Categorized | Finance and Mortgage

Increase in Mortgage Refinancing Applications Puts Stress on Banks

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With 15-year and 30-year fixed mortgage loans at record low rates, the number of refinancing applications has surged in recent weeks. While the option of refinancing certainly helps the average homeowner save a significant amount of money, it is taking its toll on banks. As such, many banks in the United States have looked to increase their margins between primary and secondary loan rates.

Banks generally do not prefer homeowners to refinance their mortgages, as the earlier repayment of loans leads to either reduced profit, or even a loss to bonds. The widened margins between primary rates and secondary loans packaged into mortgage-based securities are most evident in the rates of the major banks, such as JP Morgan Chase. The major banks use wider margins so as to manage their business, and to cut back on potential losses.

In order to cut back on losses, and to prevent the prepayment of mortgage loans, the major banks have put capacity constraints into place. The capacity constraints typically involve higher rates in attempts to cap the number of refinancing applications. Most economic experts, however, believe that even with such constraints, the number of refinancing applications will continue to rise.

As such, investors are discouraged from buying mortgage-back securities, as they basically guarantee a loss for investors due to their higher rates.

Although many banks are doing whatever they can to slowdown the number of refinancing applications, they will likely continue to face an increased number of applications due to the low mortgage rates that will remain available for at least the next year.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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