Super low mortgage rates are spurring major demand for refinancing. It’s different now as well. Instead of refinancing to take cash out, borrowers are putting cash into their homes. This is partly due to tighter lending requirements and lower values, but there is plenty of value visible to the stable homeowner in refinancing at record low rates for a much lower monthly payment.
It appears that in the third quarter of this year the banks originated as much as $450 billion in home loans, according to Inside Mortgage Finance, a publication that tracks the industry. That figure includes both refinancing and new mortgages. This is a major jump from the second quarter, when $405 billion in loans were originated, 68% of them for refinancing.
Low interest rates are a double-edged sword. They result in lower revenues for banks for all lending. However, the boost in refinancing demand has helped to counteract this and raise profits from origination fees. The banks take a quick profit by reselling most loans quickly in bond packages to investors. These bond sales also generate a profit for the banks. The markup on these bond sales is higher than in the past as well. This has been a trend since the Federal Reserve announced in September that there are plans to buy large amounts of mortgage-backed bonds. This has driven the price up for these bonds, creating more profits for the banks.
Treasury programs to make it easier for underwater homeowners to refinance coupled with super low interest rates are contributing to this boon for banks. Analysts expect this trend to continue for a while, with banks realizing excellent profitability for multiple quarters in the future. The wave of consolidation that followed the mortgage crash has created less competition for lenders as well. However, there is some concern that this profitable trend could get dashed, especially by rising interest rates.