A common misconception held by most real estate agents is that the 10-year US treasury note drives mortgage rates. Some loan originators believe that to be fact as well.
That statement isn’t true.
Mortgage-backed securities (MBS), or mortgage bonds, cause mortgage rates to fluctuate. Often mortgage-backed securities act in concert with the 10-year U.S. treasury note; most fixed-income securities do. Sometimes, they move in opposite directions; that’s when the folks that follow the 10-year treasury note get caught with their pants down.
Consider this first chart, provided by StockCharts.com:
It’s easy to see that we started off the last 30 day period with a 3.775% yield, bottomed out on January 23, 2007 at a hair above 3.5%, then finished up today at 3.625%. Based on this statement, mortgage rates should be about .125% lower than they were last month.
So, why are mortgage rates actually higher, even though The Fed cut rates some 1.25%?
The answer lies in this chart for the FNMA mortgage-backed pool, provided by MBSquoteline.com:
You’ll see that we started the month at a hair above 5.5%, bottomed out on January 23, 2007 at 5.15%, and shot up with the 10-year bond. Look, however, at what happened last week. While the 10-year T-bond dropped an eight of a percent, the MBS yield rose an eight of a percent.
That’s a QUARTER PERCENT difference. Where I practice, in Southern California, .25% can mean an extra $100/month.
If you followed the fallacy that the 10 year treasury bond drove mortgage rates, you’d be waiting around for mortgage rates to fall…and you might be waiting a long time. There are external pressures which are keeping mortgage rates higher:
1. The effect of the economic stimulus package may be interpreted as inflationary.
While higher conforming and FHA loan limits sound wonderful, we may see lenders “pad” the rates to counter-balance that inflationary expectation.
2. Lenders don’t need to drop mortgage rates; demand is high.
In fact, they may be taking advantage of the lower Fed Discount rate to fatten up their margins. Who could blame them after the losses they took these past few years? Now, someone’s going to comment that loan losses were the banks’ own fault. While true, that statement is naive. If we want banks to keep lending money on residential real estate (and we do), we want them to get healthy fast. I referred to this phenomenon as the “stated income tax” some six months ago.
3. Mortgages can be risky investments.
The ratings agencies have long held mortgage bonds to be AAA rated; that isn’t the case anymore. Greater scrutiny on the underlying mortgage pools has caused ratings agencies to stratify risk so that mortgage pools can be priced appropriately. That recognition of risk may widen the margins even more.
Professional Mortgage Planners are dedicated solely to their mortgage practice. We subscribe to live MBS quotes and follow that market daily. We structure mortgage financing to be in line with your long-term financial goals and to better match your risk tolerance. Most of us have a background or specific training in financial planning.
Does that mean that a Professional Mortgage Planner is the best choice for your residential real estate financing? Well, $100/month, in interest savings, may be the answer to that question.
Maybe not. It’s only 100 bucks.