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Rising Mortgage Rates to Hurt Mortgage Lenders' Fee Income

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Mortgage rates, which hit record-lows last year, have crossed 3% for the first time since the outbreak of the coronavirus. Mortgage rates saw their highest jump last week since the start of the pandemic, following the surge in treasury yields amid expectations of an accelerated economic recovery on the back of the extensive vaccination drive, additional government spending and a rise in inflation expectations.

In 2020, the mortgage business witnessed a boom on the back of record-low interest rates. Both mortgage origination and refinancing activities improved drastically.

Driven by historically-low rates, prospective home-buyers started coming out and entered the housing market. Also, homeowners, who had taken loans at higher rates, refinanced them at lower rates.

Thus, companies with mortgage operations, including banks with mortgage-lending businesses received substantial top-line support from an improvement in mortgage revenues in 2020.

Notably, for JPMorgan JPM, its mortgage fees and related income rose 51.8% year over year. Similarly, Wells Fargo WFC recorded an 82% increase in net gain on mortgage loan origination/sales activities during last year.

Hilltop Holdings’ HTH mortgage origination segment witnessed a 47.4% year-over-year rise in loan origination volumes. Refinancing activities increased significantly in the year compared with 2019.

However, now, with mortgage rates rising at high speed, the mortgage business might not perform as well as it did last year.

Notably, with the expectation of a speedy economic recovery, treasury yields are expected to rise further as investors have been dumping government bonds of late. And mortgage rates, which move in sync with treasury rates, might keep increasing during the year, making mortgages more expensive.

Therefore, originations and refinancing activities are likely to normalize in the quarters ahead. Banks with mortgage businesses are likely to witness a decline in mortgage-banking fees. Thus, banks’ fee income, which got substantial support from mortgage operations, will likely be hurt to some extent this year.

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