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New Refinancing Fee Likely to Hurt Banks' Mortgage Revenues

Nikita Kataruka

During the first half of this year, the mortgage business witnessed consistent improvement. Owing to historically low mortgage rates, homeowners/buyers have been refinancing and originating loans, which have aided banks’ mortgage banking revenues despite continued concerns related to the coronavirus outbreak.

Like all sectors, the housing industry also had to bear the brunt of the pandemic because of the lockdown and the subsequent halt in activities. However, as mortgage rates started to hit all-time lows, prospective home-buyers began coming out of the lockdown and entered the housing market in order to take advantage of the low rates.

Further, with such low rates, refinancing activities increased drastically. Homeowners, who had taken loans at higher rates, refinanced them in order to take advantage of lower rates.

Thus, mortgage banking revenues for banks improved significantly.

Notably, for JPMorgan JPM, mortgage fees and related income surged 83.3% year over year in the first half of 2020. Similarly, Wells Fargo WFC recorded a 35% increase in net gain on mortgage loan origination/sales activities during the first six months of 2020.

However, going forward, the mortgage refinance boom, which began in late 2019, might get killed.

This is because the Fannie Mae FNMA and Freddie Mac FMCC, the government-sponsored enterprises that back millions of mortgages in the United States, have announced that starting Sep 1, all mortgage lenders will have to pay 0.5% for every refinance loan made to consumers.

This charge has been introduced only for mortgage refinancing and not for mortgage originations so that it does not hamper home sales.

While lenders have the option of paying the fee themselves, in the most likely scenario, this will be passed on to the consumers. Thus, either 0.5% will be added to the fees that lenders quote consumers for every refinance loan or the mortgage rate will be increased, thereby, increasing the interest cost per year.

This is going to hurt homeowners who planned to refinance their mortgage loans at the current low rates. Thus, the pace, with which refinancing activities were increasing, might slow down a bit as the new fee will likely discourage homeowners from refinancing loans.

Hence, with an expectation of a decline in refinancing activities, mortgage revenues of banks with considerable exposure toward the mortgage business will likely be adversely impacted. In fact, a decline in mortgage revenues will likely hurt banks’ top line growth to some extent, which has already been hampered because of near-zero interest rates.

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JPMorgan Chase Co. (JPM) : Free Stock Analysis Report
 
Fannie Mae (FNMA) : Free Stock Analysis Report
 
Freddie Mac (FMCC) : Free Stock Analysis Report
 
Wells Fargo Company (WFC) : Free Stock Analysis Report
 
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