Average Interest Rates above 4 Percent Stave off Mortgage Refinancing BoomBy E. Scott Reckard
(TNS)—Homeowners who didn’t refinance their mortgages when interest rates were below 4 percent may be out of luck for quite a while.
Banks had been processing big batches of refis earlier this year when the average rate fell below 3.6 percent. But they’ll be writing fewer home loans now as rates above 4 percent choke off the refi business. Quarterly results from the nation’s four major banks last week showed that refis are slowing markedly, pressing banks to focus more on borrowers who want to buy homes, a lukewarm market. “The refinance opportunity seems to have come and gone,” says John Shrewsberry, chief financial officer at No. 1 mortgage lender Wells Fargo & Co. Since the Federal Reserve took steps during the Great Recession in 2008 to lower long term rates, small rate variations have sent the mortgage market gyrating as waves of borrowers took advantage of historically cheap financing. In the first six months of 2013, for instance, when mortgage rates averaged around 3.5 percent, lenders wrote $1.1 trillion worth of home loans — 70 percent of them refinancings. As average rates edged above 4 percent, it took lenders a year to write loans worth that much, and refis were less than half the total, according to the Mortgage Bankers Association trade group. After six months of lower interest rates this year, the average rate for a 30-year conventional loan has been above 4 percent for the last six weeks, according to mortgage finance giant Freddie Mac, and is at its highest since October. Most experts believe that a gradual upward trend will continue as the economy improves and the Federal Reserve, as many expect, begins to raise its benchmark short-term lending rate this year. “We expect that once the Fed starts to tighten and once the tightening leads to higher mortgage rates, refinancing originations will fall steadily through 2017,” Moody’s Analytics analyst Andres Carbacho-Burgos says. “The big assumption here is that everybody who can do so has already refinanced since we are at the bottom of the mortgage rate trough, and that therefore few people will wish to do so when rates start going up,” Carbacho-Burgos says. The mortgage bankers group expects refinance loans next year to fall $172 billion, or 31 percent, from this year, while home-purchase loans rise only $84 billion, or about 10 percent. It predicts the total amount of mortgages to fall 7 percent to $1.3 trillion. As mortgage lenders compete for the shrinking home loan business, some may hold down rates to gain a bigger share of the market. Although that may slow the increase in rates, it won’t stop it, experts says, with the mortgage bankers group predicting a slow rise for the rest of this year. Even so, the trade group projected that not until the second half of next year would the rate on a conventional 30-year loan climb above 5 percent — low by historical standards, but the highest in more than five years. Some consumers will cope, as they have in past periods of higher rates, by turning to loans that carry easier initial terms, such as lower monthly payments for the first few years with the risk of higher payments later. Higher rates and fewer refis mean less business for big home lenders such as Wells Fargo, JPMorgan Chase & Co. and Quicken Loans Inc. They are shifting their focus to purchase mortgages, a market where, Schrewsberry says, “things are improving, but not rapidly.” At Wells Fargo, the second-quarter earnings report showed loan originations, or completed mortgages, were at the highest level since 2013 with a total of $62 billion, up from $49 billion in the first quarter. But applications for home loans declined to $82 billion from $93 billion. Mortgage banking accounted for 17 percent of the San Francisco bank’s revenue of $21.3 billion in the quarter, but Wells Fargo executives says originations would fall in the third quarter. Demand for purchase loans, while growing, is at the mercy of the economy’s slow recovery, Shrewsberry says. “Jobs are a little better. Household formation is about the same. First-time buyers are a little stronger,” he says. “If a lot more supply (of homes for sale) became available, it would help.” ©2015 Los Angeles Times Distributed by Tribune Content Agency, LLC |
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