4% home loans: Good for borrowers, bad for banks

30-year home mortgage loan rates "could reasonably hit 4% this year," the lowest since at least the start of the 1970s, as the Federal Reserve buys US Treasury debt and drives interest yields down, writes FBR Capital Markets analyst Bob Ramsey and his colleagues in a report to clients today.

"Half of conforming borrowers have both the economic incentive and equity to refinance. If rates continue to fall, a refi boom could swamp banks and thrifts," leaving them "with no obvious place to invest" since bond rates are so low, Ramsey writes.

That's good news for tens of millions of borrowers who could chop thousands from their yearly-home loan payments - though it's a mystery, Ramsey notes, why more borrowers haven't already refinanced.

But cheap home-loan money is bad news for small banks and thrifts already struggling to stay profitable, and for mortgage-dependent big banks like SunTrust of Atlanta, Regions Finanical of Birmingham Ala., and KeyCorp of Albany NY. At those banks, FBR says, if rates keep dropping it could "wipe out all earnings."

By contrast, PNC, Pennsylvania's largest bank, and New York giant JPMorgan Chase & Co. have "low exposure to residential mortgage assets, diversified revenues," and profitable mortgage-banking businesses that may be able to reduce losses from "the big squeeze" in interest rates.

NEW: If banks can't make money investing in bonds, why don't banks go back to making old-fashioned business and consumer loans, at higher rates?  "I think that they are already doing all of the good consumer (and) business lending that they can find," Ramsey told me. "Problem is that there is just not enough demand out there, particularly from good borrowers."