Banks Report Record Profits From Mortgages…But How?
Source: Daily Real Estate News | Tuesday, December 04, 2012
Banks have constrained their mortgage lending in recent years and mortgage rates are at all-time lows. So how are banks reporting record-breaking mortgage revenue?
According to a paper recently presented by the Federal Reserve Bank of New York, the rise in mortgage profitability “remains something of a puzzle.”
Banks’ profits have risen from around $2 per $100 in loans from 2005-2008 up to $4 in early 2009 and $5 more recently, according to the paper.
While it’s pricier to originate a mortgage now than in the past, that doesn’t explain why banks are seeing higher profits from processing mortgages, according to the paper.
The paper offers up some possible reasons for greater mortgage profitability among banks. One of the most likely reasons is partially due to capacity constraints. There are a fewer number of lenders now processing mortgages than there once were. Mortgage employment has dropped sharply over the years, so there are less lenders to meet the current higher demand.
Another reason for the rise in mortgage profitability among papers, the paper suggests, is the pricing power banks place on certain borrowers. The New York Fed says that banks are charging certain borrowers more money to refinance, particularly on government programs that aim to make it possible for borrowers with little or no equity to be able to refinance.
“Many of these borrowers may have to refinance through their existing mortgage company, or may have to jump through fewer hurdles to refinance through their existing mortgage company, making them captive,” The Wall Street Journal reports. “The study presents data that it says is consistent with (though certainly not proof of) originators taking advantage of their pricing power over streamline-eligible borrowers.”
According to The Wall Street Journal, mortgage rates could possibly be even lower than their current record-breaking lows if banks would pass along the lower funding costs to borrowers.
Source: “Why Banks Are Enjoying Record Mortgage Revenue,” The Wall Street Journal (Dec. 3, 2012)
I recently read an article from the Daily Real Estate News quoting the Wall Street Journal as saying that banks are “taking advantage of their pricing power over streamline-eligible borrowers”. This shouldn’t be a big surprise to anyone. We’ve been seeing the banks lobby for laws that make it more and more difficult for mortgage companies and brokers to stay in business and compete with them. Now it has become clear why they’re doing it. When you push your competition out of the market, it becomes much easier to gouge your customers.
The article also quotes the New York Federal Reserve Bank as saying that “banks are charging more and more to refinance, particularly on government programs”… Are you seeing the pattern?
The informed public clearly needs to redirect their mortgage business away from the big banks and more toward the mortgage companies that can not only provide them with better pricing on mortgages, but also personalized service that is tailored to their unique needs. That personalized service includes closing your loan in a reasonable time frame rather than the 90 or more days that the banks are currently taking.
We’re clearly offering a much better value to homeowners, especially those looking for coveted government refinances like HARP 2 (Home Affordable Refinance Program) which is part of the government’s attempt to help struggling homeowners with upside down mortgages. It also includes homeowners who are upside down with FHA government insured loans and needing to consider refinancing to make their payments for affordable.