How a continued increase in mortgage rates might impact mortgage lenders

Written By: Joel Palmer, Op-Ed Writer

How quickly will mortgage rates increase?How high will they go? What impact will increasing rates have on mortgage underwriters and processors?

These are some of the questions Freddie Mac attempted to answer in its latest Insight report.

If mortgage rates continue to rise, history points to a slower period of activity for lenders.

According to Freddie’s analysis of mortgage origination volume since 1990, “in most periods when rates increased, mortgage originations declined by over 40 percent.” 

The obvious driver of the decline in refinance activity, since there is little incentive to refinance a mortgage at a higher interest rate unless a homeowner needs a cash-out refinance.

But if rates climb high enough, it could also stem home purchase mortgages. As the Insight report explains, current homeowners looking to trade up may delay that decision.

“Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home.Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing,” read the report.

What can the industry expect going forward? The report considered three scenarios based on recent history:

1. If mortgage rates continue to hover in the 3.5 percent to 4.5 percent range, the industry would experience year-over-year increases of 6 percent in originations, 5 percent in home sales and 10 percent in housing starts.

2. If a more typical scenario occurred that led to 30-year fixed rates hitting 5.25 percent, the industry would experience year-over-year declines in originations (30 percent), sales (5 percent) and housing starts (11percent). 

3. Freddie Mac also ran a “severe” scenario, in which mortgage rates increase for a longer period and remain elevated due to an increase in inflation. This scenario hasn’t occurred since the period between 1977 and 1981. But if it did again, the industry could expect dramatic year-over- decreases in originations (49 percent), home sales (14 percent) and housing starts (32 percent).

“Historically when mortgage rates surge, housing swoons. But we think strength in the economy and pent up housing demand should allow U.S. housing markets to post modest growth this year even with higher mortgage rates. We really have to wait for housing markets to heat up in spring, but early indications are that housing demand remains robust to these rate increases,” said Len Kiefer, Freddie Mac’s deputy chief economist, noting that the latest report on home purchase mortgage originations showed a 3 percent increase from a year ago.

The increase in mortgage rates isn’t the only trend raising the cost of homeownership. Because of a lack of available inventory, home values surged in 2017, as median values reached all-time highs in 64 percent of markets, according to National Association of Realtors (NAR). More than a third of homes sold in January of this year sold for an amount at or above list price. 

In addition to the rising cost of buying a home, demand for purchase mortgages could also take a hit due to the recently passed Tax Cuts and Jobs Act. 

NAR has stated the tax changes remove some tax incentives to certain homeowners, especially in high-value markets. That, in turn, would lessen demand for home buying.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.