By Aaron Back
Banks in the U.S. have much to be thankful for this holiday season. Higher rates on mortgages aren't necessarily on the list.
The average rate on a 30-year fixed conforming mortgage has risen to 4.16%, according to the Mortgage Bankers Association, up from post-Brexit lows around 3.6%. Higher rates normally are good for lenders as they help them earn more on loans. Mortgages are a special case. Most are sold off to Fannie Mae or Freddie Mac and then packaged into securities. The portion held by banks stands at just a third.
Higher rates also suppress refinancing, which means fewer one-time gains for banks that make loans and sell them. For holders of mortgage-backed securities, though, this is positive. Fewer will be repaid early. As the heaviest holder of such securities among major banks, Bank of America should be the biggest beneficiary.
Ironically, though, after getting pounded by ultralow rates over the summer, BofA changed accounting policies so that quarterly earnings will be less affected. Now it will appear to benefit less from the rebound, though the impact is fundamentally unchanged.
Finally, if rates keep moving up, it could affect demand for homes. Rates are low relative to long-term averages, but a better gauge may be the post-financial-crisis average, which reflects what families are now accustomed to. Since the start of 2010, this has been just 4.22%, according to data from the Mortgage Bankers Association. If rates exceed that level, they could give some households pause before buying.
The rise in interest rates since the election has been good news for banks, but mortgage lending could become a significant exception.
Write to Aaron Back at firstname.lastname@example.org