Treasury yields to rise faster than mortgage rates, narrowing spreads: MBA

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The "enormous deficits" created by the government's coronavirus stimulus plan will cause 10-year Treasury yields to rise faster than 30-year mortgage rates, said Mortgage Bankers Association Chief Economist Mike Fratantoni.

While all industry economists are forecasting that the spreads between the two will narrow, he is taking a contrarian view on how that will happen, he said.

The current spread between 10-year Treasurys and 30-year mortgages is about 260 basis points. Typically it's about 180 basis points, Fratantoni said at a virtual event the organization sponsored.

"We see it coming down gradually over the next couple of years back to that historical norm," he added.

Frantantoni projects that both Treasury yields and mortgage rates will "slowly bubble up" in the coming months, which is a view that contrasts with forecasts from competitors, who expect the spread to narrow due to Treasury rates remaining at extreme lows while mortgage rates fall.

During the second quarter alone, the Treasury plans to auction off $3 trillion of new debt "and that's going to have to be absorbed in a world where every other government around the world is running larger deficits and issuing more debt as well," Fratantoni said.

The outcome is contingent upon how quickly the U.S. can recover from the pandemic. If the country's reopening is successful, given the amount of debt being sold by Treasury, "there is a risk rates could go up faster than we're showing," he said.

However, if there is a U-shaped economic recovery versus a V-shaped one, he expects mortgage rates to go lower.

In the MBA's latest mortgage origination forecast, it projects $1.2 trillion in refinance volume. That's the most since 2012, and it would surpass 2016's total when rates were also under 4%, said Joel Kan, associate vice president of economic and industry forecasting.

The $2.4 trillion total expected for this year is the most since the boom era of the mid-2000s, Kan added.

Purchase volume will fall to $1.25 trillion this year from $1.27 trillion last year before rebounding to $1.4 trillion next year and $1.5 trillion in 2022.

The MBA expects total volume to fall to $2.1 trillion for 2021 and $1.9 trillion in the following year.

A preview of an MBA study to be released on June 4, revealed that first-quarter production profits were higher on an average per-loan basis compared to a quarter-to-quarter and year-over-year basis.

"There was definitely a cash crunch, a liquidity crunch in March, but in terms of what was reported in an income statement … a very strong first quarter at 60 basis points," said Marina Walsh, vice president of industry analysis.

In the fourth quarter, the average production profit was 45.6 bps, while in the first quarter of 2019, it was a paltry 7.5 bps.

Besides net production income, production profits and production expenses also rose from the previous quarter.

But production volume declined, as did the pull-through rate, because of higher fall-out from borrowers looking for lower rates.

The average number of days on a warehouse line fell as lenders sold loans sooner after closing, rather than waiting for the best execution in the secondary market.

And the number of independent mortgage bankers reporting profits fell to around the mid-70 percentile, from 92% one quarter prior, Walsh said. That was more a function of declines in mortgage servicing values than production issues, she added.

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