Why might mortgage rates go up when interest rates are going down?

Posted by Jeff Ball on Mar 18, 2020 9:08:52 AM

man in suit draws on a surface with a graph and holds papers

Mortgage rates can go up even when interest rates are going down if credit spreads increase more than interest rates decrease.

Let’s break that down.

Mortgage lenders borrow money to lend money.  Many mortgage lenders, including Visio, borrow money in the bond, or securitization, markets to permanently finance their mortgage loans.

Interest rates in the securitization market are made up of two primary components including the base, or index, rate and a credit spread.

The index rate typically is tied to the rates on U.S. Treasury bonds.  So as the rates related those bonds go down, the cost to finance in the securitization market goes down provided the credit spreads do not go up.

Credit spreads are driven by several factors.  Maybe most importantly, the credit spread represents the increased amount of return a bond investor requires for the risk they perceive they are taking by not simply investing in the government bond used for the index rate.

The coronavirus has introduced significant uncertainty into the world.  As a result, investors around the globe are “fleeing to safety.”  U.S. government bonds are viewed among the safest investments in the world.  Global investors are buying U.S. government bonds driving down interest rates.  If investors are fleeing to safety, they are fleeing away from other asset classes, including the stock market and many portions of the bond market, including mortgage securitizations.  This has caused credit spreads to increase more than interest rates have declined.

If credit spreads increase more than the interests decline, mortgage lenders’ financing costs in the securitization market increase and mortgage lenders have to raise their rates to remain viable.

More Resources

Related: A Look at the Impact of the Coronaviurs on the Housing Market, Prepare Your Vacation Rentals for the Coronavirus

Topics: Finance

Most Popular

Disclaimers: Please note that our blog contains affiliate links, and at no additional cost to you, Visio Lending will earn a commission if you decide to make a purchase after clicking through the link. As an Amazon Associate, I earn from qualifying purchases. Please understand that we have experience with all of the companies we recommend, and choose to refer our borrowers and partners because they are helpful and useful, not because of the small commissions we make. Please do not spend any money on these products unless you feel you need them or that they will help you achieve your goals.

 

The information in this blog has been prepared solely for informational purposes. The contents are based upon or derived form information generally believed to be reliable although Visio accepts no liability with regard to the user's reliance on it. For legal advice, please contact your counsel.