With mortgage rates at an all time low, many prospective borrowers are thinking that this is the perfect time to apply for a home mortgage. Banking institutions are also excited about the low mortgage rates, but for entirely different reasons.
While prospective borrowers are seeing this trend as something positive, it is very important that they read between the lines and fully understand their mortgage agreement before making a commitment. The reason that the bankers are so excited is due to the fact that the profit margin on the rates that they are able to charge customers combined with the amount of money they can earn for selling those mortgages to investors is at a record. This is referred to as the “spread,” which in layman’s terms means the difference between mortgage securities yields and mortgage rates. At the start of the economic crisis, these types of transactions were commonly referred to as “gouging.”
And of course, it is no surprise to learn who is doing the gouging. Wells Fargo and JP Morgan Chase, who have earned their share of scrutiny in the last few years both reported in the past several weeks that they had earned hearty profits from the mortgage business in the third quarter. William C. Dudley, President of the Federal Reserve Bank of New York, openly expressed his disdain and frustration in a recent speech where he blamed the current concentration of mortgage making powers on a small handful of well known banking institutions.
William C. Dudley is definitely right, but what he failed to mention in his speech was that the institution where he is currently President, his former boss, Treasury Secretary Timothy Geithner, and our own presidential administration are the parties responsible for the current situation. The unbalanced mortgage market is the direct, but unintentional consequence of the bailouts of the financial institutions and the lax regulatory response following the economic crisis.
Both the US Government and the regulators had two separate approaches when it came to banking oversights during the economic meltdown and the devastating aftermath. First off, the regulators indulged the large banking institutions that were in trouble by allowing Bank of America and Citigroup extra time to work off their bad debts. They seemingly overlooked housing related discrepancies on their balance sheets as well as practiced forbearance, and they encouraged the successful banking institutions to grow even larger by taking over their small and struggling competitors.
One example is how Wells Fargo and JP Morgan Chase completely dominate the mortgage industry, and basically face no competition due to the fact that Citigroup and Bank of America are pulling out, and at one time these banks were their biggest threats. What is quite the bizarre twist in this whole scenario is that the Federal Reserve is also a victim. While it did move to buy mortgage-backed securities in its most recent round of measures to lower interest rates, the Federal Reserve can only push so far due to the state of the dysfunctional market.
While the government did indeed sweep in and save the banks and mortgage market, Americans are left with a feeling of dissatisfaction, because if this is the result of their efforts, what hope is there for the future?