30-year rates dropped into the high 5s before rebounding late
A plan announced on Thursday by President Donald Trump to have Fannie Mae and Freddie Mac buy $200 billion in mortgage bonds appears to have caused rates to plummet on Friday.
Reports show that 30-year mortgage rates fell to levels not seen in almost three years, creeping into the high 5s before rebounding into the low 6s late in the day.
The reason for the fall appears to be a tightening of mortgage-backed security (MBS) spreads on Friday, which pushed rates lower.
Eric Hagen (pictured top) is the managing director and mortgage and specialty finance analyst at BTIG. He said those spreads tightened by approximately 20 basis points on Friday to levels last seen in early 2022.
“Mortgage spreads in the secondary market have tightened about 50 basis points in the better part of three or four months since the end of the summer, including 20 basis points today,” Hagen told Mortgage Professional America. “The big question is, are mortgage originators going to price for that change in the market? We think the answer is absolutely yes.
“We've already seen mortgage rates below six. If interest rate volatility were higher, I'm not sure that that would really be the case. So we're thankful for the fact that volatility is as low as it is, because otherwise it's harder to see mortgage originators responding to a move like that as quickly.”
Tightening mortgage spreads
Hagen said Thursday’s announcement by the Trump administration was just the latest piece of the puzzle that started in late summer, when Trump said he might declare a housing emergency.
This was part of the reason Barry Habib, CEO of MBS Highway, predicted at the National Association of Mortgage Brokers (NAMB) annual event that rates could approach 5.5% in 2026.
The question Hagen raises is if spreads could tighten even further, approaching where they were before the Fed started raising rates post-pandemic. That could cause another rate drop.
“The tightest that we got before the Fed started raising rates in 2022 was like 70 to 75 basis points for mortgage spreads in the secondary market,” Hagen said. “Right now, we're just inside of 100. The GSEs could orchestrate getting down to 75 again, and that would mean mortgage rates probably come in at least another 25 basis points, and then we feel like they could probably come in even more.”
The reason that Hagen thinks rates could come down further is the increased competition in the mortgage market, especially in the wholesale channel with Rocket and United Wholesale Mortgage (UWM).
“In the pandemic, mortgage originators were slower to price lower mortgage rates,” he said. “There was a period in time when they had a lot of pricing power. We don't feel like they have as much pricing power in this market. There's a lot of competition in the market. And these non-bank originators like Rocket and United Wholesale are salivating to originate and refi borrowers.”
All eyes on tariff ruling
Many experts expected the Supreme Court to announce its ruling on the legality of Trump’s tariff policy on Friday. However, that was not announced. The next date for rulings will be Wednesday.
Hagen said brokers should keep a close eye on that ruling. If the government has to repay tariffs, it may be forced to borrow money to do that. Hagen said this could push Treasury rates higher, undoing the mortgage rate drop the market saw on Friday.
“The big question is, what happens to Treasury rates?” he said. “We were just waiting for the SCOTUS decision about whether the tariffs are legal or not. If they weren't legal, there'd be a hole in the budget. We'd have to borrow more, and presumably Treasury rates would go up in response. So, there are all these reasons why we could see Treasuries going up over the next year.”
Because the window for lower rates may be shorter, expect many rate locks to be set, thanks to this Friday's rate drop. As for further rate drops, Hagen thinks the Fed is going to play a part, especially after the new chair takes over in May.
“I think the Fed is the next big shoe to drop,” Hagen said. “We totally expect that Trump is going to get his guy at the Fed, and he's going to drive interest rates pretty much as low as possible. We’re looking for the Fed to cut rates and for that to have an almost immediate spillover effect, maybe lowering volatility even further, and potentially tightening the mortgage spreads further.
“But we really need to see Treasury rates fall. If mortgage rates get down to the low 5s, we feel like the market really starts to take off. There's going to be more activity at 5.5%, but like low 5s, high 4s, we think the market really starts to take off.”
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