Interest Rates Have Room for Adjustment

Mortgage interest rates have a larger than normal cushion over the 10 year treasury bond. First American Title’s Odeta Kushi pointed out in the May 18 REconomy Podcast that the historic gap since 1972 has been 170 basis points (1.7%). April 2023 saw the gap at 290 basis points – a 70% increase from the norm – keeping mortgage rates higher than they would normally be.

This is created in part by self-feeding problems. Mortgage Backed Securities (MBS), the reservoir of most mortgages, have extended lives compared to the past. This leads to a higher premium demand from security holders who might face greater re-payment problems with the longer hold periods (e.g., more mortgages will miss payments the longer they exist). Higher interest rates have slowed down both refinances and sales, making the average life of a mortgage within each MBS live longer. The longer the life, the higher the risk of problems, demanding higher rewards in the form of this 290 basis point margin. 

Adding to this gap is the gradual disinvestment by the Federal Reserve as a purchaser of MBS. They have been moving more toward buying securities issued by the U.S. Treasury. The Federal Reserved had represented 25% of the old market.

Please give me a call at Premier Funding Network to answer any of your mortgage questions at 714-283-9900.