We're going through a period where interest rates on mortgages are at all-time low, which is good news for folks who are in a position to buy a home, but it turns out to be even better news for the big banks making most of those loans.
That's because most of them have increased the historic spread between the interest they charge for mortgages and the interest they have to pay for their own borrowing and, of course, the now minuscule rates they pay to folks with savings accounts. As a result, according to a recent news story in the New York Times, bankers are enjoying ballooning profits from their mortgage business.
If the banks were using the formula that was in effect up until a couple of years ago, the 3.55 percent rate for a 30-year mortgage would be close to 3.05 percent. Or, they could increase the rates they pay savers by about a half percent.
The bankers, of course, defend their new practice.
"There is a much higher cost to originating mortgages relative to a few years ago," Jay Brinkmann, the chief executive of the Mortgage Bankers Association, told the Times.
Some financial observers think the increased gap between the rates charged and the amount paid savers stems for decreased competition among the big banks. The meltdown of the financial industry in 2008 wound up concentrating more mortgage lending in a few big banks — Wells Fargo, JP Morgan Chase, Bank of America and U.S. Bankcorp.
A spokeswoman for Wells Fargo insisted to the newspaper that competition is still very healthy. Nevertheless, the big boys are raking in the big bucks.
In the first six months of the year, Wells Fargo reported a 155 percent increase in mortgage revenue over 2011. The other three banks have also reported enormous increases in profits from the business.
Thomas Lawler, founder of Lawler Economic and Housing Consulting, probably put it best:
"One of the reasons that the banks charge more is that they can."
That, of course, has been the case for a long time. They were instrumental in causing the country's greatest recession since the Great Depression and, while millions of Americans are still without jobs, the big banks were bailed out by the taxpayers.
Yet they don't want to change any of their methods, fighting tooth and nail against regulations that would curtail their excesses, and thumbing their noses at anyone who suggests they should not to be paying themselves obscene bonuses.
And now they're able to double-down on making yet higher profits off the backs of home buyers and their depositors. Will the greed never end?
Published on Sunday, August 26, 2012 by the Madison Capital Times