Brexit has unleashed turmoil in global financial markets but at least one group is poised to benefit: US homeowners.
While their peers in the UK face the threat of sinking property prices after the country’s vote to leave the EU, bankers predict the referendum outcome will put American mortgage holders in line to gain from lower financing costs.
The flight to haven assets by global investors since the Leave vote has already helped push US mortgage rates down to new lows for the year, according to data published by Freddie Mac. At 3.48 per cent, the 30-year fixed-rate mortgage is only 17 basis points shy of an all-time low.
Michael Fratantoni, chief economist at the Mortgage Bankers Association, said: “With those lower mortgage rates, we do expect a higher amount of refinance activity and a little bit more purchase activity.”
Refinancings, which allow consumers to lock in the benefits of cheaper rates in exchange for a fee, are a significant source of revenues for retail banks such as Wells Fargo.
“If rates plummet, a mortgage refinance boom will develop which will increase bank earnings,” said Richard Bove, a banking analyst at Rafferty Capital Markets, adding that it was a “clear positive that could result” from Brexit.
American homeowners and prospective buyers have already benefited from rock bottom yields. Investors consider US mortgages safe assets since most are ultimately backed by the government through agencies such as Freddie Mac and Fannie Mae.
Refinancing applications are up by a tenth in the second quarter compared with the first three months of the year, according to a team of Deutsche Bank analysts led by Matt O’Connor.
“Following [the] Brexit vote, mortgage rates are likely to further decline, driving refi activity even higher,” the analysts wrote.
Advisers typically tell consumers they can only benefit from refinancings if rates are at least 50 or 75 basis points lower than they were when they took out their mortgage.
Given rates have been low for so long, analysts had been expecting the pace of refinancing deals to slow.
At the start of the year, when investors expected the Federal Reserve would finally begin increasing interest rates, the MBA forecast total originations — also including purchases — to come in at $1.38tn this year, down from $1.63tn in 2015.
However, the trade body has since lifted its estimates as mounting economic uncertainty has diminished the prospect of rate rises by the Fed — even before the turbulence caused by the Brexit vote.
Shortly before the referendum, the MBA forecast $1.66tn worth of mortgage originations would be completed this year. Refinancing transactions were estimated to account for about $690bn of that.
In a report Goldman Sachs published last week on the potential knock-on effects of Brexit for US banks, analysts estimated a 20 per cent increase in mortgage originations would boost profits in the second half of this year by about 3 per cent at M&T Bank, and 2 per cent at BB&T and SunTrust.
Wealthy and less well-off Americans alike would benefit from another reduction in rates, analysts said. As house prices rise, more lower-income households have become eligible to quality for refinancings.
“Any buyers that have purchased since 2012 may have an opportunity to refinance, along with those that perhaps didn’t have enough equity to refinance [back then],” said Danielle Hale, managing director at the National Association of Realtors. “We expect mortgage rates to come down. Lower rates do tend to boost refinancing opportunities.”
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