Mortgage rates just hit an 8-year low. Here’s why they’re not even lower

As coronavirus fears send bond yields tumbling, the average rate on the popular 30-year fixed mortgage fell Friday morning to 3.23%, an 8-year low, according to Mortgage News Daily.

The 30-year fixed loosely follows the yield on the 10-year Treasury, which is now at a record low. The bottom on the 30-year fixed was set back in September 2012, when it briefly hit 3.15%.

Mortgage rates are not falling quite as fast as Treasury yields, because of the swiftness of the declines and the resulting risk to investors in mortgage-backed bonds (MBS).

Mortgage investors pay a premium for those bonds and expect to recoup that and more over time, through monthly interest payments from borrowers. But there is a risk.

Simply put, unlike Treasuries, which can’t be paid off early by the government, mortgages can be paid off early, when borrowers refinance. When that happens, investors lose those monthly interest payments, and years of potential profit.

“When rates fall super-duper fast, those risks increase quickly. The investors who buy mortgages know this, so those premiums begin to decline,” explained Matthew Graham, chief operating officer at MND.

In other words, investors are worried about even more losses from the refinance boom, so they’re not willing to pay as much now for mortgages. As the premium they’re paying goes down, the price for borrowers goes up, slightly, in either up-front costs or higher interest rates. Mortgage rates are therefore falling, but not as much as Treasury yields.

“Bottom line: the mortgage investor has to worry about you paying your loan off too quickly, so it’s not at all uncommon to see mortgage rates get stuck in the mud even as Treasury yields surge to all-time lows,” said Graham.

But, he said, given enough time and market stability, mortgage rates eventually follow, but without enough time, sometimes they’ll just wait here and reconnect with Treasuries when rates head back up.