By David Reilly | The Wall Street Journal
Bank balance sheets involve a lot of push and pull.
This will be seen with mortgages as J.P. Morgan Chase & Co. and Wells Fargo & Co. on Friday kick off second-quarter bank-earnings season. The recent spike in long-term yields is expected to cut into refinancing activity. Freddie Mac FMCC -4.17% said the average rate on a 30-year, fixed-rate mortgage was 4.51% as of July 11, the highest in two years.
That should prompt a fall in mortgage-origination revenue, even as banks will likely have to wait for the full benefit of higher rates to flow through to improved net-interest margins. At the same time, banks’ holdings of mortgage-backed securities and other debt are seeing reduced unrealized gains, or in some cases outright losses.
Yet the biggest banks also may enjoy gains in the value of their mortgage-servicing rights. These are derived from fees banks generate handling mortgages sold to investors. A big part of their value depends on the expected speed of mortgage prepayments. Higher levels of refinancing activity make servicing rights less valuable, since it cuts off the fee stream on which they are based. When rates rise, though, refinancing activity tends to slow, making the rights more valuable.
