Mortgage rates are driven by the price of Mortgage Backed Securities (MBS); as MBS prices increase, rates decrease. Typically, stocks and bonds, like MBS, are moving in opposite directions. If the demand for stocks is high, then the demand for bonds is low, pushing rates up.

Last week the stock market dropped about 500 points and bonds picked up steam up through Friday. Three major news pieces made investors nervous about stocks: President Obama took a hard-line attitude towards Wall Street; Fed Chairman Bernanke’s nomination is no longer a given; and China has started to pull back on its own stimulus.

This week is jam packed with news; the State of the Union speech, the Federal Reserve Rate meeting, the fate of Ben Bernanke, a host of corporate earnings reports, more on bank reform and health care reform. At the end of the week we will have GDP numbers, which are supposed to be “eye popping”.1

Last week’s stock sell off was not a huge surprise to many who believed the market had taken off too fast.

MBS have had a good run, and depending on the news of the week, could be due for a slow down. Mortgage professionals will be watching the news, the stock market and the bond market for any hint of how things may shape up.

1-http://www.marketwatch.com/story/us-stocks-week-ahead-flirting-with-correction-2010-01-23>