How To Explain The Huge Drop in Mortgage Rates This Week

Mortgage rates have been all over the map recently, both in terms of their movement and in their variation between lenders.  It’s not altogether uncommon for certain borrowers to be seeing rates that are half a point lower than they were just last week and a full point below the mid-June highs. This is an  exceptionally fast drop!  Perhaps even more interesting (and uncommon) is the fact that mortgage rates have dropped faster than US Treasury yields.  It’s typically the other way around as investors flock first to the most basic, risk-free bonds. So why are mortgages winning the race this time?  There are a few contributing factors, but the most notable is the structure of the underlying mortgage bond market. A quick disclaimer/warning before proceeding: there’s really no great way to talk about what’s going on without things getting a bit esoteric.  If it’s all a bit confusing, that’s normal.  We’ll cordon off the most esoteric stuff in the six steps below, but you’ll need to it to understand the thesis below. Step 1: Mortgage rates are based primarily on mortgage-backed securities or MBS. As lenders originate mortgages, those mortgages can be “turned into” MBS and sold to investors who want to earn interest on mortgage debt.   Step 2:  MBS have a coupon–which is the official rate paid out by a bond.  Other bonds, like the 10yr Treasury Note, also have coupons. 
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