A recent spike in home mortgage rates threatens to quell the refinancing boom that helped lift bank profits last quarter.
Some lenders said the nearly half-point jump in rates in the past week could be temporary and that, even at current levels, many homeowners would come out ahead by refinancing.
But if rates rise, volume is likely to drop. And if they hold steady, lenders will at the very least have to do more active marketing to win business rather than sit back and wait for the phones to ring, industry executives said.
"There are still millions of eligible borrowers," said Scott Stern, the chief executive officer of Lenders One, a cooperative of mortgage banks in St. Louis. But with the rate spike, "now mortgage companies are going to have to go out and find them."
The Pompton Plains, N.J., mortgage research firm HSH Associates said the average rate on conforming, 30-year mortgages rose 42 basis points from a week earlier to 5.45% Tuesday.
Walter Schmidt, a senior vice president at First Horizon National Corp.'s FTN Financial Capital Markets Corp., said people must be able to save at least 100 basis points on their mortgage rates to have an incentive to refinance. A mere 50-basis-point reduction no longer covers the points and processing fees being charged.
"We've gone from having 60% of fixed-rate, 30-year mortgages being refinanceable to just 30% — so we've basically cut the rate incentive to refinance in half," Schmidt said.
The refi boom began Nov. 25 when the Federal Reserve Board said it would buy up to $500 billion of mortgage-backed securities and $100 billion of debt issued by the government-sponsored enterprises.
(In March, the Fed announced up to another $750 billion of purchases of agency mortgage bonds and $100 billion of agency debt, bringing the total up to $1.45 trillion this year.)
Brad Blackwell, an executive vice president and West markets sales manager at Wells Fargo & Co., said it was "premature" to call an end to the boom.
"We're still seeing strong volume," he said. "There is still a substantial percentage of consumers that are in the money at 5.375%" — meaning refinancing into a loan with that rate would be worthwhile for them. (Wells Fargo's chief financial officer, Howard Atkins, said in April it had hired 5,000 people to process mortgage applications.)
Some analysts said the Fed could take further steps to keep mortgage rates low.
The central bank "will act if it believes the recovery is threatened," Dean Maki, the chief U.S. economist at Barclays Bank PLC, wrote in a report last week. A sharp rise in mortgage rates "would pose some threat to the recent stabilization in home sales," he wrote. "Because of this threat, we doubt the Fed would stand by if retail mortgage rates spike for an extended time. Instead, it would likely step in and ramp up its Treasury purchases to push yields down."
Blackwell said call volumes typically spike when mortgage rates fall below 5%, as they did for many qualifying borrowers this year.
"It has been a psychological threshold in which people are willing to jump in or not, but if people were convinced that rates would not go down further, we'd see more signs that the [home] purchase market would start to emerge," he said. "Lenders have had to find ways to increase capacity to handle the volume, and if volume stays at a more manageable level, you'll find lenders will begin marketing more to consumers."
Raymond Desmond, the president of Nova Home Loans in Tucson, said higher rates "could put a damper slowly on the refi boom."
"We've got a pretty big pipeline for June, but I don't know what July will look like. It may taper off," he said. "The refis will keep coming but will probably taper off toward the fall and end of the year."
One beneficiary of the refi boom has been AmericanWest Bancorp in Spokane. Its net loss narrowed from $57.7 million in the fourth quarter to $14.5 million last quarter, thanks in part to a near-tripling of mortgage revenues, to $1.9 million, a company record.
Mike Koch, a senior vice president and the director of residential lending at the company's $1.8 billion-asset AmericanWest Bank, said the rate outlook is unclear. "We just don't know if this is a new rate plateau or a temporary bump upward," he said. "But if rates stay in this range, production will be cut in half."
Still, he said, "I'm not ready to say that awesome rates are gone."