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Mortgage rates took time out this week from their recent climb, with the 30-year fixed-rate loan falling to an average of 3.93 percent from 3.98 percent last week – the highest level since April 2012.
But don’t expect the fall to continue. Financial experts expect rates to surge next week now that Chairman Ben Bernanke said the Federal Reserve is likely to reduce its bond purchases later this year. Bernanke’s statements weren’t fully reflected in the latest rates, which were compiled through Wednesday evening.
That may not be great news for would-be homebuyers, but for small community bank struggling to improve their profit margins on loans, it’s an encouraging development.
“As bankers, we like to see long-term rates high and short-term rates low,” said Paul Van Ostenbridge, CEO of Atlantic Stewardship Bank in Midland Park, N.J. “This could be the start of us getting back to a normal rate structure.”
Or it could just be “a temporary adjustment,” he said.
As the rates paid by borrowers have inched upward, the short-term rates banks pay for deposits have remained at rock-bottom levels.
So the yield curve that measures the spread between short- and long-term rates has gotten a bit steeper.
“The low interest rate environment is not helpful to the industry,” said Robert E. Kafafian, CEO of The Kafafian Group, a community bank consulting firm in Parsippany, N.J. “Two things that would help are higher rates and a steeper yield curve.”
Generally, banks borrow short and lend long, so they benefit when short-term rates they pay depositors are low and long-term rates received from borrowers are high.
The Federal Reserve has held short rates low at zero to 0.25 percent, and through bond-buying programs that move markets, it has also kept downward pressure on long-term rates to further stimulate the economy.
Mortgage rates tend to move in parallel with U.S. government debt yields. The 10-year Treasury bond was trading Thursday at a yield above 2.4 percent.
Amid higher rates, refinancing activity is off more than one-third from a recent peak in the beginning of May, according to the Mortgage Bankers Association.
Banks that have been relying on fee income from refinancing loans and selling them to Fannie Mae or Freddie Mac could see a decline in revenue.
But several community bankers said this week that they welcome some increase in long-term rates – with reservations.
“We think it’s healthy for rates to move up slightly,” said Chris Martin, CEO of The Provident Bank in Jersey City, N.J. “It would be great if rates were going up and the economy was growing.”
“The downside, if rates continue to go up, on the lending side, is that people may not refinance or consider doing construction projects,” said Frank Giancola, CEO of Mariner’s Bank in Edgewater, N.J.
Bankers agree that a slow and steady increase in long-term rates is their best hope.
“If the 30-year (mortgage rate) really spikes a lot, that will have an effect on the real estate market, and it’s a fragile market,” said Alex Grinewicz, chief operating officer at Fair Lawn, N.J.-based Columbia Bank.