Questions regarding the Coronavirus & mortgage rates

As coronavirus fears send bond yields tumbling, the average rate on 30-year fixed mortgages fell this morning to 3.23%, an 8-year low. (The bottom on the 30-year fixed was set back in September 2012, when it briefly hit 3.15%.)

As you will know, 30-year fixed mortgage rates follow the yield on the 10-year Treasury, which is now at a record low but mortgage rates are not falling quite as fast as Treasury yields so what’s going on?

Well simply put, it’s because of the swiftness of the declines in mortgage rates and the resulting risk to investors in mortgage-backed bonds (MBS). You see, mortgage investors pay a premium for those bonds and expect to recoup that and more over time, through monthly interest payments from borrowers - but there is a risk. However, unlike Treasuries, which can’t be paid off early by the government, mortgages can be paid off early, when borrowers refinance and when that happens, investors lose those monthly interest payments, and years of potential profit.

In other words, investors are worried about even more losses from the refinance boom, so they’re not willing to pay as much now for mortgages. As the premium they’re paying goes down, the price for borrowers goes up, slightly, in either up-front costs or higher interest rates. Mortgage rates are therefore falling, but not as much as Treasury yields.

That said, given enough time and market stability, mortgage rates will eventually follow, but without enough time, they’ll just “hang out” and reconnect with Treasuries when rates head back up.