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Less Competition Adds to Cost of Purchases and Mortgage Refinance

Written By:
October 23, 2012 at 12:50 AM

JP Morgan Chase Building

For the last few months, some mortgage industry analysts and professionals have stated that historic low mortgage interest rates should be even lower. The publisher of Inside Mortgage Finance Guy D. Cecala states that if lenders had the same profit margin that was in place of a few years ago, a 30-year fixed-rate mortgage at an interest rate of 3.55 percent would be about a ½ point lower or 3.05 percent.

This would save a borrower about $30,000 on a $300,000 mortgage, said Cecala.

In light of the fact that major mortgage lenders have reported record-breaking profits in the third quarter 2012, the argument that borrowers should be paying lower interest rates when buying or refinancing mortgages takes on more relevance.

Limits Placed on Competition

Limiting the number of mortgage lenders that can place home mortgages with the government lies at the root of the problem. Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac have received plenty of applications from lenders who would like to do business with the GSEs.

Fannie Mae has placed a limit on the number of loans it will accept each year. Fannie has in place a quota that caps the number of loans it will purchase or insure, said David Lykken, a consultant in the mortgage industry. According to Lykken, Freddie Mae, the firm that insures bonds, has been slow in processing applications and have tighter standards for firms seeking approval.

Fannie Mae justifies limiting the number of lenders by invoking its responsibility to protect American taxpayers. Consequently, big banks are the beneficiary of this protection as they are now receiving higher mortgage margins on the home loans.

However, by approving more lenders that have direct access to Fannie Mae, borrowers benefit because mortgage firms will command better prices, according to John Robbins, CEO of Bexil American Mortgage Inc.

William Dudley, who serves as president of the Federal Reserve Bank of New York, expressed frustration over interest rates that are higher than they should be after the latest round of quantitative easing enacted by the Federal Reserve in September. Quantitative Easing 3 or QE3 involves the Fed purchase of $40 billion in mortgage-backed securities each month.

Government Insures Most Mortgages

Since the Federal Housing Finance Agency assumed responsibility for the oversight of Fannie Mae and Freddie Mac four years ago, government-insured mortgages have help to keep the market afloat and account for 90 percent of new lending or $9.6 trillion in the industry.

Many industry analysts criticize the “outsized role” Fannie and Freddie play in the housing market. In a recent Mortgage Bankers Association (MBA) conference, MBA’s CEO Timothy J. Mayopoulos stated that private capital has show very little evidence of being ready to take a more active role in providing mortgages for Americans.

Banks More Profitable As Middlemen

Lenders have pulled in record profits from an improved housing market. More people feel confident enough to buy homes. Homeowners have move to refinance their mortgages to take advantage of interest rates.

MBA chief economist Jay Brinkmann said that bankers have higher expenses for mortgage originations because of more stringent federal regulations. According to Brinkman, lenders are not charging borrowers higher mortgage application fees, but make more money in their roles as “middlemen.”

Mortgage lenders bundle the mortgages into mortgage-backed securities and sell them to institutional bond investors. A combination of higher mortgage rates paid by borrowers and low interest rates paid to bond investors result in more profits for the banks.

With mortgage lending activities concentrated mostly with the big mortgage lenders like Bank of America, JPMorgan Chase, Wells Fargo, and U.S. Bancorp; these lenders will continue to receive record profits.





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