A good-credit borrower who could have gotten a 4.625- percent 30-year mortgage on May 22 and a 4.875-percent loan yesterday will probably be offered a rate of 5.25 percent tomorrow, according to Grant Stern, the owner of Morningside Mortgage Corp., a brokerage in Miami Beach, Florida. Today, one lender he works with increased its pricing four times, he said.
“The last two months have been quite abnormal” as mortgage rates generally held in a range between 4.5 percent and 4.75 percent even while Treasury yields began climbing, he said.
Back in January, a client of mine remarked that he wished the rates would go down. I told him that I hoped rates would go up and spreads would go down.
Simply put, the benchmark interest rates for lending are the rates which investors demand to lend money, virtually risk free, to the US Treasury (who in 233 years has never defaulted). An interest rate “spread” is simply the difference between the benchmark and a rate which is compared to the benchmark, “spreads” are expressed in absolute percentage terms or bps (basis points 1 = 0.01%).
When the market was in a panic, investors rushed to lend money to the government at generously low interest rates, but demanded giant premiums to purchase Agency Mortgage Backed Securities (MBS) which are considered only slightly more risky than T-Bills.
Fortunately for the market, this has played out in the last months, but created a strange dynamic where mortgage rates stayed fairly rangebound, while the cost of government debt continuously rose. This means that the “spreads” or risk premiums that investors demanded have been reduced, and is yet another “green shoot” in the budding spring of our economic recovery.
