The Lender’s Last Laugh

 

“Actually, the word ‘lender’ is a misnomer. Banks don’t really lend much mortgage money. They just originate and package mortgages, buy a government guarantee and then sell in the secondary market to fixed-income investors content to earn just a smidgeon over Treasuries on paper of close to the same quality and risk. The banks are really only ‘pricers’ of mortgages.” Sanford Rose

Dolors& Sense

By Sanford Rose

KISSIMMEE Florida—1/7/2013—The folks who made the recession deeper are now making the recovery shallower.

It’s your friendly banker.

Understand that the banks did not cause the recession. That distinction belongs to the government, the monetary authority, which did the job with excessively cheap money and excessively relaxed regulation.

But the banks made it worse.

Understand also that the monetary authority, which has apologized for previous derelictions of duty, has done its level best to correct its mistakes in the last few years.

But the banks are making it harder.

The Fed is once again pouring money into the economy. This is justified now, whereas it was not justified ten years ago.

Then, the monetary authority was overreacting to a singularly mild recession. Today, it is, if anything, underreacting to a singularly severe recession.

Be that as it may, the Fed is currently buying up mortgage securities at a frenetic pace—a $40 billion-a-month clip. As a result, the mortgage rate has indeed fallen, but it has not fallen by as much as it should have.

The banks are holding up the rate, using a rare opportunity to fatten their interest margins and boost lending profits.

The mortgage rate is low, but it should be lower, a half a percentage point lower.

Otherwise stated, mortgages are close to 20 percent more expensive than they would be were the banker’s margin the same as it was a few years ago.

The Fed says that the banks now make $5 per $100 in mortgage loans. In 2005-2008, they made only $2.

Oddly enough in the view of the average person who has been reading a lot of drivel about the so-called curbing of bank power, the banks now exercise more market power in many areas of financial services than they ever did.

That’s in large measure because the industry has become much more concentrated. There are many fewer mortgage lenders now than in the halcyon days just before the recession.

Actually, the word “lender” is a misnomer. Banks don’t really lend much mortgage money. They just originate and package mortgages, buy a government guarantee and then sell in the secondary market to fixed-income investors content to earn just a smidgeon over Treasuries on paper of close to the same quality and risk.

The banks are really only “pricers” of mortgages.

And the fewer the pricers, the higher the price.

The recession drove many banks out of business altogether and many others that stayed in the banking business out of the mortgage part.

Those who were able to hold on are enjoying rich pickings. But their good fortune is bad news for those consumers who might have bought houses (or mortgagors who might have refinanced at a lower rate) had industry pricing been more competitive.

For them, and for all whose prosperity depends on the buoyancy of the housing market, there is little mirth in the lender’s last laugh.

Note: The image used to illustrate this column was originally created by Byzantine_K and may be found at http://www.flickr.com/photos/november5/6496196089/.