Thirty Year Fixed Rate Mortgages Should be as Low as 2.60 Percent Says Fed

The Federal Reserve Bank of New York published a very interesting article on why 30 year fixed mortgage rates are hovering around 3.30 percent and are not as low as 2.60 percent, where they should be based on one measure. Since the Financial crisis of 2007 mortgage rates have made a series of record lows because of several factors including the Federal Reserve buying mortgage backed securities (MBS) to drive rates lower.

MBS are bundles of mortgage loans sold to investors, bundling mortgage loans and selling them to investors frees up capital so mortgage companies can make more loans.

The Fed is buying MBS to provide more liquidity to the market to drive MBS prices lower which in turn will drive mortgage rates lower as well. Both mortgage rates and yields on MBS have moved lower since the Fed's policy was enacted but the declines in the latter have been more pronounced.  

Loan Type

Purchase Refinance with Cash out Refinance

State

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District Of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

FICO Score

Superior (780-850) Exceptional (760-779) Excellent (740-759) Very Good (720-739) Good (700-719) Above Average (680-699) Average (660-679) Fair (640-659) Need Improvement (620-639) Poor (350-620)

Loan Amount

$

Points

Up to 0 points Up to 0.5 points Up to 1 points Up to 1.5 points Up to 2 points Up to 2.5 points Up to 3 points

LTV

%

Loan Term

 15-Year Fixed  20-Year Fixed  30-Year Fixed  5-Year ARM  7-Year ARM  10-Year ARM

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The lenders whose rates and other terms appear on this chart are ICB's advertising partners. They provide their rate information to our data partner RateUpdate.com. Unless adjusted by the consumer, advertisers are sorted by APR from lowest to highest. For any advertising partners that do not provide their rate they are listed in advertisement display units at the bottom of the chart. Advertising partners may not pay to improve the frequency priority or prominence of their display. The interest rates, annual percentage rates and other terms advertised here are estimates provided by those advertising partners based on the information you entered above and do not bind. Any lender Monthly payment amounts stated do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Although our data partner RateUpdate.com collects the information from the financial institutions themselves, the accuracy of the data cannot be guaranteed. Rates may change without notice and can change intraday. Some of the information contained in the rate tables including but not limited to special marketing notes is provided directly by the lenders. Please verify the rates and offers before applying for a loan with the financial institution themselves. No rate is binding until locked by a lender.

Lender

APR / Rate

Fees / Points

Payment

NMLS #1835285

4.831%

15-Year Fixed

4.625%

$5,500

Includes 0.875 points for $3,500

Lender Fees: $2,000

$3,086 /mo

Next >

NMLS #1085173

4.949%

15-Year Fixed

4.750%

$5,370

Includes 1.000 points for $4,000

Lender Fees: $1,370

$3,112 /mo

Next >

NMLS #1312186

5.258%

15-Year Fixed

5.125%

$3,500

Includes 0.875 points for $3,500

Lender Fees: $0

$3,190 /mo

Next >

NMLS #6606

5.400%

15-Year Fixed

5.250%

$3,944

Includes 0.986 points for $3,944

Lender Fees: $0

$3,216 /mo

Next >

NMLS #1025894

5.426%

15-Year Fixed

5.250%

$4,612

Includes 0.978 points for $3,912

Lender Fees: $700

$3,216 /mo

Next >

NMLS #1835285

5.625%

5-Year ARM

5.500%

$5,552

Includes 0.888 points for $3,552

Lender Fees: $2,000

$2,272 /mo

Next >

NMLS #1312186

5.708%

5-Year ARM

5.625%

$3,672

Includes 0.918 points for $3,672

Lender Fees: $0

$2,303 /mo

Next >

NMLS #1835285

5.750%

30-Year Fixed

5.625%

$5,500

Includes 0.875 points for $3,500

Lender Fees: $2,000

$2,303 /mo

Next >

NMLS #1085173

5.850%

5-Year ARM

5.750%

$4,422

Includes 0.763 points for $3,052

Lender Fees: $1,370

$2,335 /mo

Next >

NMLS #1085173

5.860%

30-Year Fixed

5.750%

$4,870

Includes 0.875 points for $3,500

Lender Fees: $1,370

$2,335 /mo

Next >

NMLS #1312186

6.070%

30-Year Fixed

6.000%

$3,000

Includes 0.750 points for $3,000

Lender Fees: $0

$2,399 /mo

Next >

NMLS #6606

6.090%

30-Year Fixed

6.000%

$3,860

Includes 0.965 points for $3,860

Lender Fees: $0

$2,399 /mo

Next >

NMLS #1025894

6.097%

30-Year Fixed

5.990%

$4,620

Includes 0.980 points for $3,920

Lender Fees: $700

$2,396 /mo

Next >

Rate data provided by RateUpdate.com. Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes and insurance premiums. Actual payments will be greater with taxes and insurance included. Rate and product details.

In fact, if the declines in the secondary market (MBS) were passed through to loan rates one-for-one, the average mortgage rate would now be around 2.60 percent. Rates in this week's Primary Mortgage Market Survey (PMMS) are averaging 3.34 percent, almost 75 basis points higher.

The chart to the right shows the rate spread between the primary mortgage market and secondary mortgage market. The spread difference has increased 70 basis points to 115 basis points today from around 45 basis points in 2007. This begs the question why mortgage rates today are not at 2.60 percent instead of where they are at 3.3o percent.

Before we get into why current mortgage rates haven't fallen as much in the primary market as they have in the secondary market, I'd like to first point out that there are some lenders quoting current mortgage rates only about 25 basis points higher than 2.60 percent. The lowest fixed 30 year mortgage rates we have seen on our rate table the past couple of months is at 2.875 percent. Granted, to get this low rate you have to pay points but nonetheless, the rate is available and only slightly above where rates should be according to the New York Fed.

There are several reasons why the spread between the two markets is increasing, including the fact that yields on MBS can be directly observed and are computed under a number of assumptions that according to Fuster and Lucca, "are particularly sensitive to misspecification in the current environment."

Another main factor is the spread doesn't take into account the guarantee fees on loans charged by Fannie Mae or Freddie Mac, which have increased from 20 to 25 basis points before 2008 to about 50 basis points today. If you just factor in the fees that are charged by the GSE's, the rate difference between the lowest rates available right now and the secondary market rates, the spread difference makes sense.