The moribund lending business received a boost on the recent surge in mortgage refinancing activities. Recent drop in mortgage rates below 4% mark amid decline in 10-Year Treasury yields resulted in the spur of refinancing activity by homeowners.
According to the Mortgage Bankers Association (MBA), the Refinancing Index – a gauge of refinancing applications – jumped 23% in the week ending Oct 17, touching the highest level since Nov 2013. In the previous week, the gauge had climbed 11%.
For the week ending Oct 17, the purchase index declined 4.8%, pushing the share of home loan applicants seeking to refinance to 65%, the highest since Dec 2013. During the previous week, the refinance share of mortgage activity increased to 59% of total applicants, the highest level since Feb 2014.
However, there are constraints to this uptick in refinancing activities. Millions of homeowners already refinanced in 2013. In May 2013, 30-year fixed mortgage rates were less than 3.5%. Further, many home borrowers are already in the range of 3.5–4% on their mortgages, according to Michael Fratantoni, MBA’s chief economist.
Nevertheless, the recent drop in mortgage rates fueled mortgage refinancing activity. Let us now see how the mortgage rates progressed in the last six weeks:
Mortgage Rates Remains Low
The standard 30-Year mortgage rate started rising from mid-2013 after the Federal Reserve hinted at phasing out its asset-purchasing program in order to keep borrowing costs low. Rates for 30-year loans began increasing from 3.35% in May 2013 to 4.53% at the beginning of 2014. Analysts projected the 30-year fixed-rate mortgage to exceed 5% in 2014.
However, rates dipped to 4.12% by May 2014 and remained more or less unchanged before rising to 4.23% in mid-September. Afterwards, rates again started sliding. Let’s look at Freddie Mac’s weekly Primary Mortgage Survey table for the last six weeks:
The table shows that 30-year fixed mortgage rate in the U.S. touched its lowest level in 2014 in the week ending Oct 9. The rates then breached the 4% mark to end at 3.97% in the week ending Oct 16. This turned out to be the lowest rate since Jun 2013. The rates further dropped to 3.92% in the week ending Oct 23. Rates ticked up slightly but remained below 4% in the week ending Oct 30.
The 15-year fixed mortgage rate, a popular choice for people who want to refinance, also dropped significantly. The decline in mortgage rates follows a drop in yields of 10-Year Treasury note.
10-Year Treasury Note Yield Forecasted to Remain Low
On Oct 15, yields had fallen sharply below 2%, hitting its lowest level since May 2013, before settling at 2.09%. Drop in bond yields compelled banking behemoths like The Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp. (NYSE:BAC) to lower their year-end interest rate projections.
Goldman Sachs, JPMorgan and Bank of America expect 10-year Treasury notes' yield at the end of this year to be 2.5%, 2.45% and 2.75%, respectively, down from earlier forecast of 3%, 2.7% and 3.1%. Since the beginning of this year, HSBC Holdings plc (HSBC) anticipated 10-year Treasury note’s yield to be 2.1%.
Meanwhile, bank lending businesses took a beating this year due to stringent credit requirements. Data on pending home sales also improved marginally in September as Americans found it difficult to qualify for mortgage financing. However, U.S regulators relaxed mortgage lending rules in order to boost the bonds market that is backed with mortgages and other loans. Let's now look into the changes in detail:
Relaxed Lending Rules
The Dodd-Frank Act of 2010 required the banks to hold 5% of the risk of mortgages sold to investors or a 20% borrower down payment. Instead of this, the regulators backed away from the 20% down payment. Regulators also added that lenders can avoid the 5% risk-retention requirement provided they fulfill their ability to repay the loan and their debt-to-income doesn’t exceed 43%.
To top it, mortgage giants – Fannie Mae and Freddie Mac – are contemplating to provide loans with down payments as less as 3%.
3 Banks Draws Attention
Wells Fargo & Company (NYSE:WFC), JPMorgan Chase & Co. and Citigroup Inc. (NYSE:C)) reported mortgage lending gains in the third quarter. Let’s see how they have progressed:
Wells Fargo & Company, the largest U.S. mortgage lender, reported mortgage originations of $48 billion in the third quarter, up 2.1% from the second quarter. However, the results were down 40% from the year-ago period.
The expected earnings growth rate for this Zacks Rank #3 (Hold) stock is 5.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.7x.
JPMorgan Chase & Co., the second largest U.S. mortgage lender, reported mortgage originations of $21.2 billion in the third quarter, climbing 26% from the second quarter. However, the results declined 48% from the year-ago period.
JPMorgan holds a Zacks Rank #3 and has a negative expected earnings growth for this year. However, expected earnings growth for next year is 9.3%. It has a P/E (F1) of 10.8x.
Citigroup Inc., the seventh largest U.S. mortgage lender, reported mortgage originations of $7.1 billion in the third quarter, rising 15% from the second quarter. However, the results were down 51% from the year-ago period.
The expected earnings growth rate for this Zacks Rank #3 stock is negative for this year. However, expected earnings growth for 2015 is a whopping 57.4%. It has a P/E (F1) of 15.4x.
Conclusion
Given the recent uptick in mortgage refinancing activities coupled with less stringent credit requirements; banks' mortgage origination revenue might see an uptick in the near future. Additionally, MBA predicted that more 7% Americans will apply for mortgages next year than in 2014. MBA believes the rise in mortgage applications will be due to the 10-Year Treasury note, remaining at or below 3% for 2014 and much of 2015.