Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Categorized | Property

Mortgage rates: self-extending prophecy


Posted on November 29, 2016

The recent uptick in US mortgage rates has home buyers scrambling to finalise new purchases. Since the election, a benchmark index of 30-year mortgage rates has gained half a per cent at a speed reminiscent of the taper tantrum in 2013. The impact on borrowers is clear. Several factors will determine the effect on lenders.

Predictably, the move has brought a decline in refinancing activity; no rational borrower will pre-pay when market rates are higher than the interest on their existing loans. Once the rush to beat the rise is over, higher rates may ultimately also mean less demand for mortgages in general as interest payments become less affordable. Wells Fargo made 10 per cent of this year’s non-interest income on mortgage originations. And nonbank lenders, often focused on refinancing existing mortgages, may have to rethink business models.

In the meantime, the average maturity of the bonds into which the mortgages are packaged will increase as prepayments become less likely. Mortgage-backed securities might then pay low coupons for longer. This increases duration, making their prices more vulnerable to the rising rates that extended their maturity.

For banks, higher rates will mean higher net interest income, although this benefit will take time to percolate through. More immediately, it will mean losses on mortgage-backed securities, although banks had already reduced their portfolio allocations to MBS as capital charges against them increased and lawsuits highlighted the reputational risk of lending to consumers. MBS losses may be offset by gains in the value of mortgage servicing rights, as lower refinancing activity means they will collect administration fees for longer. And gains on hedges will depend on the extent to which lower for longer expectations were built into them.

The Mortgage Bankers Association predicts an average rate of 4.8 per cent for 2018. How that would impact on demand among borrowers who have grown used to 30-year rates of 3.5 per cent is unclear. But habits form quickly, and mortgage related headwinds could loom both in the short and the longer term.

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