Despite what some people believe, mortgage-backed securities (MBS’s) are the bonds that directly dictate fixed rate mortgage interest rate pricing. The supply and demand for MBS’s is the final determinant of how fixed rate pricing is set. Just like stocks, MBS’s trade throughout the day. Large volumes of buying and selling can cause extreme fluctuations in the rate and point structures of loans available to borrowers.

Major market participants, just like individual investors, are constantly searching investment opportunities that will provide the greatest return with the least amount of acceptable risk. All investments inherently possess at least some risk. For example, one risk associated with mortgage-backed securities is a fear of prepayment. A homeowner obtains a loan for a certain duration of time at a certain interest rate. As interest rates fall, homeowners tend to refinance their homes, which lead to the early payoff of the first loan and the origination of a new loan at a lower interest rate.

Investors are very aware of this scenario and factor this risk into their demand for MBS’s. If the demand for MBS’s is strong, the prices of MBS’s increase leading to lower mortgage rates. However, if the demand weakens, mortgage interest rates rise. Continued gains in the US stock market add to the competition for investors’ funds. In addition, Treasury securities also provide competition and thus, volatility.

Regularly, stocks and bonds exhibit a general trading pattern or direction. Last year, bonds steadily increased pushing mortgage rates lower. Unfortunately, the recent pattern has been a wild and almost constant up and down motion resulting in a general increase in mortgage interest rates.