FORTUNE – The nation’s major banks have seen profits soar as the business of refinancing home loans have become especially lucrative. This wasn’t always the case during the darkest days of the Great Recession, when refinancing wasn’t worth the time or costs for many borrowers weighed down by debt, joblessness and mortgages worth more than the value of their property.
But thanks to the Federal Reserve’s moves to stimulate the economy by purchasing billions of dollars of bonds, interest rates have fallen to record lows. Borrowers haven’t been able to resist the savings; the costs to refinance make sense. In November 2012, refinancings were up 71.2% over the same period in 2011, according to the Mortgage Bankers Association.
That might likely change this year. While the Fed has promised to buy more mortgage bonds, interest rates may not fall much farther, which could certainly slow the boom in refinancing that has helped drive earnings at the nation’s biggest banks.
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The Mortgage Bankers Association, which tracks trends in borrowers taking out new mortgages and refinancing old ones, comes up with some grim predictions:
Whereas applications for refinances totaled $1.2 trillion in 2012, that’s expected to spiral to $818 billion in 2013 and $358 billion in 2014. To put it another way: Refinances made up 71% of all mortgage originations in 2012, but that is forecast to decline to 58% in 2013 and 34% in 2014.
New mortgages for home purchases aren’t likely to offset the drop. Such loans are expected to edge up only modestly, from $503 billion in 2012 to $592 billion in 2013 and $703 billion in 2014.
To be sure, not all seem to believe the refinance boom has peaked, at least not anytime soon. Bank of America (BAC), the nation’s fourth-largest mortgage lender, is looking to ride deeper into home lending, The Wall Street Journal reported, quoting CEO Brian Moynihan at an investor conference back in December. Of the all the bank’s mortgage loans, 84% are refinances. The Charlotte, N.C.-based company aims to sell more mortgages at its 5,000-plus branches, after retreating from the business less than two years ago.
It remains to be seen if and how all that pans out, though. As Fortune’s Stephen Gandel says in his look at Bank of America’s latest earnings, it may be too late to ride the good times in refinance.
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Nonetheless, JPMorgan (JPM) and Wells Fargo reported strong earnings during the last three months of 2012. This was largely driven by mortgages. Even still, there are signs that the banks may not gain as much in the quarters ahead.
During the fourth quarter, Wells Fargo (WFC) handled $125 billion of mortgage originations. That’s 4% more from a year earlier, but 10% less compared with the third quarter. And on Wednesday, JPMorgan CEO Jamie Dimon said he expects revenue from home loans will be inconsistent over the next several quarters.
All this underscores a broader point: That while the Fed’s low-interest rate prescription for a troubled economy has benefitted the big banks, it could also hurt them in the end. It has eroded banks’ net interest margins – a widely watched metric that speaks to their overall lending profitability. For instance, Wells Fargo’s net interest margin during the fourth quarter fell slightly to 3.56% from 3.89% a year earlier.
Banks hope the refinance boom will last, but that’s probably not something they should count on.
