The attached chart of the rate spread between the 30 year fixed rate mortgage and the 10 year treasury note is a prefect visual and mathematic illustration on how today’s low mortgage rates are still high relative to where they should be historically, given other economic considerations.
I’ve blogged recently on the issues the lenders and the mortgage backed security market are having presently due to government policy reactions to COVID-19 economic concerns. The unintended result has been higher interest rates for mortgages, and tighter underwriting guidelines.
Generally there is a direct correlation between the 30 year mortgage rate, and the US 10 year note. The standard 30 year mortgage has a normal life span of 7-9 years, as properties are sold or loans refinanced earlier than the 30 year note term. The investor of bonds and mortgage notes compare duration, rate of return and risk.
Historically over the past 50 years the average rate spread for the additional risk for mortgages over the US Treasury guaranteed 10 year note has been 1.7%. Presently it jumped to 2.69%. A full percent higher than the historical average.
Read my previous blog for the breakdown on the new risks (liquidity, forbearances, MBS hedging and margin calls, etc). Normally the dominant risk to mortgages has been allocated to default/foreclosure. Not all these extracurricular risk factors.
The added risks boosting the spread will be temporary. They won’t all be resolved at the same time. Ultimately they will be eliminated once the economy, government response and the mortgage market stabilizes once COVID runs its course. An easy initial chronological target is as soon as the forbearance period has lapsed, and lenders can put their finger on the true percentage of performing loans after funding, the spread will drop.
Lets do the math… With the present 10 year note at approx. .6%, and the present spread of 2.69%, gives you a rate of 3.3% for a conforming “A” paper 30 year mortgage… which sounds right on what’s offered today.
Now in a normal environment with the historic 1.7% spread, it drops the rate to 2.3%!
Obviously there are several elements that have to align to get the mid 2% rate to the consumer. Not necessarily in this order; Will the gov’t impose additional forbearance components that will help or hurt the mortgage system? How strong will the economy be post COVID? Will there be a vaccine soon, or a second round shutdown?
Just over the past week the mortgage system has been a little better, but not all lenders or loan programs are healing at the same pace. Locking loans has gotten easier. Some non-QM loan programs are starting back up. Rates have stabilized.
It helps to be a loan broker to be able to shop and confirm, not just pricing, but how stable are specific lenders, and are they able to execute? It’s still a moving target. Some lenders will not survive, and go out of business.
Lenders are still going to be scrutinizing loans harder than in the past. They’d rather not fund a loan, than deal with one that may go into forbearance or default. Presently they are looking for “A+” loans with borrowers that have stable jobs and income, great credit scores, low loan to values. “A-“ or worse level loans will be receiving higher rates, or not be approved. It will loosen up… over time.
What I’ve been doing recently for my clients is collecting documentation, pre-approving loans, determining their viability to get approved with a good rate at a specific lender that meets their criteria, and properly evaluating the best time to submit the loan to a lender’s underwriting.
Note: The higher spreads especially during the 1980 period was during a period when the Fed Funds Rate was around 15%. Considering the Fed Rate is now 0-.25%, the spread should theoretically be lower than the historic 1.7%.
Timing’s everything !!!
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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