Effects of interest rate increase all a matter of perspective

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focus-interest-ratesWhen the Federal Reserve signaled last month that interest rates would increase, it dropped a bomb on the housing and mortgage market that’s sending shockwaves through the industry.

While Colorado Springs analysts and industry insiders are divided about both the long- and short-term effects of the rate increase, all agree that it will cause fluctuation in the demand for new homes and severely taper the rate of refinance activity, which will spur a host of other industry changes.

The recent hike, which amounts to an uptick of a little more than one full percentage point, is significant because it’s viewed as the first real increase in years and the end to historically low rates, which had served to boost the ailing housing market during the past few years.

Differing impacts

The national average rate on a 30-year, fixed-rate mortgage went from 3.35 percent in May to 4.51 percent a week ago.

In Colorado, average mortgage rates on a 30-year, fixed-rate loan shot up from 3.41 percent on May 1 to 4.64 percent near the beginning of July. A quick online check of rates in Colorado earlier this week found quotes ranging up to 4.829 percent.

To most larger lending banks that do not rely on refinance loans for a bulk of their business, the increase could mean a minor shift in profit, but for smaller, independent mortgage companies that have clung to refinance applications for business, it spells certain doom.

“Obviously everyone is extremely concerned,” said president of Springs-based Adams Mortgage Robert Hutchinson, who heads the local chapter of the Colorado Mortgage Lenders Association. “These rates have been dropping since the ’80s, and there have been relatively few spikes.”

Hutchinson noted that even though today’s nearly 4.5 percent average rate pales compared to the nearly 18 percent rate 30 years ago, any increase now is considered “code red” for the refinance market.

“Our refinance application volumes across the industry are down 40 to 50 percent in just the last few weeks,” Hutchinson said, “and refinances represent about 40 percent of our total loan volume, so 25 or 30 percent of our income is just gone.”

Hutchinson said small mortgage companies with between 10 and 35 employees are going to be hit hard. He expects layoffs and mergers in the industry.

“Mergers and acquisitions are going to be very popular for these companies,” he said. “It’s all about market share, and if two small companies can gain more by merging, they’ll do it.”

He also said small companies that used to rely on walk-in traffic might start spending more on advertising and work harder to beat down the doors of homebuilders, who can supply valuable referrals.

“Bottom line, mortgage companies today are going to have to have a different plan,” Hutchinson said.

“The business that used to revolve around lower rates is gone.”

More optimistic view

Not everyone, however, views the situation as severely as Hutchinson. Most banking insiders view the increases as the first step toward a return to normal, and don’t really expect the drop in housing demand to be significant.

Colorado Bankers Association Senior Vice President Jenifer Waller noted that interest rates are market-driven and therefore are likely to have little or no effect on business models of banks that expect such fluctuation, because they place an emphasis on new-purchase mortgage lending.

“Interest rates have been unnaturally low for a very long period of time,” she said. “I see the rates returning to normalcy as a very positive sign that the economy is also returning to normal.”

Tim Coutts, president of Springs-based Central Bank and Trust Mortgage, shared a similar view.

“The first thing to remember is that these rates have been low for a long, long time, and the increase is relatively small,” Coutts said. “So, I don’t think we’re going to see a wave of people clamoring to attain loans before rates increase more, and I doubt what we’ve seen lately will mean too much on the overall loan spectrum.”

But that’s not necessarily so, according to what annual Fannie Mae surveys revealed.

Surveys conducted since May showed that consumers believe mortgage rates will continue to increase during the next year, and the number of respondents who expected an increase jumped 11 percentage points from May to June to hit 57 percent, the highest level in the survey’s three-year history.

People expecting home prices to increase over the same period also hit a survey high of 57 percent. Only 7 percent believe prices will decline.

Still, Coutts acknowledged that there might be many who are kicking themselves for not purchasing or refinancing while rates were so low.

“Whenever you have a movement that goes against the ultimate consumer and, in this case, homebuyers, they feel like they missed the train altogether, and that shock will move throughout the system,” he said.

Not easy to predict

Tom Binnings, senior partner with Springs-based Summit Economics has an even more positive outlook on the rate hikes.

“I think the housing market will certainly soften, he said. “But the good news is that the market has gotten some traction during this low period.”

Binnings said it’s still too early to gauge to what degree the overall market will be affected.

“The way the market fluctuates makes it dangerous to make those predictions,” he said, “but I’ll sum it up by saying that I think the market is just getting back to normal — for now.”

That’s no consolation for Hutchinson and the small mortgage companies he represents.

“This is big,” he said. “I think we’re going to look back in time and see the summer of 2013 was a pivotal time in the market.”