With its recent new initiative to inject a potentially
unbounded amount of additional stimulus into the economy, the
Federal Reserve is pulling out all the stops to try to get the
economy moving forward again. But recent evidence suggests that
some of the people that the Fed has targeted to get the benefit
of its moves aren't getting the full beneficial impact because of
interference from other sources who are tapping Fed policies for
their own profit.
In particular, with the Fed expressly targeting
mortgage-backed securities for its latest round of quantitative
easing,
the central bank clearly wants to help
homeowners
who are underwater on mortgages and struggling to refinance their
outstanding loans. Yet as a report in
The
New York Times
recently noted, interest rate reductions in the mortgage-backed
securities market that would ordinarily put homeowners in a
position to get favorable mortgages simply aren't flowing through
to mortgage borrowers.
Spreading the profits around
In the distant past, banks made home loans with the intention of
holding on to them. As a result, banks were highly interested in
the creditworthiness of their customers, since they'd potentially
be on the hook if those customers couldn't pay. As the
Times
article explains, however, the ability to sell mortgage loans
onto the open market where they could then be turned into
mortgage-backed securities changed the way that banks profited
from home loans. It also changed the incentives the banks had for
ensuring high-quality loans.
Because the
mortgage-backed securities market has become so
large
, you can use the difference between prevailing rates on those
securities and the mortgage rates that banks offer to gauge the
amount of profit that banks are collecting on home loans. As
recently as a year ago, the spread between those two rates was
about three-quarters of a percentage point.
Now, though, the spread has nearly doubled, rising above the
1.4 percentage point mark. In other words, banks are reaping a
windfall at mortgage borrowers' expense. And if mortgage rates
reflected more normal conditions, they'd be almost three-quarters
of a point lower than they are today, potentially saving
homeowners hundreds of dollars on their monthly payments when
they refinanced.
Where's the money?
The obvious place to look for the profits is mortgage lenders.
Wells Fargo
(
WFC
) ,
Bank of America
(
BAC
) , and
JPMorgan Chase
(
JPM
) are the usual suspects, having been named in the
$25 billion settlement that resolved the
foreclosure scandal
earlier this year. Yet other banks, including
US Bancorp
(
USB
) , have seen a big ramp-up in mortgage activity as well.
But if big banks are running wild, the question you have to
ask is why competition isn't holding them in check. One possible
reason is that after the financial crisis,
mortgage brokers
faced intense scrutiny over their business practices. Unlike big
banks getting government rescues, mortgage brokers were largely
seen as scapegoats, allegedly luring unsuspecting customers in
and getting a cut off the top.
Although there were certainly cases of abuse, the impact of
the crisis and resulting tighter regulation on surviving mortgage
brokers may well have led to the industry swinging too far to the
other extreme. Without independent brokers who can shop different
lenders with sophistication to find the best rates for their
customers, lenders don't have nearly the incentive to cut their
rates as much as they can. Instead, they can focus on customer
service and relationship building while at the same time trying
to widen their profit margins on loan transactions by withholding
better rates.
What can you do?
If you're looking for a mortgage, you have to know not just
prevailing rates at competing financial institutions but also the
current state of the mortgage-backed bond market. A small local
bank or credit union may give you your best bet to get a
rock-bottom rate.
Homeowners simply need to get more sophisticated. Otherwise,
all the Fed's rate moves will be for naught -- unless you're a
big bank.
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also faces some big challenges. Find out the opportunities and
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Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
on Twitter
@DanCaplinger
.
Fool contributor Dan Caplinger got out of the mortgage
business a long time ago. He owns warrants on Wells Fargo and
JPMorgan Chase. The Motley Fool owns shares of JPMorgan Chase,
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