The COVID-19 crisis is threatening to hit bank profitability, but a flood of residential refinancings are poised to help them bump up their numbers.

The economic impact of coronavirus is expected to hit bank profitability hard, as customers struggle to make loan payments and growth projections slow with a large chunk of the world hunkering down to prevent the spread of the virus. 

But the one bright spot banks are seeing in all of this is an uptick in refinancing activity. 

When the Federal Reserve dropped interest rates from close to 2 percent at the beginning of March almost down to zero, homeowners rushed to refinance and lock in at a lower interest rate on their home mortgages.  

Although taking a lower interest rate means lower monthly loan payments for the banks, refinancings also come with fee income through application fees and closing costs. 

Capacity Issue Created 

Banks in New Hampshire say they are seeing a huge surge in refinancing activity, with some even looking to bring on additional staff to handle all of the new applications. 

“The amount of refis that flooded in initially created a capacity issue within the industry, not only from internal processing at the bank level, but also in Northern New England with the limited amount of appraisers,” said Mike Urnezis, senior vice president at the Norwich, Vermont-based Ledyard Bank, which has most of its offices in New Hampshire. “Getting a title is a concern as well. Some town offices are closed, which makes it difficult to get the title and legal work done.” 

It all started at the beginning of March when the Fed dropped rates by a whole half point to combat early signs of an economic slowdown.  

Although mortgage rates are not directly tied to the Federal Reserve’s short-term borrowing rate, the Fed’s benchmark rate does impact the 10-year Treasury rate, which in turn directly impacts mortgage rates. The half-point drop pushed the 10-year Treasury bill briefly down to an all-time low of around 45 basis points. 

At that point, Urnezis said mortgage rates on the 30-year fixed product at Ledyard fell to 2.87 percent briefly.  

Carol Bickford, the senior vice president of mortgage lending at New Hampshire Mutual Bancorp, which is the holding company of Meredith Village Savings Bank, Merrimack County Savings Bank and Savings Bank of Walpole, said the company experienced a similar rate drop. She said the 30-year fixed product dropped briefly to 2.75 percent. 

Shortly after this drop, however, the Fed began intervening with its other monetary tools and the government began taking other measures to combat the slowdown, which pushed the 10-year Treasury bill up and mortgage rates as well.  

Still, Bickford said the bank experienced a 329 percent increase in refinancing activity between the first week of February and the first week of March. 

Staffing Expanded to Help 

Ledyard is actively hiring staff to help with the surge in applications, while Urnezis said the is using people in other departments of the bank who are cross trained to help out. 

“Most operations streamlined to prepare for higher [interest] rates and a reduction in volume,” he said. “That didn’t happen in 2019 and now the same staff sizes are seeing a huge increase in demand.” 

Purchase activity, which normally picks up in a falling rate environment, has been mixed.  

Urnezis said as of March 16 that Ledyard was seeing good activity in terms of purchase mortgages, and many refi requests on commercial loans as well. Bickford said that purchase activity had been flat, if not a little down year-over-year. 

While conditions are anything but certain, the interest rate on 10-year Treasurys has risen above 1 percent, bringing mortgage rates on the 30-year fixed product up to about 3.65 percent as of March 20, which is actually as high as they’ve been since mid-January, according to Freddie Mac.  

But with such volatility in the bond market, mortgage rates could eventually come down again, prompting more refi activity. If they start to decline to a level that is not profitable for banks, decisions will need to be made. 

“We may hold some loans in our portfolio and then sell some,” said Bickford. “We will look at where we need to be on the balance sheet. Volume is always good, but not at a low rate obviously, so we do have that option to sell some mortgages in the secondary market if we need to. This option is good for our banks and our customers.”