Bank of America: Making Sense of Why It's Higher Today

Shares of Bank of America (NYSE: BAC  ) are following the bank's blue-chip brethren higher today on the heels of multiple better-than-expected economic reports. Roughly halfway through the trading session, the nation's second largest bank by assets is up by $0.14, or 1.1%.

There are a number of likely catalysts for the positive sentiment in the market today. Among others, the Commerce Department reported that personal income and consumer spending both rose more than expected last month, and that core consumer price inflation came in on the low side. In addition, the Labor Department estimated that there were 9,000 fewer applications for unemployment benefits filed last week than the week before.

For banks in particular, probably the biggest news concerned the housing sector. According to the National Association of Realtors, pending home sales (where a purchase contract has been signed but a closing hasn't occurred) rose last month to the highest level since late 2006. Its pending home sales index increased by 6.7% in May compared to the previous month and by 12.1% over May 2012.

"Even with limited choices," NAR's chief economist Lawrence Yun noted, "it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher."

Yun is referring here to the recent run-up in mortgage rates. In a separate report released today, Freddie Mac estimated that the average rate for a conventional, conforming 30-year fixed rate mortgage rose last week to 4.46% from 3.93% the week before. This amounted to a 13.5% uptick, which was the largest such move in more than 35 years.

The upward movement in interest rates, and mortgage rates in particular, could mean multiple things for banks. In the first case, it will mean fewer applications to refinance mortgages. All of the nation's largest lenders have looked to this activity over the past few years to juice the bottom line with noninterest income. Over the past 12 months, for example, Bank of America and JPMorgan Chase (NYSE: JPM  ) recorded $4.4 billion and $8 billion in mortgage-banking income, respectively, much of which has come via refinancing activity.

At the same time, it could also incentivize more homebuyers to apply for purchase-money mortgages as they try to lock in rates before it's too late to do so. The quote by NAR's Yun touched on this, and data released yesterday from the Mortgage Bankers Association provided further confirmation of it, showing that refinancing activity fell last week by 5% on a sequential basis, while applications for purchase-money mortgages rose on a seasonally adjusted basis by 2%.

According to the MBA's Mike Fratantoni, "Mortgage rates increased by the most in a single week since 2011, and refinance application volume dropped to its lowest level in almost two years. However, applications for conventional purchase loans picked up by more than 3 percent over the week, and total purchase applications were 16 percent higher than one year ago, indicating that homebuyers are not yet dissuaded by the increase in mortgage rates."

The final two areas in which banks could feel the influence of higher mortgage rates are in the value of the mortgage-servicing rights, or MSRs, and in their net interest income. The value of the former should head higher as mortgage rates climb, as it will reduce prepayments via refinancing. And the amount of income derived from their securities portfolios should be boosted as well -- though this will be offset by a downward adjustment for the underlying securities themselves.

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