Drop in bond yields has led to historic mortgage refinancing boom

CNBC's Diana Olick takes a look at how lenders are managing a flood of requests from homeowners to refinance.

A sharp drop in mortgage interest rates has sparked a sudden and unexpected refinance boom that has lenders large and small scrambling to handle the volume.

That stress on the lending market, as well as increased risk to mortgage investors from all those refinances, is actually keeping mortgage rates higher than they could be.

The average rate on the 30-year fixed loosely tracks the yield on the 10-year U.S. Treasury bond, but it is no longer keeping up. The 10-year plummeted to yet another record low overnight, but mortgage rates, while also at a record low, are slower to fall.

Mortgage rates hit 3.11% on Monday, according to Mortgage News Daily.

“Demand has ramped up in a way that many lenders have never experienced,” said Matthew Graham, chief operating officer at Mortgage News Daily, which tracks rates every morning. “Some of them have taken to raising rates in order to deter new business. Others have completely stopped accepting new applications.”

One borrower who called Bank of America on Saturday was told there would be a two-hour wait to speak with a loan officer.

At Cross Country Mortgage, a small lender in Boca Raton, Fla, phones were ringing before 8 am Monday. They have increased hours and are trying to find more staff to handle the volume, which is now triple the usual.

“It’s absolute pandemonium,” said Matt Weaver, vice-president of sales at Cross Country. “It is a supply and demand situation. The industry right now is certainly inundated with requests. Let’s put it this way, we are like Home Depot during a hurricane.”

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