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Tuesday, August 17, 2010

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."
Posted by Joseph N. DiStefano @ 9:25 AM  Permalink | 6 comments
Comments   
  • 0 like this / 0 don't   •   Posted 9:35 AM, 08/17/2010
    The problem is that a lot of consumers are unemployed and most sane businesses are stockpiling cash in advance of all of the tax increases and regulation that's coming their way in 2011. We may well start seeing the disappearance of LLC's and sole proprietorship's the way things are going.
    — theodotius
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 10:39 AM, 08/17/2010
    It seems to me that for too long banks have considered themselves as a growth industry. Their thinking needs to change so they become an income industry.
    — cboath
  • 0 like this / 0 don't   •   Posted 10:41 AM, 08/17/2010
    And when you get your GFE, shop around for title insurance and settlement services (pick an independent title agency). GFEs often have over inflated pricing on them for those services.
    — Citizenc92
  • 0 like this / 0 don't   •   Posted 3:11 PM, 08/17/2010
    Are you kidding the banks are STILL making money at 3% over 3o years, do the math. By the way they are only giving 1/10 % on CD's and savings.
    — mark carr
  • 0 like this / 0 don't   •   Posted 5:39 PM, 08/17/2010
    Sure Mark Carr, banks make plenty of money at 1% and 2% margins. As long as everyone works for free, and doesn't need benefits, and the FDIC gives deposit insurance for the asking, etc etc. You know, cost of running a business. No profit, nothing left for owners = no business. Course some here wouldn't mind that...
    — distefj


6 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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