Turbulent global markets and fears about slowing global growth are having a positive side effect for US consumers and banks: a wave of mortgage refinancing.
Investors have sought out the relative safety of US Treasuries in recent weeks, driving down yields and pulling mortgage rates down with them. As of last week, the average interest rate on a 30-year fixed rate mortgage was 3.6 per cent, according to Freddie Mac, the government sponsored mortgage guarantor. That is the lowest level since November 2016 and close to the all-time low of 3.3 per cent set in late 2012.
US homeowners are rushing to take advantage. The Mortgage Bankers Association index of mortgage refinance activity rose 12 and 37 per cent week on week, respectively, in the first two weeks of August, hitting its highest level in three years. The index is based on a broad survey of mortgage originators.
Analysts say, however, that fees earned on refinancing transactions will not be enough to offset the lower lending margins that result from a lower interest-rate environment. “Big banks’ mortgage businesses are a lot smaller than they used to be,” said Jeffery Harte of Sandler O’Neill. “I’m thinking of [the refi wave] more like a partial offset to [lending margin] pressure, as opposed to a meaningful earnings boost.”
Many large, systemically important banks reduced their exposure to mortgages after the financial crisis as the capital required to be held against housing debt increased. Non-banks lenders such as Quicken Loans have taken market share. Non-banks lenders now originate 60 per cent of the mortgages that are guaranteed by Freddie Mac and its peer Fannie Mae, up from 47 per cent five years ago, according to Inside Mortgage Finance.
Regional banks have reduced their mortgage exposure, too. Mortgage business had fallen to just 2 per cent of revenue for the regionals, said Brian Foran of Autonomous Research. “Any little bit helps, but the fees made from mortgage refi are far outweighed by the net interest income lost amid lower rates,” he said.
Even banks that are concentrated in mortgages, and have grown recently as a result, are receiving little credit from the markets. First Republic is a California-based bank with more than $100bn in assets, with about half of those in residential lending. Its loan book grew 18 per cent in the second quarter from the year before, driven by home loans.
“Refinance activity allows First Republic to grab market share from other banks, so the renewed refi boom is a big positive in its growth trajectory,” said Sandler O’Neill’s Aaron Deer. Yet shares in First Republic, however, have fallen a tenth in the past six months, in line with the banking sector and well behind the wider market.
For homeowners, on the other hand, the rate environment has some unique positive features, according to Todd Johnson, a division manager in Wells Fargo’s mortgage business, the largest of any US bank. “What is different about this rate environment is that usually when rates fall, there is considerable fear in the market, but now we have had strong employment, wage growth and a strong housing market — and customers can take advantage of that,” he said.
