MBA Chief Economist Wary of Interest Rate Hikes, Rising Lending Costs
By Laura Haverty | May 26, 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. The first increase could come despite a decline in gross domestic product growth from 1.4 percent in the fourth quarter of 2015 to 0.5 percent in this year’s first 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 were in line with the recent view of some Fed officials that the central bank might raise short-term interest rates at its next meeting in June. He also cited other recent economic data – including low unemployment (4.9 percent in the first quarter) and steady wage growth.
While Inflation has remained low thanks to low energy prices, oil prices have been creeping back up in recent weeks, he added.
What will that mean for mortgage rates? They’ll go up too, he says, with predictable results. The market has already seen how increases in mortgage rates – even slight ones – can offset volume.
"In the last month we saw two successive weeks where 30-year mortgage rates rose by a grand total of four basis points and (refinancing) applications fell by 10 percent,” Fratantoni says. The refinancing market, he observes, “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 ongoing political events – like the U.S. presidential election and the United Kingdom’s “Brexit” referendum to leave the European Union – may influence the flow of foreign capital.
Rising rates and declining 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 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.
“No silver bullet has been found to try to bring down those costs,” he says.
Laura Haverty is editor-in-chief of Housing Industry Forum. She can be reached at Editor_HIF@fanniemae.com.