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Banks Poised to Gain From Historically Low Mortgage Rates

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Despite coronavirus fears disrupting businesses globally, banks with mortgage lending operations are expected to benefit in the near term because of the recent decline in mortgage rates.

Mortgage rates tend to hover around two percentage points above the yield on 10-year U.S. Treasury notes. In fact, with the Fed cutting benchmark interest rates by half a percentage point in what has been the first unscheduled and biggest one-time move since the 2008 financial crisis, mortgage rates have declined to historical lows recently.

Notably, the mortgage lending business did not perform very well in 2018 because of continued increases in interest rates by the Fed. However, the trend seemed to reverse in 2019, especially during the second half of the year, after the central bank lowered rates thrice to support the U.S. economy.

Thus, with such lower mortgage rates, mortgage refinancing activities are expected to increase drastically. Home buyers, who had taken loans at higher rates, would definitely want to refinance them, thus taking advantage of lower rates.

This will, in turn, aid mortgage revenues for banks, which are already expected to face the troubles of declining net interest income that is the main source of their revenues.

However, mortgage originations are not expected to rise as much as mortgage refinancing because the fear of coronavirus might keep people away from plans of buying houses.

After the financial crisis, most of the big banks began to scale down their operations and pulled back from the riskier mortgage markets because of complicated regulations and tougher capital rules.

Also, amid a decline in volumes, most of the banks did not originate as many mortgage loans through government programs as they should have. Notably, the Federal Housing Administration (“FHA”) insured mortgages are more profitable as it provides insurance on mortgages that are originated by lenders for low-income borrowers, who otherwise would not be eligible for home loans because of their low credit scores.

However, now, following the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions in October 2019, banks are planning to restart offering mortgage loans insured by the FHA.

This, along with an expected increase in mortgage refinancing will likely aid banks’ top-line growth to some extent in the near term, offsetting the negative impact of a decline in interest income.

If the trend in mortgage business continues as expected, banks like Wells Fargo (WFC - Free Report) , Bank of America (BAC - Free Report) , JPMorgan (JPM - Free Report) and other major players will likely benefit the most.

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