Are Mortgage Rates As Low As They'll Go? Wall Street Journal Thinks So.

Click to enlarge. Mortgage rate chart of last 36 years, courtesy of MortgageNewsDaily.com

By Troy Corman, t2realestate.com

According to Prahba Natarajan in the Wall Street Journal, the 4.27% average on 30-year fixed mortgage rates are about as low as they can go.

Yet some bankers and industry executives claim that mortgage rates should be in the 3.75% to 4% range based on current yields of mortgage-back securities. "Illiquidity and unusual situations are causing originators to hold rates at this level rather than risk losing money on new loans they have difficulty hedging," according to Paul Jacob, director of research at Banc of Manhattan Capital.

Local and regional banks often provide lending for homeowners and then sell those loans to the dominant players in the market including Citgroup, Bank of America, Wells Fargo and J.P. Morgan Chase. Since there are so few new mortgages and many investors eager to buy them, the big banks are able to control the price and interest rates on loans.

Typically, mortgage rates are tied to the 10-year treasury yield - so the lower the 10-year drops, the lower the mortgage rates. But Paul Norris, a portfolio manager at Dwight Asset Management says "even if interest rates drop to 2% on the 10-year, mortgage rates are going to stay right here."