This article is Part II of a two-part series on the surge in mortgage rates. In Part I, we discussed simple questions. For Part II, we've selected several technical scenarios we think will interest our newsletter subscribers. We edited the transcript for clarity and length. Questions are emboldened.
Recently, Lenders Compliance Group was asked to host a meeting for a mortgage lender's sales team. 450 loan officers from across the country attended. Jonathan Foxx, our Chairman and Managing Director, hosted the meeting. We recorded it and obtained the transcript. We did not charge a fee. The format was a question-and-answer session in which loan officers asked us how to explain the surge in interest rates to their borrowers.
Jonathan covered many scenarios, from simple to complex, reflecting borrowers' familiarity with financial conditions. We placed considerable emphasis on ensuring that the LOs' responses would comply with regulatory guidelines regarding contact with the public. The meeting lasted an hour, after which many LOs sent us additional questions.
We have scheduled another compliance-related meeting with this lender on a different topic. We would like to schedule one with you! If you want us to host a free meeting, we would be glad to discuss the topic.
Please email us here and tell us about your meeting topic!
For this Part II article, we selected several technical questions we think will interest our newsletter subscribers. We edited the transcript for clarity and length. Questions are emboldened.
This two-part article is separated into simple and technical scenarios, as follows:
- Part I: Simple Questions
- Part II: Technical Questions
TECHNICAL EXPLANATIONS
Many borrowers follow the markets closely, so drop the analogies and explain how mortgages are actually priced. Depending on the borrower's level of understanding, four ideas may carry the conversation. These are the benchmark, the spread, the Fed's role, and the decisions in the borrower's control.
Together, they usually cover the general range of concerns. But if you are unfamiliar with the technical side, do yourself a favor and read up on it; and if you don't know an answer, tell the borrower you will check – and get back to them promptly.
The Benchmark
Question: I work with high-net-worth borrowers. These people follow the market constantly. Yet they come to me for more feedback, especially when they're deciding on financing. I need a way to start the discussion that helps break the ice. What would you suggest?
Answer: I would start with something easy to test the waters. I would say:
"A mortgage rate is driven mostly by the 10-year Treasury yield, not the Fed funds rate. A 30-year mortgage has a 30-year term, but most are refinanced or paid off through a sale within about 7 to 10 years. Investors therefore price them against intermediate-term Treasuries. With the 10-year near 5.29% in early October, mortgage rates followed it up."
It may seem counterintuitive to tell them what they probably already know, but start by showing you are going to tell it like it is, no matter what. Sophisticated borrowers – like all borrowers – want to work with LOs who keep it real!
The Spread
Q: I have a borrower who watched a YouTube video on the mortgage process and now thinks he's an expert! I respect his diligence. He even knew about negative convexity, which I never knew. So maybe he is an expert! But he can't figure out how the spread works. I tried explaining it. It didn't make sense to him. How can I walk him through how the spread works?
A: The spread is the part most borrowers have never heard of. With the 30-year mortgage at 7.28% and the 10-year at about 5.29%, the gap is roughly 2 points. Historically, it has averaged closer to 1.7 points.
The spread pays for lender origination and servicing costs, the guarantee fee Fannie Mae or Freddie Mac charges, and, most importantly, the prepayment risk. To answer his question, you will need to get a bit technical. I would tell him:
"When you take a mortgage, you hold a free option to refinance whenever rates fall. The investor who buys your loan in a mortgage-backed security is short that option.
If rates drop, you refinance, and they get their money back right when reinvesting it is least attractive. If rates rise, they're stuck with a below-market loan for longer.
That's called negative convexity, and investors demand extra yield for it. When rate volatility is high, as it is now, that option is worth more, so the spread widens."
The Fed
Q: I want to be able to explain how the Fed impacts HELOCs and ARMs. What would you say to a borrower who asked me how the Fed's rate hikes impact them?
A: When you get a borrower like this, don't try to match apples with apples. Just lay out the systemic Fed process. The Fed's September hike matters, but indirectly. It moves short-term rates, such as HELOCs and the reset rates on adjustable-rate mortgages. That said, long-term rates respond to what the hike signals about inflation and future policy.
They also respond to the term premium, which is the extra return investors want for locking up money long-term amid uncertainty. From a market perspective, large Treasury issuances – even if the Fed does not act as a major buyer of mortgage bonds – add pressure to both the 10-year yield and the spread.
Well, about those ARMs, I'd say they offer little relief. ARMs normally trade at a lower starting rate in return for the future reset risk. Right now the discount is thin. On October 2nd, Yahoo Finance showed the 5/1 ARM at 6.97% versus 7.44% for the 30-year fixed. Zillow's October 4th figures had both at 7.40%. When the discount is that small, a fixed rate often looks better; but, of course, you should determine the numbers for each borrower's situation.
Decisions in the Borrower's Control
Q: I realize we are running out of time. So I'll be brief. What am I supposed to say to a sophisticated borrower who talks discount points, lock versus float, and buydowns?
A: In my view, sophisticated borrowers want to discuss trade-offs. So you should come prepared with trade-offs, and you've already mentioned three. So, let's look at them and then I'll give you a way to reply.
First, the discount points. This is usually viewed as a break-even calculation. Speaking hypothetically, let's assume a $400,000 loan, paying one point – which is $4000 – drops from 7.28% to 7.03%, thereby – wait a second while I check my trusty HP 12C – saving about $68 a month in principal and interest. That is a break-even of roughly five years. Use your actual pricing, since the rate reduction per point varies. If the borrower expects to sell or refinance within that window, points probably won't pay off.
Second, lock versus float. This is generally easy to explain. Point out the lock periods, extension costs, and any float-down option. Personally, I don't think it's a good sales strategy to frame floating as a bet on rate direction. From the compliance perspective, that kind of sales pitch is fraught with problems.
Third, buydowns. By buydowns, I assume you mean temporary versus permanent buydowns. If a seller concession is available, compare a 2-1 buydown with a permanent rate reduction funded by the same dollars.
Now, here's a possible script for you to consider:
"Mortgage rates are priced off the 10-year Treasury, which is now around 5.3%, plus a spread of about 2 points. That spread is wider than usual, mainly because rate volatility makes the refinance option in your mortgage more expensive for investors to hedge.
The Fed's September hike feeds into this through inflation and policy expectations, not by setting mortgage rates directly. With ARMs priced close to fixed rates right now, your real decisions are whether to buy down the rate, which breaks even in about X years on your loan, and how long to lock.
I can't predict where the 10-year goes next, but I can show you how each option performs if rates rise, stay flat, or fall."
Key Takeaways
- Simplify the market: Break down what is moving rates today without using overwhelming jargon.
- Focus on the payment: Always tie abstract rate fluctuations back to their actual monthly bottom line.
- Highlight client control: Empower them by showing how adjusters like down payments, loan terms, and points alter the math.
- Use scenario planning: Illustrate potential "what-if" market shifts to maintain compliance while educating the buyer.
Scenarios, Not Forecasts
Whether your borrower is a novice first-time buyer or a seasoned bond-market enthusiast, your approach should remain the same: explain the market drivers, translate the numbers into a clear monthly payment, and highlight the levers they can personally control.
When clients inevitably ask where interest rates are heading, avoid predictions. Instead, walk them through multiple rate scenarios. This strategy keeps you strictly in compliance while empowering the borrower to weigh their own risks and make informed decisions.
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This article, Talking Rates: Sales Meeting - How Loan Officers Can Explain the 2026 Mortgage Rate Surge – Part II, published on October 29, 2026, is transcribed from a Zoom meeting hosted on behalf of a mortgage lender. The presenter was Jonathan Foxx, PhD, MBA, the Chairman & Managing Director of Lenders Compliance Group, founded in 2006, the first and only full-service mortgage risk management firm in the United States, specializing exclusively in residential mortgage compliance.
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Sources
We used the following links for our research and preparation.Freddie Mac weekly survey coverage, Fox Business (Oct. 1, 2026)
Trading Economics: US mortgage rates climb further in October
LendingTree: compare mortgage rates, October 2026
The Mortgage Reports: mortgage rates today, Oct. 2, 2026
U.S. News: mortgage rates today, Oct. 2, 2026
Yahoo Finance: mortgage rates, Oct. 2, 2026
