Mortgage Rates - What Really Drives Them, Part 2

In yesterdays post I wrote about what drives mortgage rates from the technical and fundamental side of things.  What I didn't tell you about is the third thing that drives interest rates - the lenders themselves.

All lenders sell mortgages in the secondary market; there are some lenders who offer portfolio products and those are held in the lenders portfolio, at least for a short time and sometimes for the life of the loan.  The regular loans that can be securitized like FHA, VA, conventional and jumbo all get sold off.  The lenders may or may not keep the servicing rights but they sell off the interest rate rights which frees up more capital to write more mortgages.

Big lenders have targets as to how much penetration they want to have in any given market.  If they are considerably under that target, they may offer rates that are below the market for a short time in order to "buy" more mortgages.  This entices borrowers to go with them or mortgage bankers and mortgage brokers to send more loans their way until they have the level of business they want at which point their rates will revert to market rates.

Conversely, if a lender decides that it has all of the exposure it wants in a given market, it will raise rates such that it won't be attractive for a borrower to choose that lender.  This happened at Bank of America when I worked there in 2009.  In a sales meeting our sales manager told us that the bank had all the exposure it wanted in Southern Nevada and so they were going to raise interest rates to a point such that borrowers probably wouldn't choose to do business with them but if they did, the reward for Bank of America would be good enough to offset the additional risk of another loan in the saturated market.

Herein lies one of the advantages that a mortgage banker who sells to a number of lenders has over the big banks.  When a big bank raises their rates, they don't have an alternative to offer their clients to keep the business coming in.  When one source of a mortgage bankers list of lenders raises its rates, the mortgage banker still has a number of other options to choose from.  With the lenders we sell to, it is usually the same three or four who always have the best terms.  It varies as to which one of those lenders has the best rate on any given day but having these options is a great thing for the clients.  Another added benefit is the fact that some lenders interpret guidelines a little more liberally than others but that's a topic for a whole different post.

It's important to remember that for the most part, mortgage rates are driven by technical analysis, fundamentals (economic data) and the secret sauce - the lenders themselves.  Feel free to comment and share your thoughts and ideas.  Here's a snapshot of the mortgage bond market currently: