Fed Rate Hike? Whatever, Mortgage Rates Are Already Up

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The surge in mortgage rates since the November election is expected to offset the increase to lenders' short-term funding costs following the Federal Open Markets Committee's 25-basis-point increase to the federal funds rate Wednesday.

The federal funds rate doesn't directly affect the interest rates that borrowers pay on home loans, as mortgage rates are benchmarked against longer-term 10-year Treasury yields. But depository and nonbank lenders are both expected to see their short-term funding costs go up, albeit in different ways.

"Anything that's a warehouse line or something like that is going to go up in price," said Brent Nyitray, director of capital markets at iServe Residential Lending in Stamford, Conn.

For banks, the fed rate influences their cost of funds for the deposits they use to fund mortgage originations. Likewise, the warehouse lines of credit that independent nonbanks use to fund their pipelines until loans can be sold to end investors are pegged to the London Interbank Offered Rate or the prime rate, which are influenced by the fed funds rate.

But the increase in that short-term rate isn't so much a concern as long as it's offset by a rise in the long-term rates most mortgages have. The average interest rate on 30-year mortgages has gone up nearly 60 basis points since the week before the election.

"In my opinion, this...rate increase should not have any adverse impact on the warehouse lending sector," said Stanley Street, owner of warehouse lending software firm Street Resource Group. 

The rise in mortgage rates is enough to offset the increase in short-term rates, plus warehouse lines are not a big cost for mortgage lenders, said Charles Clark, director of mortgage warehouse finance at EverBank.

"I don't think there's going to be a big effect on mortgage bankers at all. You're moving the goal posts, essentially," he said.

But if the curve between long- and short-term rates or yields were to flatten, lenders would feel their margins slightly pinched by higher funding costs.

"It would really hurt everybody if the curve flattened because the cost of funding would go up relative to the note rate on the loan," said Tom Millon, president and CEO of the Capital Markets Cooperative, a subsidiary of Computershare.

Flattening, and even inversion of the curve has happened.

"There have been times when the long-term yield has gone down in response to a fed rate hike because the market may feel the Fed is cutting back on its accommodative measures in way that would reduce the outlook for inflation over the next 10 years," said CoreLogic chief economist Frank Northaft.

Even if the curve doesn't flatten, lenders' margins could be squeezed if they face pressure to keep their long-term rates lower than market to "get loans through the door," said Dave Hurt, vice president of global capital markets at CoreLogic.

With upward pressure on short as well as long-rates, not only will fewer borrowers have rate incentives to refi the long-term fixed-rate loans that dominate the market; existing and new loans pegged to shorter-term adjustable will cost slightly more.

For example, borrowers with a $50,000 home equity line of credit will pay about $10-$11 more a month given a 25 basis point increase in short-term rates, according to TD Bank.

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