So far, the mortgage business has gone unscathed by the declining dollar. But interest rates could climb again if the Federal Reserve reacts to support the dollar, so home lenders are not in the clear yet.
While many in the industry had expected interest rates to continue the leisurely decline that started two weeks ago, it is unclear now whether the Fed will raise short-term interest rates, a move that could bring the decline to an end.
Long-term rates were expected to go up, said Robert Van Order, chief economist at the Federal Home Loan Mortgage Corp. Those rates did go up 10 basis points at the beginning of the week, shadowing long-term Treasury notes, but came back down before the end of the week. Treasuries ranged from 7.3% to 7.4%, where they ended the week.
What should influence interest rates more than the currency issue, Mr. Van Order said, are the employment figures released at the end of last week. Employment was stronger than expected and the Fed, possibly satisfied with the economy's soft landing, may leave interest rates alone for a while.
"The effect (on mortgage rates) will be only 5 or 10 basis points, which is pretty small," Mr. Van Order said. But if a mortgage bank has millions of dollars of loan commitments in the pipeline, it may lose large amounts of money, even if the rate change is relatively small.
Mortgage companies are particularly vulnerable to anything that might affect interest rates. A hedging plan will help a lender stay profitable as pipeline loans lose value when rates increase.
Charles A. Richard, senior vice president of Quantitative Risk Management, Chicago, said if rates increase because of the weakening dollar, the worst thing a lender could do is react with a hedge. This would lock in the loss.
"Most mortgage banks are engaging in some sort of hedging activity," Mr. Richard said. "Assuming they already had a reasonable strategy in place they should not have to do anything" if rates increase.
However, servicing portfolios gain value with increasing interest rates, he said, balancing a loss that would result from increasing rates.
Interest for fixed-rate loans increased 0.125% last week, according to HSH Associates, a financial information publisher in Butler, N.J.
Lee Shelton, vice chairman and managing director of Resource Bancshares Mortgage Group, Columbia, S.C., said the currency decline would manifest itself first on interest rates and then on the mortgage business.
"It will impact short-term rates on interest margins when a lender sells loans. That's a major source of income," he said. The declining dollar and the possible implications that may result could change the direction the mortgage industry has taken recently.
"Three weeks ago, we all thought interest rates would fall. With the currency situation, all bets are off," Mr. Shelton said.
But instead of staying away from home loans because of impending rate increases, Mr. Shelton said, people who are contemplating buying a home often will go ahead and apply in order to lock in a rate.