Lending spreads are the difference between a lender’s cost of funds and what that lender sells a mortgage for.
For example, a lender may be able to raise capital in the mortgage backed securities market at 4.00% and sell a mortgage to the borrower at 5.50%. That 1.50% difference is the “spread.”
When investors perceive added risk (or less return) in the mortgage market, spreads tighten. As a result, profit for lenders decreases and mortgage rates often go up to compensate.