As a result, the recent declines in the yield of the 10-year treasury have been more than offset by the escalating risk premiums. That has prevented mortgage rates from falling as much as they otherwise might.
Will these risk premiums decrease anytime soon?
As portfolios begin to heal from the housing market's wrath, risk premiums should begin to decrease, says Keith Gumbinger, vice president of HSHAssociates.com. "We'll start to get to a point where lenders will feel more comfortable passing along more of those declines in interest rates [to customers] and certainly expanding—nibbling at the fringes—of lending they used to embrace wholeheartedly," Gumbinger says. "So you should see some of those risk premiums start to decline, especially for the best credit quality borrowers."
Indeed, the risk premiums have decreased recently—although they remain well above historical norms. Gumbinger credits the narrowing in part to recent changes allowing government-sponsored mortgage finance giants Fannie Mae and Freddie Mac to increase their holdings of mortgage-backed securities. "Lots of liquidity is becoming available to good credit quality borrowers," he says.
What's the outlook for the 10-year treasury?
While risk premiums may decline, the 10-year treasury yield is expected to increase. Marta of RBC Capital Markets expects the yield to be about 3.9 percent by the end of the year, up from its current yield of about 3.5 percent. "Back in January, on the [Société Géneralé] meltdown, we made our second-lowest yield in [modern] history," Marta says. "I don't really see that yields are going to get a whole lot lower than this."
So where will mortgage rates be at the end of the year?
Velz of the Mortgage Bankers Association expects the rate on the 30-year fixed mortgage to be just over 6 percent at the end of the year. Rates could go lower, she says, should the economy slip into a protracted recession—which she does not expect.
How attractive are current mortgage rates?
Although higher risk premiums may be preventing rates from falling as low as they otherwise might, today's mortgage interest rates are still pretty darn compelling. After all, the lowest average 30-year fixed rate ever recorded by Freddie Mac's weekly mortgage survey was 5.21 percent in June 2003. By that standard, the current weekly average mortgage rate of 5.85 percent is "very attractive," says Lincoln Anderson, chief investment officer and chief economist at LPL Financial Services.
