Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Currencies, Equities

Scary movie sequel beckons for eurozone markets

Just as horror movies can spook fright nerds more than they expect, so political risk is sparking heightened levels of anxiety among seasoned investors. Investors caught out by Brexit and Donald Trump are making better preparations for political risk in Europe, plotting a route to the exit door if the unfolding story of French, German […]

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Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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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.

Email the Lex team at lex@ft.com