DALLAS–As long-term interest rates keep rising, financial institutions with unhedged mortgage loans have reason for concern, according to an analysis released by ALM First Financial Advisors here.
“Right now, the 10-year Treasury rate is sitting at roughly 2.40%, compared with 1.88% just after Election Day (Nov. 8),” said Travis Goodman, CFA, principal, Advisory Services. “Just last summer, the long-end Treasury was at its lowest in decades, setting an all-time record of 1.37% July 8. “Now it’s at almost double that figure.”
Goodman predicted the jump in interest rates may help net interest margins going forward, but it isn’t good for those credit unions with pipelines that include unhedged mortgage loans, whose value has been dropping significantly.
“Here’s an example,” he said. “The pricing for 30-year, 3.5% coupon mortgage loans has dropped between three and four points, from 103 around Oct. 1 to below 99 as of Nov. 30. So, for financial institutions with unhedged mortgage loans, you’re looking at a painful month of lost value. And, depending on size, that could be in the millions of dollars for some.”
In terms of economics, Goodman said there isn’t much institutions can do about the existing loss because its diminished economic value already has been “realized,” regardless of accounting practices. He added that although the mortgage market could move back in sellers’ favor, timing the markets more often than not leads them astray.
Goodman added that the best advice for any institution engaged in mortgage loan production is to never rely on interest rates to determine profitability. “The focus should be on a proper mortgage pipeline management process to mitigate the risk of changes in mortgage values,” he said. “Not only will that help improve efficiencies, but it also will reduce the risks of secondary mortgage operations.”