Rising Mortgage Rates Are Two-Edged Sword for Banks -- Heard on the Street
November 27 2016 - 12:40PM
Dow Jones News
By Aaron Back
Banks in the U.S. have much to be thankful for this holiday
season. Higher rates on mortgages aren't necessarily on the
list.
The average rate on a 30-year fixed conforming mortgage has
risen to 4.16%, according to the Mortgage Bankers Association, up
from post-Brexit lows around 3.6%. Higher rates normally are good
for lenders as they help them earn more on loans. Mortgages are a
special case. Most are sold off to Fannie Mae or Freddie Mac and
then packaged into securities. The portion held by banks stands at
just a third.
Higher rates also suppress refinancing, which means fewer
one-time gains for banks that make loans and sell them. For holders
of mortgage-backed securities, though, this is positive. Fewer will
be repaid early. As the heaviest holder of such securities among
major banks, Bank of America should be the biggest beneficiary.
Ironically, though, after getting pounded by ultralow rates over
the summer, BofA changed accounting policies so that quarterly
earnings will be less affected. Now it will appear to benefit less
from the rebound, though the impact is fundamentally unchanged.
Finally, if rates keep moving up, it could affect demand for
homes. Rates are low relative to long-term averages, but a better
gauge may be the post-financial-crisis average, which reflects what
families are now accustomed to. Since the start of 2010, this has
been just 4.22%, according to data from the Mortgage Bankers
Association. If rates exceed that level, they could give some
households pause before buying.
The rise in interest rates since the election has been good news
for banks, but mortgage lending could become a significant
exception.
Write to Aaron Back at aaron.back@wsj.com
(END) Dow Jones Newswires
November 27, 2016 12:25 ET (17:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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