The epic bond rally on Wall Street isn’t trickling down to Main Street in the form of significantly lower mortgage interest rates. That supposed benefit to consumers may be far less than expected, and less than the wealth destruction from the plunge in stock prices.
It’s a bit like the lag that motorists experience in waiting for prices at the gasoline pump to fall after a drop in crude-oil futures prices, says Walt Schmidt, senior vice president for mortgage strategies at FHN Financial.
Typically, 30-year fixed-rate mortgage rates track the 10-year Treasury note but not this time. It’s been a two-step process that’s kept home-loan rates from following the bellwether Treasury yield, which has been more than cut in half, from 1.64% on Feb. 12, to 0.81% Tuesday afternoon, although that was up from Monday’s close of 0.57%.
First, yields on mortgage-backed securities traded in the secondary market have fallen far less than Treasury yields. On top of that, mortgage originators such as banks and other lenders have been even slower to trim the rates they offer prospective borrowers, leaving them far above the MBS market.
According to Mortgage News Daily’s survey, 30-year fixed rate loans Tuesday averaged 3.35%, down from 3.50% in mid-February, but actually up slightly from 3.15% on March 5. For a refinancing to save a homeowner money after closing costs, it typically requires a mortgage-rate reduction of about 75 basis points (three-quarters of a percentage point).
Those who borrowed at rates north of 4% in 2018 and early 2019 might find the interest savings worthwhile, but those with loans in the 3% range may not. To be sure, there are incentives to refinance a home mortgage other than saving on the monthly payment, including paying for home improvements or paying off other debt.
Given where the Treasury market trades, Schmidt says mortgage rates would normally be around 2.50% based on historical averages. But spreads on mortgage-backed securities over Treasuries are much higher than normal at 70 basis points, wrote Thomas Tzitzouris, economist at Strategas Securities, in a client note Monday. That was a level not seen since the “taper tantrum” of 2013, when bond yields shot higher after the Federal Reserve said it would begin to wind down its purchases of Treasury and agency mortgage-backed securities.
At the same time, Schmidt points out, the difference between mortgage-backed securities and the 3.66% rates on average new 30-year fixed-rate home loans posted on Bankrate.com as of Friday were even more out of whack with history. (For students of statistics, the comparison was five standard deviations from the mean of the history of the past five years, he calculates.)
Right now, mortgage lenders may have all the business they can handle. According to the Mortgage Bankers Association’s data released March 4, applications for refinancings were up 224% from a year earlier, and purchase applications were up 10%. Once they catch up with those applications, Schmidt looks for the big originators to start soliciting customers in earnest.
Those home-loan rates also may not help the housing market as it heads into the all-important spring selling season. While a still-strong labor market has meant strong new-home sales and robust demand for a tight supply of existing homes, Schmidt observes the stock market’s swoon may have a negative wealth effect on home buyers. According to Wilshire Associates’ calculations, some $7.1 trillion was sliced from the value of U.S. equities since the market’s peak on Feb. 19, cutting the gain since the November 2016 election by more than half, to $6.5 trillion.
Tzitzouris contends the Fed could help narrow the spread between market yields and what prospective borrowers have to pay by resuming its purchases of mortgage-backed securities. “It would reduce the secondary MBS broad market spread, likely back below 40 basis points, and quickly,” he wrote.
Schmidt doubts that’s about to happen, however. He noted that when Boston Fed President Eric Rosengren Friday suggested buying assets other than Treasuries, it would more likely be corporate securities. Corporate credit has seen strains that haven’t been evident in the mortgage market.
For now, at least, mortgage borrowers aren’t seeing much of a windfall from the plunge in Treasury yields to historic lows, and the Treasury market has already reversed a portion of its rally. Normalcy could return to the credit markets if mortgage spreads contract and if Treasury yields retrace more of their decline.
Write to Randall W. Forsyth at email@example.com