Mortgage Rate Truth

Posted by: Jeffrey Bastress on February 8th, 2008

Is the media correct in their assessment on the Fed rate moves and how that relates to mortgage rates and the lowest mortgage rates ever? Are we as real estate professionals thinking this to be the case also?

Just so you know, fixed mortgage rates directly correlate to the 10 year treasury bond, which is an investors haven of choice when other markets such as the stock market are tanking.

With a flush of investors money into mortgage backed bonds, rates drop as supply and demand dictates.

However, when the Fed lowers the short term discount rate, this is designed for consumer spending on short term credit and therefore investors may see the stock market as the better investment as profits pour into retailers etc. They bail out of bonds, and interest rates are on the rise to enhance back the now elusive bond investor.

This all happens with lightening speed, and in many cases it happens prior to any Fed move as investors hedge on the expected or react to the unexpected.

Here is what occurred over the last wild 10-day period:

(NOTE: The 10 yr. bond is what affects the 30 year fixed rate mortgage rate)

• January 22nd (TUESDAY): 10 yr bond starts day at 3.60%. Fed drops short term lending rates by ¾% (75 basis points) which such a decrease had been unprecedented for 24 years! By the end of the day, the 10 yr. bond had dropped 18 bps to 3.42%.
Rates were set for the following day based on this information, and Wednesday morning opens with the best 30 year mortgage rates in many many years. It was short lived however. Like 1 hour!

• January 23rd (WEDNESDAY) The 10 yr bond goes up 16 bps during the day to end at 3.58% which is basically where it began the day before. Almost ALL wholesalers and the investors changed rates 3-4 times that day before finally just “calling it quits” and STOP taking rate locks until the dust settled on a very volatile market. Rate lock websites were jammed and rates at one minute were not good the next, all day.

Only a very lucky few got their rate locked, the rest either fell in the trap that rates are dropping so they wait, or they simple could not lock due to rate fluctuation and black outs.

• January 29th (TUESDAY) Fed drops short term lending rate AGAIN. This time by ½% (50 basis points)

• January 31st (THURSDAY) As of 11:30AM est. the 10 year bond is at 3.62%.

Summary: Fed has dropped short-term rates an aggregate of 125 basis points in the last 9 days.

This 1.25% drop is HIGHLY publicized and “every Tom, Dick, and Mary” consumer has seen it on the news and ASSUMES this directly affects mortgage rates going DOWN 1.25%. In fact the media hype it as exactly this.

In fact the 10 year bond started at 3.60% prior to Fed cuts, and is at 3.62% Thursday 31st. It is safe to say that there has been NO discernable over all decrease in mortgage rates in the last 10 days, except for a VERY short period of time on Wednesday January 23rd for one hour.

The good news in all this for the housing market is…

that the media, consumers and even real estate professionals believe that the Fed move means mortgage rates must be at an all time low.

And this media hype is priceless to the perception needed right now in the housing market.

Perception is reality. So I am not here to dispel the hype, just to inform. After all, I am along for the ride as every one else, and my success rides on a robust housing market. So I for one say … ”Thank You Ben Bernanke for lowering the mortgage rates by 1.25%!”

Maybe that’s all any of us really need to know anyway.

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19 Comments on “Mortgage Rate Truth”

Louis Cammarosano

Great explanation of how the Fed acted, people perceived a huge change, and actual rates stayed the same.

Mike Mueller

I can’t believe I am the first one to call you on this. “Just so you know, fixed mortgage rates directly correlate to the 10 year treasury bond” That is incorrect. They DO NOT directly correlate.

Long term rates are determined by MBS – not the 10 Yr.

Brian Brady

Great call, Mike. I was crafting a blog post about the incorrect statement.

Mike W

To Mike Mueller….according to your earlier statement long term rates are determined by MBS, what is a big factor in the MBS market? Do some research…..wait I’ll save you sometime….the 10 yr treasury bond/yield

Jeffrey Bastress

Mortgage Brokers and originators on the street watch the 10 year bond yield, since it is published and current by the minute on Bankrate, Bloomberg, CNBC etc, as the indicator of how mortgage backed securities (MBS), which are not as readily available, will affect mortgage rate pricing, which in turn affects rate changes either up or down, as a very short term understanding of which way mortgage rates may be going also.
Therefore the correlation in my being on the streets opinion.
Jeffrey Bastress

Brian Brady

I’m sorry to be blunt, Jeffrey, but that statement isn’t factually correct. That’s like suggesting REALTORs rely on for valuations (because it’s free).

Like a REALTOR relies on the MLS, professional mortgage originators rely on the MBS quote services. There are three that I’m aware of:

1- Mortgage Market Guide ($100/month)
2- Rate Link ($50/month)
3- MBS Quoteline ($50/month)

Mike W- you’re just incorrect. The 10-year T-note and FNMA 30-year MBS often move in opposite directions. Credit quality and demand/supply issues affect MBS prices which can cause polarity in the MBS/Treasury spread.

Isn’t $50/month a low enough bar to determine who will best serve your clients’ financing interests?

Mike W

Your knowledge about the mortgage rates is so impressive perhaps you can answer a question, when the 10 yr yield lowers and lenders issue new rate sheets with better pricing (sometimes several times in one day) and vice versa when the 10 yr treasury goes up lenders issue new rate sheets with worse pricing…is this a coincidence? Or should I subscribe for $50 a month for the answer. Apparently you have set a high bar for your customers and you are a top notch originator. Please share some more of your original ideas for the rest of us.

Brian Brady

Mike W.-

That is a GREAT question.

The 10 yr note often acts in concert with MBS; that’s why that happens. In times of crisis or exuberance, polarity between the two securities happens.


It’s the spread. Extraneous variables, like underlying risk to the credit quality of mortgages or supply/demand imbalance, affects MBS and causes them to move in the opposite direction. The secondary mkting guys call that “basis risk”

That rarely happens, right?

Only in times of crisis or exuberance. Crisis/exuberance pretty much defines the past 5 years (especially the past 5 months).

When credit quality and mortgage supply/demand is in balance, the 10 year will still be less reliable but the wacky, volatile mortgage market will be more predictable. You could, in essence, rely on the 10 year to be more (but not perfectly) accurate.

I sense that you’re an originator, Mike W. All three services offer free trials. You’ll get 2-3 months of free MBS pricing if you try them all. Try it; you’ll be hooked and you’ll be amazed at how simple it is to catch the movements before the lenders reprice.

John R

I guess you now know how wrong you are about this article. Anyone that has watched the market this week knows the 10 YR Tres is not tied to mortgage backed securites. If you still think that I have some ocean front property in AZ to sell you.


I think the most important thing that this article does is to make sure that consumers/borrowers are not sucked into thinking that the Fed drives mortgage rates directly. Educating homeowners is the best way to make an originator’s job easier in my opinion.


Nice recap of what’s been going on. The fed cuts help out the economy whether it’s perceived or reality. Some our our monthly payments have decreased and some of our friends have received decent fixed rates.

As long as the media thinks they’re good, and we remain responsible in lending and future cuts, they can only help.

Joe Hayden

Interesting point about how some people fail to lock their rates because they are waiting for the Feds to make a move and miss the fact rates are tied to other benchmarks.

I always correct customers and clients when I hear them discuss the Fed rate, but few understand. So much confusion comes from the great proliferation of advertising promoting the Fed rate cuts that imply a connection to mortgage rates. There ought to be a law…

Alex Greben

They can cut the rates all they want. The only people its good for is the refinance and equity line crowd. As for stimulating the purchasing side of business I’m noticing a great deal of buyers are just not qualifing like they used to. I really dont think it make a big difference on the market.


HOw do we Subscribe to MBS. Today is an interesting day. 10 year treaury is down .12 yet there was hardly any reprice notification from lenders. I assume that must be the 10 yr and MBS going in opposite direction due to extreme swings in the markets


Brian Brady is Spot On. The author, being convinced of MBS and UST’s correlation and willing to defend that opinion aggressively, is unfortunately not in scarce company even among many mortgage originators.

The pay sites listed earlier have served as great tools for more savvy brokers and have helped to start what feels like almost an underground movement. This migration of consciousness should not be relegated to the shadows though.

In no other industry will you find the principal point of contact knowing so little about the forces at work at the higher levels of their industry. At least the fry cook at McDonalds knows what a potato is and where it comes from. Most mortgage brokers, sadly, do not have an analogous understanding of their “french fry,” the mortgage loan, or the “potato” from which it comes.

At least for now, my blog is still free of charge, and actually releases updates on MBS changes any time a price swing might affect rates. I also occasionally point out when treasuries and MBS are diverging as I did in this post:

It’s amazing how germane that post is to this conversation. Jeffrey, I’ve encountered similar stubbornness in other 10-year treasury evangelicals, but let me be another voice to assure you that although parts of what you are saying, in that MBS and treasuries are extremely interdependent, that you are indeed incorrect in asserting they move in concert or that mortgage rates are in any way, other than that interdependence, tied to treasuries. A simple google search of MBS will further add to this concept.

Anyone else wishing to stay up to date on the minute by minute changes in MBS will always be notified of any appreciable digressions from treasuries on my site:
As I said, it’s free for now, and even when/if we do start charging for it, it will not be as much as the others, and certainly MUCH less expensive than making a bad call on when to float or lock a rate either because one was paying attention to treasuries, or altogether uninformed.


I am glad that you posted this. I have learned a lot from reading what each of you posted. I am new to all this stuff and I enjoy learning about all of this. Thank you again.


It was a very informative and useful post for me. I can talk about it with my clients and friends and answer their questions better. Thanks for the info.

Brian Brady

Matt’s blog is free. Originators who don’t want to spend money should read his blog daily (agents would do well to read it also):

San Antonio Attorney

I couldn’t agree more, everything said in the post is true, I gained a lot of information from it.

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