Monday , December 5 2016

Rising Mortgage Rates Help, but Also Hurt, Banks

mortgage-rates

Banks in the united states have much to be grateful for this holiday season. Higher rates on mortgages aren’t essentially on the list.

The average rate on a 30-year fixed conforming mortgage has increased to 4.16%, according to the Mortgage Bankers Association, up from post-Brexit decreases around 3.6%. Higher mortgage rates normally are good for lenders as they help them earn more on loans. Mortgages are a different case. Most are sold off to Fannie Mae or Freddie Mac and then packaged into securities. The portion held by banks stands at just at 3rd place.

rising-mortgage-rates

Higher rates on mortgage 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. Some people will be repaid early. As the heaviest holder of such securities among major banks, Bank of America should be the biggest beneficiary.

Unluckily, though, after getting pulverized by very low rates over the summer, BofA changed accounting policies so that quarterly earnings will be not as much affected. Now it will appear to benefit not as much from the rebound, though the effect 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 habituated 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 families pause before buying.

The rise in interest rates since the US election has been a good news for banks, but mortgage lending could become a significant exception.

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Rising Mortgage Rates Help, but Also Hurt, Banks
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