NEW YORK – The Federal Reserves latest mortgage bond purchases are helping profit margins at lenders including Wells Fargo and JPMorgan Chase more than homebuyers and property owners looking to refinance.
Since the Feds Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30-year loans have fallen by just 0.11 percentage point, compared with a drop of more than 0.6 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and Bankrate.com. The gap between the two, which typically signals increasing lender revenue when it widens, has reached a record of more than 1.6 percentage point.
Fed Chairman Ben Bernankes stated goal of helping boost the housing market is being undercut by lenders inability to keep up with consumer demand, even as investors drive up bond prices. Banks have been slow to lower rates after being overwhelmed this year by applications to refinance mortgages.
Think about it this way: If you had a restaurant with 100 people out the door waiting in line, would lowering prices be the first thing on your mind? said Scott Simon, the mortgage head at Newport Beach, Calif.-based Pacific Investment Management Co., manager of the worlds largest bond fund.
Margins on sales of mortgages have widened by about 50 percent since the Feds announcement from the average level this year, which already was elevated, said Kevin Barker, an analyst at Washington-based Compass Point Research & Trading.
Its very good to be a mortgage originator right now, he said in a telephone interview.
The Fed is targeting the $5.2 trillion market for mortgage bonds guaranteed by government-backed Fannie Mae, Freddie Mac and Ginnie Mae, which helps determine the rates that lenders can offer. Lenders bundle about 90 percent of new loans into the securities to sell to investors, giving them funds to make more.
The added time its taking to close on loans is signaling the industrys limited capacity for handling more
Mortgage refinancings completed in August took an average of 51 days, up from 42 days in March and 37 days a year earlier, according to Ellie Mae, a Pleasanton, Calif.-based mortgage- technology firm. Loans for home purchases, which lenders often prioritize, took 47 days, up from 43 days in August 2011.
To be sure, mortgage rates have continued to set new lows after the Feds announcement, reaching 3.46 percent on Sept. 24, according to Bankrate.com.
The trend, which the Fed has also helped engineer with stimulus efforts including pledges to keep short-term interest rates near zero, has contributed to a recovery in housing this year after a 35 percent slump in prices since mid-2006.
U.S. home values climbed more than forecast in July, with the S&P/Case Shiller index for 20 metropolitan areas released last week showing a rise of 1.2 percent from a year earlier, the biggest 12-month jump since August 2010.
Still, Michael Bauer, a San Francisco Fed economist, signaled in a May paper that the central bank was aware its purchases of mortgage-backed securities might provide limited help for homeowners or buyers. The weaker link between MBS yields and actual loan rates may persist for some time, Bauer said.
At a news conference after the Feds announcement, Bernanke said that hes been attempting to reduce loan costs because the residential property market is one of the missing pistons in the engine of the economic recovery.
Along with low rates, President Obamas administration has helped fuel gains in refinancing this year by making it easier for borrowers with Fannie Mae and Freddie Mac loans without home equity to qualify and by reducing costs for homeowners with older Federal Housing Administration loans.
A weekly Mortgage Bankers Association index of refinancing applications hit a three-year high of 5452.8 during the week ended July 28. While the gauge fell to 4224.48 in late August, it was still 23 percent more than this years low in March, and then climbed to 4765.3 last week.
Lenders only have the ability to handle the pipelines of pending loans produced by an index level somewhere around 5500, according to Pimcos Simon, whose firms Total Return Fund has joined lenders in benefiting from the Feds action with outsized bets on home-loan securities.
Wells Fargo, JPMorgan and US Bancorp, the three largest U.S. home lenders, may be among the biggest beneficiaries of higher margins even as borrowing volumes remain constrained. Vickee Adams, a spokeswoman for San Francisco-based Wells Fargo, declined to comment, as did Tom Kelly of New York-based JPMorgan and Teri Charest of Minneapolis-based US Bancorp.
Wells Fargo alone controlled 33.1 percent of the origination market through the first six months of the year, according to newsletter Inside Mortgage Finance. Unlike rivals such as Bank of America and MetLife that over the past year shrank or closed home-loan units, the bank said it added the equivalent of about 2,000 workers last quarter.
The company recorded gains of about 2.25 percent on mortgages it sold during the period, up from 1.9 percent in 2011s fourth quarter, according to comments by Chief Financial Officer Timothy J. Sloan on conference calls. Countrywide Financial Corp., the then-market leader later bought by Bank of America, reported a margin on prime loans of 0.80 percent in 2007, before the industrys capacity and competition fell.
Over the past two years, a 1 percentage-point decline in mortgage-bond yields has generally translated into a 0.6 percentage-point decrease for rates, Barclays analysts including Nicholas Strand wrote in a Sept. 21 report.
The drop has been smaller when loan rates fall to new lows that are significantly less than their averages. That means borrowing costs will now probably be very sticky, they said.
The Fannie Mae securities that lenders have been packaging most new loans into, with coupons of 3 percent, traded Tuesday at prices of more than 105.8 cents on the dollar, up from 103.3 cents before the Fed announcement, according to Bloomberg data.
That means a lender gets 5.8 percent more than the principal amount of a loan upon a sale. They also receive income stream usually equal to 0.25 percent a year that can be retained for servicing the mortgage.
The gains that are helping banks are also benefiting bondholders. An investor betting $25 million that the securities would outperform yield benchmarks in a trade suggested by Barclays would have made $6.7 million between Sept. 7 and Sept. 20.
The wager involved using 20 times leverage, a typical amount for a hedge fund on such bets.
For consumers the payoff hasnt been as quick.
With each successive round of easing, the Fed appears to be getting less bang for its printed buck, Richard Eckert, an analyst in San Francisco at securities firm B. Riley & Co., wrote in a report. Along with lenders finding they can maintain or increase their margins while still remaining competitive, fewer borrowers are refinancing after previously lowering their rates.