Interest rates on mortgages and refinancing are at record lows, giving borrowers plenty to celebrate. But the bigger winners are the banks making the loans.
Banks are making unusually large gains on mortgages because they are taking profits far higher than the historical norm, analysts say. That 3.55 percent rate for a 30-year mortgage could be closer to 3.05 percent if banks were satisfied with the profit margins of just a few years ago. The lower rate would save a borrower about $30,000 in interest payments over the life of a $300,000 mortgage.
"The banks may say, 'We are offering you record low interest rates, so you should be as happy as a clam,' " said Guy D. Cecala, publisher of Inside Mortgage Finance, a home loan publication. "But borrowers could be getting them cheaper."
Mortgage bankers acknowledge that they are realizing big gains right now from home loans. But they say they cannot afford to cut rates even more because of the higher expenses resulting from stiffer regulations.
"There is a much higher cost to originating mortgages relative to a few years ago," said Jay Brinkmann, chief economist at the Mortgage Bankers Association, a group that represents the interests of mortgage lenders.
The jump in revenue for the banks is not coming from charging consumers higher fees. Instead, it comes from the their role as middlemen. Banks make their money from taking the mortgages and bundling them into bonds that they then sell to investors, like pensions and mutual funds. The higher the mortgage rate paid by homeowners and the lower the interest paid on the bonds, the bigger the profit for the bank.
Mortgage lenders may also be benefiting from less competition. The upheaval of the financial crisis of 2008 has led to the concentration of mortgage lending in the hands of a few big banks, primarily Wells Fargo, JPMorgan Chase, Bank of America and U.S. Bancorp.
"Fewer players in the mortgage origination business means higher profit margins for the remaining ones," said Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University.
Mary Eshet, a spokeswoman for Wells Fargo, said the mortgage business remains competitive. "The only way we can effectively grow our business and deliver great service to customers is by offering market competitive rates," she said.
The other three banks declined to comment. But the banks are benefiting from the higher mortgage gains. Wells Fargo reported $4.8 billion in revenue from its mortgage origination business in the first six months of the year, an increase of 155 percent from $1.9 billion in the first six months of 2011. JPMorgan Chase and U.S. Bancorp, the other big lenders, are also reporting very high levels of mortgage origination revenue. Wells Fargo made 31 percent of all mortgages in the 12 months through June, according to data from Inside Mortgage Finance.
"One of the reasons that the banks charge more is that they can," said Thomas Lawler, a former chief economist of Fannie Mae and founder of Lawler Economic and Housing Consulting, a housing analysis firm.
The banks are well positioned to profit because of their role in the mortgage market. After they bundle the mortgages into bonds, the banks transfer nearly all of the loans to government-controlled entities like Fannie Mae or Freddie Mac. The entities, in turn, guarantee the bond investors a steady stream of payments.
The banks that originated the loans take the guaranteed bonds, called mortgage-backed securities, and sell them to investors. The banks nearly always book a profit when the bonds are sold.
The mortgage industry has a yardstick for measuring the size of those profits. It compares the mortgage rates paid by borrowers and the interest rate on the mortgage bond — a difference known in the industry as the spread.
For example, a bank may lend money to homeowners at a 3.6 percent interest rate. After bundling those mortgages, the bank may then sell them in bonds that have an interest rate of 2.8 percent. The lower interest rate on the bond shows that the banks are effectively able to sell the mortgages to investors for a gain.
The banks pocket that markup when they sell the bonds. The bigger the spread between the mortgage rate and the bond rate, the bigger the markup for the banks.
Mortgage analysts who track this difference say it has been historically high in recent months. They contend that if the market were functioning properly, the recent drop in the bond rates should have led to a larger decline in mortgage rates for consumers than has actually occurred. .
Instead, the difference between the two rates is increasing: mortgage rates are falling much more slowly than the bond interest rates.
In the six months through June, the average difference between the two rates was 1.1 percent, and at the start of this month it was 1.26 percent. From 2000 to 2010, it was about 0.5 percent.
If banks offered mortgages with an interest rate that was half a percentage point lower — a move that would leave their mortgage gains closer to the historical levels of 0.5 percent — borrowers would see real savings.
Bankers say they need the extra mortgage revenue to cover new costs. As a result of more stringent conditions since the housing bust, bankers are required to be more diligent in approving loan applications. The banks say this requires better-trained employees and other added expenses. If Fannie Mae and Freddie Mac find flaws in the loan applications, they ask the banks to buy back the faulty loans, which can be expensive for the lenders.
"Fannie and Freddie are requiring zero-error loans," said Tom Deutsch, executive director of the American Securitization Forum, a group that represents financial firms active in the mortgage market.
But Mr. Lawler, the housing analyst, is somewhat skeptical about the banks' fears about the costs of buybacks. "If banks do their job properly, there should be little buyback risk," he said.
The failure of mortgage rates to fall further poses a quandary for the government entities like the Federal Reserve and the Treasury Department, which have spent hundreds of billions of dollars to help make home loans cheaper.
"Policy makers get a little frustrated that they are not getting all the bang for their buck that they could," said Mr. Lawler.
If the Federal Reserve bought more mortgage bonds in the market, it could actually increase banks' mortgage profits, since such buying could drive down bond rates and increase the size of the markup banks take when they sell their mortgages.
It is hard to see how this situation can change in favor of lower rates for consumers. The banks are finding plenty of consumers wanting mortgage loans at current rates, and bond investors are happy to pay whatever low rate is offered.
And regulators, who are loath to dictate business practices, are unlikely to force banks to lower mortgage rates.
Still, the housing market would benefit if rates to consumers fell in tandem with the bond rates, said Mr. Van Nieuwerburgh of New York University.
"The relatively high mortgage rates do not help the housing recovery because they make it harder for new homeowners to get on the housing ladder and because they make refinancing relatively less attractive," he said.