Yet again, Mortgage Rates improved today. But the improvements
were fairly minor, just as they have been in general despite a healthier rally
in Treasury rates. In some cases BestExecution rates may be
lower, but in most cases, the improvements will be seen in the form of lower
closing costs for the same rates available yesterday. The “current market” and “guidance” sections
would be the same as yesterday’s, so if those are important to you, read them HERE. Today
we want to use that space to address this question of why mortgage rates aren’t
lower considering the record low Treasury rates.
As you might already be aware, mortgage rates ARE NOT based in any way on US
Treasuries. However, IN GENERAL,
Treasuries tend to move in the same direction as mortgage rates because of
their relationship to the “stuff” that actually does determine mortgage rates:
Mortgage Backed Securities, or MBS for short.
Getting into a detailed definition of the MBS Market isn’t necessary for the
purposes of this post. If you want to
read more about it, you can do so HERE.
What’s important to know is that MBS are
SIMILAR to Treasuries in a lot of ways.
They’re both fixed-income investments, both are in the “less risky”
realm of the investment world, although MBS are more complex and their value is
subject to certain factors that DO NOT AFFECT Treasuries.
In short, the PRICE and YIELD of MBS are the basis for mortgage rates. This equates to the raw pricing that lenders
are dealing with in order to lend you money.
But lenders can’t simply offer mortgage rates based on raw MBS pricing
because they wouldn’t make any money, and they gotta make some if they’re going
to keep offering mortgages! This is
where a subjective component enters into mortgage rates. There are several factors that affect
profitability which lenders attempt to account for in deciding the ideal amount
of cushion between raw MBS and mortgage rates (also known as primary/secondary
Actually, we could probably write a whole series on those factors but we’ll
focus on a few of the “biggies” for today.
First of all, we’ve already been mentioning VOLATILITY as a reason for a
discrepancy in rates from lender to lender.
Bottom line: volatility makes things more expensive for lenders. They absorb some of that cost with lower
profits and you absorb some with higher mortgage rates than you might otherwise
see in a lower volatility environment.
Beyond volatility, this whole rally in the fixed-income world (bonds,
Treasuries, MBS, etc…) has been very fast and abrupt. That has created capacity constraints for
lenders who can only really raise rates in order to deter the new business they
can’t handle. Additionally, if rates get
low too quickly, lenders may lose commitments from borrowers who now seek a
lower rate. But the lender has already “accounted
for” that new mortgage in their pipeline when you locked your loan (meaning
they’ve promised to sell into the MBS market using your loan as part of that
MBS). When that happens, it costs them
more money to readjust and consequently will cost future borrowers more money
in the form of slightly higher rates.
These are just a few of the reasons why you’re not seeing mortgage rates
fall as quickly as Treasury yields. It’s
a whole different world-a deep dark rabbit hole of financial complexity. Today’s post only begins to scratch the
surface, but if it’s helpful, let us know and we’ll do more. Or let us know if you have questions about
this one and we’ll follow up on those.