Lenders that can handle the demand in volume, and other companies that play a part in the process, could see some tailwinds.
Theeffects of the coronaviruswill likely force many companies to cut revenue projections, and in some cases even bring their businesses to a complete halt. This is not good for lenders because when business activity slows and people fear a recession, they stop investing in their businesses and therefore stop taking out loans. U.S. GDP projections have already been cut significantly.
Despite the bad news, there is perhaps one bright spot for lenders: The sharp decline in interest rates from around 2% going into March to zero now has prompted a surge of refinancing activity on home mortgages. When people refinance, they change the terms of their loan with their bank or lender so they are paying a lower monthly interest rate. While that means less in loan payments for lenders, homeowners must pay application and closing fees to get this deal, which is immediate revenue for those lenders. As a result of lower interest rates, the Mortgage Bankers Association on March 10 projected that total mortgage originations would grow more than 20% year over year from 2019, driven largely by refinancing activity.
Image source: Getty Images.
Understand when refinancing activity occurs
Contrary to what some might think, long-term mortgage rates do not move directly with the Federal Reserve'sbenchmark lending rate. They move directly with the 10-year Treasury bill, which, in normal times, is influenced by the benchmark lending rate. When the Feddropped interest rates a half point at the beginning of March (which feels like ages ago now), the move sent the 10-year Treasury bill to an all-time low, briefly under 0.5%, causing mortgage rates to tumble to perhaps the lowest they have been in the last decade. The 30-year fixed mortgage product averaged 3.29% in the week ending March 5, according to Freddie Mac, with some banks saying they had briefly offered refinancing rates below 3%. That prompted a wave of refinancing activity.
Image source: Freddie Mac.
However, as the effects of coronavirus continued to cause chaos in the markets, the Fed intervened with other drastic monetary moves, and the federal government got involved as well, creating volatility in the bond market. The 10-year rate suddenly surged to almost 1.2% on March 18, bringing the average mortgage rate on the 30-year fixed product to 3.65%, the highest it has been since early January. But, either on news of the huge stimulus bill or perhaps the announcement by the Fed of even more quantitative easing, the 10-year Treasury began to come down again on March 23. Overall, it has been bouncing around, but keep an eye on it because it pulls mortgage rates with it.
Who will benefit
The companies that could benefit from this are lenders that regularly do lots of purchase mortgages eligible for refinancing, and that have the expertise to carry out a huge incoming volume of refinancing activity. According to federal data from 2018, while many of the top mortgage companies are private, Wells Fargo (WFC 2.35%) did the second-most home purchase loans and the second-most refinance originations. In 2019, the bank had 15% of its total assets in residential mortgages. Other big banks like JPMorgan Chaseand Bank of Americaare good candidates as well.
But you may also want to look at banks or companies that are less complex and have higher concentrations of mortgage lending. Take the Third Federal Savings and Loan Association of Cleveland, whose parent company isTFS Financial(TFSL 1.47%)-- with roughly $15 billion in assets, Third Federal originates almost all of its loans in residential mortgages, although hopefully it has the capacity to keep up with demand. Or consider a stock like Zillow Group (ZG 5.39%)(Z 5.47%). While the company does not directly do refinancing, it serves as an advertising marketplace for lenders, which pay Zillow based on cost per click or cost per impression. The company is by far the most popular real estate website in the U.S., with roughly 36 million unique visitors each month.
Keep an eye on the 10-year treasury
Based on what happened in early March after the Fed did that initial half-point drop in interest rates, it is clear that consumers are watching mortgage rates closely. The 10-year bill should come down again when the dust settles, and considering that home purchases have been falling, lenders are going to make most of their income in their residential departments from refinancing activity. Look for companies that can handle the spike in demand or are involved in the process in some other way.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.
FAQs
One of the biggest drivers of corporate refinancing is the prevailing interest rate. Companies can save significantly by refinancing their existing debt with debt at a lower interest rate. Such a move can free up cash for operations and further investment that will ultimately bolster growth.
Does refinancing really help? ›
Refinancing can save you money if you get a lower interest rate, but you could also end up paying more if you refinance simply to extend the loan term. Refinancing can help you consolidate debt or tap your home equity for extra cash for renovations, but it can also lead to more debt.
What's the downside to refinancing? ›
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
What is not a good reason to refinance? ›
Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.
How do people make money from refinancing? ›
A cash-out refinance allows you to use your home as collateral for a new loan, creating a new mortgage for a larger amount than currently owed. The new mortgage pays off your previous, smaller mortgage balance, and you get paid the difference in cash.
At what point does it make sense to refinance? ›
Some 86% of all outstanding home mortgages have an interest rate below 6%, and more than three quarters have a rate 5% or lower, according to Realtor.com. If your mortgage rate falls within that range, you'll want to make sure you can refinance to a significantly lower rate than you have now.
Is it better to refinance or not? ›
Refinancing can be a smart financial move if it reduces your mortgage payment, shortens the term of your loan, or provides cash for necessary expenses. However, it can also involve significant closing costs and fees, so you may not realize savings for several years.
Do banks benefit from refinancing? ›
When people refinance, they change the terms of their loan with their bank or lender so they are paying a lower monthly interest rate. While that means less in loan payments for lenders, homeowners must pay application and closing fees to get this deal, which is immediate revenue for those lenders.
Is refinancing a smart idea? ›
Whether refinancing your home is a good idea depends on many factors, including current interest rates, the length of time you plan to live there, and how long it will take to recoup your closing costs. In some cases, refinancing is a wise decision.
What should you not do when refinancing? ›
Here are 7 mistakes to avoid when you're refinancing your mortgage:
- Refinancing to Pay off Large Debts. ...
- Refinancing to Reduce Monthly Payments. ...
- To Get Cash for Investing. ...
- To Get a Longer-Term Loan. ...
- To Get Cash for a New Home. ...
- Refinancing to Opt for a Fixed-Rate Loan. ...
- Refinancing to Scoop a "Deal"
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Can refinancing hurt your credit? ›
Key takeaways
Refinancing a mortgage temporarily lowers your credit score. Refinancing can affect your credit score for up to one year while remaining on your credit report for up to two years.
What disqualifies a refinance? ›
Homeowners are commonly disqualified from refinancing because they have too much debt. If your DTI is above your lender's maximum allowed percentage, you may not qualify to refinance your home. A low credit score is also a common hindrance.
Is there such a thing as a free refinance? ›
No-closing-cost refinances don't eliminate a borrower's expenses – they only move them into your principal or exchange them for a higher interest rate. Even so, this still means that it is possible to refinance without closing costs paid out of pocket.
Is it bad to constantly refinance your home? ›
It doesn't always make sense to keep refinancing your home simply because interest rates go down or your credit score goes up. Like your first mortgage, a refinance has closing costs. Each time you refinance, you'll have to pay fees, such as for the application, appraisal, credit check, attorney and title search.
What is the purpose of refinancing a business loan? ›
The major appeal generally is a reduced interest rate, which can result in significantly lower monthly payments. But this isn't the only potential benefit. Refinancing also may give you the opportunity to get additional cash out to help with company expansion and new expenses.
How do you take advantage of refinancing? ›
As a borrower, you can do a cash-out refinance to access the equity you've built up. This money can be used for a variety of purposes — finance home improvements or repairs, pay off high interest debt or pay for large expenses such as medical bills, legal expenses and college tuition.
What are the purposes of refinancing? ›
Common goals from refinancing are to lower one's fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa.
Are there tax benefits to refinancing? ›
Are refinancing costs tax deductible? Some of the costs associated with refinancing your mortgage are tax deductible while others are not. Popular tax deductions for a refinance include mortgage interest, discount points and the closing costs on a rental property refinance.
