Pre-Qualify Your Loan Officer By Asking: "Where Do Mortgage Rates Come From?"

This snapshot comes from my Mortgage Market Guide dashboard.  It perfectly illustrates an important point I make over and over again.

If you want to know in which direction mortgage rates are moving, watch the price of mortgage bonds, not the 10-year treasury note.

Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula.  This is fact.  And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note.

This premise is as simple as it is essential. 

Unfortunately, a large percentage of the media, the real estate corps, and <gasp!> the mortgage industry incorrectly track the 10-year treasury note as a mortgage rate indicator instead.  As the majority, these people are consistently pushing "bad information" into the collective consciousness.

And, it's excusable to a point. 

After all, respected publications such as the Washington Post and Business Week tell us that the 10-year treasury is linked to the path of mortgage rates, so we're inclined to believe it. 

The reality is that the mortgage-backed securities market is esoteric; it's foreign to most people.  It's not in-your-face clear what mortgage rates will do when the FNMA 6.000% 30-year moves from $100.34 to $100.36 in a day.  We tend to ignore what we don't understand -- it's human nature.

By contrast, it's not tough to figure out what happened when the 10-year treasury note drops from 4.27% to 4.23%.  This is one major reason why people incorrectly use the 10-year treasury to track mortgage rates -- it's easier to follow. 

But that doesn't make it right.

As a layperson, you are not expected to know why the 10-year treasury note has nothing to do with mortgage rates.  It's a common misconception.  Your loan officer, on the other hand, is supposed to know the difference. 

Your loan officer is an mortgage expert and an industry insider.  He absotively posilutely should know the different between treasuries and mortgage bonds.  And he must be watching the right market indicators if he's going to do his job for you properly.

So, let's hammer the point home.

As of 2:00 P.M. ET yesterday, the U.S. treasury market was rallying.  The bond market looked good from 30,000 feet.  A check into the mortgage bond market, though, showed that mortgage prices were getting killed, off 25 basis points. 

This is about the same time that my inbox starting dinging with new mortgage rate sheets reflecting higher rates from our nation's lenders. 

I wasn't surprised by the reprice for the worse because I had been watching the market slowly slip away on my MBS ticker all day.  I had ample time to contact a few clients and get them locked in at lower rates before the reprice.

But for people not watching mortgage bonds at 2:00 P.M. ET yesterday, everything looked fine.  The market was actually rallying and it looked like a good day to let a mortgage rate just hang out there.  People watching the wrong indicators were unaware that pricing was slipping away with every passing minute.

I once showed a client my live mortgage bond ticker feed and he asked a really simple question: "Why don't all loan officers use this?"  I don't know, I said, it probably has something to do with cost. 

Getting access to real-time market data is not free.  Rather than pay for it, most loan officers choose to "get by" using free sources of data that aren't quite accurate.  Maybe this is why people quote the 10-year treasury so often -- you only have to turn on CNBC to find it. 

The best loan officers are always watching the proper market indicators in real-time.  You wouldn't work with a stockbroker quoting yesterday's closing price, and you shouldn't work with a loan officer ignorant to the mortgage bond market.  After all, mortgage bonds trade just like stocks and change minute-by-minute.

In the game of home loans and high finance, those with the best information preserve the most wealth, so next time you're talking to a loan officer, just ask the simple question: "Where do mortgage rates come from?".  If the answer is anything other than "mortgage-backed securities", end the relationship on the spot -- you deserve a better loan officer than that.

(Image courtesy: Mortgage Market Guide, STinSV.com, Bob Pitch)