Mortgage bankers may have been in mourning as they looked at their term sheets this week as recent rate spikes have driven interest rates over 4 percent for the first time in months and pushed down refinance applications.  

“[People are] surprised. Lenders were not anticipating a spike in interest rates,” said Jerami Marshal, senior vice president at Sovereign Bank and chair of the Massachusetts Mortgage Bankers Association (MBA).

Across the country, the average contract interest rate for conforming 30-year fixed-rate mortgages increased to 4.15 percent, the highest rate since March 2012, according to the most recent weekly survey from the Mortgage Bankers Association.

Though refinance applications ticked up 5 percent last week, according to the MBA, that increase follows a full month of severe declines, with the seasonally adjusted volume of refinance applications dropping around 10 percent for three weeks in succession according to the MBA survey.

In Massachusetts, the number of completed refinances was up in May, the month the slowdown began, but the 4.5 percent increase in completed refinances was well below the 10 percent-plus growth seen in March and the 30 percent increase in refinances from 2011 to 2012, according to data from The Warren Group, publisher of Banker & Tradesman.

‘A Crazy Ride’

It’s still unclear whether the recent shift above 4 percent will be for good. Rates have spiked up and down rapidly in the past few weeks, leaving lenders and borrowers alike jittery.  

“This has been a really crazy, crazy ride. We’ve had days when we’ve had four or five rate changes in a day in the last three weeks. Really volatile,” said Amy Tierce, regional vice president for Fairway Independent Mortgage Corp. in Needham.

But as the housing recovery strengthens and prices increase, some lenders are beginning to prepare for a new, higher-rate world. After years of record lows, vast swaths of homeowners have already refinanced, and if rates stay up they’ll not be tempted to do so again for many years. That’s a troubling prospect for a mortgage industry still recovering its footing after the housing crash.  

“Being a purchase-focused company anyway, we’re not thinking of any changes like layoffs or changes like that. In fact we’re shoring up where we can – underwriting and processing are still at a premium. But we’re making sure that those who are with us are purchase-focused – and if they’re not, they won’t be with us very long,” said Brian Koss, executive vice president at the Danvers-based Mortgage Network.  

Some lenders see light at the end of the horizon in the form of a revived home equity market. As home prices increase and more and more borrowers get out from underwater, recently moribund product lines like home equity lines of credit and second mortgages may again be appealing to consumers.

 “When Mr. and Mrs. Borrower want to put on an addition or pay some bills off, what are they going to do? They’re not going to touch that first mortgage at 3.5 percent. They’re going to go to their local bank or credit union for a home equity loan to 90 percent. That’s what the mortgage lending community should be thinking about,” said Marshal.

But even if the consumer sees the appeal of such products, the secondary market may take more convincing. Currently there’s little interest in securitizing such mortgages, said Koss. “It’s not a profitable business … We’re hoping by 2014 that will begin to formulate,” he said.

In the meantime, loan officers are having some tough conversations with consumers – the increase in rates will force many to readjust their expectations about how much home they can purchase.

“We’re pre-approving people at about a half-a-point [over the current prevailing rate]. We want to make sure that we’re not putting people out on the street with a pre-approval they’re not just on the edge of being able to buy,” only to find a deal slipping through their fingers if rates should increase further, said Tierce. “You got to be real and tell the truth. You don’t want people coming in all excited that they got an offer accepted, only to find they can’t buy the house after all.”

With foresight, lenders hope to weather the transition to higher rates over the coming months – especially as the strong demand and low inventory have kept the housing market strong. But if recent good news inspires more sellers to get off the fence, that could spell bad news for the recovery.

“A combination of higher pricing and higher inventory will put the brakes on this,” said Koss. 

Email: csullivan@thewarrengroup.com