Even as the10-year Treasury yield has risen in recent weeks, mortgage rates have continued to eek lower. Orion’s management feels that it is important for our brokers to understand what is happening, and why, so that they can explain it to your clients.
Most 30-yearmortgages are packaged together into bonds that, on average, tend to pay off over a 10-year period, so investors like to look at the 10-year Treasury yield as a “benchmark.” Normally, the spread in pricing between mortgage rates and the risk-free 10-year Treasury reflects the risk that investors bear forholding those bonds, but we have seen lenders decrease margin in recent weeks. Because mortgages are packaged together into securities and sold as mortgage bonds, it’s the return investors demand to buy these bonds that dictates the general level of mortgage rates.
When concern about the economy is high, as it is now in December, investors gravitate toward safe-haven investments like Treasury bonds and mortgage bonds, pushing bond prices higher but the yields on those bonds lower. Mortgage rates already were low when COVID-19 began to spread in the U.S., but the spring’s sharp declines in employment and spending pushed rates even lower. Good economic news tends to push mortgage rates higher because the higher demand means more work for lenders who only have so much money to lend and manpower to originate loans. When demand for mortgages surges, as Orion’s brokers are seeing, mortgage pricing increases. Likewise, when demand is flat or falls, lenders have to adjust pricing to attract business and keep the lights on.
In setting prices, lenders and investors like Orion have to look at the cost of origination and decide what margins they want above those costs. Tasks such as running a credit check, underwriting, a title search, and the many other steps Orion must take to process a loan all have costs associated with them. Lenders have to ensure a borrower can repay their mortgage, and they do that by assessing the risk of default which is why we pay close attention to debt-to-income (DTI)ratio and credit score to understand the risk of a borrower. As mortgage rates fall, DTI ratios fall, because a lower rate will drop a monthly mortgage payment, which is included in DTI ratio calculations.
Our brokers know that mortgage rates are always in flux, changing hourly, daily, and weekly. Borrowers weighing a home purchase or refinance are often told by brokers to start the process, and when it comes time to lock, the broker will obtain the best rate and price possible.