Mortgage rates are the lowest on record. But by a key historical measure, they should be even lower.
Over the past year, a wide gap ripped open between the mortgage rates house hunters see and a benchmark interest rate investors demand to buy bonds backed by home loans.
In normal times, this obscure metric would only be of interest to bankers, brokers and traders of mortgage-backed securities. But with housing still dragging on the economy, the spread is potentially slowing the recovery—and important to everyone from top Washington policy makers to strapped homeowners who could use a few extra dollars each month.
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For months, a key interest rate on mortgage-backed securities—known as the current coupon yield—has tumbled faster than average U.S. 30-year mortgage rates.
In recent weeks, the difference between the two has flirted with levels seen in the aftermath of the financial crisis.
Some say the wide spread shows the large banks that dominate the mortgage market are flexing their muscle by keeping prices relatively high. Others argue the gap reflects increased regulatory costs, risks and new realities of mortgage making.
Either way, the spread is wide. Tuesday afternoon, it was 0.96 percentage
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