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A question I keep getting asked – are mortgage rates going to drop any further? I wish I had a crystal ball so I could give everyone a definitive answer. Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.
So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer. I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.
Mortgage rates tend to follow the 10-year Treasury bond. I say “tend to” because the correlation isn’t perfect, and current times are a good example. If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%. Instead, they’re hanging in the mid-3% range.
That begs the question why. We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act. The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner. Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow. The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance. As a result, the bond market is requiring higher mortgage rates to account for this risk.
A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers. Rumor has it that the Treasury Dept has heard them, and something is in the works.
For mortgage rates, the questions then become:
- whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
- how quickly will it happen?
The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall. But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.
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