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Record-Low Mortgage Rates to Keep Supporting Banks in 2021

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Since the beginning of 2020, mortgage rates have been continuously declining, even touching historical lows several times. Last week, Freddie Mac (FMCC - Free Report) released its weekly Primary Mortgage Market Survey.

Per the report, the 30-year fixed-rate mortgage for the week ending Nov 25, 2020, averaged 2.72%, down from 3.68% in the same period last year. Also, the 15-year fixed-rate mortgage averaged 2.28%, down from 3.15% from the previous-year period. Given such record-low mortgage rates, banks with mortgage-lending operations are expected to continue to benefit in the near term.

The performance of mortgage-lending business was muted in 2018 and in first half of 2019 because of continued increases in benchmark interest rates by the Federal Reserve. However, as the central bank’s interest rate cuts (rates were slashed thrice last year) started taking effect, the trend reversed in the latter half of 2019.

Moreover, since the outbreak of the coronavirus early this year, the Fed reduced benchmark interest rates to near-zero to support the U.S. economy. Subsequently, mortgage rates have remained at historically low levels and have been fueling the demand for new mortgages and refinancing.

Performance So Far

During the first half of the year, mortgage revenues were mainly driven by an increase in refinancing activities and not mortgage originations. This was because, the lockdown, which resulted in a halt in business activities, created tremendous uncertainty in the minds of people, due to which they were not very keen on buying new homes.

However, once the stay-at-home orders were lifted and economy gained traction, the mortgage-lending business got a boost from higher refinancing activities along with a substantial rise in originations as prospective home-buyers started coming out and entered the housing market again to take advantage of the low rates.

Of the many banks that have benefited from low mortgage rates this year, Wells Fargo & Company (WFC - Free Report) is one, which recorded an 18.3% year-over-year rise in mortgage-banking revenues during the first nine months of 2020. Another Wall Street biggie, JPMorgan (JPM - Free Report) witnessed a 49% rise in its mortgage fees and related income in the same period this year.

Like the big banks, smaller banks also got support from higher mortgage revenues. For Hilltop Holdings (HTH - Free Report) , its Mortgage Origination segment recorded a 44.7% rise in total loan origination volume in the first nine months of 2020. Also, the company’s total mortgage loan origination fees improved 30.6% year over year.

Road Ahead

Just like this year, 2021 is likely to witness an improvement in mortgage business on the expectation of continued low mortgage rates. In fact, this will continue to support banks’ fee income growth, which will, in turn, aid the top line.

Because of the near-zero interest rate environment, banks have been recording lower interest revenues off late. Also, the low interest rate environment has been continuously putting pressure on net interest margin (the main indicator of banks’ profitability).

And, margins are expected to continue contracting in the near term as the Fed has signaled no change in interest rates at least until 2023. Thus, if banks continue to witness higher mortgage revenues in 2021, then growth in fee income will help partly offset the negative impacts of near-zero interest rates.

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