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 (WFC 2.45%), JPMorgan Chase (JPM 2.33%), Bank of America (BAC 3.15%), and U.S. Bancorp (USB 2.04%), 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.
