Why Isn't the 30-Year Mortgage Rate Below 3%?

An enigma has developed as the Federal Reserve initiates an open-ended buying spree of mortgage-backed securities.
Average fixed mortgage rates should be lower than the current 3.5 percent ballpark for the 30-year loan, which is just above its all-time low.
The 30-year mortgage would be below 3 percent based on the factors that should be driving what lenders charge borrowers, according to a piece by Pete Eavis of The New York Times.
“Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way,” Eavis writes.
Here’s the basics of the enigma:
Mortgage rates have dropped as the Fed has bought trillions of dollars in bonds, a strategy aimed at stimulating the economy through increased lending at lower rates. The Central Bank’s focus is on mortgage-backed securities.
But will these purchases lead to even lower mortgage rates, below the 3.49 all-time low recorded by Freddie Mac in July?
Pricing in the mortgage market seems to be stuck in a groove, The Times article said.
In September 2011, mortgages were being originated at 4.1 percent. The lenders then sold these mortgages into the bond market with a yield of 3.36 percent, according to a Bloomberg index.
The metric is the difference between the bond and mortgage rates; 0.74 percentage points in this case. Obviously, the bigger the “spread,” the bigger the profit for the banks selling the mortgages.
That 0.74 percentage point “spread” was close to the 0.77 percentage point average since the end of 2007.
But over the last 12 months, the spread has widened significantly, and is now more than 1.4 percentage points. That’s because bond yields have fallen deeper than the mortgage rates banks are charging borrowers.
Putting it simply: the banks’ mortgage revenues are surging, but borrowers are not seeing a further drop in rates.
What’s behind this “enigma”? Apparently, it’s a backlog issue in which banks are overwhelmed with applications, and they are blaming Fannie Mae and Freddie Mac, the government-controlled entities that guarantee the mortgages.
Fannie and Freddie are requiring that borrowers meet overly strict conditions to qualify for mortgages. Banks have slowed down the process to ensure compliance, or they’ll have to take mortgages back once they’ve sold them, a move that can saddle them with losses.
But the banks have muddled through two big waves of mortgage refinancing since the 2008 financial crisis, The Times contends.
During the two waves, the spread between mortgage and bond rates rose. But not anywhere close to the height of the spread seen recently.
“And the spread has stayed wide for much longer this time around,” The Times wrote.

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