Podcast Summary
Mortgage Rates vs Treasury Yields: Historically, mortgage rates are about 2 percentage points higher than Treasury yields, but recently, mortgage rates have exceeded 2 percentage points above Treasury yields, causing confusion for borrowers and requiring further investigation.
The traditional relationship between mortgage interest rates and 10-year Treasury bonds has been disrupted, causing mortgage rates to be higher than expected. Normally, mortgage rates are about 2 percentage points higher than Treasury yields. For instance, if Treasuries are yielding 4%, one would anticipate a mortgage interest rate of around 6%. However, in recent years, this relationship has faltered. Mortgage rates have even surpassed 2 percentage points above Treasury yields, which is historically high. This anomaly was brought to the attention of NPR by a listener named Matt Kazulis. The Planet Money team is investigating the cause of this discrepancy, and they invite listeners to tune in to learn more about how mortgage rates function and why they're currently out of sync. This change in mortgage rates impacts new borrowers, so it's an essential issue to understand. For more information, visit NPR.org/elections to get closer to the issues that matter during election season.
Mortgage interest rate factors: The mortgage interest rate you pay is determined not only by the cost of borrowing from the Federal Reserve, but also by the risk of borrowers paying off their loans early, which is priced in by investors
The mortgage interest rate you pay is influenced by multiple factors, with the 10-year treasury bond acting as the benchmark in the wholesale market. The refiners, or the wholesale mortgage market, add a percentage point to the mortgage interest rate due to the risk of borrowers paying off their loans early, which reduces the future income for the original lender. This risk is priced in by investors, and when interest rates drop, borrowers may refinance, causing a loss for the original lender. So, the mortgage interest rate you pay includes not just the cost of borrowing from the Federal Reserve, but also the compensation for the risk that borrowers may pay off their loans early.
Mortgage Spread: The mortgage spread is the extra percentage points borrowers pay on top of the agreed mortgage rate, acting as insurance for the lender and covering their expenses. It can be significant and has increased due to economic uncertainty.
When you take out a mortgage, you're not just paying for the cost of borrowing the money over the agreed term. You're also paying an additional percentage point or two as compensation for the lender, acting as insurance or a "gift" in case you decide to end the mortgage early or in the event of potential financial risks like a divorce. This extra cost, known as the mortgage spread, also covers the expenses of the retail bank, such as staffing, advertising, and financial risk. The mortgage spread can be quite significant, with the difference between the 30-year mortgage rate and the 10-year treasury rate averaging around 1-2 percentage points, but recently reaching as high as 2.6 percentage points. This means that someone borrowing $300,000 could be paying an extra $1,500 per year. The rise in this extra cost can be attributed to the uncertainty in the economy and financial markets a few years ago, leading to increased risk premiums demanded by large-scale lenders and investors.
Banking industry risk aversion: Following economic uncertainty, the banking industry has become more risk-averse, leading to less competitive pricing for mortgages due to cautious lending practices.
The banking industry has become more risk-averse following the uncertainty surrounding interest rates a few years ago and the subsequent bank failures. During this period, wholesalers sought more buffer to lend money due to economic uncertainty. However, when the fear of a recession subsided, retail banks seemed to overreact and became more cautious in their lending practices. This risk aversion is evident in the lack of competitive pricing for mortgages, as banks are no longer offering attractive interest rates. This shift in banking behavior is supported by recent surveys and the aftermath of significant bank failures, such as Silicon Valley Bank and First Republic Bank.
Retail bank mortgage rates: Retail banks might maintain high mortgage rates due to strategic coordination rather than intense competition, but consumers should still shop around for the best deals.
Retail banks may be maintaining high mortgage interest rates due to a coordinated response, rather than intense competition. Bill, the guest on the podcast, suggests that this behavior is strategic and occurs without outright collusion. Despite the Fed's interest rate cuts, the oversized spread between the rates and the Fed's benchmark remains. Bill is optimistic that these competitive forces will eventually normalize, leading to lower mortgage interest rates for borrowers. Shopping around for mortgages can be a tedious process, but it's essential for consumers to ensure they're getting the best deal. With the election season bringing a flood of news, the Up First podcast offers a daily 15-minute segment to help listeners make sense of the most significant stories, both domestic and international.
NPR Politics Podcast: The NPR Politics Podcast provides valuable context and background information on important election stories, helping listeners make informed decisions.
This election year is significant, and staying informed goes beyond just being aware of the latest news. It's crucial to understand the context and background of the campaign trail to make informed decisions. That's where the NPR Politics Podcast comes in. Every weekday, NPR's political reporters break down important stories and provide valuable context, helping listeners stay fully informed leading up to November. So, if you want to make an educated decision in the upcoming high-stakes election, tune in to the NPR Politics Podcast. It's available wherever you get your podcasts.