Mortgage Rate Weirdness May Be Working in Your Favor Today

Things have been weird enough for mortgage rates recently that we were forced to add a "Temporary Note on Mortgage Rate Inconsistency" to our daily coverage recently.  It will likely return before too long, but with a few edits for clarity.  Edits will also need to account for days like today, which offered a prime example of how the inconsistency can be corrected.

There's a decent chance those first 3 sentences are confusing and/or relatively meaningless, so let's change that!

Mortgage rates aren't the only rates out there.  They exist in an ecosystem with more established players like US Treasury yields.  They move so much like Treasury yields that even very smart people mistakenly believe Treasuries (specifically, the 10yr) dictate mortgage rates.  Recently though, mortgage rates have moved in the opposite direction from Treasuries at times, or simply haven't fallen remotely as much as past precedent would suggest.

The reasons for the discrepancies have to do with the fundamental differences between mortgages and Treasuries as investments.  Simply put, a mortgage can be paid off any time whereas Treasuries are guaranteed to stick around.  If you invest in a mortgage that's paying a certain rate of return, you're hoping rates don't fall so fast that your borrower refinances. 

This plays out time and again in an environment like this, however, and it costs investors so much money so quickly that they immediately become less interested in buying mortgages.  As such, rates have to move higher to keep investors interested.  Fortunately, rates only need to rise RELATIVE to stable Treasury benchmarks.  In other words, mortgage rates are still at long-term lows, but Treasury yields have moved MUCH lower, much faster.

Mortgages CAN catch up and we finally saw a great example of that this week.  Despite Treasury yields being noticeably higher compared to yesterday afternoon, the average lender was offering lower mortgage rates.  This was made possible by the fact that Treasury yields stopped moving relentlessly lower today.  They were also much less volatile than yesterday.  Both of these things help sooth investor concerns when it comes to buying mortgages.  

This is all well and good for today, but there's no telling how prevalent it will be next week.  Either way, no one should expect that the paradoxical mortgage rate movement is over, even if we may start to see a winning day here and there.

This Daily Mortgage Rate Update is provided in partnership with Mortgage News Daily.