U.S. Aid Benefits Banks, Not Homeowners


U.S. Aid Benefits Banks, Not Homeowners


Government support for the economy has helped banks make all manner of windfall profits. But have outsize returns in banks’ mortgage operations deprived borrowers of lower mortgage rates?

In 2009, there was a big jump in an industry margin used to gauge the profitability of banks’ main mortgage business, selling home loans to government-supported Fannie Mae and Freddie Mac.

In theory, if that margin had remained at narrower, historical levels, mortgage rates for borrowers could have been lower. That might have caused sizable savings for homeowners over the life of their loans and breathed more life into the housing market.

Banks’ mortgage profits have come amid extraordinary government support for the housing market. Since 2008, the Treasury has spent $112 billion to shore up Fannie and Freddie. Further support has come from the Federal Reserve’s $1 trillion-plus of purchases of mortgage-backed securities since the start of 2009. All this has helped mortgage rates fall. But could they have been lower still?

Consider what happens when banks sell their loans to Fannie or Freddie. A bank might write a mortgage at 5.1% and sell it to Fannie, which guarantees the loan and sells it with other loans packaged as mortgage-backed securities, perhaps with a coupon of 4.35%. The difference of 0.75 of a percentage point is booked by the bank, which uses some of that revenue to cover costs in its mortgage business. From 2000 through 2008, that margin averaged 0.73 of a percentage point, according to Barclays Capital data. But in 2009, the average was a much wider 0.98 of a percentage point.

Any additional margin likely boosted banks’ bottom lines. And by a lot, potentially, given that $1.4 trillion of mortgages were written in the first three quarters of 2009, according to Inside Mortgage Finance. Indeed, Wells Fargo and Bank of America, which together account for 45% of the market, reported blowout mortgage earnings last year.

The cause of the wider margin: The Fed’s buying helped pull down coupons on Fannie and Freddie securities by more than mortgage rates. If banks had cut mortgage rates in line with those coupons, homeowners would have benefited. Instead, the benefit appeared to have accrued to the banks.

Banks say the higher margin only offset higher expenses. But basic costs, like the guarantee fee banks pay to Fannie or Freddie as well as loan-servicing costs—roughly 0.25 of a percentage point each—likely haven’t gone up excessively.

Jay Brinkmann, of the Mortgage Bankers Association, says banks needed to recoup a drop in the value of servicing-related assets last year. Lenders also face hedging costs when selling mortgages into a forward market, he says. Of course, since mortgage rates have come down so much, some might say it is nitpicking to focus on potential extra gains for banks. But mortgage rates still are relatively high on an inflation-adjusted basis. And though mortgage origination picked up in 2009 on the lower rates, it fell well short of previous low-rate years.

So should the Treasury have leaned on banks to charge lower mortgage rates, given the government’s desire to help homeowners? Sure, intervention would have risked making banks skittish, perhaps leading to less lending. But the main lenders all have strengthened their mortgage operations through big mergers, and the price at which they sold mortgages benefited a lot from the Fed’s buying.

As the government spends huge sums shoring up the housing market, it may want to look more closely at who is benefiting. Peter Eavis