5 year programs have several advantages from the lender’s point of view – not the least of which is that some lenders will probably keep some or all of that production in their own portfolio. If they do go to package it for sale, as you point out, the loans are designed to adjust so they lessen interest rate risk.
Just my hunch.
With regard to the difference to the 10 year treasury – the treasury is just a benchmark and the spreads change when their is a flight to quality (as we are now experiencing). Most conforming loans end up in mortgage backed securities and their price is their price but over time they do tend to move more in tandem with treasuries.
The private mortgage backed securities are what is causing some of the distress in the market – as lenders are experiencing difficulty (or at least great pain) in selling/packaging those loans their ability to make future loans changes. That appears to be what is happening in the current scenario.
