The problem in residential mortgage banking is that interest rate risk is one-sided in favor of the customer, not the bank. The customer can always refinance their mortgage when interest rates drop, but the bank doesn’t have that same option if interest rates rise.
Yes, excellent observation and that also presents a problem for bankers. The banks in California had problems since most of their investments were in those bonds paying 1.5% interest.
Unless the customer took out an ARM.
In my case, I took out a special relocation ARM that was 5/15 @ 2%. That's a five-year fixed rate at 2% and then adjustable each year for the next 10 years.
When the five years was up, the loan adjusted upwards by 2% (the maximum allowed per year). I was able to do a loan modification to convert to a 10-year fixed rate at 2.625% in March of 2020 (the beginning of COVID-19).
Today, the rates are much higher than they were when most mortgages were taken out so the customer doesn't really have the option to refinance to a reduced rate. They may try to convert an ARM to a fixed rate to stop the growth, but they will still be locking in a much higher rate than a conventional loan would have charged them if they weren't attracted to the lower introductory rates of the ARMs.
-PJ