August 12, 2019
Mortgage rates were unchanged to slightly higher today--a claim that utterly boggles the mind of anyone who thought they understood the relationship between bond markets and the mortgage world. ALMOST without fail, a big drop in 10yr Treasury yields will coincide with lower mortgage rates. In fact, many people believe (albeit incorrectly) that mortgage rates are based on the 10yr yield. But today, despite a substantial drop in Treasury yields, mortgage rates are stuck in the mud.
Since this could continue to be the case, I'm going to include the following brief statement/reminder until the situation subsides:
A note on mortgage rates not improving even when 10yr yields are falling:
Mortgages and the bonds that underlie them (MBS) are subject to one major uncertainty that doesn't affect US Treasuries: the risk that a borrower will refinance. Investors pay extra money for mortgages upfront in exchange for interest over time. They have well-researched models that suggest average refinance risk. When rates fall more quickly than expected, people refinance faster and investors lose out on the returns they were counting on to break even. The result is that investors pay much less for any given mortgage relative to what they would pay if Treasury yields were holding steady. When investors pay less, borrowers pay more for any given interest rate, or they're simply forced to take a higher interest rate.
There's one more layer of frustration that exists between mortgage lenders and the bond market. Simply put, when volatility is high, it costs lenders much more than normal to ensure the availability of locked rates, not to mention the ability to remain profitable in the process. The result is that lender pricing will appear very conservative compared to times when MBS prices are holding in a more stable pattern.
This double whammy for mortgage borrowers can keep rates flat or even HIGHER on days where 10yr Treasury yields are MUCH lower. It will only be fixed by TIME.
If you're looking for the simplest possible analogy, here you go: mortgage rates find drops in the 10yr yield to be intoxicating and pleasant. But this particular drop is tantamount to alcohol poisoning. Last thing they want right now is another drink.
Loan Originator Perspective
Treasury yields continued descending today, pulling mortgage rates along for the ride. MBS are still lagging treasuries' gains, but we'll still take the improvement. Closing within 30 days? Take a hard look at your pricing today, if it looks good, grab it. Closing further out? Still worth discussing current pricing, especially if you're pacing the floor at 4 AM, following overseas' treasury trading and distraught over the prospect of rates rising. -Ted Rood, Senior Originator
Today's Most Prevalent Rates
- 30YR FIXED - 3.625 - 3.75%
- FHA/VA - 3.375-3.5%
- 15 YEAR FIXED - 3.375%
- 5 YEAR ARMS - 3.375-3.75% depending on the lender
Ongoing Lock/Float Considerations
- 2019 has been the best year for mortgage rates since 2011. Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections.
- Fed policy and the US/China trade war have been key players
- The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad, as well as trade war updates. The stronger the data and trade relations, the more rates could rise, while weaker data and trade wars will lead to new long-term lows.
- Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are "effective rates" that take day-to-day changes in upfront costs into consideration.