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Mortgage rate update

As the top chart shows, 30-year fixed rate jumbo mortgage rates are going for a post-crisis low, a rate not seen since 2005. With a few scattered exceptions, the rate you get today is about as low as it has ever been in history. Conforming rates are still very close to all-time lows.

As the second chart shows, the fundamentals driving these rates (i.e., 10-year Treasury yields and the spread between MBS and Treasury yields that investors demand in order to compensate them for the prepayment risk of mortgage-backed securities) suggest that we are unlikely to see rates go lower than they are now. Treasury yields are quite low from an historical perspective, and spreads are about as tight as they have ever been.

One other interesting fact that shows up in the first chart is that the difference between jumbo and conforming mortgage rates is still quite large. That means that even if conforming rates move higher, it will likely take awhile before jumbo rates move higher; the spread between them could compress by another 25-50 bps. However, I should also point out that the declining spread between jumbo and conforming loan rates is a very good sign that private capital is returning to the mortgage market. The Fed is only buying conforming mortgages, not jumbos, so jumbos have been outperforming conforming MBS, which in turn suggests that private capital has been actively seeking out the higher yields on jumbos. That is also an indication that when the Fed stops buying MBS at the end of March, there is no reason to expect mortgage rates to move significantly higher.

I continue to believe that prospective homebuyers would be well-served to choose a 30-year fixed rate mortgage instead of an adjustable rate. Fixed rates are very low from an historical perspective, while the short-term rates that drive ARMs are very likely to rise significantly in coming years. With the fixed rate you get the certainty of locking in an historically low rate, but with adjustable rates you are exposed to considerable uncertainty down the road, because no one knows today how high short-term rates will be in the future.

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