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A: I want to touch on this topic as I have been asked recently why mortgage rates are not falling as much as 10YR Bond yields have? In the past there was a much closer relationship between 10YR bond yields and lending rates, but something changed. Risk joined the party. As a result, investors deemed mortgage related security products much riskier than in the past and would only be interested if the yield that came with this riskier bet was increased. For main street, any debt that is related to the current fear of delinquency & default risk, comes with a higher borrowing cost. In this new world where risk has been re-priced, that is the key term here, bond yields are no longer a reliable indicator to the future direction of lending rates. Instead, lending rates will be more closely tied to the evolving credit crunch and will act more on credit history than ever before! Lets see what I mean. The simplest way to get statistical evidence of what I just said, we must look at how 10YR bond yields & NY 30 YR Jumbo mortgage rates have performed over the past month or so! Lets no forget that things have changed significantly over the past 30 days as the credit crunch worsened, stocks sold off, bond yields plunged, and yet lending rates went higher. Here are my sources: BANKRATE.COM: showing the trend of NY 30YR Fixed Jumbo mortgage rates; 1 month MARKETWATCH.COM: showing the trend of 10YR Treasury Yield; 1 month I merged the two line charts onto one graph that shows: a) the downward trend of 10YR bond yields b) the upward trend of 30 YR Fixed Jumbo rates I don't know how much more clear this point can get! During times of credit distress, your credit rating will be more important than ever in deciding how low of a rate you can get on a loan as lenders try to clean up their books, tighten lending & underwriting standards, and assign a higher rate to riskier borrowers! My friend and fellow blogger Dan Green will support this theory now, but argued with me a number of times in the past before the credit crunch invaded; where I often showed you charts relating the 10YR bond yields to mortgage rates. Dan discussed recently, "Where Mortgage Rates Come From", and stated:

Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula. This is fact. And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note. So, let's hammer the point home. As of 2:00 P.M. ET yesterday (Nov. 20th), the U.S. treasury market was rallying. The bond market looked good from 30,000 feet. A check into the mortgage bond market, though, showed that mortgage prices were getting killed, off 25 basis points. This is about the same time that my inbox starting dinging with new mortgage rate sheets reflecting higher rates from our nation's lenders. I wasn't surprised by the reprice for the worse because I had been watching the market slowly slip away on my MBS ticker all day. I had ample time to contact a few clients and get them locked in at lower rates before the reprice.

So, at least there is one agreeable point here: 10 YR TREASURY YIELDS ARE NO LONGER RELATED TO LENDING RATES; ESPECIALLY JUMBO RATES! At least Dan provides an actual answer to where rates are linked to, the fixed rate mortgage backed securities (via The Mortgage Market Guide). Does your loan officer have this tool for real-time reporting? I'd certainly be surprised if they did.

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