Posted 07/11/2008


The Disassociation Between Mortgage Rates And The 10-Year Treasury Note

Dan Green

The Mortgage Reports Contributor

Mortgage rates are based on the price of mortgage-backed securities, plus all applicable fees.

This chart may read like gibberish, so I notated it.

It's meant to illustrate that daily mortgage rates are not based on the yield of the 10-Year Treasury Note.  Sure, there is a long-term correlation between the two, but "long-term" doesn't do us any good when we're looking to lock an interest rate today.

We've covered this topic in-depth once before, but it's worth revisiting.

Mortgage rates are based on the price of mortgage-backed securities, plus all applicable fees.  Specifically, the formula works as follows:

  1. Start with the base mortgage rate, as set by Wall Street
  2. Add adverse market delivery charges
  3. Add loan-level pricing adjustments

This mortgage-rate formula is a major reason why rates rarely vary from lender-to-lender.  There's just no wiggle room in there because the rate is set by the combination of mortgage-backed bond prices, plus whatever fees that Fannie Mae and Freddie Mac tack on top.

In other words, conforming mortgage rates have nothing to do with the daily 10-Year Treasury yield (although the press may tell you otherwise).

Today's chart confirms it.

Now, as an unfortunate post-script, getting access to pricing in mortgage-backed securities is both difficult and expensive.  So, if you ever have questions about what mortgage rates are doing on a given day, just know that you can always call or email me, or follow me on Twitter.

I'm happy to share with you what I know so you can make better mortgage decisions.

Dan Green

The Mortgage Reports Contributor

Dan Green is an expert on topics of money. He has been featured in The Washington Post, MarketWatch, Bloomberg, and others.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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