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Banks to Benefit as Mortgage Rates at New Lows Amid Coronavirus

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As mortgage rates fall to a record low for the third time since March, the housing sector is expected to get a boost from improvement in origination volumes as well as refinancing activities. Thus, banks with mortgage banking operations will likely record improvement in mortgage revenues.

Like all sectors, the housing industry also had to bear the brunt of the coronavirus outbreak because of the lockdown and the subsequent halt in activities.

However, now, as mortgage rates hit new all-time lows, prospective home-buyers are coming out of the lockdown and are entering the housing market once again in order to take advantage of the low rates.

Freddie Mac considers the current situation as a “remarkable turnaround” for mortgage borrowing. On Thursday, the mortgage giant reported that the rate for a 30-year fixed-rate home loan dropped to an average 3.15% in the week ending on May 28.

With such low rates, refinancing activities are also expected to increase drastically. Homeowners, who had taken loans at higher rates, would want to refinance them, thus, taking advantage of lower rates.

Given the expectation of an increase in origination volumes along with refinancing activities, mortgage revenues for banks are expected to improve drastically.

Notably, in order to support the U.S. economy during the current virus-induced slowdown, the Federal Reserve reduced benchmark interest rates to near zero. While the step has been undertaken to boost the economy, it has resulted in a decline in net interest income (the main source of revenues) for banks in general.

Thus, improvements in mortgage revenues will likely aid banks’ top-line growth to an extent in the near term, offsetting the negative impacts of a decline in interest income.

Further, following the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions in October 2019, banks are trying to restart offering mortgage loans insured by the FHA. Thus, if the trend in mortgage business continues as expected, major banks like Wells Fargo (WFC - Free Report) , Bank of America (BAC - Free Report) and JPMorgan (JPM - Free Report) will likely benefit the most.

Additionally, Freddie Mac projects mortgage rates to stay low throughout 2020. In fact, the Mortgage Bankers Association reported last week that applications for purchase loans increased 9% in the week ended May 22 and have risen almost 54% since April.

Sam Khater, the chief economist at Freddie Mac, said stated, “This means a broader base of borrowers are taking advantage of the record low rate environment, which will benefit the economy.”

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