Despite a weak first quarter for GDP growth, the Mortgage Bankers Association's chief economist still predicts that the Federal Reserve will raise short-term interest rates this year.
That won't necessarily mean higher mortgage rates, but other variables could push long-term rates higher, the MBA's Mike Fratantoni cautioned. And these days it doesn't take much of a rise to hurt production volumes.
"In the last month or so we had two successive weeks where 30-year mortgage rates rose by a grand total of 4 basis points and refi applications fell by 10%," he told reporters Monday at the MBA's Secondary Market Conference in New York. "So this is extraordinarily sensitive to even the slightest upward movement in rates."
And that's in an environment where lenders desperately need to ramp up production to offset rising origination costs. In roughly the last year, it cost a lender on average $7,000 to write a new loan, versus $4,500 in 2008, Fratantoni said. While costs related to the new disclosure requirements and other regulatory changes certainly contributed, expenses across the board have crept up.
"Talking to lenders, at this point, no silver bullet has been found to try to bring down those costs," he said. "If we are now through much of the regulatory implementation phase, can the industry's attention turn to more efficient processes and other ways to get productivity up?"
Fratantoni said he predicts there will be two more rate hikes this year and then four per year for the next couple of years. Ultimately, he expects the central bank to continue making moves until it reaches a Federal Funds Rate target between 3.25% and 3.5%.
Of course, skepticism persists: Attendees pushed Fratantoni on how much stock to put in the Fed actually raising rates when they've reneged on such promises.
The first quarter did see a decline in GDP growth to 0.5% from 1.4% and 2.0% in the prior two quarters. But unemployment also dropped to 4.9% in the first quarter and wage growth remained steady. And while inflation has remained low because of energy prices, recent weeks have seen improvement. All of this make future hikes more likely, Fratantoni argued.
Even if they do come, can the mortgage industry really rely on these increases to short-term rates to push mortgage rates higher? Fratantoni would likely tell you to look overseas for the answer.
"We've had this very strange situation where after the Fed raised short-term rates in December, long term rates dropped," Fratantoni said. "When we get strong U.S. domestic economic news that may bring rates up a bit, but we are at the mercy of these global capital flows," which may be influenced by the U.K. referendum on leaving the European Union and the U.S. presidential election.
