WASHINGTON–The wave of refinancings and first mortgages credit unions have been experiencing show no signs of abating, as rates continue to fall into record territory.
And according to analysts, rates will fall even further in coming weeks, giving some 18 million homeowners an opportunity to save money by refinancing.
“The spread between 30-year fixed-rate mortgages and the yield on 10-year treasury bonds usually runs between 1.5 and 2.0 percentage points,” noted Forbes. “That spread rose, though, hitting a peak of 2.71 percentage points in April. Since then, mortgage rates have come down well below 3% (as of August 6, 2020), bringing the spread down to 2.33 percentage points. That’s good news for today’s borrowers, even though the spread remains above long-term norms.”
In order to understand how much further mortgage rates will drop, the Forbes analysis said it’s important to understand why the spread rose so high.
‘Crucial Question’
“This is the crucial question, because the 10-year treasury yield is very likely to remain low in the near future. As of this writing it is just 0.55%,” the analysis continued. “Most mortgages except jumbos are originated by a bank or mortgage company, then sold to a federal agency, usually Fannie Mae or Freddie Mac. The agency guarantees repayment of the loans and bundles them into securities sold to institutional investors. In recent years the Federal Reserve has been buying many of these mortgage-backed securities.
“The huge volume of refinances—up 84% from a year ago, according to a Mortgage Bankers Association report—was a bit much for the market to digest. Investors hesitated to buy all of the supply, causing interest rates on wholesale bundles of mortgages to rise,” the analysis continued.
In recent months mortgage originators pushed up their spreads both to compensate for their higher risk and because they couldn’t handle all the volume coming at them, observed Forbes.
Size of Market
“Spreads have fallen in recent weeks, helping homebuyers as well as refinancing homeowners. Banks and mortgage companies have succeeded in gearing up their operations for higher volumes and are now willing to accept lower profit margins to fill their pipelines,” Forbes stated. “They should be able to work through the backlog of would-be customers. But remember that as they bring mortgage rates down, more people will step up to refi.”
The Forbes report cited data from Black Knight that showed as of July 23, with the 30-year rate at 3.01%, there were still 15.6 million refinance candidates that met broad-based underwriting criteria, which included being current on their mortgage, having a credit score of 720 or higher, and having at least 20% equity in their homes.
“These refinance candidates could also reduce their 30-year interest rate by at least 0.75% through a refinance, with an average savings of $289 per month and an aggregate savings of more than $4.5 billion per month if each of those homeowners were to refinance their mortgage.”
Black Knight had estimated 18 million refi candidates earlier when mortgage rates were lower.
How Low Can They Go?
How far will they drop? Forbes noted the current spread between 30-year fixed rate mortgages and 10-year treasuries is now 2.33%, and it should come down to at least 2.00%.
“However, treasury rates are pretty low and could easily rise again by five or 10 hundredths of a percent. The latest mortgage rate reported by Freddie Mac as of this writing is 2.88%. That could easily drop to 2.65%,” Forbes said. “A more significant drop is possible.”