Preparing for a World Without Record-Low Interest Rates

Mortgage interest rates are starting to rise dramatically, and lenders such as Bank of America, JPMorgan Chase and Wells Fargo are cutting thousands of mortgage-related jobs. This week, Bank of America announced it will be eliminating 2,100 jobs and shutter 16 mortgage offices, according to Bloomberg. JPMorgan Chase is slashing 300 jobs in central Ohio and 450 jobs in South  Carolina. And Wells Fargo is cutting 2,300 mortgage-related jobs in Des Moines, Iowa, according to The Wall Street Journal.

Refinancing Falls
Last week, mortgage refinance activity plunged to the lowest level since June 2009. With mortgage rates on the rise, refinancing is no longer a good deal for millions of Americans, many of them deeply  underwater. That means the banks are losing business in an area that has been extremely profitable for them lately.

Mortgage Apps Plunge
Not only is refinancing receding, but applications for purchase money loans are  down as well. U.S. home loans plunged, CNBC reports. The Mortgage Bankers Association said both refinancing and home purchase demand sank 13.5 percent in the week that ended September 6. Loan demand is waning because interest rates are rising. The average rate on a 30-year fixed loan was 4.73 percent, according to the Mortgage Bankers Association. That’s more than a full percentage point jump from just a few months ago.

Meanwhile, the yield on U.S. Treasuries has nearly doubled since May. Mortgage interest rates closely mirror the yield on 10 year U.S. Treasuries. Treasury yields touched 3 percent for the first time in over two years.

Mortgage interest rates and Treasury yields spiked lately because Federal Reserve chairman Ben Bernanke hinted recently that Uncle Sam will soon “taper” quantitative easing. Such talk has spooked bond buyers, creating a sell-off in the bond market. The central bank is expected to reduce its $85 billion purchase of Treasuries and mortgage-backed securities. Bernanke hasn’t tapered yet, but bond holders are jittery.

Some  analysts speculate that once Bernanke starts to taper the purchase of U.S.Treasuries, the yield on a 10-year U.S.Treasury note could hit 7 percent or more. If that happens, mortgage interest rates will double too. And the U.S. housing “recovery” could slip back into a slump.

Pay attention real estate agents and investors. The banks are making their moves. They are getting ready for a post-QE3 world. Shouldn’t you start preparing too?

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