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Chrisman's Corner: No, Mortgage Rates are not Declining as Fast as U.S. Treasury Rates

JMAC’s brokers know that government bond yields have plummeted, but mortgage rates haven’t fallen so fast. Why not?

Viewed as “risk free” with virtually no chance of default, debt issued by the United States Government continues to set record low interest rates/yields. Yet the difference between rates on, say, a 10-year Treasury note and the average mortgage rate (as calculated by Freddie Mac) has risen in recent weeks and is at one of its widest levels since mid-2012.

That should bolster bank profits from making mortgages – a good thing since these low interest-rates threaten to crush overall bank profits. (Those come under pressure because falling bond yields mean banks lend out money at lower rates, even though they can’t reduce their own cost of borrowing since many are already paying next to nothing for deposits.)

Historically speaking, back in 2012, falling bond yields led to a mortgage-refinancing wave. Amid strong loan demand, banks & lenders such as JMAC didn’t pass on the savings in lockstep to borrowers. The same looks to be happening today. Our experienced brokers know that lenders can use profit margins to adjust lock volume entering their pipelines. Interest rate volatility is expensive from a hedging perspective. And rates could easily go up.

Lenders are in an improving-volume environment thanks to a pickup in borrower demand for refinances and home purchases as rates have fallen. (Total mortgage originations for the year are expected to hit $1.663 trillion, up 2% from 2015, per the Mortgage Bankers Association’s latest forecast.) Mortgage rates haven’t come as far down as they could suggest that mortgage rates may drop more, but at this point lenders aren’t slashing prices and thus eroding profits in the process.

If history is any indication, the good times won’t last forever for lenders. Companies like JMAC will lower mortgage rates once the latest wave of demand slows.