For banks, it appears as though the chickens are coming home to roost. The Mortgage Bankers Association reported this morning that its composite mortgage applications index fell on a seasonally adjusted basis by 3% last week. This puts the measure at the lowest level since November of 2011.

The explanation for the fall is simple: Mortgage rates are headed higher. "Interest rates moved up sharply following the Federal Reserve press conference last Wednesday where it was indicated that the Fed could begin tapering their asset purchases later this year," said Mike Fratantoni, MBA's Vice President of Research and Economics.


Thanks to the central bank's third round of quantitative easing, the interest rate on a conventional, conforming 30-year fixed rate mortgage fell last year to below 3.5%. The same rate is now well above 4%. By the MBA's estimate, it was at 4.6% for the week ended June 21. This was the highest level in nearly a year.

The refinance industry is feeling the most immediate effects of this. The portion of mortgages that were related to refinance activity, as opposed to purchase-money mortgages, dropped to 67%. By comparison, for much of last year, it was above 80%, topping out at 84% in the first week of December.

This aside, there are silver linings behind this trend. As Fratantoni noted, "applications for conventional purchase loans picked up by more than 3 percent over the week, and total purchase applications were 16 percent higher than one year ago, indicating that homebuyers are not yet dissuaded by the increase in mortgage rates."

In a strange way, in other words, higher mortgage rates could even theoretically provide a boost to the housing market. In the first case, as refinance activity drops out, banks will presumably be both freed up and incentivized to increase the supply of new mortgages. And on the demand side, the fear of ever-increasing rates could spur prospective homebuyers to act sooner rather than later.

Predicting what impact this will have on banks is, to put it simply, difficult. Among the lenders that dominate the mortgage industry -- think Wells Fargo with a third of the market share and runner-up JPMorgan Chase -- the decrease in revenue from reduced refinancing could very well be offset by an increase in net interest income, as lenders like these have massive securities portfolios that will benefit from higher long-term interest rates. 

Meanwhile, for banks like Bank of America and Citigroup , it's hard to conclude that there's anything but upside, here -- which is ironic given how hard their shares have been hit after fear of the Fed's tapering surfaced at the end of last month. This is because, on balance, these banks generate significantly more revenue on a proportional basis from their asset portfolios than from their mortgage underwriting activities. See Bank of America CEO Brian Moynihan's recent comment that the "interest rate risk is only upside."

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

The article Trouble for Banks? Mortgage Applications at More Than 2-Year Low originally appeared on Fool.com.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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