What Rising Mortgage Rates Mean for Banks

If you've been thinking about refinancing your mortgage, then you might want to get on top of that sooner rather than later. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage increased this week to 3.91%. That's nearly 60 basis points higher than the trough at the end of 2012.

Besides the immediate implications to your monthly payments, however, a more nuanced question is: What does this mean for the banks? I'm talking specifically about Wells Fargo (NYSE: WFC  ) , JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , and U.S. Bancorp (NYSE: USB  ) , which collectively account for a majority of home loans in the United States.

It's tempting to conclude that this is bad news. Take Wells Fargo as an example: in the first quarter of this year, it originated a staggering $109 billion in home loans -- by comparison, the other three banks combined underwrote $99 billion dollars' worth. If one were to believe the laws of supply and demand, it seems all but certain that these astronomical numbers will come down as the price of mortgages (expressed via its interest rate) goes up. Wells Fargo's CFO Timothy Sloan alluded to this on a recent conference call saying that, "it's probably likely that revenues and margins [in the mortgage business] will come down a little bit."

It'd nevertheless be a mistake to conclude that the mortgage bonanza, if you will, is coming to an end. If you dig further into Wells Fargo's numbers -- and they're generally representative of industrywide trends -- you find that a full two-thirds of its mortgage applications related to refinancing as opposed to purchase-money mortgages. As interest rates go up, these will invariably come down. And when they do, actual homebuyers will step in to fill at least some of the void.

Beyond this, it's worth noting that higher long-term interest rates, while potentially weighing on loan origination volumes, also exert a positive influence on bank profits. This is because they fuel the yield on earning assets and, through this, the net interest margin and, finally, the bottom line.

The point is, while rising mortgage rates may be bad news for homeowners, it's far from certain whether they're equally bad for banks.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

Read/Post Comments (1) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2013, at 8:10 PM, prginww wrote:

    The banks are too big to fail, remember? They are now (since 1999 when Clinton and the 106th Congress threw out the Banking Act of 1933, aka Glass-Steagall) writing the banking laws for Congress. Seems to me they will always be a safe investment. If they screw up again the tax payers will just have to bail them out. Wells Fargo made a fortune on the foreclosures, and they still sit on an unknown number of foreclosed properties...just waiting for the housing market bubble to fully inflate so they can make maximum profits.

    If you can sleep well owning stock from these nefarious companies you will always do well, financially.

    Never leave out politics when deciding what stocks to buy.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2477761, ~/Articles/ArticleHandler.aspx, 9/27/2016 3:16:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,219.98 125.15 0.69%
S&P 500 2,159.07 12.97 0.60%
NASD 5,301.78 44.28 0.84%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 3:00 PM
BAC $15.30 Up +0.21 +1.36%
Bank of America CAPS Rating: ****
JPM $66.23 Up +0.45 +0.68%
JPMorgan Chase CAPS Rating: ****
USB $42.85 Up +0.38 +0.88%
US Bancorp CAPS Rating: ****
WFC $44.98 Up +0.10 +0.22%
Wells Fargo CAPS Rating: ****