Mortgage Rates Move Modestly Lower, But Caveats Remain

Mortgage rates had a reasonably calm and logical day--not something we've been able to say very often recently.  It was calm in the sense that today's average rates didn't fall too far from yesterday's and yesterdays movement wasn't too extreme.  It was logical in the sense that the improvement coincided with stronger trading levels in mortgage bonds. 

That logic is typically taken for granted.  After all, if mortgage bonds are improving, it means investors are willing to pay higher prices for mortgages.  Paying a higher price for a bond/mortgage is the same thing as being repaid a lower yield (i.e. interest rate).  In other words, investors are willing to accept lower rates, so it's exceedingly logical for mortgage lenders to offer lower rates as a result. 

But for at least a month, we've seen wild divergences between mortgage bond performance and mortgage lenders' rate sheets.  This doesn't have anything to do with the lenders being crazy or greedy.  Rather, it has to do with the fact that the mortgage bond is only one piece of the puzzle when it comes to assigning value to mortgage.  The other major consideration is the cost/value of "servicing" (the collection of payments over the life of the loan).