With interest rates down, lenders can expect to see demand spike for refinances and jumbo residential mortgages, according to Moody’s Investors Service, and this will help boost profits.
A recent report from Moody’s revealed that banks reported a 0% net change in residential mortgage underwriting standards in the second quarter of 2019. And, with interest rates falling, it expects standards to “remain stable and possibly to tighten modestly.”
After a tightening of underwriting standards post-crisis, things have loosened in the last few years in a bid to retain volume, Moody’s said.
Mortgage profitability has been weak in the last two years as rates rose and originations fell, but the investor service said the Federal Reserve’s move to cut rates will reverse this trend.
“With the decline in interest rates since the beginning of the year, there has been a significant increase in demand from homeowners to refinance their current mortgages,” Moody’s said. “The increase in refinance origination volume will result in improved lender profitability, tempering any need to continue loosening underwriting standards to increase loan volume.”
At the same time, banks reported a substantial uptick in interest for jumbo residential mortgages, Moody’s said, a trend it also attributed to lower rates.
According to the report, after two years of tepid demand, banks reported a near-40% spike in demand for QM jumbo residential mortgages in Q2 – the most since 2014.
“We expect continued solid demand for residential mortgage loans over the next 12 months as homeowners again look to refinance their existing mortgages, and as new and existing home sales rise moderately because of the decline in interest rates,” Moody’s said.