By AnnaMaria Andriotis

The rapid rise in interest rates since Election Day is taking a toll on the mortgage market, and lenders are scrambling to adjust.

Since Donald Trump's surprise victory, average rates for a 30-year, fixed-rate mortgage have leapt by more than half a point, to 4.18% on Wednesday. Rates still remain low by historical standards, but are now at their highest level since June 2015, according to

The fast rise in rates has spurred homeowners to pull back from refinancing their mortgages. Applications dropped 3% in the week ended Nov. 18 from the prior one, the seventh consecutive weekly decline, and the second since Election Day, according to data released Wednesday by the Mortgage Bankers Association.

The MBA estimates refinances will fall 46% next year, to $484 billion, which will hurt Americans' ability to free up cash by reducing the cost of their monthly mortgages. The fall in refinances also will hit an important area of consumer-loan growth for banks. To slow the possible damage, banks already are pitching riskier loans that come with adjustable interest rates or allow borrowers to pull more equity out of their homes.

"The increase in rate has shocked consumers...I didn't expect it either, " said Dave Norris, chief revenue officer at LoanDepot, the 10th largest mortgage lender in the U.S. by loan volume.

The impact on home buying may be less clear-cut, but some buyers have rushed to lock in terms before rates rise further. In the week ended Nov. 18, applications for mortgages to purchase homes jumped 13% from a week earlier and were up 11% from a year ago, the MBA data showed.

Eventually, though, rising rates make houses less affordable, and that could lead to slowing sales, price growth and mortgage activity. Some analysts are now projecting home values will decline by the end of next year in many U.S. housing markets.

The MBA lowered its projections for next year's new mortgage loans by 3% last week, to $1.58 trillion. That would represent a 16% drop from the nearly $1.9 trillion in mortgages that lenders are on pace to originate this year, with refinancing accounting for all of the drop.

There is little reason to hope "the refi market will be large next year, " said Greg Gwizdz, national sales manager for Wells Fargo Home Mortgage, a unit of Wells Fargo & Co., the nation's largest mortgage lender by loan volume.

This month's rate increase has eliminated a large share of borrowers for whom refinancing would make financial sense. Before the election, 70% of all borrowers with a 30-year fixed-rate conforming mortgage stood to incur at least a half a percentage point in savings by refinancing. Now only 35% of borrowers are eligible for such savings, said Walter Schmidt, who tracks mortgage-backed securities at FTN Financial.

In response, lenders are revising their strategies for drumming up mortgage demand.

LoanDepot's Mr. Norris said he has been overhearing more conversations about ARMs on the independent mortgage lender's sales floor. Should rates continue to rise, the company plans to ramp up advertising significantly early next year to grab more market share in refinancings, he said.

Wells Fargo said its loan officers began talking to borrowers during the last couple of weeks about the benefits of ARMs that have a low fixed-rate for the first few years before fluctuating with interest rates.

Buyers who plan to keep their home for around five years, for example, are being advised by Wells's loan officers to get ARMs with a seven-year fixed rate. The bank on Wednesday was charging 3.750% for this product versus 4.375% for its 30-year, fixed conforming mortgage.

Bank of America Corp. said some of its loan officers have been having more discussions about ARMs with borrowers who are applying for jumbo mortgages.

The bank also is increasing its marketing of home-equity lines of credit for the first quarter of 2017, in light of the rising rate environment. Home prices have risen substantially in several U.S. housing markets over the past two years, according to S&P CoreLogic Case-Shiller Indices. That has allowed more borrowers to tap into that new equity to pay down credit-card debt or make home renovations.

"We're seeing some of the highest levels of cash-out [refis] the last six or seven years," said Jay Farner, president of Quicken Loans.

Interest rates have fluctuated wildly in recent years. As recently as July, the yield on the benchmark 10-year U.S. Treasury dropped to an all-time low of 1.36% after the U.K. voted to leave the European Union. The drop had banks bracing for a new wave of refinance activity.

This time around, lenders and analysts say the size and speed of the mortgage-rate increase, combined with the new president's fiscal policies and signals from the Federal Reserve about another short-term rate increase, suggest the increase might not fade so quickly.

"This one feels different," says Pete Boomer, head of mortgage production at PNC Financial Services Group Inc. "This is going to be sustained."

Write to AnnaMaria Andriotis at

(END) Dow Jones Newswires

November 24, 2016 08:14 ET (13:14 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.