected which resulted in high yields.  During that day, my bank had 3 mid-day pricing increases for a total worsening of rates by 0.850 points from the start of the day. 

A good example of a Bank's pricing department increasing rates occurred on January 24^th.  The initial pricing at the beginning of the day was very low.  Mortgage loan officers immediately notified their clients to lock their rates.  The Volume that came into the banking centers overwhelmed them.  To slow down the volume, the banks pricing department made a mid-day pricing adjustment by 0.385 points.

Alan ‘AJ' Nisen, a Contra Costa California Mortgage Loan professional on ActiveRain.com