Lower Rates Increase Mortgage Applications- Mixed Bag for Banks

Wall Street Journal writer Aaron Back reported earlier this week that, “For banks, slowdown fears come with a silver lining. Sharply lower lending rates typically spur a surge in profitable mortgage originations as existing or aspiring homeowners pounce. This lining loses some of its luster every time storm clouds gather, though.

Interest rates have plummeted in recent weeks after an especially dovish policy statement last month from the Federal Reserve. The yield on 10-year U.S. Treasury notes fell from 2.61% on March 19 to 2.37% on March 27.

“In response, total mortgage-application volumes rose by 28% from a year earlier in the week through March 29, according to data from the Mortgage Bankers Association. Mortgages for home purchases were up just 10%, but refinancing applications soared by 58% and the dollar value of refinancing applications more than doubled.”

“Mortgage Surge a Mixed Bag for Lenders,” by Aaron Back. The Wall Street Journal (April 3, 2019).

The Journal article stated that, “The volume of refinancing applications was only around 60% of those seen in a prior surge in the summer of 2016, though. What is more, as Mortgage Bankers Association Chief Economist Michael Fratantoni notes, it was only around a third of peak volumes in the post-crisis years of 2009-2012.

Homeowners in that period had taken out mortgages at much higher, pre-crisis interest rates so they had much more to gain by refinancing at lower rates. Today most homeowners either bought or have already refinanced at some time during the long era of low rates that followed. The result is that every downdraft in rates now brings less of a response in terms of refinancing demand.

And, while they produce a short-term fillip, refinancing waves are at best a mixed bag for banks. Lenders that hold big books of mortgage-backed securities are forced by early repayments to reinvest those holdings at lower rates. Similarly if a bank refinances a mortgage that it is currently holding on its books, then it earns a lending fee but is left holding a lower-yielding loan. Many nonconforming ‘jumbo’ loans are retained.”

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