Monday
November 24, 2014

Banks Report Record Profits From Mortgages...But How?

|
-A A +A

Banks Report Record Profits From Mortgages...But How?

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 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)

Read More

Banks Profit From Helping Home Owners Refinance