The 10-year U.S. Treasury rates rose a substantial 15 basis points higher this past week (see black line)
As the 10-year rates increased, the 30-year mortgage rates increased by only 2 basis points. This caused the spread to decrease by 13 basis points ending the spread up by 14 bps above the historic spread of 168 bps.
Given we are in a rising rate environment, a 14-bps spread is not much of a cushion. It is likely that the 30-year mortgage rates will increase soon.
As rates rise, so will the applications for loans as people try to lock in lower rates, putting profitability pressure on the loans currently in the pipeline—-especially for lenders who do not have locked in cost of funds. The loan rates to the consumer are locked while their Cost of Funds (COF) floats and is not known until funding closes. With Income fixed and costs rising—it will tank the profitability spread of the pipeline inventory.
It is one of the main reasons why rates ROCKET UP and FEATHER DOWN in an increasing or decreasing market.