Reflecting On The Rate Hike

USA Today reports that the Federal Reserve’s hike of short-term interest rates by 0.25 percentage point, was in line with nearly universal expectations. It’s the first time the central bank has raised rates in almost a year. Now that we’ve had some time to reflect on this news, it’s time to talk about the real industry impact.

If you’re a current or would-be homeowner, you shouldn’t feel rushed into action. In fact, the biggest moves in mortgage rates have likely already happened — and the Fed had nothing to do with them.

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But the Fed’s action, and the expectation that it will raise rates again in the coming months, has important implications for mortgage rates, as well as your ability to buy a home or refinance your loan.

“Rates have been moving up since last July, so the Fed is merely playing catch-up to what’s already happened. Also, let’s not forget that the Fed only controls short-term rates, not long-term rates like mortgages,” said Sam Heskel, CEO of Nadlan Valuation, an appraisal management company.

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“Having said that, I think the immediate affect will be that refinances dry up and there might be some negative effect on the purchase mortgage market as well. Developers and builders will pay more to finance new projects which may stall some commercial and residential building and perhaps raise prices. Long-term, however, I think people will adapt to the ‘new low rates’ – which are still low by historical standards – and get back into the market. Actually, higher rates may have a beneficial effect: If consumers cut back on buying homes, that may force home prices to come down to more realistic levels, which could help more homebuyers than low rates did.”

But not everyone is convinced that this rate hike will be so insignificant. “I can see this small change at the Fed having a large impact on the industry,” noted Dr. Rick Roque, president and founder of MENLO, a firm that advises mortgage lenders on their M&A strategies.  “In essence, retail lending may become less attractive to a broad spectrum of originators, leading to more exits than normal and perhaps even glutting the market for M&A.  If this happens, it will also drive a new approach to finding street origination talent that will mean fewer big signing bonuses and overvalued compensation scenarios due to more players and reduced margins.

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“Early on, of course, we could well see an increase in transactions.  Borrowers currently considering purchases might be moved to action by the Fed’s changes, which could offset the normal seasonal slowdown at this time of year.  Many believe the Fed will make several of these adjustments during 2017, and if true, we can expect more valleys than spikes over the course of the year.”

But if you are taking the long view, most expect the mortgage industry to be just fine. “In the long run, the Federal Reserve raising its benchmark rate by a quarter point shouldn’t have a significant impact on housing. We may, however, see sales and loan applications slow down in the near-term as the market adjusts, and as consumers get over the psychological hurdle of interest rates above 4% on their mortgage loans,” said Rick Sharga, EVP of Ten-X, an online real estate transaction marketplace.

“Fortunately, there’s no guarantee that lenders will raise mortgage rates more than they already have (based largely on changing yields on US Treasuries). Last year’s disastrous experience of loan applications falling off a cliff after lenders used another quarter-point Fed rate increase to raise mortgage rates by a full point are probably still fresh in the industry’s mind.”

How will this rate hike impact homebuyers? “Interested homebuyers will figure out in short order that the difference in their monthly payment will be minimal – the difference between a 3.5% 30-year fixed-rate loan and a 4.0% loan works out to about $26 per month per $100,000 borrowed,” answered Sharga. “For anyone who can actually afford to buy a home, this certainly doesn’t seem to be a game-changer. We could even see a slight “rush,” as interested buyers act quickly, in order to lock in rates before they rise further.

“It will be interesting to watch how interest rates fluctuate throughout 2017, especially if the Fed follows through on plans to raise rates another 2-3 times. And it will be equally interesting to see if home price appreciation cools off as it has historically during periods of rising interest rates, keeping affordability levels intact.”

Tony Garritano
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.