MBA Chief Economist on Rising Costs, Interest Rate Hikes
May 24, 2016
At last week’s Mortgage Bankers Association National Secondary Conference in New York City, MBA Chief Economist Michael Fratantoni predicted that the Federal Reserve could raise short-term interest rates twice this year—possibly in June and December. This is in spite of a decline in GDP growth to 0.5 percent from 1.4 percent the previous quarter.
Looking ahead, Fratantoni told reporters he expects the central bank to incrementally increase the short-term rate until it reaches a federal funds rate target between 3.25 percent and 3.5 percent.
Fratantoni was careful to say his assumptions are in line with recent overtures made by the Fed that it could raise short-term interest rates in June. He also cited other recent economic data including low unemployment (4.9 percent in the first quarter) and steady wage growth. Inflation, too, has remained low thanks to low energy prices, although, he notes, oil prices have been creeping back up in recent weeks.
But what will that mean for mortgage rates? They’ll go up too, he predicts, and the market has already seen how increases in mortgage rates—even slight ones—can offset volume. Says Fratantoni: “In the last month we saw two successive weeks where 30-year mortgage rates rose by a grand total of 4 basis points and (refinancing) applications fell by 10 percent,” he says. “(The refinancing market) is extraordinarily sensitive to even the slightest upward movement in rates.”
The market is also sensitive to political and economic shifts, both in the U.S. and abroad. “When we get strong U.S. domestic economic news, that may bring rates up a bit, but we are at the mercy of global capital flows,” says Fratantoni. He adds that the flow of foreign capital may be influenced by ongoing political events like the U.S. presidential election, and the United Kingdom’s referendum to leave the European Union (otherwise known as “The Brexit”).
Rising rates and decreasing volume aren’t good news for lenders who are facing higher costs across the board. In 2008, it cost on average $4,500 to write a new loan. By the second quarter of 2015 (the most recent data available), that cost jumped to more than $7,000, Fratantoni says.
While costs related to the new disclosure requirements and other regulatory changes certainly contributed to this price increase, especially in the second and third quarters of 2015, Fratantoni warns that lenders may continue to face higher expenses in the immediate future.
“If we are now through much of the regulatory implementation phase, can the industry’s attention turn to more-efficient processes and other ways to get productivity up?” asks Fratantoni.
He adds: “No silver bullet has been found to try to bring down those costs.”
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