How Low Will Mortgage Rates Go?

Mortgage rates, even though still favorable to borrowers, may fall lower in the wake of the reports in last week that show government bond yields dropped precipitously.

Earlier last week, the ten-year yield was reported closed at 1.387% on Thursday, July 7, 2016. 

These are some of the lowest percentage rates on record. 

The national average in the U.S. for a fixed rate conforming mortgage over thirty years was 3.41%.

According to Freddie Mac, and as can be seen from the chart below, mortgage rates have dropped down 15 basis points in the preceding two weeks:

This leaves them a mere ten basis points above the record low.

The reports show that the spread, or difference, between the two – 2.02% points – rose in recent weeks to get to one of its greatest gap levels since the middle of 2012.

All this favors the banks’ profitability when lending money for the purpose of mortgages. 

Banks and investors alike see this as a blue sky environment in which to benefit from the hyper-low-interest rate climate which otherwise crushes the profits made overall.

The bank is having to lend money out at lower rates because of the falling bond yields. 

Even though they are paying close to nothing for deposits, they cannot reduce their costs of borrowing.

Providing mortgages on property loans does not offset the possible detrimental effect of low rates.

However, the benefits are significant for some. 

One who has been noted to experience positive growth from the low levels is:

• Wells Fargo & Co. The leading mortgage lender in the U.S. by volume.
• Approximately 15% of its noninterest volume comes from mortgages.

Others with a far lower contribution are:

• P. Morgan Chase & Co.
• Bank of America

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Rising borrower demand has always helped banks hold the line of profits in the past. 

This has kept the negative effect of lowered bank rates at bay. 

In 2012, the fall of bond yields brought on a wave of mortgage refinancing. 

When strong loan demand happened previously, banks in the past never passed on the savings to borrowers. 

Could this slow response to low bank yields still happen today?

The chart below shows the low fall of U.S. prime rate, 30-year fixed-rate mortgage, 15 years fixed rate mortgage and the U.S. 10 year Treasury yield:

Analysts are stating that mortgage rates should be more in step with the bank yields at 3.25% or lower.

The reason why mortgage rates are linked to the ten-year Treasury yields is that most homeowners and mortgage holders choose to move houses after or within that period. 

In the process of doing that, they pay off their mortgage.

With rates set at around 3.5%, borrowers are still doing incredibly well. 

With some lenders nationally offering below 3.5% will drive to even more borrowing activity.

It can be seen on the chart below that the 30 years Fixed Rate Mortgage Average in the U.S. currently is still dipping:

Jumbo mortgage rates dipped to an all-time low of 3.51 % last week and may settle even lower. 

As implied by the word, Jumbo mortgages are larger than the average ones that are considered for purchase by specialists like Fannie Mae and Freddie Mac. 

In most parts of the country, that is an amount exceeding $417,000.

Jumbos are mainly held on the banks’ books instead of being bundled and sold on to investors. 

They have become a popular choice with the banks because the borrowers who demand such large amounts to borrow are, in general, more affluent. 

Being a more affluent customer in the main has historically and statistically meant less delinquent foreclosures than those held by smaller mortgage borrowers.

• Banks benefit from mortgages in two ways.
• Lenders are in a lock for profit because of the environment of improved volume.  This happens when borrowers apply for refinancing.  Applications for refinancing rose 21% last week.
• Mortgage origination for the year are forecast to hit approximately $1.663 trillion, which is an increase of 2% from those recorded on 2015.

All this impacts favorably for banks shortly. 

In the long term, they may have to consider lower mortgage rates. 

The borrowers will fall back to the initial lure that the low levels posed become oversubscribed.