How Record-Low Mortgage Rates Could Fall Further

The Federal Reserve has helped push mortgage rates to record lows. Whether rates fall any further, for the time being, is up to lenders, according to one market expert.

“The Federal Reserve’s ability to create credit at will performs wonders, but it may have done all it can do for homeowners. The lending community now holds the reins,” said Christopher Maloney, a market strategist, and former portfolio manager in an article for Bloomberg this week.

The Federal Reserve has purchased $765 billion in mortgage bonds since March 16, according to the article.

Their effort has certainly brought results. The 30-year fixed-rate mortgage rate is just 3.13%, according to the latest data from Freddie Mac.

A total of 4.3 million homeowners are currently past-due on their mortgage loans—either in foreclosure, some stage of delinquency, or in a forbearance plan, as of the latest data from Black Knight.

The national delinquency rate is at its highest level in 8.5 years at 7.76%; and serious loan delinquencies are up 50% over the past two months, according to data from Black Knight.

As mortgage expert and former Freddie Mac CEO Don Layton wrote in a working paper this month, “it is reasonable and appropriate that there should be tightening to a modest degree, even with the best possible government policy, as risks have gone up in the current economic environment.”

There is currently no indication that lenders will narrow the primary/secondary spread, but Maloney says if they were to bring the spread back to its average of 1%, mortgage rates could fall an additional 0.75% from their already-record low.

The U.S. 10-year Treasury yield stood at 0.69% on Wednesday. It has varied between 0.66% and 0.91% so far this month. Maloney says it is expected reach 0.94% at the end of the year, “which does not bode well for lower mortgage rates,” he said.

Thus, lenders are the ones with the power to push rates lower, according to him.

The primary/secondary spread—the measured difference between the level at which a lender can sell a home and the level at which they are willing to offer one—has been relatively high of late.

As of Tuesday, the spread was 1.72%, which is wider than the 1% spread averaged over the past several years, according to Bloomberg.