If the 10-year Treasury sustains a yield above 3%, rates for the 30-year fixed-rate mortgage could hit 5% sooner than later.

The yield broke through the 3% ceiling in the early morning hours of April 25 but it is unlikely mortgage rates followed in lock step.

"There's a lot of competition for not a lot of lending activity. And the industry has learned over the last couple of years that too rapid of a rate increase results in sticker shock and fewer borrowers," said Rick Sharga, executive vice president at Carrington Mortgage Holdings.

"It's supply and demand. We've got all the supply of people to get loans but don't have quite as many loans to get them, so our prices have had to drop," said Jeff Bode, chairman, CEO and president of Mid America Mortgage.

Most in the industry expected the 30-year to end 2018 at or near the 5% level. "This might accelerate that," Sharga said.

There has been a lot of volatility in the yields, so lenders are likely to take a deep breath to see if the 3% number holds, rises or retreats before taking action, Sharga added.

Or will they? In the past, some lenders have cut their pricing to below market levels in order to feed their origination fulfillment operations.

Reduced gain-on-sale is already an issue for mortgage lenders like Flagstar Bancorp and Waterstone Financial, which are reporting margin compression in their first quarter results.

The rising 10-year yield also is contributing to a flattening of the yield curve, which has a negative impact on mortgage bankers' financing vehicles.

"Our positive spread position on our warehouse line seems to have diminished," said Bode.

With refinancing drying up and slower than expected purchase activity, this should keep rates from rising too rapidly overall, Sharga said.

"We're going up on rates, but probably not as fast as we should be," Bode added. Another effect of rising rates and increased competition is that it created a race to the bottom on credit quality.

The margin compression is especially brutal on the wholesale and retail side, he said.
But there will be lenders who will "stubbornly keep their rates as low as they can for as long as they can." Bode said.

Compared with the last couple of days, rates quoted to mortgage brokers by wholesale lenders have not moved much, said Richard Pisnoy, one of the principals at Silver Fin Capital Group. But compared to two weeks ago rates moved up about 25 to 37.5 basis points.

Most large Fannie Mae and Freddie Mac lenders adjust rates or other elements of pricing along with movements in the 10-year Treasury yield, he said. But regional and community lenders take a more wait and see approach.

On April 20, the 10-year hit its highest point since the start of 2014. It then touched or came very close to the 3% mark during trading hours on April 24, but quickly bounced back down. However in after-hours activity the yield was in a tight range slightly above or below 3% until around 2:30 a.m. eastern time when it started rising, to 3.03% at 4:38 a.m. before backing down. The yield reached 3.02% shortly after the markets opened at 9:30 a.m., but quickly fell back to 3.01% before starting to rise again.

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