Why Aren’t Mortgage Rates Lower?

The fact that the Fed lowered the overnight rate 0.5% last week had zero effect on mortgage rates. For many of our broker’s clients, this is hard to understand, but it is yet another example of media misinformation that good brokers work to correct, and help their borrowers understand.

The Fed sets a target (the Fed Funds rate) and attempts to control the rate which banks charge other banks to borrow money for 24 hours. This has near-zero effect on the 10-year Treasury or mortgage rates. The same economic conditions, however, impact short term and long-term rates, as well as the stock market. For example, the unemployment data that came out Friday had no impact on rates, as investors are fixed on the impact of the coronavirus. Many expect the Fed to reduce rates again in less than two weeks.


With the 10-year Treasury, which is usually a harbinger of mortgage rates, closing Friday at 0.76%, why aren’t mortgage rates much lower than they are? With rates continuing to fall, the people holding mortgages as investments (mortgage-backed securities) were concerned about early pay offs. In addition, there are capacity issues. Orion’s brokers know that we are working overtime to process and fund loan, and our brokers are working hard to satisfy your clients. We have added technology and processes to help streamline your loan in recent years, and this helps as well. Many lenders have increased margins to slow volume.

As rates have fallen, many borrowers with fixed-rate mortgages refinance to lock in lower payments. The owners of the mortgage backed securities and mortgages (including banks, insurance companies, and pension funds), lose out on higher payment streams. Because of this, the prices of mortgage bonds tend to rise less in any given bond rally than Treasury securities, or other bonds, making them negatively convex. The process of hedging this event is complex, and results in banks and other investors purchasing Treasury securities, further pushing up their prices and pushing down their yields.

Returning to customer service, we believe in understanding your expectations, and you understanding ours. There is no sense in promising to make a loan to a client in a certain period if you, or Orion, can’t meet that expectation. Brokers are encouraging clients to start with a conversation and work on a loan application and the needed documentation. This way, the day when rates fall to your client’s objective, if they do, we can lock the rate and at that time all that is needed is the appraisal. If your client waits to start when rates fall it will be too late.

The process of getting you to the point where you can lock a rate costs you no money, just time.  Our online process enables you to create an application and upload all your forms (pay stubs, bank statements etc.) directly into our system – no mail, no faxes. And we have some great programs with low down payments – talk to your Orion AE!

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