A 30-Year Mortgage Below 3%? Treasury Rally Offers Bargain Loans

Homeowners are starting to lock in some of the lowest 30-year mortgage rates ever, yet many in the business say the best deals may be yet to come.

Mortgage rates that were sinking for much of 2019 are again hovering near all-time lows, and brokers say they’re locking in 30-year rates south of 3% for some customers. Still, thanks to the dynamics of the mortgage market and seemingly endless demand for U.S. government bonds, industry veterans expect borrowing costs to fall even further.

Ten-year U.S. Treasuries, which tie closely to 30-year mortgage rates, plunged below 1% for the first time Tuesday, boosting the difference between them to about 2.2 percentage points, the widest since 2012. Historically, the gap has been closer to 1.8 percentage points. The differential typically narrows when Treasury rates stay low and lenders start adding staff to keep up with demand, said Jeff Tucker, an economist with Zillow Group Inc.

“Given such low 10-year yields, we would expect 30-year mortgage rates to drop even lower than they are today,” Tucker said.

The question is how quickly that spread will narrow. It can remain elevated if mortgage-bond investors grow wary about rising prepayment speeds or lenders are slow to hire more loan officers to handle a crush of applications, according to Michael Fratantoni, chief economist at the Mortgage Bankers Association.

The average 30-year conventional mortgage rate was 3.45% in the week that ended Feb. 27, approaching the all-time low of 3.31% in November 2012. In contrast, the yield on the 10-year U.S. Treasury closed at a record low 1.26% that day, and plunged another 20 basis points by the end of Wednesday trading in response to the growing coronavirus fallout and the Federal Reserve’s emergency rate cut.

Major Savings

Even if the gap doesn’t come in for a while, there are plenty of homeowners who still stand to benefit. Mortgage refinancings surged 26% in the week that ended Feb. 28 to the highest level since 2013, according to the MBA.

That’s because at current levels, more than 11 million borrowers could chop at least 0.75 percentage point off of their current rate by refinancing, according to data provider Black Knight Inc. If the average rate falls to around 3%, the pool grows to 19.4 million borrowers who would see savings.

Joseph Ashton, who co-owns Orion Mortgage in Phoenix, said refinancing volumes have swelled to about 50% of his business, from around 15% before the boom began. He’s working weekends to keep up.

“Everyone is kind of aware that the coronavirus can have a negative effect on the economy,” Ashton said. “Negative news is good for long-term rates, unfortunately.”

Virus fears show no signs of hurting refinancing demand, at least for now. Those borrowers tend to be rate-sensitive above all else, said Mark Zandi, chief economist for Moody’s Analytics. But he’s monitoring the virus’s impact on the spring home buying season.

“Certainly the virus is a cloud on the market,” Zandi said. “Big purchases like a home are the first thing for people to be more circumspect about.”

Fourteen-Hour Days

Mortgage brokers say they don’t expect the activity to let up anytime soon.

Julie Swenson, a senior home-loan specialist at Churchill Mortgage in Tacoma, Washington, is doing about 70% of her business in refinancings, though she expects that could fall back toward 50% as more buyers shop for new homes in the spring. The 24-year mortgage-industry veteran pulled a 14-hour day on Monday to keep up with demand, and said borrowers she worked with as recently as last summer are finding savings by refinancing.

“I’m reaching out to all of my clients,” Swenson said. “The amount of money they’re able to save is in the thousands of dollars a month for some.”

Swenson said she was working with a prospective borrower when the 10-year Treasury yield tumbled below 1% for the first time. Like many, she sees little chance that the relentless rally will reverse in the near-term.

Her advice to the client: Hold off on getting that rate lock just yet.

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