Mortgage spreads reached their narrowest point in three years on Aug. 22, but were still wider than their historic average, Redfin reported.
The normal spread, which in this case measures the difference between the 30-year fixed rate mortgage and the 10-year Treasury yield, is in a range between 150 basis points and 200 basis points. Last Friday, it fell to 226 basis points, down from around 250 basis points at the start of the summer and
What the Treasury-mortgage spread represents
Redfin compared the spread's effect on mortgage rates to how restaurants price meals. "The Treasury yield is the cost of raw ingredients, the mortgage rate is the price of the meal on the table, and the spread is the restaurant's markup, which covers the cost of the chef, rent on the restaurant, profit margin, etc," said Chen Zhao, Redfin's head of economics, in a press release. "Regardless of the cost of raw ingredients, if the restaurant has a lower markup, that lowers the customer's bill."
This is why, no matter what actions the Federal Open Market Committee might take, a lower spread helps to reduce mortgage rates, Zhao continued.
What happens if spreads keep narrowing
An FHN Financial analysis said if mortgage rates were to fall another 20-to-30 basis points, it could
If the FOMC does cut in September by 25 basis points as expected — or by even a larger amount, like the 50 basis points some pundits are calling for — mortgage rates could fall further than anticipated because the spread is being narrowed, Zhao said.
As the spreads narrow, it creates opportunities for both purchase and refinance mortgage originations. Given that the spread is still over the upper range of the norm, it gives mortgage rates the opportunity to fall even further.
What are the MBA's expectations for 2025 and 2026
The Mortgage Bankers Association's August forecast had the spread ending the first quarter of 2025 at approximately 230 basis points, before rising to 240 basis points in the second quarter. But for the second half of the year, the prediction is back to 230 basis points in each quarter.
Its 2026 outlook is consistent, with the 30-year FRM averaging 6.5% and the 10-year averaging 4.3% in all four quarters, creating a 220 basis point spread.
As of 11:30 on Aug. 26, the 10-year Treasury was unchanged at 4.275%, while Lender Price data on the National Mortgage News website had the 30-year FRM at 6.574%, meaning the spread had gone back to almost 230 basis points.
The MBA rate forecast is higher than
But Fannie Mae goes to 6.5% in the fourth quarter, while the MBA outlook only falls to 6.6%. For next year, Fannie Mae has rates falling to 6.1% by the third quarter.
In the August forecast, MBA cut its origination projection for this year to $2.015 trillion from
The MBA's 2026 and 2027 forecasts remain unchanged at $2.242 trillion and $2.287 trillion respectively.
