Interest Rate Increases May Have Silver Lining

Inman News

15 July 2013

Though a recent surge in interest rates may dissuade some consumers from buying homes, the development also could have a silver lining for the real estate market: making mortgages available to more people.

With the recent spike in interest rates, refinances have plummeted. In the last week of May, shortly after Fed officials hinted that the Fed may scale back its stimulus program later this year, refinance applications dropped to their lowest level since November 2011, the Mortgage Bankers Association (MBA) reported.

With the average rate on a 30-year fixed-rate mortgage continuing to push higher, they have trended lower since then.

That’s chipping away at banks’ profits. JPMorgan and Wells Fargo recently reported that their earnings from refinances have dropped significantly in recent months.

To make up for the lost revenue, some experts say, banks may extend credit to a larger swath of borrowers, allowing them to originate more mortgages.

“Because refi activity is down, you have a little more room to do business with people who don’t have an 800 credit score,” said Zillow Senior Economist Svenja Gudell.

One new indicator suggests that banks are already beginning to loosen lending standards, with the Mortgage Credit Availability Index (MCAI) moving up recently, and posting a score of 109.8 in June.

The index’s benchmark level is 100, and was recorded in March 2012. If the index had been tracked in 2007, it would have been roughly 800, the MBA says.