Mortgage lending executives and experts are scrambling to understand the implications of Tuesday's Federal ReServe interest rate hike.
At first blush mortgage bankers would appear to be the winners - but the help may prove to be a weak tonic.
Mortgage banks will benefit because the increase may drive more borrowers into fixed-rate loans -- their bread and butter- but ultimately will lead to less borrowing. Portfolio lenders, especially thrifts, have won market share this year as consumers reacted to rising rates by choosing adjustable-rate mortgages.
"It's too early to say a shift has happened, but it's in the wings," said Luke Hayden, the head of secondary marketing for Chemical Home Mortgage.
The Federal Reserve Board move will likely reinforce the recent flattening of the yield curve. When the margin between short- and long-term rates decreases, consumers tend to elect a loan that is fixed for a longer time.
On Tuesday the Federal Reserve increased its target rate for overnight reserves, known as the Fed Funds rate, by 75 basis," points, to 5.50% from 4.75%. The Fed also hiked the discount rate to 4.75% from 4.00%, the largest such move in 14 years.
There had been some anticipation of an even greater increase. "If they raise rates by 100 basis points you will see mortgage bankers singing and dancing," said Dave Beat, the president of Barclays American Mortgage, in the moments before the Fed announced on Tuesday.
However, once the news hit more sober behavior was the norm. "it's the biggest nonevent of the year. It's still a matter of who wants to lose the most money," said Karl J. Mendenhall, senior vice president of First Union Mortgage Corp., noting that a flattening of the yield curve will do nothing to curb the price war.
But flatten the curve did. Prices for 30-year treasuries rose Tuesday, driving yields down, while shorter term bonds lost value. The yield on the long bond ended Tuesday at 8.03%, from 8.07% Monday. The yield on the two-year note, however, rose to 7.08% from 7.01% Monday.
According to Mr. Hayden the first change may be a shift from shorter term adjustables into intermediate adjustment instruments, such as three-year adjustable mortgages. This may be followed, he added, by a move into 30-year fixed-rate loans.
But a boom for mortgage bankers remains highly unlikely, analysts say, and portfolio leaders will retain a powerful advantage. "This will have no material effect on refinancings, and the environment for mortgage bankers remains with Sanford Bernstein & Co.
Some think the rising rates and flattening of the yield curve will ultimately rein in thrift lenders, which have been winning market share because of the popularity of adjustable rate mortgages.
"There are a number of factors compelling a decline in the relative attractiveness of arms over the next 6 to 12 months," said Brace Harting, a Salomon Brothers analyst. He added that the bigger thrifts are probably getting close to capital constraints and may take a less aggressive lending posture in the months ahead.
Also, some believe that a volatile activity in the shorter end of the spectrum will make loans tied to the 11th District Cost of Funds index less attractive for thrifts.