The developed world has lived with unnaturally-low interest rates for so long that it’s become hard to imagine what life in a normal financial system would be like.
But as rates finally start to rise, some of the necessary lifestyle adjustments are emerging. A big one is the fact that the days of refinancing one’s house every few years to extract free cash or lower the monthly mortgage payment are over. Now you pay what you pay, for as long as it takes.
That’s also bad news for the banks that have gorged on refi fees for the past decade:
(Wall Street Journal) – Refinancings make up a smaller portion of the mortgage business than at any time in the past two decades, posing a challenge for lenders who already fear higher interest rates and climbing house prices could eventually depress purchase activity.
Last year, 37% of mortgage-origination volume was because of refinancings, according to industry research group Inside Mortgage Finance. That is the smallest proportion since 1995, and the number of refinancings is widely expected to shrink again this year. In 2012, refinancings were 72% of originations.
While purchase activity has climbed steadily from a post-financial-crisis nadir in 2011, growth in 2017 wasn’t enough to offset a $366 billion decline in refinancing activity. The result: The overall mortgage market fell around 12%, to $1.8 trillion, according to Inside Mortgage Finance.
What’s more, there are fewer homeowners eligible to refinance because of rising rates. The number of borrowers who could benefit from a refinancing is down about 37% from the end of last year, estimates Black Knight Inc., a mortgage-data and technology firm. At 2.67 million potential borrowers, this group is at its smallest since 2008.
“The market has just gotten so very competitive because every loan matters,” said Ed Robinson, head of the mortgage business at Fifth Third Bancorp . He added that the bank is contacting homeowners who could be eligible for a refinancing in coming years to help maintain that business, and it is also instructing mortgage-loan officers to focus more on purchases.
Freddie Mac said last week that the average rate on a 30-year fixed-rate mortgage was 4.45%, up from 3.95% at the beginning of the year. Increased mortgage rates can hamper refinancing activity because many homeowners have rates that are already lower than what lenders can now offer. In other cases, the higher rates cut into the savings a homeowner stands to reap by refinancing a mortgage.
The Mortgage Bankers Association expects mortgage-purchase volume to grow about 5% in 2018 but refinancing volume to drop 27%. Refinance applications fell 5% in the week ended March 16 from the prior one, according to the group.
To drum up business, lenders are emphasizing home-equity lines of credit, which let borrowers tap their homes for cash through a new loan that doesn’t affect the rate on their current mortgage. They are also pushing adjustable-rate mortgages, where initial rates are rising more slowly.
A few things
First, this is an obvious negative for bank earnings, which makes bank stocks an even more compelling short sale idea. Most analysts view the big banks as better capitalized than before the last crash, so another “death of Wall Street” scenario might be too much to hope for. But there’s no escaping cyclicality — when the economy turns the banks follow. Here’s Citigroup’s stock in the Great Recession. If it falls even half as much in percentage terms it — and the other big banks — are still classic shorts.
Second, mortgage companies steering homeowners towards home equity credit lines and adjustable-rate mortgages is just what a dysfunctional system does when confronted with a return to historical normalcy. Keep your customers borrowing however you have to do it and let them worry about making the payments!
Third, higher rates are a sign that we’re finally starting to redress some of the past decade’s cultural bias in favor of borrowers and against savers. As interest rates rise, the relative handful of people who are putting part of each paycheck away – or who spent a lifetime doing that and now would like to retire with a bit of interest income – benefit, and the people who just borrow ever-larger amounts of money suffer.
That’s as it should be, though this trend is likely to last only until the next round of QE and ZIRP when the Money Bubble finally bursts.