Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM): An Unexpected (but Welcome) Consequence of Rising Mortgage Rates

Page 1 of 2

Wells Fargo & Co (NYSE:WFC)Common sense seems to dictate that rising mortgage rates will hurt the housing market by depressing the demand for purchase-money mortgages. But here’s the thing: The data suggests that the exact opposite may be occurring.

At the end of last week, the nation’s two largest mortgage originators, Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM), released earnings for the second quarter. Insofar as headline numbers go, both banks had stellar quarters, netting $5.5 billion and $6.5 billion, respectively — Citigroup Inc. (NYSE:C), which reported today, had a similar experience.

But if you dig a bit further, and into their mortgage operations specifically, the story is more nuanced. As expected, the volume of refinance mortgages fell markedly relative to the first quarter. Wells Fargo & Co (NYSE:WFC)’s dropped by 17% and JPMorgan Chase & Co. (NYSE:JPM)’s by 6%.

Unexpectedly, however, both banks reported dramatic sequential upticks in purchase-money mortgage originations. Volume at Wells Fargo & Co (NYSE:WFC) was 46% higher than the first quarter, and JPMorgan Chase & Co. (NYSE:JPM) reported an improvement of 44%.

I say “unexpectedly” because of what we’ve seen happen to mortgage rates since the Federal Reserve first hinted on May 22 that it may begin to taper its support for the economy. Following the announcement, the rate on a 30-year fixed-rate mortgage went from 3.35% at the beginning of May all the way up to 4.51% today.

As the price of a mortgage goes up via the interest rate, conventional economics tells us, the demand for one should go down. But clearly that’s not happening here.

There are at least two explanations for this apparent paradox. The first is that homebuyers are rushing to lock in current rates, which are still exceptionally low on a historical basis, before they head higher.

“I’m afraid we’re going to miss the boat,” an aspiring homeowner recently told CNBC’s Diana Olick. “I feel like we might get priced out of the market in a few months, and just depending on the mortgage payment whether we could afford it if the interest rates go up more.”

The problem with this conclusion is that purchase-money mortgage applications are going down. You can see this in the figure below, which charts the Mortgage Bankers Association’s index for purchase-money and refinance mortgages.

While applications for purchase-money mortgages may not have taken as dramatic a dive as refinance applications, one can’t help but notice a subtle downward slope over the past two months.

It’s for this reason that I prefer the second explanation. Namely, given the precipitous decline in refinance applications, mortgage lenders now have both the motive and the opportunity to pursue purchase-money mortgages.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!