Interest rates on mortgages and refinancing are at record lows, giving borrowers plenty to celebrate. But the bigger winners are the banks making the loans.
Banks are making unusually large gains on mortgages because they are taking profits far higher than the historical norm...
The jump in revenue for the banks is not coming from charging consumers higher fees. Instead, it comes from the their role as middlemen. Banks make their money from taking the mortgages and bundling them into bonds that they then sell to investors, like pensions and mutual funds. The higher the mortgage rate paid by homeowners and the lower the interest paid on the bonds, the bigger the profit for the bank....
The mortgage industry has a yardstick for measuring the size of those profits. It compares the mortgage rates paid by borrowers and the interest rate on the mortgage bond — a difference known in the industry as the spread....
The spread is the profit for the banks from loaning out at a higher interest rate to consumers and borrowing at a lower one.
Mortgage analysts who track this difference say it has been historically high in recent months. They contend that if the market were functioning properly, the recent drop in the bond rates should have led to a larger decline in mortgage rates for consumers than has actually occurred. .
Instead, the difference between the two rates is increasing: mortgage rates are falling much more slowly than the bond interest rates....
If banks offered mortgages with an interest rate that was half a percentage point lower — a move that would leave their mortgage gains closer to the historical levels of 0.5 percent — borrowers would see real savings.....
The failure of mortgage rates to fall further poses a quandary for the government entities like the Federal Reserve and the Treasury Department, which have spent hundreds of billions of dollars to help make home loans cheaper.
“Policy makers get a little frustrated that they are not getting all the bang for their buck that they could,” said Mr. Lawler.....
It is hard to see how this situation can change in favor of lower rates for consumers. The banks are finding plenty of consumers wanting mortgage loans at current rates, and bond investors are happy to pay whatever low rate is offered.
And regulators, who are loath to dictate business practices, are unlikely to force banks to lower mortgage rates.
Still, the housing market would benefit if rates to consumers fell in tandem with the bond rates, said Mr. Van Nieuwerburgh of New York University.
“The relatively high mortgage rates do not help the housing recovery because they make it harder for new homeowners to get on the housing ladder and because they make refinancing relatively less attractive,” he said.
