Fitch Says Rising Mortgage Rates Will Hurt Purchases, Bank Earnings

If mortgage interest rates continue to rise, that could put a damper on the emerging home purchase market and hurt the earnings of those banks with a strong presence in the origination business, Fitch Ratings warned.

In its report, it cited the Mortgage Bankers Association’s application survey released Wednesday, which found rates on the 30-year fixed-rate mortgage hitting 4.68%, a two-year high.

“We expect mortgage volumes will continue to fall, as many borrowers have already refinanced their homes or are still unable to refinance because of depressed housing values, though Fitch would note that this is partially offset by rising home prices. Additionally, a shift in the mix of mortgage originations from refinancing toward new purchase loans could offset some volume pressure in coming quarters, especially if the housing market recovers at a somewhat faster pace,” the ratings agency said.

Fitch noted that at some institutions, mortgage banking has accounted for as much as 20% of non-interest income and nearly 8% to 10% of net revenue. If the mortgage business falls off by as much as 50% due to higher interest rates, it could represent a 4% revenue decline for regional banks, “a significant drop that we believe would need to be offset to keep revenue at least level.”

It added that with fewer refinancings and mortgage rates moving higher, bank earnings would be affected over the next few quarters.