When megabanks JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) reported second-quarter earnings late last week, the effect of skyrocketing mortgage interest rates was front and center. Both banks reported a drop in refinance and new mortgage loan activity, and Wells reported many fewer loans in its pipeline compared to last quarter. JPMorgan noted that refinancing could drop by 40% in the next half-year, and the overall slackening of the demand for mortgages might be worse than analysts have predicted.
Does this mean that the slowly recovering housing market is stumbling, right along with rising rates? Apparently not, and most experts seem to agree that it will continue to thrive, despite higher mortgage rates.
Higher home prices, looser credit
Despite JPMorgan Chase & Co. (NYSE:JPM)’s glum predictions regarding its future mortgage revenue, its own analysts have opined that housing will survive the new rate environment. Higher home prices, fewer foreclosures clogging the market, and softening lending standards will keep housing hopping, according to a recent report.
Are looser lending rules truly in the offing? Many think so, and it’s a sensible deduction to make. With other avenues of mortgage revenue drying up, banks will have more incentive to relax some of the extremely strict rules they put in place after the mortgage crisis. As my colleague John Maxfield recently noted, this phenomenon is an agreeable consequence of rising mortgage rates.
Others, like Paul Willen, a senior economist at the Federal Reserve Bank of Boston, concur. Just last month, Willen stated that, as home prices rise, banks will see their way clear to writing more loans, rather than take in less revenue. Similarly, real estate website Zillow Inc (NASDAQ:Z) has seen an increase in lending to consumers making smaller down payments, while the chief economist at CoreLogic Inc (NYSE:CLGX) has observed a movement back toward the loan parameters lenders used during the 1990s.
Confidence is high
Federal Reserve Chair Ben Bernanke commented last month that rising interest rates are the result of an optimistic outlook on housing in particular and the economy in general. Optimism is a good thing, of course, and several recent developments appear to support his view.