Banks Sneak in the Backdoor for more Fed Money

Mortgage rates should be lower than they are. Why are banks smiling about this?

January 17, 2009 -- BLOOMFIELD, MI - On November 25^th of 2008, the Federal Reserve announced a program to reduce the cost and increase the availability of credit for the purchase of houses. 

Over several quarters, the Federal Reserve will buy up to $100 billion of direct obligations of FNMA, FHLMC & GNMA, and purchase up to $500 billion in mortgage-backed securities (MBS) that the entities sell on Wall Street. 

The move is designed to put a floor under the housing market and break the vicious cycle of foreclosures pushing housing values down, causing more foreclosure, pushing prices down further.

The Fed started their purchases at the beginning of January and in response, mortgage rates dropped to 50 year lows.

This is great news for potential homebuyers as these historically low rates combined with marked down houses probably represent the best buying opportunity in a generation. 

It's also good news for homeowners as those with equity in their homes can refinance to lower their mortgage payments. 

Increasing home sales, a refinancing boom - sounds like the clock's been turned back to the "good old" days of a few years ago!

Well, this time around is very different for many obvious reasons and some not so obvious ones.  Anyone notice that most banks are teetering on the brink of bankruptcy or insolvency?  They're not lending as eagerly as in the past, despite the government handing out $700 billion in TARP funds.  Banks are desperate for money wherever they can get it.  As such, they're making this refinance boom dramatically different from previous ones.

Take a look at the chart below.  It compares wholesale mortgage rates with those the consumer sees.  The wholesale rate is represented by the FNMA 60 Day Delivery Rate, as best a wholesale rate as can be found.  The weekly FHLMC Primary Mortgage Market Survey represents the consumer rate.  Note that the survey has a "fee" component also.

The chart shows an overall widening between the two rates beginning in late November.  Also notice the FHLMC survey shows consumer fees have increased since the end of October.

What's going on?  Well, to generate higher profits banks are keeping the improvements in wholesale rates while also raising mortgage fees (this is why it's very difficult to get a no-cost refinance).

Remember, many banks are struggling to survive.  They're looking to increase revenues any & every way they can.

What's interesting about this is that they're taking advantage of the Federal Reserve's purchase of MBS to lower mortgage rates for consumers.  The Fed is spending taxpayer dollars to lower wholesale mortgage rates, but the banks are keeping the money, just like they're keeping the TARP funds they received and were supposed to loan out to save the economy.

It's just another sneaky way for the banks to get more money out of the government and taxpayers.  

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education.  He can be reached at 248-356-3739, dsygit@TheLendingEdge.com  or read his blog:  http://drewsmortgagenews.blogspot.com.