Most homebuyers assume a lender receives a mortgage application, chooses a rate, and keeps that loan for 30 years.
Sometimes a lender does keep the loan. Often, however, eligible mortgages are sold into the secondary market and pooled into mortgage backed securities, usually shortened to MBS. Investors buy those securities for the principal and interest cash flows generated by the underlying loans.
This is why mortgage pricing can change even when the Federal Reserve has done nothing. Mortgage rates are connected to a live bond market. MBS are one of the seven forces in my full mortgage rate guide.
Quick answer: A mortgage backed security is an investment supported by a pool of mortgage loans. As investors buy and sell those securities, prices and yields change. Lenders use that market, along with loan level adjustments, costs, and margins, to price new mortgage loans.
How a Mortgage Becomes Part of an MBS
The process can vary by loan and investor, but the basic path is straightforward.
1. A lender closes a mortgage that meets a particular program’s requirements.
2. The loan may be sold to an aggregator, Fannie Mae, Freddie Mac, or another investor.
3. Loans with similar characteristics are pooled into securities.
4. Investors purchase interests in those securities and receive principal and interest cash flows, subject to the security’s structure.
Conventional loans are commonly connected to Fannie Mae and Freddie Mac securities. FHA, VA, and USDA loans are commonly pooled into securities guaranteed by Ginnie Mae. The structures and guarantees are different, but the practical point for a buyer is the same: investor demand helps establish the market price for new mortgage production.
Why MBS Prices and Mortgage Rates Move in Opposite Directions
Bond prices and yields generally move in opposite directions. When demand for mortgage backed securities rises, MBS prices improve and the yield investors require falls. That can give lenders room to improve rate sheet pricing.
When investors sell MBS, prices fall and required yields rise. Lenders may respond by increasing rates, charging more points, reducing lender credits, or some combination of the three.
That last point matters. A market move does not always show up as a clean one eighth or one quarter change in the note rate. It may first appear in the cost or credit attached to a rate.
Why the Borrower Rate Is Higher Than the MBS Coupon
The homeowner’s note rate is not passed directly to an investor. The mortgage system has costs between the payment a borrower makes and the return an MBS investor receives.
Those costs can include servicing, guarantee fees, hedging, operations, loan level pricing adjustments, lender compensation, and profit margin. The exact mix depends on the loan and the company pricing it.
This is also why borrowers should compare more than the note rate. Use Compare Mortgage Quotes to compare the rate, points, lender fees, payment, and breakeven together.
The Prepayment Problem
A Treasury investor knows when the bond is scheduled to mature. An MBS investor does not know exactly when homeowners will pay off the underlying mortgages.
If rates fall, more borrowers may refinance. Investors can receive principal back sooner than expected and then have to reinvest it at lower yields. If rates rise, refinancing slows and investors may be stuck with below market cash flows longer than expected.
This combination is called prepayment and extension risk. It is a major reason MBS can perform differently from Treasuries even when both markets are reacting to the same economic news.
Why Volatility Can Hurt Mortgage Pricing
Mortgage investors do not only care about the direction of rates. They care about how violently rates are moving.
High volatility makes mortgage cash flows harder to predict. That uncertainty can cause investors to demand more yield relative to Treasuries, widening the mortgage spread. Rates can therefore stay elevated even if the 10 year Treasury has stopped rising.
Why Lenders Sometimes Reprice During the Day
Lenders release rate sheets based on the market and their own pricing position. If MBS move sharply after the first rate sheet, a lender may reprice.
A negative reprice can make the same interest rate cost more or reduce the credit available. A positive reprice can improve pricing, although lenders differ in how quickly and fully they pass improvements through.
That is why the rate shown on today’s St. Louis mortgage rates is time stamped and why a rate is not protected until it is locked.
What This Means for St Louis Homebuyers
The MBS market establishes a national baseline, but buyers do not receive one national mortgage rate. Credit score, down payment, occupancy, property type, loan size, program, lock period, points, and lender margin all change the final quote.
Local property details can matter too. A single family home in St. Louis County, a two to four unit property in the city, and a condominium with a complex project review may receive different pricing or program treatment even for the same borrower.
This is where a broker’s lender access and pricing structure can matter. The market sets the backdrop. The lender or broker determines how that backdrop reaches your loan.
What a Buyer Should Do With This Information
You do not need an MBS trading screen. You need three practical habits:
- Compare rate and cost at the same time on the same day
- Ask whether the quote is locked and how long the lock lasts
- Use your real payment and likely time in the loan when deciding whether to pay points
Run the full housing payment with the Full Mortgage Payment Calculator. If two lenders are presenting different rate and cost combinations, use the mortgage quote comparison tool before choosing.
The Bottom Line
Mortgage backed securities are the market where mortgage cash flows are bought and sold. Their movement helps explain why mortgage pricing can change quickly, why the 10 year Treasury is only a guide, and why two lenders can react differently to the same market.
Return to What Really Moves Mortgage Rates for the complete framework, then check today’s St. Louis mortgage rates for the current pricing picture.
Frequently Asked Questions
Are Mortgage Backed Securities the Same as Mortgages
No. A mortgage is the loan secured by a property. An MBS is an investment backed by cash flows from a pool of mortgage loans.
Does the Federal Reserve Set MBS Prices
No. MBS trade in the market. Federal Reserve policy and balance sheet actions can influence investor demand and financial conditions, but market participants set prices.
Why Can Mortgage Rates Rise When the 10 Year Is Flat
MBS may underperform Treasuries because of volatility, prepayment expectations, supply, investor demand, or changing mortgage spreads. Lender pricing can also change independently.
Do All Mortgages Go Into Securities
No. Some loans remain in bank or credit union portfolios, and some nonagency loans are securitized through different structures. The agency MBS market still plays a central role in pricing many common mortgage products.
Want to Learn More?
What Really Moves Mortgage Rates? The 7 Forces I Watch Every Morning
