LIKE everyone else, banks last year were counting on dot-com riches. Mergers and acquisitions were also mighty important to their profits.
You can scratch both those sources of income thus far this year.
So what are banks relying on until the Federal Reserve again gives them favorable interest rates? Home refinancings.
The mighty have fallen. If you had brought up such a mundane business to bankers this time last year, you would have been hustled to some lowly vice president in the Little Italy branch.
Now, even the biggest banks are hoping mortgage rates fall far enough below 7 percent to entice millions of Americans to pay the fees to refinance.
“That’s what all the banks are talking about,” says Mitchell Securities analyst Charles Peabody. Last year, Peabody was one of the first experts to notice that banks were wildly overindulging at the dot-com buffet.
If the refinancing boom catches, banks may have their earnings pulled out of the fire. And, so far – so good.
Greg McBride of Bank Rate Monitor says rates are down enough since the middle of last year that homeowners are starting to trade their old mortgages for new ones. Last May, for instance, 30-year fixed-rate mortgages were averaging about 8.7 percent. Now they’re slightly above 7 percent.
And those favorable interest rates are already bringing out homeowners.
The Mortgage Bankers Association says its refinancing index is the highest it has been since October 1998. The MBA uses an index that’s too complex to explain here. But, to put the situation in perspective, right now 64 percent of all mortgage applications are for refinancings, compared to just 15 percent in June. And while banks are thrilled about all this, they were happier a couple weeks back.
Here’s the problem: The experts say that under-7 percent mortgages are the real flash point for refinancing. If rates go that low, it will make sense for millions of Americans to visit their local banks for a new mortgage.
As you know, the Fed is expected to cut interest rates this week. Might that put mortgage costs down to where bankers and Washington want them? The answer’s not simple.
Since Alan Greenspan first lowered interest rates back in early January, borrowing costs for home buyers and people who are refinancing have actually increased. Back then, mortgage rates were at 7.02 percent; last week they averaged 7.16 percent. This week they’ll probably be higher.
Mortgage rates have been ahead of the Fed, not following. If this trend doesn’t change, the big boost from mortgage fees just isn’t going to happen.
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Don’t fight the Fed.
Everyone has heard the saying. And those who ignored the Fed when interest rates were being raised regretted it last year.
So what’s the Fed’s record on boosting the stock market? Salomon Smith Barney says 78 discount-rate cuts by the Fed back to the early 1900s produced a higher stock market three months after the rate reduction on 58 occasions; a higher market six months later after 61 cuts; and a higher market a year later 65 times.
Before you write to me about the math, remember that you can have a rise three-months later, six-months later and a year later off the same rate cut. So the odds favor a higher market this year.
But let me add a caveat.
Interest rates don’t always go down because the Fed wants them down. Borrowing costs have risen since the first rate cut in January and if the bond market fights by moving interest rates contrary to Greenspan’s wishes, stocks might not obey either.
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