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Chrisman's Corner: Interest Rates Influence Business Models, but They Don't Determine Them

We have entered 2015 with a nice holiday week, and plenty of JMAC’s brokers are wondering what will happen to interest rates. No broker, or CEO, bases their company’s fortunes on interest rate projections, and plenty of experts were wrong about 2014. But what is going on with borrowing costs now that Quantitative Easing (QE) is done?
The United States does not operate in a vacuum and now Europe’s economy could arguably use a shot in the arm. The prospect of QE has driven risk-free rates lower in Europe, which has lured companies based in the United States to issue Euro bonds. This impacts JMAC and our brokers both directly and indirectly for a number of reasons. Smaller lenders do not have access to the global markets, but the global markets impact them.
Large companies like Apple, Exxon, or Verizon are issuing billion in euro bonds yielding 1.65%. If you wonder why the stocks of big S&P 500 companies seem to be doing great in spite of our economy merely doing “well”, this is why. International exposure matters.
Independent mortgage banks like JMAC cannot borrow at 1.65%. They pretty much borrow from warehouse lenders at 3 or 4%, or they can access the debt markets at 9-11%. We have all see the announcements and minutes from the Federal Reserve Open Market Committee meetings. They have pretty much set the stage for higher U.S. borrowing costs next year (at least short term rates). 
That is an interesting situation: rates heading higher in the United States while remaining at rock bottom overseas. The big U.S. banks which are currently enjoying a very low cost of funds will see their margins squeezed as rates head higher.

JMAC’s leading brokers are making plans for 2015, trying to hone their business models to accommodate various rate environments, overhead escalations, expansion plans, and so forth. And although rates factor into those plans, there are more critical factors than basing your entire business model on a rate guess.