An unexpected jump in mortgage rates this month reminded mortgage bankers that the business is still precariously sensitive to interest fluctuations.
The sudden 50-basis-point uptick to 7.01% in the 30-year fixed mortgage rate from Oct. 9 to 16 was a cold shower for those on the production side. They have been having a record year and since late August have basked in another refinance boom.
But mortgage servicers, who administer loans, collecting payments and mailing statements, breathed a sigh of relief as the threat that refinancings would shrink their portfolios was diminished.
According to the Mortgage Bankers Association of America, applications to refinance mortgages that were filed in the week that ended Oct. 9 increased 28% from the week before. But for many of those applicants, refinancing may no longer be worth it.
"There was a big jump in application volume in the last two weeks," said Peter Wissinger, managing director of consumer lending and servicing at Norwest Mortgage. "If you hadn't locked, I doubt those people are still in the refi market."
Lenders who made loan commitments at specific interest rates may have an even bigger problem-so-called "pipeline risk." Because the loans in their pipelines pay lower rates than the new market rate, the lenders can no longer sell those loans to Fannie Mae and Freddie Mac for the prices they had originally thought.
"If you didn't hedge your pipeline, thinking rates could go lower, you're in big trouble," Mr. Wissinger said. "Customers are going to hold you to that. People who didn't cover themselves on their locked pipeline are going to get hurt."
And even those who hedged may have been hurt.
"In order to be perfectly hedged against an event like last week, you would have to spend so much money in times of low volatility that I don't see how you could compete with other originators," said John Pak, senior account manager at Tuttle & Co., a Mill Valley, Calif.-based risk- management firm.
Besides applying quantitative brainpower to hedging, the larger lenders also reacted to the unforeseen rate rise with marketing blitzes.
Countrywide Home Loans of Calabasas, Calif., publicized a program that lets homebuyers lock in rates while they shop for a home, and another that lets homeowners secure rates for prospective buyers of their homes. Principal Residential Mortgage of Des Moines touted a Web site that lets its correspondent lenders lock in prices for their loans instantaneously.
Walter C. Klein Jr., chief executive officer of First Nationwide Mortgage Corp., Frederick, Md., was relieved to see mortgage rates change course and move upward. "The industry is better off at 6.75% to 7% than at 6.25% or lower," Mr. Klein said. "There's too much servicing to refinance."
If mortgage rates did fall below 6.25%, 40% to 50% of most servicing portfolios would run off, Mr. Klein said.
"It would be harmful to mortgage securities and the larger servicers, hedged or not. In a refi boom there are a few winners and a lot of losers. We've all invested good money in the portfolios we have, and to lose it two years later is not healthy for the industry."