Where Mortgage Rates "Come From"

A Good Explanation
Where Mortgage Rates "Come From" For every type of U.S. mortgage, there's a different basis for assigning a mortgage rate. For example, mortgage rates for portfolio loans (e.g.; jumbo mortgage, super jumbo mortgage, non-warrantable condo) are often based on some cost of funds-type index such as COFI, plus a spread. HELOCs are based on Prime Rate. Other mortgage rates, though, are based mortgage bond prices within a particular market. Conforming mortgage rates are based on the price of Fannie Mae and Freddie Mac mortgage-backed securities, as one example. By contrast, FHA mortgage rates are based on the price of a Ginnie Mae mortgage-backed security. This is why conforming mortgage rates can fall on a day that FHA mortgage rates are up -- the products' respective rates come from separate, distinct markets. Note that no mortgage rates, however, are based on the 10-year treasury. If you want to know where mortgage rates are headed, therefore, you have to watch the mortgage-backed bond market. That's fa ct and it's provable. 10-Year Treasuries Are A False Indicator In defense of the 10-year treasury, it's got a terrific, long term correlation to mortgage bonds And perhaps that's why "expert" like to link the two. The issue, though, is that everyday homeowners in places like Orange County, California; Bergen County, New Jersey; or Montgomery County, Maryland don't shop for mortgage rates over the 5-year correlation window cited by the expert. Rate shoppers compare mortgages rates over the course of one day. There's very little correlation between the 10-year treasury and mortgage bonds when we consider the actual timeline on which a rate shopper is active. On same days, 10-year treasuries will move in the same direction as Fannie Mae, Freddie Mac or Ginnie Mae bonds. On other days, 10-year treasuries will move in the opposite direction. In 2011, there was only one calendar day on which the 10-year treasury note and the current Fannie Mae coupon made the exact same move in the exact same direction. Nearly every day, the 10-year treas ury moves differently from the drivers of conforming and FHA mortgage rates, proving that you can't use the 10-year treasury as a mortgage rate proxy. It fails terribly. Thank you for allowing me to serve you. Kevin Lambe Loan Officer 1550 E McKellips Rd Suite 117 Mesa, AZ 85203 Phone: 480-344-1992 Fax: 480-374-7092 klambe@amerifirst.us www.kevinlambe.com Cut and paste this link into your browser: http://www.referralswelcome.com/referrals.html?qid=50665610