"U.S. Aid Benefits Banks, not Homeowners
by Peter Eavis, special for the Wall Street Journal
January 19, 2010
"Government support for the economy has helped banks make all manner of windfall profits. But have outsize returns in banks' mortgage operations deprived borrowers on lower mortgage rates?
"In 2009, there was a big jump in an industry margin used to gauge the profitablilty 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.
". . . . Instead, the benefit appeared to have accrued to the banks.
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"As the government spends huge sums shoring up the housing market, it may want to look more closely at who is benefitting. --Peter Eavis "
Hal Rogers says "Stay the Course". His friends are the fat-cat bankers and brokers who get million dollar bonuses from their corporations for mulching the government out of millions of dollars stimulus money. Kenneth Stepp and the Democrats favor "percolate up" economics of government policies benefitting the working poor and those on welfare, and then the additional money "percolating up" to the bankers and brokers who have things to sell to the working poor and those on welfare. Let's put first things first. --Kenneth Stepp.